KBRA Affirms Ratings for Bremer Financial Corporation

16 Feb 2024   |   New York


KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Saint Paul, Minnesota-based Bremer Financial Corporation ("Bremer" or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating BBB+, and the short-term deposit and debt ratings of K2 for its primary subsidiary, Bremer Bank, N.A. ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings and Stable Outlook are supported by Bremer’s diverse revenue base and consistently solid regulatory capital measures, which reflect favorably on the management team. The bank’s robust and relatively stable volume of noninterest-bearing deposits also underpins the ratings.

Beginning in 2023, earnings have been pressured by the declining NIM, primarily because of the rising funding costs associated with cost of interest-bearing deposits, which increased to 2.24% for 2023 compared to 0.37% for the prior year, and greater reliance on higher cost wholesale borrowings, which increased to 10% of total funding base compared to 6% for 2022. The sizable investment securities portfolio (24% of average assets), which is high credit quality (approximately 88% are U.S. government and agencies securities), though relatively low yielding in the context of higher cost of funding, has also weighed on the NIM. The bottom-line profitability was also impacted by a number of non-operational or one-time items, which amounted to 0.1% of average assets (excluding these items, the adjusted ROAA for 2023 was 0.86%).

Bremer’s noninterest income sources are well diversified, higher quality, and perennially comprise roughly 20% of total revenue. The mix consists of deposits service charges and card fees (26%), insurance income (15%), wealth management & retirement services fees (17%), investment management fees (17%), and mortgage banking (12%).

Consolidated regulatory capital ratios have been prudently managed over time, with the CET1 ratio consistently maintained at greater than 12%. A key element of management’s capital policy is related to the privately held nature of the company, which could limit the ability to raise common equity efficiently if needed.

As of 4Q23, the bank had $3.6 billion available borrowing capacity with FRB and FHLB, as well as $462 million in unused Fed Funds lines, although KBRA is mindful that contingent sources of funding may not always be available depending upon various factors.

Uninsured deposits totaled $4.98 billion as of 4Q23, or 38% of total deposits, down from 44% at 4Q22. Excluding uninsured deposits that are collateralized by investment securities or loans (vis-à-vis letters of credit), coverage of remaining uninsured deposits in the form of cash, unencumbered investment securities and contingent funding capacity is 149%.

Rating Sensitivities

Barring an exogenous event, a rating upgrade is unlikely. Rating pressure would most likely develop if loan quality deterioration emanated such that earnings performance becomes highly variable, including episodes of net losses, or if consolidated regulatory capital ratios were to decline to (and likely to be maintained at) levels below (currently in-line with) similarly-rated peers.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1003262

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