KBRA Affirms Ratings for Bremer Financial Corporation

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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Methodologies