KBRA assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Burke & Herbert Financial Services Corp. (NASDAQ: BHRB)(“the company”). Additionally, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for its subsidiary, Burke and Herbert Bank and Trust Company. The Outlook for all long-term ratings is Stable.

The ratings are supported by the company’s strong funding profile which includes a limited reliance on wholesale borrowings (core deposits were 85% of total funding at 2Q24) and below-average costs (BHRB’s total cost of funds was 2.13% for 2Q24, 45 bps below the rated peer average). Historically concentrated in the Washington, D.C. metro areas, BHRB’s merger with Summit Financial Group, Inc. ("Summit") (completed 2Q24) further enhances its funding base, by adding greater market diversification and granularity to its deposit base. At close, BHRB had a branch network of over 75 retail offices stretched primarily across parts of MD, VA, and WV with a smaller presence in DE and KY.

BHRB has a long history of outperformance with regards to credit losses with an NCO ratio tracking below 0.2% since the GFC, when the company’s NCO ratio peaked at 0.4% in 2010. With that said, KBRA recognizes the changes BHRB has made in recent years with regards to its lending strategy (geared more towards relationship based-lending as opposed to its past which included a comparatively elevated concentration in participation lending) that includes the recent merger with Summit and its more traditional community bank loan portfolio. While the company’s new lending strategy has yet to be tested through a credit cycle (we note, Summit has reported strong credit quality with an NCO ratio at or below 0.1% since 2015), KBRA considers its loan underwriting and review practices to be proportionate to banks of similar size and scope. Moreover, KBRA favorably views the greater granularity and diversification (both by loan type and geographically) brought to BHRB through the Summit merger.

Earnings should benefit from the merger as it manages towards a higher concentration of loans within its earning asset mix (average loans are expected to track close to 75% of average earning assets as compared to historical levels that were typically below 60%), providing an immediate boost to NIM and taking advantage of its lower-cost funding. Finally, while the merger materially changed the capital profile of BHRB, with its CET1 ratio falling nearly 600 bps to 10.9% at 2Q24, the company expects to be able to quickly rebuild capital towards its targeted levels with a CET1 ratio expected to track towards the higher-end of the rated peer group.

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Methodologies

• Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
• ESG Global Rating Methodology

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

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.

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