Burke & Herbert Financial Services Corp. — Q1 2023 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2023, with balance-sheet comparisons to December 31, 2022. The Virginia bank holding company conducts its material operations through Burke & Herbert Bank & Trust, serving Northern Virginia and nearby markets. The company began operating as a holding company in October 2022.
Key financial results
| Metric | Q1 2023 | Comparable / prior period |
|---|---|---|
| Interest income | $34.3 million | $24.3 million, Q1 2022 |
| Interest expense | $9.6 million | $0.8 million, Q1 2022 |
| Net interest income | $24.8 million | $23.5 million, Q1 2022 |
| Tax-equivalent net interest margin | 3.06% | 2.89%, Q1 2022 |
| Provision for credit losses | $0.5 million expense | $2.6 million recapture, Q1 2022 |
| Non-interest income | $4.2 million | $4.1 million, Q1 2022 |
| Non-interest expense | $20.4 million | $19.2 million, Q1 2022 |
| Net income / diluted EPS | $7.5 million / $1.00 | $9.1 million / $1.23, Q1 2022 |
| Operating cash flow | $10.9 million | $14.2 million, Q1 2022 |
- Profitability and costs: Net income fell 17.6% year over year. Higher net interest income and lower income tax expense were outweighed by increased credit-loss provision and operating costs. The effective tax rate was 7.2%, compared with 17.5%, with management attributing the decline to additional tax credits. The efficiency ratio rose to 70.25% from 69.47%.
- Balance sheet and liquidity: Total assets were $3.67 billion, up from $3.56 billion at year-end. Gross loans rose $64.5 million to $1.95 billion; deposits increased $112.0 million to $3.03 billion. Cash and cash equivalents were $116.9 million, up from $50.3 million. Investing cash flow was negative $31.0 million and financing cash flow was positive $86.7 million, producing a $66.6 million increase in cash.
- Funding and debt: Borrowings declined $21.4 million to $321.7 million; period-end borrowing rates ranged from 4.38% to 4.88%. The company reported $809.1 million of unused borrowing capacity. Brokered time deposits increased to $389.2 million from $100.3 million at year-end.
- Credit and securities: The allowance for credit losses was $25.7 million, or 1.32% of gross loans. Non-accrual loans declined to $3.2 million from $5.5 million at year-end; net charge-offs were minimal. Available-for-sale securities had $144.2 million of gross unrealized losses and fair value of $1.36 billion. The company recorded no securities credit-loss allowance, attributing unrealized losses primarily to market and interest-rate changes.
- Capital: The company reported an 18.65% total risk-based capital ratio and an 11.19% Tier 1 leverage ratio. The Bank was categorized as well capitalized under prompt corrective action rules.
Material changes and management commentary
- Interest income grew substantially, but deposit and borrowing costs rose sharply as market rates increased. Deposit costs and borrowing costs increased to 1.09% and 4.70%, respectively, on average, from 0.08% and 0.60% in Q1 2022. Management said continued rate increases could further raise funding costs and pressure profitability.
- Non-interest expense increased 6.3%, including higher employee benefits, consulting, legal and audit costs, and $287,000 of fees associated with fair-value hedges.
- The company adopted CECL on January 1, 2023. Adoption increased loan credit-loss reserves by $4.1 million and unfunded-commitment reserves by $275,000; the after-tax cumulative adjustment reduced retained earnings by $3.4 million. Q1 2023 provision figures therefore use the expected-loss approach, unlike the prior-year incurred-loss basis.
- In response to 2023 bank failures and industry liquidity concerns, management tested liquidity sources, reviewed deposit composition and securities, and stress-tested liquidity and capital. Management reported that stress-test capital remained above well-capitalized ratios and liquidity stayed within internal guidelines. It said there had been no significant unusual deposit withdrawals related to the events, believed current liquidity sources were adequate, and did not expect the events to have a material impact as of the filing date.
- No specific earnings or revenue guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
- Other items: the company declared dividends of $0.53 per share for the quarter. It reported no material pending litigation and no material changes to previously disclosed risk factors. The filing’s cover page marks “No” to whether all required Exchange Act reports had been filed during the preceding 12 months; the company had commenced holding-company operations in October 2022.
Important facts for investors to verify
- Whether brokered-deposit growth and the decline in non-interest-bearing deposits remain manageable, particularly given $715.1 million of deposits at or above the FDIC insurance limit.
- How higher deposit pricing and borrowing costs affect net interest margin, earnings, and funding needs in subsequent quarters.
- Whether the CECL allowance adequately reflects risks in the loan book, which is concentrated in commercial real estate, and whether criticized or non-performing credits change.
- Whether the large unrealized securities losses remain manageable without sales; verify the portfolio’s rate sensitivity and available liquidity against potential deposit outflows.
- Reconcile the cover-page “No” response on prior reporting requirements and confirm the company’s filing history and reporting status.