Burke & Herbert Financial Services Corp. — Q1 2024 10-Q
Business context and reporting period. The filing reports unaudited results for the three months ended March 31, 2024, compared with Q1 2023; balance-sheet changes are generally compared with December 31, 2023. The company is a Virginia-based bank holding company operating through Burke & Herbert Bank, with 23 branches and a primary market in Northern Virginia. Unless otherwise stated, dollar amounts below are in millions.
Financial performance and condition
- Profitability: Net income was $5.2 million, down 30.7% from $7.5 million; diluted EPS was $0.69 versus $1.00. Return on average assets declined to 0.58% from 0.85%, and return on average equity to 6.67% from 10.83%.
- Interest income and margins: Interest income increased 12.9% to $38.7 million, but interest expense rose 73.9% to $16.6 million. Net interest income fell to $22.1 million from $24.8 million; tax-equivalent net interest margin declined to 2.68% from 3.06%, and the interest-rate spread to 1.95% from 2.58%.
- Other income and costs: Non-interest income was $4.3 million, up 0.9%. Non-interest expense increased 3.9% to $21.2 million, including $0.6 million in merger-related costs. The efficiency ratio worsened to 80.22% from 70.25%.
- Credit costs: The company recorded a $0.7 million credit-loss provision recapture, versus a $0.5 million provision in Q1 2023, citing loan payoffs and upgrades. Net charge-offs were minimal. The allowance for credit losses was $24.6 million, or 1.16% of gross loans, versus $25.3 million and 1.21% at year-end.
- Balance sheet: Total assets were $3.70 billion, up $78.8 million from year-end. Gross loans rose $30.4 million to $2.12 billion; deposits decreased $11.8 million to $2.99 billion; borrowed funds increased $88.0 million to $360.0 million. Shareholders’ equity was $319.3 million, up $4.6 million.
- Cash flow: Operating cash flow was $7.1 million, compared with $10.9 million in Q1 2023. Investing activities used $70.6 million, including $65.7 million of securities purchases; financing activities provided $73.1 million, including $88.0 million of additional short-term borrowings. Cash and cash equivalents ended the quarter at $54.1 million, versus $116.9 million at March 31, 2023.
- Capital and liquidity: The Bank was classified as well capitalized. Consolidated CET1 and total risk-based capital ratios were 16.56% and 17.54%, respectively. Available borrowing capacity was $704.2 million; outstanding borrowings mature within one year. Management stated that available liquidity sources were adequate.
Material changes and notable developments
- Higher deposit funding costs were the main pressure on earnings: the average rate paid on interest-bearing deposits rose to 2.41% from 1.09%, while the loan yield increased to 5.41% from 4.81%. Average interest-bearing deposits also shifted toward higher-cost time deposits.
- Deposits declined modestly from year-end, although deposits excluding brokered deposits increased $6.4 million. Brokered deposits totaled $370.8 million at quarter-end.
- Commercial real estate is a significant concentration: CRE loans excluding owner-occupied and construction/development were $1.3 billion, or 61.6% of gross loans. Including those categories, exposure was $1.5 billion, or 71.2% of gross loans.
- Non-performing loans increased to $26.7 million from $3.7 million at year-end, primarily because of a $22.4 million loan more than 90 days past due but still accruing. The filing says this loan was well-secured and became current after quarter-end. Non-accrual loans were $4.3 million.
- Available-for-sale securities had $124.9 million of gross unrealized losses at March 31. Management attributed these primarily to market rates and spreads, recorded no securities credit-loss allowance, and stated it did not intend, nor expect to be required, to sell the securities before recovery.
Outlook, risks, contingencies, and unusual items
- Merger: The Summit Financial Group merger and the related bank merger closed on May 3, 2024, after quarter-end. Summit shareholders received approximately 7.4 million Burke & Herbert common shares in aggregate, and Summit’s Series 2021 preferred shares converted into a new Burke & Herbert preferred series. Management said it could not yet estimate the merger’s financial statement impact. The filing cover reports 14,847,927 common shares outstanding as of May 8, 2024.
- Outlook: The filing provides no specific earnings, margin, or balance-sheet guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It expects funding costs may remain sensitive to market rates and monitors liquidity and interest-rate exposures.
- Key risks: Management discussed CRE risks from higher rates, vacancies, and upcoming maturities; deposit competition and funding costs; interest-rate and securities valuation risk; and execution, cost, and integration risks associated with the Summit merger. The company’s risk factors were reported as unchanged from its 2023 Form 10-K.
- Interest-rate sensitivity: The company’s model estimated that a parallel +300-basis-point rate shock would increase projected 12-month net interest income by 3.2%, while a -100-basis-point shock would reduce it by 1.3%. Estimated economic value of equity fell 17.9% under a +300-basis-point shock. These are model estimates, not forecasts.
- Contingencies and controls: Management said ordinary-course litigation was not expected to have a material effect. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deposit pricing and funding costs continue to outpace loan-yield gains, and the resulting trend in net interest margin and earnings.
- CRE portfolio performance, especially office and other property exposures, borrower maturities, delinquencies, and any migration in internal credit ratings.
- The status and subsequent payment performance of the large 90-days-past-due accruing loan, and the trend in non-accrual loans and the allowance for credit losses.
- Liquidity and funding composition, including brokered deposits, short-term borrowings, unused borrowing capacity, and securities pledged as collateral.
- The Summit merger’s eventual purchase accounting, integration costs, capital and share-count effects, and realization of expected synergies; the Q1 filing does not quantify the financial impact.
- Whether securities unrealized losses, interest-rate sensitivity, and liquidity assumptions change materially in later filings.