Burke & Herbert Financial Services Corp. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. The company is a Virginia financial holding company whose banking operations are conducted through Burke & Herbert Bank & Trust, serving Northern Virginia and nearby markets. In September 2023, the company elected financial holding company status.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $37.3 | $29.3 | $108.7 | $80.1 |
| Net interest income | $22.9 | $26.7 | $71.5 | $75.8 |
| Provision for (recapture of) credit losses | $0.2 | $(2.4) | $1.0 | $(7.6) |
| Non-interest income | $4.3 | $4.3 | $13.1 | $12.9 |
| Non-interest expense | $22.4 | $20.0 | $64.1 | $59.5 |
| Net income | $4.1 | $11.1 | $17.6 | $30.7 |
| Diluted EPS | $0.55 | $1.49 | $2.35 | $4.11 |
| Tax-equivalent net interest margin | 2.76% | 3.25% | 2.90% | 3.10% |
Balance sheet at September 30, 2023: Total assets were $3.59 billion; gross loans were $2.07 billion and net loans $2.04 billion; deposits were $2.99 billion; borrowings were $299.0 million; and shareholders’ equity was $270.8 million. Cash and cash equivalents were $41.9 million. The allowance for credit losses on loans was $26.1 million, or 1.26% of gross loans.
Cash flows, nine months: Operating activities provided $32.3 million, investing activities used $50.1 million, and financing activities provided $9.3 million. Cash and cash equivalents decreased by $8.4 million to $41.9 million.
Capital and credit: The company reported regulatory capital ratios of 16.44% CET1, 17.48% total risk-based capital, and 11.32% Tier 1 leverage; the Bank was classified as well capitalized. Non-performing loans were $2.9 million (0.14% of loans), down from $5.5 million at December 31, 2022. The loan portfolio is concentrated in commercial real estate, which represented about 61% of gross loans.
Material changes versus comparable periods
- Q3 net income fell 63.6% year over year; nine-month net income fell 42.6%. The company attributed the declines to higher funding costs, lower net interest income, higher expenses, and the absence of prior-year credit-loss provision recaptures.
- Net interest income declined 14.2% in Q3 and 5.7% year to date. Interest expense rose sharply as deposit and borrowing rates repriced faster than yields on earning assets. Q3 interest-bearing deposit cost rose to 2.09% from 0.19%; nine-month cost rose to 1.70% from 0.12%.
- Gross loans increased $183.4 million from year-end 2022, principally through commercial and residential real estate lending. Deposits increased $65.2 million, while borrowings declined $44.1 million.
- Non-interest expense increased 12.4% in Q3 and 7.8% year to date. Q3 included $1.6 million of merger-related legal, consulting, and audit costs; nine-month merger-related costs were $1.7 million.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $4.1 million and the allowance for unfunded commitments by $0.3 million, reducing retained earnings after tax by $3.4 million. Prior-year credit-loss results use the previous incurred-loss method and are not directly comparable.
- Available-for-sale securities had a fair value of $1.22 billion versus $1.37 billion at year-end 2022, with $176.1 million of gross unrealized losses. Management attributed losses primarily to interest rates and market conditions and recorded no securities credit-loss allowance.
Outlook, risks, and unusual items
- Merger: Under the August 24, 2023 agreement, Summit Financial Group shareholders are to receive 0.5043 Burke & Herbert common shares per Summit share, subject to customary conditions, shareholder votes, and regulatory approvals. The filing estimates approximately $57 million of future merger and integration-related pre-tax costs. If specified termination conditions apply, a $14.86 million termination fee may be payable. The filing provides no specific standalone earnings guidance.
- Funding and liquidity: Brokered time deposits rose to $389.0 million from $100.3 million at year-end 2022. Management reported $883.5 million of unused borrowing capacity and stated that current liquidity sources were adequate. All $299.0 million of borrowings mature within one calendar year.
- Interest-rate exposure: The company cautioned that further rate increases may raise funding costs. Its modeled 12-month net interest income declined 6.9% under a +300 basis-point parallel rate shock; modeled economic value of equity declined 23.0% under that scenario. These are simulations, not forecasts.
- Investment securities: Management said it did not intend, and was not more likely than not required, to sell securities before recovery. The portfolio includes substantial long-duration holdings; market-rate changes could affect fair values, accumulated other comprehensive income, and capital.
- Merger execution: Risks include approval delays or failure, integration costs and disruption, employee and customer retention, lower-than-expected synergies, and potential purchase-accounting marks on Summit’s assets. The company estimated former Summit shareholders and current Burke & Herbert shareholders would each own approximately 50% of the combined company.
- Other: Management reported no material pending litigation, and disclosure controls were considered effective. No material changes to previously disclosed risk factors were reported other than merger-related risks.
Important facts for investors to verify
- Whether deposit pricing and deposit mix stabilize, particularly brokered funding levels, and how this affects net interest margin.
- Whether loan growth—especially commercial real estate—remains sound, and whether delinquencies, non-accruals, charge-offs, or CECL reserves increase.
- Whether the merger receives required approvals, closes as planned, and achieves expected benefits relative to the estimated $57 million of costs and possible termination fee.
- How unrealized securities losses, liquidity needs, and modeled interest-rate sensitivity evolve, including any effect on capital or ability to avoid securities sales.
- Whether reported earnings and dividends remain sustainable amid higher funding costs and merger-related expenses; Q3 declared dividends were $0.53 per share versus diluted EPS of $0.55.