Burke & Herbert Financial Services Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results include the Company and its wholly owned bank subsidiary. The bank serves Northern Virginia and nearby markets; commercial real estate is its largest loan category.
Financial performance and position
| Metric | Q2 2023 | Comparable period / balance |
|---|---|---|
| Net income | $6.0 million; diluted EPS $0.80 | Q2 2022: $10.4 million; diluted EPS $1.39 |
| Net interest income | $23.8 million | Q2 2022: $25.6 million |
| Net interest margin, tax-equivalent | 2.87% | Q2 2022: 3.15% |
| Interest income / interest expense | $37.1 million / $13.3 million | Q2 2022: $26.5 million / $0.9 million |
| Credit-loss provision | $0.2 million expense | Q2 2022: $2.5 million recapture |
| Non-interest income / expense | $4.6 million / $21.3 million | Q2 2022: $4.5 million / $20.4 million |
For the first six months, net income was $13.6 million versus $19.5 million in 2022; net interest income was $48.6 million versus $49.1 million, and tax-equivalent net interest margin was 2.96% versus 3.02%. The company attributed much of the earnings decline to sharply higher deposit and borrowing costs and the prior-year credit-provision recapture. Six-month non-interest expense rose 5.5%, including higher employee-benefit costs and public-company filing-related legal, consulting and audit costs.
At June 30, total assets were $3.57 billion, gross loans $2.00 billion, deposits $3.01 billion and shareholders’ equity $290.1 million. Since year-end 2022, net loans grew $108.9 million, deposits grew $84.9 million and borrowings fell $94.1 million to $249.0 million. Cash and cash equivalents were $80.8 million. First-half operating cash flow was $22.9 million; cash increased $30.5 million.
The allowance for credit losses was $25.9 million, or 1.30% of gross loans. Non-performing loans were $2.9 million, down from $5.5 million at year-end. Loans were concentrated in commercial real estate: $1.20 billion, approximately 60% of gross loans. The loan portfolio grew about $113.7 million during the first half.
Available-for-sale securities had a fair value of $1.25 billion and gross unrealized losses of $150.5 million at quarter-end; accumulated other comprehensive loss was $126.2 million. Management attributed securities losses primarily to market interest-rate movements, reported no credit-loss allowance on the portfolio, and said it did not expect to need to sell securities to meet deposit outflows.
Liquidity, capital and material changes
- Deposits increased overall, but non-interest-bearing deposits declined to $876.4 million from $960.7 million at year-end. Brokered time deposits rose to $389.1 million from $100.3 million.
- Management reported $959.0 million of unused borrowing capacity. Outstanding borrowings carried rates of 4.38%–5.20% and were scheduled to mature within one calendar year.
- The Bank was classified as well capitalized. At June 30, consolidated total risk-based capital was 18.71%, CET1 was 17.60%, and Tier 1 leverage was 11.20%. Management said stress tests showed capital above well-capitalized thresholds and liquidity within internal guidelines.
- Effective January 1, 2023, the Company adopted CECL. Adoption increased the loan allowance by $4.1 million and the unfunded-commitment allowance by about $0.3 million; retained earnings, net of tax, decreased $3.4 million. Prior-year comparisons use the former incurred-loss method.
- The company reported $681.9 million in deposits meeting or exceeding the $250,000 FDIC insurance limit. Separately, time deposits of at least $250,000 totaled $48.5 million.
Outlook, commentary and risks
No numerical earnings or financial guidance was provided. Management cautioned that further Federal Reserve rate increases could raise deposit and borrowing costs and pressure funding costs and net interest margin. It described ongoing liquidity and capital monitoring, stress testing, and interest-rate risk management, including the use of interest-rate swaps. The company estimated that $1.5 million of cash-flow-hedge amounts would be reclassified as a reduction to interest income over the next 12 months.
Key exposures include interest-rate and securities-valuation risk, deposit outflows and reliance on brokered funding, commercial real estate and other borrower credit risk, and changes in economic conditions. The company stated that there were no material changes to previously disclosed risk factors. Ordinary-course litigation was not expected by management to have a material effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- The selected financial data table reports non-performing assets as a percentage of total assets at 81.89%, which does not reconcile to reported non-performing assets of $2.9 million and total assets of $3.57 billion. Verify the intended ratio; the filing text does not provide a clear, consistent value.
- Track whether brokered deposits continue to rise and whether deposit mix, uninsured deposits and funding costs affect liquidity and margins.
- Monitor the large unrealized securities losses, portfolio duration of 4.3 years, and the potential impact of interest-rate changes or any need to sell securities.
- Review commercial real estate concentrations, credit quality and allowance adequacy, noting CECL adoption makes comparison with 2022 less directly comparable.
- Assess whether higher interest expense and operating costs continue to outpace asset-yield growth and weigh on earnings.