Burke & Herbert Financial Services (BHRB) - 2025 Q2 - Quarterly Results

Q2 2025 Earnings Announcement & Highlights Burke & Herbert Financial Services Corp. reported increased net income for Q2 2025 and declared a cash dividend of $0.55 per common share 1.1. Q2 2025 Overview The company announced its Q2 2025 financial results, including a cash dividend payment and a focus on strategic financial management - The company declared a cash dividend of $0.55 per common share, payable on September 2, 2025, to shareholders of record as of August 15, 2025[1] 1.2. CEO Commentary The CEO expressed satisfaction with H1 2025 performance, highlighting a strong balance sheet, strategic loan replacement, and future expansion plans - Strategic focus included successfully replacing non-strategic loans with relationship-based assets, maintaining ample liquidity, robust capital ratios, and sufficient loss reserves[3] - Future investments include planned expansion in Bethesda, Maryland, and Fredericksburg and Richmond, Virginia[3] 1.3. Key Financial Highlights Q2 2025 saw increased net income and diluted EPS compared to Q1 2025, alongside strong profitability metrics and robust capital ratios Q2 2025 vs Q1 2025 Financial Performance Comparison | Metric | Q2 2025 | Q1 2025 | | :-------------------------------- | :------ | :------ | | Net Income Applicable to Common Shares | $29.7 million | $27.0 million | | Diluted EPS | $1.97 | $1.80 | | Annualized Return on Average Assets | 1.51% | N/A | | Annualized Return on Average Equity | 15.50% | N/A | | Net Interest Margin (non-GAAP) | 4.17% | N/A | Balance Sheet Strength as of June 30, 2025 | Metric | Value | | :-------------------- | :---------- | | Ending Total Gross Loans | $5.6 billion | | Ending Total Deposits | $6.4 billion | | Ending Loan-to-Deposit Ratio | 87.5% | | Total Liquidity | $4.4 billion | Capital Ratios as of June 30, 2025 | Metric | Ratio | Well-Capitalized Requirement | | :-------------------------------- | :------ | :--------------------------- | | Common Equity Tier 1 Capital to RWA | 12.2% | 6.5% | | Total Risk-Based Capital to RWA | 15.3% | 10% | | Leverage Ratio | 10.4% | 5% | Results of Operations (Q2 2025 vs Q1 2025) This section details the company's financial performance in Q2 2025 compared to Q1 2025, covering income, balance sheet, and credit quality 2.1. Net Income and EPS Performance Net income applicable to common shares increased to $29.7 million in Q2 2025, with diluted EPS rising to $1.97 from $1.80 in Q1 2025 Net Income and EPS Growth | Metric | Q2 2025 | Q1 2025 | | :-------------------------------- | :------ | :------ | | Net Income Applicable to Common Shares | $29.7 million | $27.0 million | | Diluted EPS | $1.97 | $1.80 | 2.2. Balance Sheet Dynamics Total gross loans decreased due to non-strategic loan divestitures, while total deposits also declined, primarily driven by a reduction in brokered deposits - Loan portfolio changes (Q2 2025 vs Q1 2025): - Ending total gross loans decreased by $57.1 million to $5.6 billion[9] - Approximately $90.8 million in non-strategic loans were divested[9] - $200 million in new relationship-based loans were originated[9] - Deposit portfolio changes (Q2 2025 vs Q1 2025): - Ending total deposits decreased by $150.9 million to $6.4 billion[9] - Primarily due to a $114.8 million decrease in brokered deposits[9] 2.3. Net Interest Income and Net Interest Margin Analysis Net interest income slightly increased to $74.2 million in Q2 2025, driven by lower interest expense and higher securities interest income, while net interest margin (non-GAAP) marginally decreased Net Interest Income (Q2 2025 vs Q1 2025) | Metric | Q2 2025 | Q1 2025 | Change | | :---------------- | :------ | :------ | :----- | | Net Interest Income | $74.2 million | $73.0 million | +$1.2 million | | Interest Expense | Decreased by $0.2 million | | | | Interest Income | Increased by $1.1 million | | | - Net Interest Margin (non-GAAP) (Q2 2025 vs Q1 2025): - Decreased from 4.18% to 4.17%[9] - Primarily attributed to a decrease in loan portfolio yields, offset by an increase in securities portfolio yields and a decrease in interest-bearing liability yields[9] - Total Cost of Deposits (Q2 2025 vs Q1 2025): - Decreased from 1.99% to 1.90%[9] - Mainly due to a $0.8 million reduction in acquired time deposit amortization and lower rates on savings and brokered time deposits[9] 2.4. Non-Interest Income and Expense Total non-interest income significantly increased to $12.9 million in Q2 2025, driven by life insurance death benefits and card network revenue, while non-interest expense slightly decreased due to merger-related cost savings Total Non-Interest Income (Q2 2025 vs Q1 2025) | Metric | Q2 2025 | Q1 2025 | Change | | :-------------------- | :------ | :------ | :----- | | Total Non-Interest Income | $12.9 million | $10.0 million | +$2.9 million | | Drivers | Company-owned life insurance death benefits (+$1.8 million), bank card network partnership income (+$1.3 million), additional swap income | | | Non-Interest Expense (Q2 2025 vs Q1 2025) | Metric | Q2 2025 | Q1 2025 | Change | | :------------------ | :------ | :------ | :----- | | Non-Interest Expense | $49.3 million | $49.7 million | -$0.4 million | | Reason | Cost savings realized following the Q4 2024 merger-related conversion | | | 2.5. Credit Quality and Provision The company recorded a $0.624 million provision for credit losses in Q2 2025, maintaining an allowance of $67.3 million, representing 1.2% of total loans, with asset quality within moderate risk parameters - Provision for credit losses (Q2 2025): $0.624 million[9] - Allowance for credit losses (as of June 30, 2025): $67.3 million, representing 1.2% of total loans[9] - Asset quality metrics remained within the company's moderate risk parameters, supported by ample reserves[6] 2.6. Capital Adequacy Burke & Herbert Financial Services Corp. and its subsidiary bank maintained strong capital positions, with all regulatory capital ratios significantly exceeding minimum requirements Company Capital Ratios (as of June 30, 2025) | Metric | Ratio | Well-Capitalized Requirement | | :-------------------------------- | :------ | :--------------------------- | | Common Equity Tier 1 Capital to RWA | 12.2% | 6.5% | | Total Risk-Based Capital to RWA | 15.3% | 10% | | Leverage Ratio | 10.4% | 5% | Bank Subsidiary Capital Ratios (as of June 30, 2025) | Metric | Ratio | | :-------------------------------- | :------ | | Common Equity Tier 1 Capital to RWA | 14.0% | | Total Risk-Based Capital to RWA | 15.1% | | Leverage Ratio | 11.5% | Company Information This section provides an overview of Burke & Herbert Financial Services Corp., highlighting its historical significance and extensive service offerings 3.1. About Burke & Herbert Burke & Herbert Financial Services Corp. is the financial holding company for Burke & Herbert Bank & Trust Company, the oldest continuously operating bank in the D.C. metropolitan area - Company structure: Financial holding company for Burke & Herbert Bank & Trust Company[11] - Historical significance: The oldest continuously operating bank under its original name in the Washington D.C. metropolitan area[11] - Business scope and products: Over 75 branches across Delaware, Kentucky, Maryland, Virginia, and West Virginia, offering a full range of commercial and personal financial solutions[11] Forward-Looking Statements This section contains cautionary notes regarding forward-looking statements, which are subject to various risks and uncertainties, and the company disclaims any obligation to update them 4.1. Cautionary Note This report includes forward-looking statements about future financial performance and strategic objectives, which are inherently subject to various risks and uncertainties - Nature of statements: Includes beliefs, goals, intentions, and expectations regarding revenue, earnings, EPS, loan originations, asset quality, capital levels, estimates of future action costs and benefits, assessments of expected loan losses, evaluations of interest rate and other market risks, and the ability to achieve financial and strategic objectives, along with other non-historical facts[12] - Disclaimer: Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from these statements; the company undertakes no obligation to update these statements, except as required by law[13] 4.2. Risks and Uncertainties Factors that could cause actual results to differ from forward-looking statements include economic and market trends, increased competition, changes in consumer behavior, and regulatory and technological risks - Economic and market risks: Changes in general economic, political, or market trends (nationally or within the company's operating areas), including inflation, interest rates, market volatility, and currency fluctuations, as well as changes in federal government policies and practices[14][15] - Operational and business risks: Costs or difficulties associated with new business development or acquisitions; increased competition; changes in consumer confidence and demand for financial services, including changes in consumer borrowing, repayment, investment, and deposit habits; changes in asset quality and credit risk; the company's ability to control costs and expenses; adverse developments in borrower industries or declines in real estate values[14][15] - Regulatory and technological risks: Changes in and compliance with federal and state laws and regulations related to the company's business and capital levels; the company's ability to raise capital as needed; the impact, extent, and timing of technological changes; and the impact of any cybersecurity breaches[15] Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including the statements of income, balance sheets, and detailed net interest margin information 5.1. Consolidated Statements of Income The consolidated statements of income show a significant increase in net income applicable to common shares in Q2 2025 compared to Q2 2024, driven by higher net interest and non-interest income and a substantial reduction in credit loss expense Consolidated Statements of Income (Q2 2025 vs Q2 2024, in thousands of US dollars) | Metric | Q2 2025 | Q2 2024 | | :-------------------------------- | :------ | :------ | | Total Interest Income | $111,858 | $96,097 | | Total Interest Expense | $37,625 | $36,332 | | Net Interest Income | $74,233 | $59,765 | | Total Provision for Credit Losses | $624 | $23,910 | | Total Non-Interest Income | $12,877 | $9,505 | | Total Non-Interest Expense | $49,305 | $64,432 | | Net Income (Loss) Applicable to Common Shares | $29,672 | $(17,144) | 5.2. Consolidated Balance Sheets The consolidated balance sheets as of June 30, 2025, indicate an increase in total assets, primarily from cash and available-for-sale securities, while total deposits slightly decreased and shareholders' equity grew Consolidated Balance Sheets (June 30, 2025 vs December 31, 2024, in thousands of US dollars) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Total Assets | $8,057,981 | $7,812,185 | | Cash and Cash Equivalents | $325,146 | $135,314 | | Securities Available-for-Sale | $1,522,611 | $1,432,371 | | Loans (gross) | $5,590,457 | $5,672,236 | | Total Deposits | $6,390,974 | $6,515,239 | | Total Liabilities | $7,277,963 | $7,082,028 | | Total Shareholders' Equity | $780,018 | $730,157 | 5.3. Details of Net Interest Margin This section provides detailed insights into the company's net interest margin, including yield percentages and average balances for interest-earning assets and interest-bearing liabilities 5.3.1. Yield Percentages Total interest-earning asset yield slightly decreased to 6.25% in Q2 2025 from 6.31% in Q1 2025, primarily due to lower taxable loan yields, accompanied by a decrease in total interest-bearing liability costs Yield Percentages (Q2 2025 vs Q1 2025) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Taxable loans | 6.90% | 6.96% | | Total interest-earning assets | 6.25% | 6.31% | | Total interest-bearing deposits | 2.41% | 2.53% | | Total interest-bearing liabilities | 2.68% | 2.76% | | Taxable-equivalent net interest margin (non-GAAP) | 4.17% | 4.18% | 5.3.2. Average Balances Average interest-earning assets increased to $7.248 billion in Q2 2025 from $7.172 billion in Q1 2025, driven by higher average taxable loans and securities, with average interest-bearing liabilities also slightly increasing Average Balances (Q2 2025 vs Q1 2025, in thousands of US dollars) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Total loans | $5,630,973 | $5,655,994 | | Total securities | $1,535,896 | $1,475,180 | | Total interest-earning assets | $7,248,238 | $7,171,931 | | Total interest-bearing deposits | $5,060,651 | $5,103,391 | | Total interest-bearing liabilities | $5,632,239 | $5,552,019 | 5.4. Supplemental Information This section provides additional financial details, including per common share metrics, balance sheet items, asset quality indicators, and key income statement ratios 5.4.1. Per Common Share & Balance Sheet Metrics Per common share metrics show growth in diluted EPS and book value, while balance sheet items indicate increased total assets and equity, alongside reduced total and brokered deposits Per Common Share Information (Q2 2025 vs Q1 2025) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------- | :------------ | :------------- | | Diluted earnings (loss) | $1.97 | $1.80 | | Cash dividends | $0.55 | $0.55 | | Book value | $51.28 | $49.90 | | Tangible book value (non-GAAP) | $45.73 | $44.17 | Balance Sheet Related (June 30, 2025 vs March 31, 2025, in thousands of US dollars) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------- | :------------ | :------------- | | Assets | $8,057,981 | $7,838,090 | | Loans (gross) | $5,590,457 | $5,647,507 | | Deposits, total | $6,390,974 | $6,541,871 | | Brokered deposits | $132,098 | $246,902 | | Total equity | $780,018 | $758,000 | 5.4.2. Asset Quality Metrics Asset quality indicators show an increase in nonperforming loans and assets as a percentage of total loans and assets, while the allowance for credit losses as a percentage of nonperforming loans decreased Asset Quality (Q2 2025 vs Q1 2025) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Provision for credit losses | $624 | $501 | | Net loan charge-offs | $1,214 | $1,187 | | Allowance for credit losses | $67,256 | $67,753 | | Total delinquencies | $29,056 | $86,223 | | Nonperforming loans | $85,531 | $64,756 | | Allowance for credit losses as % of non-performing loans | 78.63% | 104.63% | | Non-performing loans as % of total loans | 1.53% | 1.15% | | Non-performing assets as % of total assets | 1.10% | 0.86% | 5.4.3. Income Statement & Key Ratios Income statement data indicates growth in net income and total revenue, while key ratios show improved return on average assets and equity, stable net interest margin, and enhanced efficiency Income Statement (Q2 2025 vs Q1 2025, in thousands of US dollars) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Interest income | $111,858 | $110,786 | | Interest expense | $37,625 | $37,799 | | Non-interest income | $12,877 | $10,023 | | Total revenue (non-GAAP) | $87,110 | $83,010 | | Non-interest expense | $49,305 | $49,664 | | Net income (loss) applicable to common shares | $29,672 | $26,976 | Key Ratios (Q2 2025 vs Q1 2025) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Return on average assets (annualized) | 1.51% | 1.41% | | Return on average equity (annualized) | 15.50% | 14.57% | | Net interest margin (non-GAAP) | 4.17% | 4.18% | | Efficiency ratio | 56.60 | 59.83 | | Loan-to-deposit ratio | 87.47 | 86.33 | | Consolidated Common Equity Tier 1 (CET1) capital ratio | 12.21% | 11.77% | | Consolidated Total risk-based capital ratio | 15.26% | 14.79% | | Consolidated Leverage ratio | 10.42% | 10.12% | Non-GAAP Reconciliations (Unaudited) This section provides unaudited non-GAAP reconciliations for key financial metrics, offering a clearer view of core business performance by excluding significant non-recurring items 6.1. Operating Net Income, Adjusted Diluted EPS, and Adjusted Non-Interest Expense This section presents reconciliations for non-GAAP operating net income, adjusted diluted EPS, and adjusted non-interest expense, excluding significant items like merger-related costs to reflect core business performance Operating Net Income and Adjusted EPS (Q2 2025 vs Q1 2025) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Net income (loss) applicable to common shares | $29,672 | $26,976 | | Operating net income | $29,672 | $26,976 | | Adjusted diluted EPS | $1.97 | $1.80 | Adjusted Non-Interest Expense (Q2 2025 vs Q1 2025) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------- | :------------ | :------------- | | Non-interest expense | $49,305 | $49,664 | | Adjusted non-interest expense | $49,305 | $49,664 | - Purpose: These non-GAAP metrics are used by management to measure performance, enhancing understanding of underlying business performance by excluding significant items, and reflecting management's ability to grow the business and manage expenses[31] 6.2. Total Revenue (Non-GAAP) Non-GAAP total revenue, calculated as total interest income less total interest expense plus total non-interest income, increased to $87.1 million in Q2 2025 from $83.0 million in Q1 2025, indicating stable revenue streams Total Revenue (Non-GAAP) (Q2 2025 vs Q1 2025, in thousands of US dollars) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------- | :------------ | :------------- | | Total revenue (non-GAAP) | $87,110 | $83,010 | - Purpose: A useful tool for measuring the company's operating condition and demonstrating the stability of revenue sources[32] 6.3. Pretax, Pre-Provision Earnings (Non-GAAP) Non-GAAP pretax, pre-provision earnings increased to $37.8 million in Q2 2025 from $33.3 million in Q1 2025, providing insight into the company's ability to cover credit costs from operations by isolating the impact of credit loss provisions Pretax, Pre-Provision Earnings (Non-GAAP) (Q2 2025 vs Q1 2025, in thousands of US dollars) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Pretax, pre-provision earnings (non-GAAP) | $37,805 | $33,346 | - Purpose: Helps assess the ability to cover credit costs through operations and compare performance across periods by isolating the impact of credit loss provisions[37] 6.4. Tangible Common Equity (Non-GAAP) Non-GAAP tangible common equity increased to $686.3 million as of June 30, 2025, from $661.7 million as of March 31, 2025, with tangible book value per share rising to $45.73 Tangible Common Equity (Non-GAAP) (June 30, 2025 vs March 31, 2025, in thousands of US dollars) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Common shareholders' equity | $769,605 | $747,587 | | Tangible common equity (non-GAAP) | $686,342 | $661,743 | | Tangible book value per common share | $45.73 | $44.17 | - Purpose: An important measure of a financial institution's capital strength, assessing the company's equity utilization and facilitating peer comparisons by excluding intangible assets from shareholders' equity[38] 6.5. Net Interest Margin & Taxable-Equivalent Net Interest Income (Non-GAAP) The non-GAAP taxable-equivalent net interest margin for Q2 2025 was 4.17%, a slight decrease from 4.18% in Q1 2025, with this adjustment providing a more comparable view of net interest income by considering tax-exempt assets Net Interest Margin (Non-GAAP) (Q2 2025 vs Q1 2025) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Net interest income (FTE) | $75,292 | $73,868 | | Net interest margin (non-GAAP) | 4.17% | 4.18% | - Purpose: Provides a more meaningful comparison of net interest income by adjusting for tax-exempt instruments, making yields on taxable, tax-exempt, and partially tax-exempt assets comparable[42]