Burke & Herbert Financial Services (BHRB) - 2023 Q2 - Quarterly Report

Part I - Financial Information Financial Statements Unaudited consolidated financial statements for Burke & Herbert Financial Services Corp. as of June 30, 2023, are presented, noting the $3.4 million CECL impact on retained earnings Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Total Assets | 3,569,226 | 3,562,898 | | Net Loans | 1,975,050 | 1,866,182 | | Securities available-for-sale | 1,252,190 | 1,371,757 | | Total Deposits | 3,005,263 | 2,920,400 | | Borrowed Funds | 249,000 | 343,100 | | Total Shareholders' Equity | 290,072 | 273,453 | Consolidated Income Statement Highlights (Unaudited) | Metric | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 23,792 | 25,631 | 48,566 | 49,102 | | Provision for (recapture of) credit losses | 214 | (2,538) | 729 | (5,176) | | Net Income | 6,034 | 10,397 | 13,558 | 19,523 | | Diluted EPS | $0.80 | $1.39 | $1.80 | $2.62 | - The company adopted the CECL accounting standard on January 1, 2023, resulting in a cumulative-effect adjustment that increased the allowance for credit losses on loans by $4.1 million and decreased retained earnings by $3.4 million, net of tax[415][440] Notes to the Consolidated Financial Statements Detailed notes explain accounting policies, CECL impact, portfolio composition, and regulatory capital, confirming the company is 'well capitalized' Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses decreased net income for Q2 and H1 2023, driven by higher funding costs and credit loss provision, analyzing financial condition - For the six months ended June 30, 2023, consolidated net income decreased by $6.0 million (30.6%) to $13.6 million, primarily due to a large recapture of provision expense in the first half of 2022[375] - For the three months ended June 30, 2023, consolidated net income decreased by $4.4 million (42.0%) to $6.0 million, mainly due to increased funding costs and a provision for credit losses compared to a recapture in the prior-year quarter[33] Results of Operations Net interest income slightly decreased for H1 2023 due to rising funding costs, with a $0.7 million credit loss provision replacing a prior year recapture Net Interest Income Analysis (Six Months Ended June 30) | Component | 2023 ($ thousands) | 2022 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Interest Income | 71,444 | 50,794 | 40.7% | | Total Interest Expense | 22,878 | 1,692 | 1252.1% | | Net Interest Income | 48,566 | 49,102 | (1.1%) | - The provision for credit losses was an expense of $0.7 million for the first six months of 2023, a significant shift from a recapture of $5.2 million in the same period of 2022. This change was primarily due to the large recapture in 2022 related to COVID-19 factors and a non-performing loan sale, coupled with the adoption of the CECL model in 2023[52] - Non-interest expense increased by $2.2 million (5.5%) for the six months ended June 30, 2023, mainly driven by a $0.9 million increase in pensions and employee benefits and a $1.1 million increase in other expenses, including legal and consulting fees for SEC filings[31][378] Analysis of Financial Condition Total assets stable at $3.6 billion, net loans grew to $1.98 billion, funded by deposits, with stable asset quality and increased equity from reduced AFS losses - The loan portfolio grew by $113.7 million (gross) from year-end 2022 to June 30, 2023, driven by organic growth in commercial and residential real estate lending[482] - Non-performing assets totaled $2.9 million as of June 30, 2023, a decrease from $5.5 million at December 31, 2022[485][486] - Total deposits increased by $84.9 million since year-end 2022, largely due to a rise in brokered time deposits, which grew from $100.3 million to $389.1 million[511] - Shareholders' equity increased to $290.1 million from $273.5 million at year-end 2022, primarily due to a $13.3 million positive change in accumulated other comprehensive income as unrealized losses on the AFS securities portfolio decreased[472] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed by ALCO, with models indicating NII is slightly asset-sensitive and EVE decreases in rising rate scenarios Interest Rate Sensitivity Analysis on Net Interest Income (Next 12 Months) | Change in Interest Rates (Basis Points) | % Change in Net Interest Income (as of June 30, 2023) | % Change in Net Interest Income (as of Dec 31, 2022) | | :--- | :--- | :--- | | +300 | (1.3)% | (9.2)% | | +200 | (1.1)% | (6.2)% | | +100 | (0.4)% | (3.0)% | | -100 | (2.3)% | (2.0)% | | -200 | (4.1)% | (5.8)% | Interest Rate Sensitivity Analysis on Economic Value of Equity (EVE) | Change in Interest Rates (Basis Points) | % Change in EVE (as of June 30, 2023) | % Change in EVE (as of Dec 31, 2022) | | :--- | :--- | :--- | | +300 | (14.8)% | (15.8)% | | +200 | (10.3)% | (10.5)% | | +100 | (4.6)% | (4.7)% | | -100 | 2.0% | 0.1% | | -200 | 1.3% | (3.2)% | Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[518] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[504] Part II - Other Information Legal Proceedings The company is not party to any material legal proceedings, and management expects no material adverse effect from ordinary course litigation - The company is not party to any material legal proceedings, and management does not expect any pending litigation to have a material adverse effect on its financial position[505] Risk Factors No material changes have occurred in the risk factors previously disclosed in the company's Registration Statement on Form 10 - No material changes have occurred in the risk factors disclosed in the company's Registration Statement[520] Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023 - No directors or officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the second quarter of 2023[522] Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley Act - The exhibits filed with this report include certifications from the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act[508]