Burke & Herbert Financial Services (BHRB) - 2024 Q1 - Quarterly Results

First Quarter 2024 Financial Highlights Burke & Herbert Financial Services Corp. reported Q1 2024 net income of $5.2 million, maintained strong capital and liquidity, and secured final merger approval Key Financial Metrics Burke & Herbert Financial Services Corp. reported a net income of $5.2 million for Q1 2024, with diluted earnings per share of $0.69, while operating net income (non-GAAP) was $5.7 million, and adjusted diluted EPS (non-GAAP) was $0.76, both showing a decrease compared to prior periods Q1 2024 Key Financial Metrics (GAAP & Non-GAAP) | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :-------------------------------- | :------ | :------ | :------ | | Net Income | $5.2M | $5.1M | $7.5M | | Diluted EPS | $0.69 | $0.67 | $1.00 | | Operating Net Income (non-GAAP) | $5.7M | $6.2M | $7.7M | | Adjusted Diluted EPS (non-GAAP) | $0.76 | $0.83 | $1.02 | Balance Sheet and Liquidity The Company maintained a strong balance sheet with ample liquidity, totaling $758.3 million at the end of the first quarter, with total deposits remaining relatively stable at $3.0 billion - Total liquidity, including all available borrowing capacity with cash and cash equivalents, totaled $758.3 million at the end of Q1 2024[2] - Total deposits were relatively stable, ending the quarter at $3.0 billion[3] - Total gross loans increased by $166.4 million, or 8.5%, year-over-year, with a loan-to-deposit ratio of 70.8% at quarter-end[22] Capital Position Burke & Herbert remains well-capitalized, exceeding regulatory requirements with strong capital ratios at the end of the quarter Q1 2024 Capital Ratios | Metric | Ratio | | :--------------------------------- | :------ | | Common Equity Tier 1 capital to RWA | 16.6% | | Total risk-based capital to RWA | 17.5% | | Leverage ratio | 11.4% | Strategic Developments (Merger) The Company received final regulatory approval for its merger of equals with Summit Financial Group, Inc., with the closing expected on May 3, 2024, creating a significant financial holding company - Final regulatory approval for the merger with Summit Financial Group, Inc. was received on April 19, 2024, with the merger expected to close on May 3, 2024[24] - Upon completion, the merger will create a financial holding company with over $8 billion in assets, more than 75 branches across five states (Virginia, West Virginia, Maryland, Delaware, and Kentucky), and over 800 employees[5] Management Commentary David P. Boyle, Company Chair, President, and CEO, expressed satisfaction with the financial progress, highlighting the strong balance sheet, stable asset quality, active lending, dependable deposit base, and the ongoing efforts for a smooth merger integration - CEO David P. Boyle noted satisfaction with financial progress, a well-positioned balance sheet for various economic scenarios, stable asset quality, active lending teams, a strong deposit base, and diligent merger integration efforts[25] Results of Operations Q1 2024 net income decreased to $5.2 million, driven by increased funding costs and merger expenses, partially offset by loan interest income growth Net Income and Earnings Per Share Net income for Q1 2024 was $5.2 million, a decrease of $2.3 million compared to Q1 2023, primarily driven by increased funding costs and merger-related expenses, partially offset by higher loan interest income and a credit loss recapture - Net income for Q1 2024 was $5.2 million, a $2.3 million decrease from Q1 2023, mainly due to increased funding costs and merger-related costs, partially offset by higher loan interest income and a credit loss recapture[7] Net Interest Income and Expense Net interest income decreased by $2.6 million year-over-year, as a significant increase in interest expense, particularly from deposits, outpaced the growth in interest income from loans, reflecting a shift from non-interest-bearing to interest-bearing deposits Q1 2024 Interest Income & Expense (YoY Change) | Metric | Q1 2024 | Q1 2023 | Change (YoY) | | :-------------------------- | :------ | :------ | :----------- | | Total Interest Income | $38.7M | $34.3M | +13% | | Loan Interest & Fees | $28.0M | $22.76M | +23% | | Investment Security Income | $10.3M | $11.26M | -8% | | Total Interest Expense | $16.6M | $9.55M | +$7.1M | | Deposit Interest Expense | $12.9M | $5.4M | +$7.5M | | Net Interest Income | $22.1M | $24.77M | -$2.6M | - Non-interest-bearing deposits decreased by 9% to $822.8 million, while interest-bearing deposits increased by 2% to $2.2 billion year-over-year, reflecting a changing deposit mix[8] - Borrowed funds increased by 12% to $360.0 million from the prior year quarter[8] Non-Interest Income and Expense Non-interest income saw a slight increase year-over-year, primarily driven by fiduciary and wealth management fees, while non-interest expense rose due to merger-related activities, including legal, consulting, and integration costs Q1 2024 Non-Interest Income & Expense (YoY Change) | Metric | Q1 2024 | Q1 2023 | Change (YoY) | | :-------------------------- | :------ | :------ | :----------- | | Total Non-Interest Income | $4.3M | $4.2M | +$0.1M | | Fiduciary & Wealth Mgmt Fees | $1.4M | $1.3M | +$0.1M | | Total Non-Interest Expense | $21.2M | $20.4M | +$0.8M | | Non-interest expense increase | 4% | | | - The increase in non-interest expense was primarily due to merger-related activities, including legal, consulting, and integration costs[29] Provision for Credit Losses The Company recorded a recapture of credit losses of $0.7 million in Q1 2024, a positive shift from a provision of $0.5 million in the prior year quarter, attributed to improving portfolio credit quality and diversification Q1 Credit Loss Provision/Recapture | Metric | Q1 2024 | Q1 2023 | | :--------------------------------- | :------ | :------ | | Provision for (recapture of) credit losses | ($0.7M) | $0.5M | - The recapture of credit losses was due to improving portfolio credit quality and continued diversification of the loan portfolio[9] Financial Position Total assets increased to $3.696 billion as of March 31, 2024, reflecting growth in loans and securities, alongside stable deposits and increased equity Balance Sheet Overview The Company's total assets increased to $3.696 billion as of March 31, 2024, from $3.618 billion at December 31, 2023, reflecting growth in loans and securities Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :------------------------------------ | :------------- | :---------------- | | Total Assets | $3,696,390 | $3,617,579 | | Total Liabilities | $3,377,082 | $3,302,829 | | Total Shareholders' Equity | $319,308 | $314,750 | Deposits and Borrowed Funds Total deposits slightly decreased quarter-over-quarter, with a notable shift from non-interest-bearing to interest-bearing deposits, while borrowed funds increased significantly Deposits and Borrowed Funds (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :-------------------------- | :------------- | :---------------- | | Non-interest-bearing deposits | $822,767 | $830,320 | | Interest-bearing deposits | $2,167,346 | $2,171,561 | | Total deposits | $2,990,113 | $3,001,881 | | Borrowed funds | $360,000 | $272,000 | Loans and Investment Securities Gross loans increased quarter-over-quarter, while the fair value of securities available-for-sale also saw an increase Loans and Securities (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :------------------------------------ | :------------- | :---------------- | | Loans (gross) | $2,118,155 | $2,087,756 | | Allowance for credit losses | ($24,606) | ($25,301) | | Net loans | $2,093,549 | $2,062,455 | | Securities available-for-sale, at fair value | $1,275,520 | $1,248,439 | Shareholders' Equity Total shareholders' equity increased to $319.3 million, primarily due to higher fair value marks for the security portfolio, which reduced accumulated other comprehensive loss Shareholders' Equity (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :------------------------------------ | :------------- | :---------------- | | Total Shareholders' Equity | $319,308 | $314,750 | | Accumulated other comprehensive income (loss) | ($100,954) | ($103,494) | - The increase in shareholders' equity was primarily the result of higher fair value marks for the security portfolio, leading to a $22.9 million lower accumulated other comprehensive loss[9] Regulatory Capital Ratios Both the Company and its Bank subsidiary maintain strong capital positions, significantly exceeding all regulatory well-capitalized requirements Company and Bank Capital Ratios Both Burke & Herbert Financial Services Corp. and its subsidiary, Burke & Herbert Bank & Trust Company, continue to be well-capitalized, with all regulatory capital ratios significantly exceeding required minimums Q1 2024 Regulatory Capital Ratios | Metric | Company Ratio | Bank Ratio | Well-Capitalized Requirement | | :--------------------------------- | :------------ | :--------- | :--------------------------- | | Common Equity Tier 1 capital to RWA | 16.6% | 16.4% | 6.5% | | Total risk-based capital to RWA | 17.5% | 17.4% | 10% | | Leverage ratio | 11.4% | 11.3% | 5% | Merger with Summit Financial Group, Inc. The merger with Summit Financial Group, Inc. received final regulatory approval and is expected to close on May 3, 2024, creating a significantly expanded financial holding company Merger Status and Impact The merger of equals with Summit Financial Group, Inc. received final regulatory approval and is anticipated to close on May 3, 2024, with this strategic combination expected to significantly expand the Company's asset base, branch network, and employee count - Final regulatory approval for the merger with Summit Financial Group, Inc. was received on April 19, 2024, with the closing expected on May 3, 2024[24] - The combined entity will operate as a financial holding company with over $8 billion in assets, more than 75 branches across Virginia, West Virginia, Maryland, Delaware, and Kentucky, and over 800 employees[5] About Burke & Herbert Financial Services Corp. Burke & Herbert Financial Services Corp. is the holding company for Burke & Herbert Bank & Trust Company, the oldest continuously operating bank in the greater Washington DC Metro area Company Profile Burke & Herbert Financial Services Corp. is the financial holding company for Burke & Herbert Bank & Trust Company, recognized as the oldest continuously operating bank under its original name in the greater Washington DC Metro area, offering a comprehensive range of financial solutions through over 20 branches and commercial loan offices - Burke & Herbert Bank & Trust Company is the oldest continuously operating bank under its original name headquartered in the greater Washington DC Metro area[33] - The Bank offers a full range of business and personal financial solutions and operates over 20 branches throughout Northern Virginia, with commercial loan offices in Fredericksburg, Loudoun County, Richmond, and Bethesda, Maryland[33] Cautionary Note Regarding Forward-Looking Statements This section provides a cautionary note on forward-looking statements, highlighting that actual results may differ materially due to various risks and uncertainties, especially regarding the proposed merger Forward-Looking Statement Disclaimer This section provides a standard cautionary note regarding forward-looking statements, emphasizing that actual results may differ materially due to various risks and uncertainties, particularly concerning the proposed merger with Summit Financial Group, Inc. - Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which may cause actual results or future events to differ materially from those indicated[13][35] - Key risks include the possibility of merger termination, legal proceedings, delays in closing, failure to realize anticipated benefits (cost savings, synergies), integration difficulties, unexpected costs, and general economic, political, and market factors[13] Consolidated Financial Statements (Unaudited) This section presents the Company's unaudited consolidated statements of income and balance sheets for Q1 2024, detailing financial performance and position Consolidated Statements of Income The consolidated statements of income provide a detailed breakdown of revenues and expenses for the three months ended March 31, 2024, compared to the same period in 2023 Consolidated Statements of Income (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Total interest income | $38,745 | $34,328 | | Total interest expense | $16,614 | $9,554 | | Net interest income | $22,131 | $24,774 | | Provision for (recapture of) credit losses | ($670) | $515 | | Total non-interest income | $4,254 | $4,214 | | Total non-interest expense | $21,165 | $20,365 | | Income before income taxes | $5,890 | $8,108 | | Income tax expense | $678 | $584 | | Net income | $5,212 | $7,524 | Consolidated Balance Sheets The consolidated balance sheets present the Company's financial position as of March 31, 2024, and December 31, 2023, detailing assets, liabilities, and shareholders' equity Consolidated Balance Sheets (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :------------------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $54,077 | $44,498 | | Securities available-for-sale, at fair value | $1,275,520 | $1,248,439 | | Loans (net) | $2,093,549 | $2,062,455 | | Total Assets | $3,696,390 | $3,617,579 | | Total deposits | $2,990,113 | $3,001,881 | | Borrowed funds | $360,000 | $272,000 | | Total Liabilities | $3,377,082 | $3,302,829 | | Total Shareholders' Equity | $319,308 | $314,750 | Supplemental Financial Information (Unaudited) This section provides unaudited supplemental financial data, including per common share information, balance sheet trends, key financial ratios, and quarterly income statement trends Per Common Share Information This section provides per common share data, including basic and diluted earnings, cash dividends, and book value, across several recent quarters Per Common Share Information | Metric | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :----------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Basic earnings | $0.70 | $0.68 | $0.55 | $0.81 | $1.01 | | Diluted earnings | $0.69 | $0.67 | $0.55 | $0.80 | $1.00 | | Cash dividends | $0.53 | $0.53 | $0.53 | $0.53 | $0.53 | | Book value | $42.92 | $42.37 | $36.46 | $39.05 | $39.02 | Balance Sheet Related Data Key balance sheet items are presented over several quarters, showing trends in assets, loans, deposits, and borrowed funds Balance Sheet Related Data (in thousands) | Metric | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :------------------------------------ | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Total Assets | $3,696,390 | $3,617,579 | $3,585,188 | $3,569,226 | $3,671,186 | | Loans (gross) | $2,118,155 | $2,087,756 | $2,070,616 | $2,000,969 | $1,951,738 | | Deposits, total | $2,990,113 | $3,001,881 | $2,985,618 | $3,005,263 | $3,032,391 | | Borrowed funds | $360,000 | $272,000 | $299,000 | $249,000 | $321,700 | | Equity | $319,308 | $314,750 | $270,819 | $290,072 | $289,783 | Key Financial Ratios A summary of key financial ratios, including profitability, efficiency, and capital adequacy, is provided for recent quarters Key Financial Ratios | Ratio | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Return on average assets (annualized) | 0.58% | 0.56% | 0.45% | 0.67% | 0.85% | | Return on average equity (annualized) | 6.67% | 7.30% | 5.60% | 8.34% | 10.83% | | Net interest margin (non-GAAP) | 2.68% | 2.70% | 2.76% | 2.87% | 3.06% | | Efficiency ratio | 80.22% | 82.20% | 82.50% | 75.12% | 70.25% | | Loan-to-deposit ratio | 70.84% | 69.55% | 69.35% | 66.58% | 64.36% | | Common Equity Tier 1 (CET1) capital ratio | 16.56% | 16.85% | 16.44% | 17.60% | 17.55% | | Total risk-based capital ratio | 17.54% | 17.88% | 17.48% | 18.71% | 18.65% | | Leverage ratio | 11.36% | 11.31% | 11.32% | 11.20% | 11.19% | Quarterly Income Statement Trends This table provides a quarterly view of key income statement figures, illustrating trends in interest income, expenses, non-interest income, and net income over the past five quarters Quarterly Income Statement (in thousands) | Metric | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | Q1 2023 | | :--------------------------------- | :------ | :------ | :------ | :------ | :------ | | Interest income | $38,745 | $38,180 | $37,272 | $37,116 | $34,328 | | Interest expense | $16,614 | $15,876 | $14,383 | $13,324 | $9,554 | | Non-interest income | $4,254 | $4,824 | $4,289 | $4,625 | $4,214 | | Total revenue (non-GAAP) | $26,385 | $27,128 | $27,178 | $28,417 | $28,988 | | Non-interest expense | $21,165 | $22,300 | $22,423 | $21,348 | $20,365 | | Income before income taxes | $5,890 | $5,578 | $4,520 | $6,855 | $8,108 | | Net income | $5,212 | $5,078 | $4,056 | $6,034 | $7,524 | Non-GAAP Reconciliations (Unaudited) This section provides reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures, along with definitions, for performance insights Non-GAAP Definitions This section defines the non-GAAP financial measures used by management, including operating net income, total revenue, pretax, pre-provision earnings, and net interest margin on a fully taxable-equivalent (FTE) basis, explaining their utility for performance evaluation - Operating net income (non-GAAP) adjusts net income for significant items like merger-related and listing-related expenses, providing a clearer view of core business performance[19] - Total revenue (non-GAAP) is calculated as total interest income less total interest expense plus total non-interest income, used to assess business management and revenue stability[43] - Pretax, pre-provision earnings (non-GAAP) adjusts income before income taxes by excluding the provision for (recapture of) credit losses, useful for evaluating the ability to cover credit costs and comparing results across periods[54] - Net interest margin on a fully taxable-equivalent (FTE) basis adjusts interest income from tax-exempt assets to be comparable with taxable investments, providing a more meaningful comparison of net interest income[55] Operating Net Income Reconciliation This table reconciles GAAP net income to non-GAAP operating net income by adjusting for significant items such as merger-related and listing-related expenses Operating Net Income Reconciliation (in thousands) | Metric | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Net income | $5,212 | $5,078 | $4,056 | $6,034 | $7,524 | | Add back significant items (tax effected): | | | | | | | Listing-related | — | — | — | $79 | $160 | | Merger-related | $537 | $1,141 | $1,592 | $92 | — | | Total significant items | $537 | $1,141 | $1,592 | $171 | $160 | | Operating net income | $5,749 | $6,219 | $5,648 | $6,205 | $7,684 | | Adjusted diluted EPS | $0.76 | $0.83 | $0.75 | $0.83 | $1.02 | Total Revenue Reconciliation This table reconciles total interest income, interest expense, and non-interest income to arrive at the non-GAAP total revenue figure for recent quarters Total Revenue (non-GAAP) Reconciliation (in thousands) | Metric | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :----------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Interest income | $38,745 | $38,180 | $37,272 | $37,116 | $34,328 | | Interest expense | $16,614 | $15,876 | $14,383 | $13,324 | $9,554 | | Non-interest income | $4,254 | $4,824 | $4,289 | $4,625 | $4,214 | | Total revenue (non-GAAP) | $26,385 | $27,128 | $27,178 | $28,417 | $28,988 | Pretax, Pre-Provision Earnings Reconciliation This table reconciles income before taxes to pretax, pre-provision earnings by adjusting for the provision for (recapture of) credit losses Pretax, Pre-Provision Earnings Reconciliation (in thousands) | Metric | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Income before taxes | $5,890 | $5,578 | $4,520 | $6,855 | $8,108 | | Provision for (recapture of) credit losses | ($670) | ($750) | $235 | $214 | $515 | | Pretax, pre-provision earnings (non-GAAP) | $5,220 | $4,828 | $4,755 | $7,069 | $8,623 | Net Interest Margin (FTE) Calculation This section provides the calculation of net interest income and net interest margin on a fully taxable-equivalent (FTE) basis, adjusting for the tax benefits of certain interest-earning assets Net Interest Margin (FTE) Calculation (in thousands) | Metric | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Net interest income | $22,131 | $22,304 | $22,889 | $23,792 | $24,774 | | Taxable-equivalent adjustments | $362 | $365 | $366 | $375 | $387 | | Net interest income (FTE) | $22,493 | $22,669 | $23,255 | $24,167 | $25,161 | | Average earning assets | $3,377,092 | $3,332,733 | $3,337,282 | $3,379,534 | $3,331,920 | | Net interest margin (non-GAAP) | 2.68% | 2.70% | 2.76% | 2.87% | 3.06% |