Burke & Herbert Financial Services Corp. (Nasdaq: BHRB) reported financial results for the quarter ended September 30, 2023. In addition, at its meeting on October 26, 2023, the board of directors declared a $0.53 per share regular cash dividend to be paid on December 1, 2023, to shareholders of record as of the close of business November 15, 2023.
For the third quarter, the Company reported net income of $4.1 million, or $0.55 per diluted share. Excluding significant items1, operating net income (non-GAAP2) for the same period was $5.6 million, or $0.75 per diluted share. For the nine months ended September 30, 2023, net income was $17.6 million, or $2.35 per diluted share. Excluding significant items1, operating net income (non-GAAP2) for the same period was $19.5 million, or $2.60 per diluted share.
The Company notes the following highlights:
- Balance sheet remains strong with ample liquidity. Total liquidity, including all available borrowing capacity with cash and cash equivalents, totaled $925.4 million at the end of the third quarter.
- Total loans increased $69.6 million, representing a 13.8% annualized growth rate, during the quarter ending September 30, 2023, to $2.1 billion.
- Total deposits were relatively stable and ended the quarter at $3.0 billion, resulting in a loan-to-deposit ratio of 69.4%.
- Asset quality remains stable across the loan portfolio with adequate reserves.
- The Company continues to be well-capitalized, ending the quarter with 16.4% Common Equity Tier 1 capital to risk-weighted assets, 17.5% Total risk-based capital to risk-weighted assets, and a leverage ratio of 11.3%.
- On August 24, 2023, the Company and Summit Financial Group, Inc. (“Summit”) (Nasdaq: SMMF) announced the signing of a definitive agreement under which Summit will merge with and into the Company in an all-stock merger of equals. When the merger is completed, the combined organization will create a financial holding company with more than $8 billion in assets and more than 75 branches across Virginia, West Virginia, Maryland, Delaware, and Kentucky, with more than 800 employees serving our communities. Completion of the merger is subject to receiving the requisite approvals of the Company’s and Summit’s stockholders, receipt of all required regulatory approvals, and fulfillment of other customary closing conditions.
From David P. Boyle, Company Chair, President and Chief Executive Officer
“I’m pleased that, despite the multiple challenges facing our industry, we remained focused on being the quintessential community bank. This quarter we increased loans, maintained a strong liquidity position, continued to make investments in our businesses and communities, and are well-positioned to deliver increased shareholder value over the long-term.”
Results of Operations
Third Quarter 2023 – Comparison to prior year quarter
Net income for the three months ended September 30, 2023, was $4.1 million or $7.1 million lower than the three months ended September 30, 2022, primarily due to merger-related costs, increased funding costs, and the change in provision for credit losses that included a recapture of credit losses in the prior year quarter.
Total revenue (non-GAAP2) for the three months ended September 30, 2023, was $27.2 million or 12% lower than the three months ended September 30, 2022, and included $26.4 million in interest and fees on loans and $10.3 million in investment security income, which was a 42% increase and a 2% decrease, respectively, over the prior year three months ended September 30, 2022. Overall, interest income for the three months ended September 30, 2023, was $37.3 million or 27% higher than the three months ended September 30, 2022. The increase in interest income for the Company’s loans was due to increased loan balances and higher rates, and the interest income decrease in investment securities was due to a lower level of investment securities. Loans, net of allowance for credit losses, ended the quarter at $2.0 billion or 18% higher than September 30, 2022, while the investment portfolio fair value ended the quarter at $1.2 billion or 16% lower than the prior year quarter.
The increase in interest income was offset by an increase in interest expense, which was $14.4 million for the three months ended September 30, 2023, or $11.8 million higher than the prior year period. The rapidly rising rate environment resulted in an increase in the Company’s cost of funds that outpaced the resulting benefit of higher rates on assets. The Company’s deposit and borrowing interest expense was $11.3 million and $3.1 million, or $10.3 million and $1.5 million higher, respectively, for the three months ended September 30, 2023. Total deposits ended the quarter at $3.0 billion, which was approximately the same as in the prior year. Non-interest-bearing deposits decreased by 13% to $853.4 million and borrowed funds increased by 23% to $299.0 million from the prior year quarter ended September 30, 2022, reflecting the changing deposit mix from non-interest bearing to interest-bearing, resulting in higher interest expense.
Non-interest income for the three months ended September 30, 2023, increased slightly from the same period last year and was $4.3 million in the current period. The increase in other non-interest income is primarily the result of increased fee income from customer swap activity when compared to the prior year quarter, partially offset by a decrease in fee income for service charges and fees.
For the three months ended September 30, 2023, the Company recorded a provision for credit losses of $0.2 million, compared to a recapture of credit losses of $2.4 million in the prior year quarter. Total revenue (non-GAAP2) after provision for credit losses was $26.9 million for the three months ended September 30, 2023, which was a decrease of 19% compared to the same period last year.
Non-interest expense increased by $2.5 million, or 12%, for the three months ended September 30, 2023, from the prior year three months ended September 30, 2022. The increase was primarily due to other non-interest expenses associated with merger-related activities. The Company incurred expenses during the third quarter of 2023 related to the pending merger with Summit that included legal, consulting, investment banking, and due diligence-related costs.
As of September 30, 2023, total shareholders’ equity was $270.8 million or $15.3 million higher than September 30, 2022, primarily the result of higher earnings in the last quarter of 2022.
Nine months ended September 30, 2023 – Comparison to prior year period
Net income for the nine months ended September 30, 2023, was $17.6 million or $13.0 million lower than the nine months ended September 30, 2022.
Total revenue (non-GAAP2) for the nine months ended September 30, 2023, was $84.6 million or 5% lower than the nine months ended September 30, 2022, and included $74.5 million in interest and fees on loans and $32.4 million in investment security income, which was a 42% increase and an 18% increase, respectively, over the prior year nine months. Overall, interest income for the nine months ended September 30, 2023, was $108.7 million or 36% higher than the nine months ended September 30, 2022. The increase in interest income for the Company’s loans was due to increased loan growth and higher rates and the interest income increase on investment securities was due to higher rates.
The increase in interest income was offset by an increase in interest expense, which was $37.3 million for the nine months ended September 30, 2023, or $33.0 million higher than the prior year period. The rapidly rising rate environment resulted in an increase in the Company’s cost of funds that outpaced the resulting benefit of higher rates on assets. The Company’s deposit and borrowing interest expense was $26.7 million and $10.5 million, or $25.0 million and $8.0 million higher, respectively, for the nine months ended September 30, 2023, than for the nine months ended September 30, 2022.
Non-interest income for the nine months ended September 30, 2023, increased $0.3 million from the same period last year to $13.1 million. The increase was primarily due to higher other non-interest income revenue of $0.5 million. Within other non-interest income, the Company received an increase in dividend income from the FHLB and increased fee income from customer swap activity when compared to the prior year period ended September 30, 2022. This increase in non-interest income was partially offset by lower income generated from service charges and fees which decreased by $0.2 million.
For the nine months ended September 30, 2023, the Company recorded a provision for credit losses of $1.0 million compared to a recapture of credit losses of $7.6 million in the prior year period. Total revenue (non-GAAP2) after provision for credit losses was $83.6 million for the nine months ended September 30, 2023, which was a decrease of 13% compared to the same period last year.
Non-interest expense increased by $4.7 million, or 8%, for the nine months ended September 30, 2023, from the prior year nine months. The increase was primarily driven by other non-interest expenses that the Company incurred during 2023 related to costs associated with the listing of our common stock on the Nasdaq stock exchange and the filing of a Form 10 Registration Statement with the U.S. Securities Exchange Commission (“SEC”) to register our common stock under the Securities Exchange Act of 1934, as amended (together, “Listing-related”), and with costs incurred for the merger with Summit. Additionally, the Company incurred higher personnel-related expenses, primarily benefits and pension, due to increased healthcare costs and general macro-economic conditions.
Regulatory capital ratios
The Company continues to be well-capitalized with capital ratios that are above regulatory requirements. As of September 30, 2023, our Common Equity Tier 1 capital to risk-weighted asset and Total risk-based capital to risk-weighted asset ratios were 16.4% and 17.5%, respectively, and significantly above the well-capitalized requirements of 6.5% and 10%, respectively. The leverage ratio was 11.3% compared to a 5% level to be considered well-capitalized.
Burke & Herbert Bank & Trust Company (“the Bank”), the Company’s wholly-owned bank subsidiary, also continues to be well-capitalized with capital ratios that are above regulatory requirements. As of September 30, 2023, the Bank’s Common Equity Tier 1 capital to risk-weighted asset and Total risk-based capital to risk-weighted asset ratios were 16.4% and 17.4%, respectively, and significantly above the well-capitalized requirements. In addition, the Bank’s leverage ratio of 11.3% is considered to be well-capitalized.
For more information about the Company’s financial condition, including additional disclosures pertinent to recent events in the banking industry, please see our financial statements and supplemental information attached to this release.
Burke & Herbert Financial Services Corp. is the financial holding company for Burke & Herbert Bank & Trust Company. Burke & Herbert Bank & Trust Company is the oldest continuously operating bank under its original name headquartered in the greater Washington DC Metro area. The Bank offers a full range of business and personal financial solutions designed to meet customers’ banking, borrowing, and investment needs and has over 20 branches throughout the Northern Virginia region and commercial loan offices in Fredericksburg, Loudoun County, Richmond, and in Bethesda, Maryland. Learn more at www.burkeandherbertbank.com.
