ALEXANDRIA, Va. and MOOREFIELD, W.Va., May 3, 2024 /PRNewswire/ -- Burke & Herbert Financial Services Corp. ("Burke & Herbert") (Nasdaq: BHRB) today announced the completion of the merger of Summit Financial Group, Inc. ("Summit") with and into Burke & Herbert and the merger of Summit Community Bank, Inc., with and into Burke & Herbert Bank & Trust Company, effective May 3, 2024. From David P. Boyle, Chair and Chief Executive Officer "The consummation of this partnership brings together two organizations co ...

ALEXANDRIA, Va., April 26, 2024 /PRNewswire/ --Burke & Herbert Financial Services Corp. (the "Company" or "Burke & Herbert") (Nasdaq: BHRB) reported financial results for the quarter ended March 31, 2024. In addition, at its meeting on April 25, 2024, the board of directors declared a $0.53 per share regular cash dividend to be paid on June 3, 2024, to shareholders of record as of the close of business on May 15, 2024. Net income totaled $5.2 million for the quarter, compared to $5.1 million the previous q ...

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](index=1&type=section&id=1.1%20Key%20Financial%20Metrics) 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](index=1&type=section&id=1.2%20Balance%20Sheet%20and%20Liquidity) 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](index=2&type=chunk) - Total deposits were relatively stable, ending the quarter at **$3.0 billion**[3](index=3&type=chunk) - 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](index=22&type=chunk) [Capital Position](index=1&type=section&id=1.3%20Capital%20Position) 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)](index=1&type=section&id=1.4%20Strategic%20Developments%20(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](index=24&type=chunk) - 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](index=5&type=chunk) [Management Commentary](index=1&type=section&id=1.5%20Management%20Commentary) 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](index=25&type=chunk) 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](index=2&type=section&id=2.1%20Net%20Income%20and%20Earnings%20Per%20Share) 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](index=7&type=chunk) [Net Interest Income and Expense](index=2&type=section&id=2.2%20Net%20Interest%20Income%20and%20Expense) 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](index=8&type=chunk) - Borrowed funds increased by **12%** to **$360.0 million** from the prior year quarter[8](index=8&type=chunk) [Non-Interest Income and Expense](index=2&type=section&id=2.3%20Non-Interest%20Income%20and%20Expense) 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](index=29&type=chunk) [Provision for Credit Losses](index=2&type=section&id=2.4%20Provision%20for%20Credit%20Losses) 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](index=9&type=chunk) 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](index=6&type=section&id=3.1%20Balance%20Sheet%20Overview) 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](index=6&type=section&id=3.2%20Deposits%20and%20Borrowed%20Funds) 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](index=6&type=section&id=3.3%20Loans%20and%20Investment%20Securities) 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](index=6&type=section&id=3.4%20Shareholders'%20Equity) 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](index=9&type=chunk) 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](index=3&type=section&id=4.1%20Company%20and%20Bank%20Capital%20Ratios) 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](index=1&type=section&id=5.1%20Merger%20Status%20and%20Impact) 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](index=24&type=chunk) - 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](index=5&type=chunk) 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](index=3&type=section&id=6.1%20Company%20Profile) 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](index=33&type=chunk) - 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](index=33&type=chunk) 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](index=3&type=section&id=7.1%20Forward-Looking%20Statement%20Disclaimer) 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](index=13&type=chunk)[35](index=35&type=chunk) - 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](index=13&type=chunk) 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](index=5&type=section&id=8.1%20Consolidated%20Statements%20of%20Income) 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](index=6&type=section&id=8.2%20Consolidated%20Balance%20Sheets) 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](index=7&type=section&id=9.1%20Per%20Common%20Share%20Information) 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](index=7&type=section&id=9.2%20Balance%20Sheet%20Related%20Data) 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](index=8&type=section&id=9.3%20Key%20Financial%20Ratios) 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](index=8&type=section&id=9.4%20Quarterly%20Income%20Statement%20Trends) 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](index=9&type=section&id=10.1%20Non-GAAP%20Definitions) 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](index=19&type=chunk) - 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](index=43&type=chunk) - 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](index=54&type=chunk) - 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](index=55&type=chunk) [Operating Net Income Reconciliation](index=9&type=section&id=10.2%20Operating%20Net%20Income%20Reconciliation) 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](index=9&type=section&id=10.3%20Total%20Revenue%20Reconciliation) 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](index=10&type=section&id=10.4%20Pretax,%20Pre-Provision%20Earnings%20Reconciliation) 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](index=10&type=section&id=10.5%20Net%20Interest%20Margin%20(FTE)%20Calculation) 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% |

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 79 Lending Activities The loan portfolio, excluding ACL, increased by $200.5 million from December 31, 2022, to December 31, 2023, primarily due to commercial real estate, commercial & industrial, and residential real estate loan production. The Company has continued to grow organically by continuing to serve existing customers and new customers through our expansion into newer markets. | --- | --- | --- | --- | --- | ...

ALEXANDRIA, Va., Jan. 26, 2024 /PRNewswire/ -- Burke & Herbert Financial Services Corp. (the "Company" or "Burke & Herbert") (Nasdaq: BHRB) reported financial results for the quarter ended and year ended December 31, 2023. In addition, at its meeting on January 25, 2024, the board of directors declared a $0.53 per share regular cash dividend to be paid on March 1, 2024, to shareholders of record as of the close of business on February 15, 2024. View PDF Burke & Herbert Financial Services Corp. Announces ...

Part I - Financial Information This part presents the unaudited consolidated financial statements and management's discussion and analysis for Burke & Herbert Financial Services Corp [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of Burke & Herbert Financial Services Corp. for the three and nine months ended September 30, 2023, and 2022, including balance sheets, income statements, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes on significant accounting policies and financial instrument specifics [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) The Consolidated Balance Sheets show the financial position of Burke & Herbert Financial Services Corp. as of September 30, 2023, and December 31, 2022, highlighting key asset, liability, and equity figures Metric (in thousands) | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total Assets | $3,585,188 | $3,562,898 | | Total Deposits | $2,985,618 | $2,920,400 | | Borrowed Funds | $299,000 | $343,100 | | Total Shareholders' Equity | $270,819 | $273,453 | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) The Consolidated Statements of Income detail the company's revenues, expenses, and net income for the three and nine months ended September 30, 2023, and 2022, showing a significant decrease in net income year-over-year Metric (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Interest Income | $37,272 | $29,265 | $108,716 | $80,059 | | Total Interest Expense | $14,383 | $2,585 | $37,261 | $4,277 | | Net Interest Income | $22,889 | $26,680 | $71,455 | $75,782 | | Provision for (Recapture of) Credit Losses | $235 | $(2,388) | $964 | $(7,564) | | Total Non-interest Income | $4,289 | $4,261 | $13,128 | $12,872 | | Total Non-interest Expense | $22,423 | $19,952 | $64,136 | $59,485 | | Income Before Income Taxes | $4,520 | $13,377 | $19,483 | $36,733 | | Income Tax Expense | $464 | $2,240 | $1,869 | $6,073 | | Net Income | $4,056 | $11,137 | $17,614 | $30,660 | | Basic EPS | $0.55 | $1.50 | $2.37 | $4.13 | | Diluted EPS | $0.55 | $1.49 | $2.35 | $4.11 | [Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) The Consolidated Statements of Comprehensive Income (Loss) show the net income and other comprehensive income (loss) components, primarily driven by unrealized gains/losses on securities and cash flow hedges, for the three and nine months ended September 30, 2023, and 2022 Metric (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income | $4,056 | $11,137 | $17,614 | $30,660 | | Unrealized gains (losses) on securities (net of tax) | $(20,285) | $(42,793) | $(8,322) | $(152,878) | | Reclassification adjustment for loss (gain) on securities (net of tax) | $0 | $33 | $88 | $(49) | | Reclassification adjustment for loss (gain) on fair value hedge (net of tax) | $(32) | $0 | $842 | $0 | | Unrealized holding gain (loss) on cash flow hedge (net of tax) | $(38) | $(654) | $(267) | $(1,519) | | Reclassification adjustment for losses (gains) included in net income (net of tax) | $373 | $58 | $995 | $(86) | | Total Other Comprehensive Income (Loss) | $(19,982) | $(43,356) | $(6,664) | $(154,532) | | Comprehensive Income (Loss) | $(15,926) | $(32,219) | $10,950 | $(123,872) | [Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) The Consolidated Statements of Changes in Shareholders' Equity reflect movements in common stock, additional paid-in capital, retained earnings, accumulated other comprehensive income (loss), and treasury stock for the three and nine months ended September 30, 2023, and 2022, including the impact of CECL adoption and dividend declarations Metric (in thousands) | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total Shareholders' Equity | $270,819 | $273,453 | | Retained Earnings | $426,744 | $424,391 | | Accumulated Other Comprehensive Income (Loss) | $(146,159) | $(139,495) | | Impact of CECL Adoption (net of tax) | $(3,439) | N/A | | Cash Dividends Declared (9 months) | $(11,809) | $(11,807) | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The Consolidated Statements of Cash Flows provide a breakdown of cash generated from or used in operating, investing, and financing activities for the nine months ended September 30, 2023, and 2022, showing a decrease in cash and cash equivalents Metric (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Net Cash Flows Provided by Operating Activities | $32,335 | $48,650 | | Net Cash Flows (Used in) Investing Activities | $(50,086) | $(85,316) | | Net Cash Flows Provided by Financing Activities | $9,320 | $419 | | Increase (Decrease) in Cash and Cash Equivalents | $(8,431) | $(36,247) | | Cash and Cash Equivalents, End of Period | $41,864 | $41,116 | [Note 1— Nature of Business Activities and Significant Accounting Policies](index=11&type=section&id=Note%201%E2%80%94%20Nature%20of%20Business%20Activities%20and%20Significant%20Accounting%20Policies) This note outlines the company's organizational structure, primary market area, and significant accounting policies, including the adoption of new accounting standards like CECL and ASU 2022-01, and the pending merger with Summit Financial Group, Inc - Burke & Herbert Financial Services Corp. became the holding company for Burke & Herbert Bank & Trust Company on October 1, 2022, and elected to be a financial holding company in September 2023. The Bank operates **23 branches** in Northern Virginia and commercial loan offices in Fredericksburg, Loudoun County, Richmond, VA, and Bethesda, MD[389](index=389&type=chunk)[361](index=361&type=chunk)[596](index=596&type=chunk)[597](index=597&type=chunk) - On August 24, 2023, the Company entered into an Agreement and Plan of Reorganization and Plan of Merger with Summit Financial Group, Inc. (Summit). Summit shareholders will receive **0.5043 shares** of Burke & Herbert common stock for each Summit common stock share. The merger is subject to shareholder and regulatory approvals[362](index=362&type=chunk)[75](index=75&type=chunk) - The Company adopted ASU 2016-13 (CECL) and ASU 2022-02 on January 1, 2023. CECL replaced the incurred loss methodology with an expected loss methodology for financial assets measured at amortized cost and off-balance sheet credit exposures. The adoption resulted in a cumulative-effect adjustment that increased the allowance for credit losses for loans by **$4.1 million** and for unfunded commitments by **$274.8 thousand**, decreasing retained earnings by **$3.4 million** (net of deferred taxes)[395](index=395&type=chunk)[419](index=419&type=chunk)[369](index=369&type=chunk)[421](index=421&type=chunk) [Nature of operations](index=11&type=section&id=Nature%20of%20operations) The Company operates as a financial holding company, with its primary business conducted through Burke & Herbert Bank & Trust Company, offering a range of banking products and services across Northern Virginia and surrounding areas - The Bank's primary market area includes northern Virginia, with **23 branches** and commercial loan offices in Fredericksburg, Loudoun County, Richmond, Virginia, and Bethesda, Maryland. Deposit products include checking, savings, and term certificates, while the loan portfolio comprises commercial and consumer loans, largely secured by real estate[361](index=361&type=chunk) [Pending Merger with Summit Financial Group, Inc.](index=11&type=section&id=Pending%20Merger%20with%20Summit%20Financial%20Group%2C%20Inc.) Burke & Herbert Financial Services Corp. is in the process of merging with Summit Financial Group, Inc., a transaction that will result in Summit merging into Burke & Herbert, and Summit Community Bank, Inc. merging into Burke & Herbert Bank & Trust Company - The merger agreement, entered on August 24, 2023, stipulates that Summit shareholders will receive **0.5043 shares** of Burke & Herbert common stock for each share they own. The completion of the mergers is contingent upon requisite approvals from both companies' stockholders and regulatory bodies[75](index=75&type=chunk)[362](index=362&type=chunk) [Basis of Presentation](index=11&type=section&id=Basis%20of%20Presentation) The consolidated financial statements are prepared in accordance with GAAP for interim reporting and SEC regulations, with all significant intercompany transactions eliminated. Management's estimates and assumptions are integral to the reported amounts - The financial statements are prepared in accordance with GAAP for interim financial reporting and SEC regulations, with all significant intercompany accounts and transactions eliminated. Management's estimates and assumptions affect reported asset, liability, revenue, and expense amounts, and actual results may differ[363](index=363&type=chunk)[393](index=393&type=chunk)[415](index=415&type=chunk) [Adoption of new accounting standards](index=12&type=section&id=Adoption%20of%20new%20accounting%20standards) The Company adopted ASU 2022-01 (Derivatives and Hedging) and ASU 2016-13 (CECL) on January 1, 2023, with CECL significantly changing the methodology for credit loss measurement and eliminating TDR accounting guidance - ASU 2022-01 (Derivatives and Hedging) was adopted on January 1, 2023, with no material impact. ASU 2016-13 (CECL) was also adopted on January 1, 2023, replacing the incurred loss methodology with an expected loss model for financial assets at amortized cost and off-balance sheet credit exposures[366](index=366&type=chunk)[395](index=395&type=chunk) - The adoption of CECL resulted in a cumulative-effect adjustment that increased the allowance for credit losses for loans by **$4.1 million** and for unfunded commitments by **$274.8 thousand**, leading to a **$3.4 million** decrease in retained earnings (net of deferred taxes)[419](index=419&type=chunk)[421](index=421&type=chunk) - ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures) was adopted prospectively on January 1, 2023, eliminating TDR accounting guidance and enhancing disclosures for loan refinancings/restructurings when borrowers face financial difficulty[369](index=369&type=chunk) [Allowance for Credit Losses](index=12&type=section&id=Allowance%20for%20Credit%20Losses) The Allowance for Credit Losses (ACL) is determined using the CECL methodology, which estimates expected credit losses over the life of financial assets, including loans and off-balance sheet exposures, considering historical experience, current conditions, and future forecasts - The ACL for expected credit losses is determined based on a quantitative assessment of collectively and individually evaluated loans, incorporating a qualitative component for risk factors not fully captured by the CECL model[401](index=401&type=chunk)[505](index=505&type=chunk) - For collectively evaluated loans, the Company uses a Weighted Average Remaining Maturity (WARM) methodology, segmenting the portfolio by federal call codes and utilizing macroeconomic variable loss drivers for a two-year forecast period, reverting to historical average loss rates thereafter[426](index=426&type=chunk)[478](index=478&type=chunk) - Individually evaluated loans, such as non-accrual loans, are assessed based on collateral value, observable market price, or present value of expected future cash flows. For collateral-dependent loans, the ACL is measured based on the fair value of the collateral[403](index=403&type=chunk)[430](index=430&type=chunk)[451](index=451&type=chunk) - The ACL on off-balance sheet credit exposures (e.g., unfunded commitments) is estimated quarterly using the same CECL methodology as the loan portfolio and is included in accrued interest and other liabilities[404](index=404&type=chunk) - The Company elected to exclude accrued interest from the amortized cost basis for ACL determination and reverses interest income directly for uncollectible accrued interest receivable[405](index=405&type=chunk)[422](index=422&type=chunk) [Note 2— Securities](index=15&type=section&id=Note%202%E2%80%94%20Securities) This note details the Company's securities portfolio, primarily available-for-sale (AFS) debt securities, their fair values, unrealized gains/losses, and the impairment evaluation process under CECL, concluding no credit-related impairment for AFS securities as of September 30, 2023 Securities Available-for-Sale (in thousands): | Category | Amortized Cost (Sep 30, 2023) | Fair Value (Sep 30, 2023) | Amortized Cost (Dec 31, 2022) | Fair Value (Dec 31, 2022) | | :-------------------------------- | :---------------------------- | :------------------------ | :---------------------------- | :------------------------ | | U.S. Treasuries and government agencies | $197,310 | $172,982 | $198,154 | $174,993 | | Obligations of states and municipalities | $536,885 | $429,479 | $550,590 | $453,907 | | Residential mortgage backed - agency | $47,494 | $41,836 | $57,883 | $53,061 | | Residential mortgage backed - non-agency | $307,763 | $282,108 | $365,983 | $339,295 | | Commercial mortgage backed - agency | $36,874 | $35,539 | $61,810 | $59,933 | | Commercial mortgage backed - non-agency | $181,844 | $173,344 | $191,709 | $183,299 | | Asset-backed | $82,811 | $81,172 | $101,791 | $98,626 | | Other | $9,500 | $7,935 | $9,500 | $8,643 | | **Total** | **$1,400,481** | **$1,224,395** | **$1,537,420** | **$1,371,757** | Gross Unrealized Losses on AFS Securities (in thousands): | Category | Less Than Twelve Months (Fair Value) | Less Than Twelve Months (Gross Unrealized Losses) | More Than Twelve Months (Fair Value) | More Than Twelve Months (Gross Unrealized Losses) | Total Unrealized Losses (Sep 30, 2023) | | :-------------------------------- | :----------------------------------- | :---------------------------------------- | :----------------------------------- | :---------------------------------------- | :------------------------------------- | | U.S. Treasuries and government agencies | $0 | $0 | $172,982 | $24,328 | $24,328 | | Obligations of states and municipalities | $1,708 | $125 | $424,139 | $107,288 | $107,413 | | Residential mortgage backed - agency | $37 | $1 | $41,798 | $5,657 | $5,658 | | Residential mortgage backed - non-agency | $12,875 | $542 | $268,477 | $25,117 | $25,659 | | Commercial mortgage backed - agency | $249 | $2 | $34,725 | $1,353 | $1,355 | | Commercial mortgage backed - non-agency | $13,671 | $103 | $158,968 | $8,397 | $8,500 | | Asset-backed | $13,080 | $47 | $58,198 | $1,603 | $1,650 | | Other | $6,252 | $1,249 | $1,683 | $316 | $1,565 | | **Total** | **$47,872** | **$2,069** | **$1,160,970** | **$174,059** | **$176,128** | - The Company concluded that unrealized losses on AFS securities at September 30, 2023, were primarily due to changes in interest rates and market volatility, not credit deterioration. No ACL was recorded for AFS securities, as the Company does not intend to sell them and is not required to sell them before recovery of amortized cost[438](index=438&type=chunk)[464](index=464&type=chunk)[466](index=466&type=chunk)[467](index=467&type=chunk)[468](index=468&type=chunk)[469](index=469&type=chunk) - Restricted stock, primarily FHLB stock, totaled **$7.2 million** at September 30, 2023, and **$16.4 million** at December 31, 2022. These investments are carried at cost and are not considered impaired[470](index=470&type=chunk) [Note 3— Loans](index=19&type=section&id=Note%203%E2%80%94%20Loans) This note details the composition of the Company's loan portfolio by segment, outlining the associated risks and the impact of the CECL methodology adoption on loan accounting Loan Balances by Portfolio Segment (in thousands): | Loan Segment | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Commercial real estate | $1,260,653 | $1,109,315 | | Owner-occupied commercial real estate | $123,496 | $127,114 | | Acquisition, construction & development | $96,535 | $94,450 | | Commercial & industrial | $61,571 | $53,514 | | Single family residential (1-4 units) | $525,558 | $499,362 | | Consumer non-real estate and other | $2,803 | $3,466 | | **Loans, gross** | **$2,070,616** | **$1,887,221** | | Allowance for credit losses | $(26,111) | $(21,039) | | **Loans, net** | **$2,044,505** | **$1,866,182** | - The Company's loan portfolio segments include commercial real estate, owner-occupied commercial real estate, acquisition, construction & development, commercial & industrial, single family residential (**1-4 units**), and consumer non-real estate and other. Each segment carries distinct risks related to interest rates, collateral market conditions, and general economic conditions[445](index=445&type=chunk)[446](index=446&type=chunk)[447](index=447&type=chunk)[471](index=471&type=chunk)[472](index=472&type=chunk)[473](index=473&type=chunk)[474](index=474&type=chunk)[475](index=475&type=chunk) - The CECL methodology was adopted on January 1, 2023, for financial assets measured at amortized cost, including loan receivables. All information as of September 30, 2023, is presented in accordance with ASC 326, while prior period information follows previous GAAP[449](index=449&type=chunk) [Note 4— Allowance for Credit Losses](index=20&type=section&id=Note%204%E2%80%94%20Allowance%20for%20Credit%20Losses) This note details the activity in the Allowance for Credit Losses (ACL) for the three and nine months ended September 30, 2023, and 2022, reflecting the impact of CECL adoption, charge-offs, recoveries, and the credit quality of the loan portfolio ACL Activity (in thousands): | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period | $25,919 | $23,362 | $21,039 | $31,709 | | Impact of CECL adoption | N/A | N/A | $4,125 | N/A | | Provision for (recapture of) credit losses | $200 | $(2,388) | $1,033 | $(7,564) | | Total loans charged-off | $(13) | $(54) | $(134) | $(3,411) | | Total recoveries of loans charged-off | $5 | $33 | $48 | $219 | | **Balance, end of period** | **$26,111** | **$20,953** | **$26,111** | **$20,953** | Aging of Past Due Loans (in thousands) - September 30, 2023: | Loan Segment | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current Loans | Total Loans | | :-------------------------------- | :------------------ | :------------------ | :----------------------- | :------------- | :------------ | :---------- | | Commercial real estate | $0 | $0 | $6 | $6 | $1,260,647 | $1,260,653 | | Owner-occupied commercial real estate | $0 | $0 | $667 | $667 | $122,829 | $123,496 | | Acquisition, construction & development | $0 | $0 | $0 | $0 | $96,535 | $96,535 | | Commercial & industrial | $0 | $0 | $0 | $0 | $61,571 | $61,571 | | Single family residential (1-4 units) | $0 | $39 | $59 | $98 | $525,460 | $525,558 | | Consumer non-real estate and other | $3 | $3 | $0 | $6 | $2,797 | $2,803 | | **Total** | **$3** | **$42** | **$732** | **$777** | **$2,069,839** | **$2,070,616** | - The Company did not extend any loan modifications to borrowers experiencing financial difficulty that resulted in a more-than-insignificant direct change in contractual cash flows for the three and nine months ended September 30, 2023[518](index=518&type=chunk)[519](index=519&type=chunk) [Note 5— Deposits](index=27&type=section&id=Note%205%E2%80%94%20Deposits) This note provides details on the Company's deposit composition and scheduled maturities of time deposits, highlighting an increase in brokered time deposits Scheduled Maturities of Time Deposits (in thousands) - September 30, 2023: | Maturity Period | Amount | | :-------------------------------- | :----- | | Remaining three months ending Dec 31, 2023 | $59,683 | | 2024 | $269,103 | | 2025 | $135,389 | | 2026 | $83,185 | | 2027 | $49,432 | | 2028 | $78,046 | | **Total** | **$674,838** | - Brokered time deposits significantly increased to **$389.0 million** at September 30, 2023, from **$100.3 million** at December 31, 2022. Time deposits through the Certificate of Deposit Account Registry Service program also increased to **$21.8 million** from **$11.7 million** over the same period[495](index=495&type=chunk) - The aggregate amount of time deposits with a minimum denomination of **$250,000** was approximately **$65.5 million** at September 30, 2023, up from **$32.6 million** at December 31, 2022[495](index=495&type=chunk) [Note 6— Advances and Other Borrowings](index=27&type=section&id=Note%206%E2%80%94%20Advances%20and%20Other%20Borrowings) This note details the Company's borrowing activities, including outstanding balances, interest rates, and available lines of credit Borrowings (in thousands): | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Total Borrowings | $299,000 | $343,100 | | Interest Rate Range (at period end) | 4.38% - 5.57% | 4.13% - 4.57% | | Average Balance Outstanding (9 months) | $302,100 | $269,500 | - The Company has unused borrowing capacity of **$883.5 million** through FHLB of Atlanta lines of credit and unsecured federal fund lines from correspondent banking relationships. All borrowings as of September 30, 2023, are set to mature within one calendar year[521](index=521&type=chunk) [Note 7— Leased Property](index=28&type=section&id=Note%207%E2%80%94%20Leased%20Property) This note describes the Company's lessor and lessee arrangements for property, including operating and finance leases, and provides supplemental information on lease terms and discount rates Right-of-Use Assets and Lease Liabilities (in thousands): | Lease Type | Balance Sheet Classification | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :--------------------------- | :----------- | :----------- | | Operating Leases (Assets) | Other assets | $4,846 | $7,255 | | Finance Leases (Assets) | Other assets | $3,661 | $2,620 | | **Total Right-of-Use Assets** | | **$8,507** | **$9,875** | | Operating Leases (Liabilities) | Other liabilities | $5,075 | $7,592 | | Finance Leases (Liabilities) | Other liabilities | $3,829 | $2,745 | | **Total Lease Liabilities** | | **$8,904** | **$10,337** | Supplemental Lease Information: | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Finance lease weighted average remaining lease term (years) | 12.87 | 12.76 | | Finance lease weighted average discount rate | 2.93% | 2.22% | | Operating lease weighted average remaining lease term (years) | 3.12 | 3.26 | | Operating lease weighted average discount rate | 3.02% | 3.19% | [Note 8— Regulatory Capital Matters](index=30&type=section&id=Note%208%E2%80%94%20Regulatory%20Capital%20Matters) This note details the Company's and the Bank's compliance with regulatory capital requirements, including Basel III rules and 'prompt corrective action' regulations, confirming their 'well capitalized' status - As of September 30, 2023, and December 31, 2022, the Bank was categorized as 'well capitalized' under the regulatory framework for 'prompt corrective action' by the FDIC[8](index=8&type=chunk)[103](index=103&type=chunk) Regulatory Capital Ratios (Consolidated) - September 30, 2023: | Capital Ratio | Actual Amount (in thousands) | Actual Ratio | Adequacy Purposes Applicable Ratio | To Be Well Capitalized Under Prompt Corrective Action Ratio | | :-------------------------------- | :--------------------------- | :----------- | :--------------------------------- | :---------------------------------------- | | Total Capital to risk weighted assets | $443,293 | 17.48% | ≥ 10.5% | ≥ 10.0% | | Tier 1 (Core) Capital to risk weighted assets | $416,977 | 16.44% | ≥ 8.5% | ≥ 8.0% | | Common Tier 1 (CET 1) to risk-weighted assets | $416,977 | 16.44% | ≥ 7.0% | ≥ 6.5% | | Tier 1 (Core) Capital to average assets | $416,977 | 11.32% | ≥ 4.0% | ≥ 5.0% | Regulatory Capital Ratios (Consolidated) - December 31, 2022: | Capital Ratio | Actual Amount (in thousands) | Actual Ratio | Adequacy Purposes Applicable Ratio | To Be Well Capitalized Under Prompt Corrective Action Ratio | | :-------------------------------- | :--------------------------- | :----------- | :--------------------------------- | :---------------------------------------- | | Total Capital to risk weighted assets | $433,958 | 18.88% | ≥ 10.5% | ≥ 10.0% | | Tier 1 (Core) Capital to risk weighted assets | $412,946 | 17.97% | ≥ 8.5% | ≥ 8.0% | | Common Tier 1 (CET 1) to risk-weighted assets | $412,946 | 17.97% | ≥ 7.0% | ≥ 6.5% | | Tier 1 (Core) Capital to average assets | $412,946 | 11.34% | ≥ 4.0% | ≥ 5.0% | - As of September 30, 2023, approximately **$175.0 million** of retained earnings was available for dividend declaration without prior regulatory approval[558](index=558&type=chunk) [Note 9— Derivatives](index=31&type=section&id=Note%209%E2%80%94%20Derivatives) This note details the Company's use of interest rate derivatives for risk management and customer financing, including cash flow hedges and derivatives not designated as hedges, and their impact on financial statements - The Company uses interest rate swaps and floors as cash flow hedges to manage interest rate risk, aiming to stabilize interest income. For derivatives designated as cash flow hedges, gains or losses are recorded in AOCI and reclassified to interest income as hedged transactions affect earnings[11](index=11&type=chunk)[530](index=530&type=chunk) - The Company enters into back-to-back interest rate swaps with loan customers and third parties, which are reported at fair value as economic hedges not qualifying for hedge accounting. Changes in fair value for these are recorded in other non-interest expense and sum to zero[532](index=532&type=chunk) Fair Value of Derivative Financial Instruments (in thousands): | Derivative Type | Balance Sheet Location | Notional Amount (Sep 30, 2023) | Fair Value (Sep 30, 2023) | Notional Amount (Dec 31, 2022) | Fair Value (Dec 31, 2022) | | :-------------------------------- | :--------------------------- | :----------------------------- | :------------------------ | :----------------------------- | :------------------------ | | Interest rate swaps (cash flow hedges) | Other liabilities | $50,000 | $1,446 | $50,000 | $2,254 | | Interest rate swaps (customer loans) | Other assets | $72,836 | $2,732 | $34,674 | $1,311 | | Interest rate swaps (customer loans) | Other liabilities | $72,836 | $2,732 | $34,674 | $1,311 | - The Company estimates an additional **$1.1 million** will be reclassified as a reduction to interest income from AOCI related to derivatives over the next **12 months**[11](index=11&type=chunk) [Note 10— Commitments and Contingencies](index=35&type=section&id=Note%2010%E2%80%94%20Commitments%20and%20Contingencies) This note outlines the Company's off-balance sheet financial instruments, including commitments to extend credit and commercial letters of credit, and discusses litigation matters Contractual Amounts of Financial Instruments Outstanding (in thousands): | Instrument | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Commitments to extend credit | $269,097 | $291,265 | | Commercial letters of credit | $10,443 | $8,539 | - The Company records a provision for credit losses on unfunded commitments, which totaled **$35.0 thousand** for the three months ended September 30, 2023, and a recapture of **$69.8 thousand** for the nine months ended September 30, 2023. The ACL on off-balance-sheet credit was **$205.0 thousand** at September 30, 2023[600](index=600&type=chunk) - Interest rate lock commitments are treated as free-standing derivative instruments, with changes in fair value reported as non-interest income[540](index=540&type=chunk)[568](index=568&type=chunk) - Management believes that liabilities from pending or threatened litigation will not have a material adverse effect on the Company's financial position[571](index=571&type=chunk) [Note 11— Fair Value Measurements](index=36&type=section&id=Note%2011%E2%80%94%20Fair%20Value%20Measurements) This note describes the Company's methodologies for fair value measurements, categorizing assets and liabilities into Level 1, 2, or 3 based on input observability, and provides a summary of financial instruments measured at fair value - Fair value measurements are categorized into three levels: Level 1 (quoted prices in active markets for identical assets/liabilities), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[544](index=544&type=chunk)[572](index=572&type=chunk)[602](index=602&type=chunk) - Derivatives are valued using observable market data (Level 2) via third-party vendors. Interest rate lock commitments are also valued at fair value based on underlying loan prices from investors (Level 2)[22](index=22&type=chunk) Assets Measured at Fair Value on a Recurring Basis (in thousands) - September 30, 2023: | Financial Assets | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :-------- | :------ | :-------- | | Investment Securities: | | | | | | U.S. Treasuries and government agencies | $172,982 | $0 | $0 | $172,982 | | Obligations of states and municipalities | $0 | $429,479 | $0 | $429,479 | | Residential mortgage backed - agency | $0 | $41,836 | $0 | $41,836 | | Residential mortgage backed - non-agency | $0 | $282,108 | $0 | $282,108 | | Commercial mortgage backed - agency | $0 | $35,539 | $0 | $35,539 | | Commercial mortgage backed - non-agency | $0 | $173,344 | $0 | $173,344 | | Asset-backed | $0 | $8

[Part I - Financial Information](index=3&type=section&id=Part%20I%20-%20Financial%20Information) [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) 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](index=415&type=chunk)[440](index=440&type=chunk) [Notes to the Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) 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](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) 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](index=375&type=chunk) - 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](index=33&type=chunk) [Results of Operations](index=50&type=section&id=Results%20of%20Operations) 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](index=52&type=chunk) - 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](index=31&type=chunk)[378](index=378&type=chunk) [Analysis of Financial Condition](index=60&type=section&id=Analysis%20of%20Financial%20Condition) 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](index=482&type=chunk) - Non-performing assets totaled **$2.9 million** as of June 30, 2023, a decrease from **$5.5 million** at December 31, 2022[485](index=485&type=chunk)[486](index=486&type=chunk) - 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](index=511&type=chunk) - 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](index=472&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=67&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) 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](index=68&type=section&id=Item%204.%20Controls%20and%20Procedures) 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](index=518&type=chunk) - 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](index=504&type=chunk) [Part II - Other Information](index=69&type=section&id=Part%20II%20-%20Other%20Information) [Legal Proceedings](index=69&type=section&id=Item%201.%20Legal%20Proceedings) 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](index=505&type=chunk) [Risk Factors](index=69&type=section&id=Item%201A.%20Risk%20Factors) 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](index=520&type=chunk) [Other Information](index=69&type=section&id=Item%205.%20Other%20Information) 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](index=522&type=chunk) [Exhibits](index=70&type=section&id=Item%206.%20Exhibits) 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](index=508&type=chunk)

Financial Performance - Net income decreased by $1.6 million (17.6%) to $7.5 million for the three months ended March 31, 2023, compared to $9.1 million in the same period in 2022[326] - Net income for the three months ended March 31, 2023, was $7.524 million, compared to $9.126 million for the same period in 2022[230] - Net income for the three months ended March 31, 2023, was $7.524 million, compared to $9.126 million for the same period in 2022[14] - Comprehensive income for the three months ended March 31, 2023, was $23.210 million, compared to a loss of $55.326 million for the same period in 2022[14] - Basic net income per share decreased to $1.01 for the three months ended March 31, 2023, compared to $1.23 in the same period in 2022[323] - Basic earnings per share (EPS) for Q1 2023 was $1.01, while diluted EPS was $1.00[230] - Return on average assets decreased to 0.85% in Q1 2023 from 1.03% in Q1 2022, while return on average equity increased to 10.83% from 9.91%[302] Assets and Liabilities - Total assets increased to $3,671.2 million as of March 31, 2023, compared to $3,562.9 million as of December 31, 2022[323] - Total consolidated assets as of March 31, 2023, were $3.7 billion, with gross loans of $2.0 billion and total deposits of $3.0 billion[280] - Assets increased by $108 million to $3.67 billion as of March 31, 2023, compared to $3.56 billion as of December 31, 2022[349] - Total deposits increased to $3,032.4 million as of March 31, 2023, compared to $2,920.4 million as of December 31, 2022[323] - Deposits increased by $112 million to $3.03 billion as of March 31, 2023, compared to $2.92 billion as of December 31, 2022[349] - Total loans increased to $1,951.7 million as of March 31, 2023, compared to $1,887.2 million as of December 31, 2022[354] - Loans increased by $60 million to $1.93 billion as of March 31, 2023, compared to $1.87 billion as of December 31, 2022[349] - Total shareholders' equity increased to $289.8 million as of March 31, 2023, compared to $273.5 million as of December 31, 2022[323] - The company had $289.8 million in total shareholders' equity as of March 31, 2023[280] - Total interest-bearing deposits increased to $2,125,668 at March 31, 2023, from $1,959,708 at December 31, 2022[416] Interest Income and Expenses - Net interest income increased to $24.8 million for the three months ended March 31, 2023, compared to $23.5 million in the same period in 2022[331] - Net interest income increased by $1.3 million to $24.8 million for Q1 2023, driven by loan growth and higher interest rates, offset by increased funding costs[303] - Loan portfolio yield increased to 4.81% for the three months ended March 31, 2023, compared to 3.80% in the same period in 2022[332] - The yield on gross loans increased to 4.81% for the three months ended March 31, 2023, compared to 3.80% for the same period in 2022[311] - The tax-adjusted yield on the investment securities portfolio increased to 3.45% in Q1 2023 from 2.18% in Q1 2022, reflecting higher market interest rates[308] - The yield on taxable securities increased to 3.63% for the three months ended March 31, 2023, compared to 1.83% for the same period in 2022[311] - The total interest-earning assets yield increased to 4.23% for the three months ended March 31, 2023, compared to 2.98% for the same period in 2022[311] - The weighted average yield on total securities available-for-sale was 3.10% as of March 31, 2023[353] - The rate paid on FHLB and other borrowings increased sharply to 4.70% in Q1 2023 from 0.60% in Q1 2022, reflecting higher short-term borrowing costs[309] - The weighted average interest rate on deposits increased to 4.63% at March 31, 2023, from 4.42% at December 31, 2022[390] Credit and Loan Performance - Credit loss expense was $0.5 million for the three months ended March 31, 2023, compared to a recapture of $2.6 million in the same period in 2022[327] - The company recorded a provision of $0.5 million for credit losses for the three months ended March 31, 2023, compared to a provision recapture of $2.6 million for the same period in 2022[359] - The company's provision for credit losses for the period was $523, compared to a recapture of $2,638 in the previous period[384] - Non-performing loans as a percentage of total loans decreased significantly to 0.17% in Q1 2023 from 1.45% in Q1 2022[302] - Non-performing loans decreased to $3.2 million as of March 31, 2023, from $5.5 million as of December 31, 2022[357] - The allowance for credit losses (ACL) as a percentage of gross loans decreased to 1.32% as of March 31, 2023, from 1.65% as of March 31, 2022[383] - The company's total allowance for credit losses (ACL) was $25,704, with commercial real estate loans accounting for 71.62% of the total ACL[386] - The company's allowance for credit losses as a percentage of non-performing loans was 791.87% at March 31, 2023[384] - Impaired loans measured at fair value increased to $3,931 thousand as of March 31, 2023, from $2,496 thousand as of December 31, 2022[195] - Net loan charge-offs for the period were $(17), with total recoveries of loans charged-off amounting to $34[384] Non-Interest Income and Expenses - Non-interest expense increased by $1.2 million (6.3%) to $20.4 million for the three months ended March 31, 2023, compared to $19.2 million in the same period in 2022[329] - Non-interest expense increased by 6.3% to $20.4 million for the three months ended March 31, 2023, compared to $19.2 million for the same period in 2022[369] - Total non-interest expenses increased to $5,607 for the three months ended March 31, 2023, compared to $4,672 for the same period in 2022[223] - Non-interest income rose by $99 thousand (2.4%) to $4.2 million in Q1 2023, primarily due to a $102 thousand increase in FHLB stock dividend income[305] - Non-interest income increased by 2.4% to $4.2 million for the three months ended March 31, 2023, compared to $4.1 million for the same period in 2022[368] - Share-based compensation cost was $580.6 thousand for the three months ended March 31, 2023, up from $506.2 thousand in the same period in 2022[223] Investment and Securities - Total investment securities available-for-sale were $1,371,757 as of March 31, 2023[213] - The weighted average duration of the company's investment portfolio is 4.0 years as of March 31, 2023[377] - The company's investment securities provide a source of liquidity and are used to manage interest rate risk[373] - Net unrealized gains on available-for-sale securities were $17,218 for the three months ended March 31, 2023[221] - Total reclassifications from AOCI to net income were $1,579 for the three months ended March 31, 2023[221] - Accumulated Other Comprehensive Income (AOCI) decreased to $(123,809) as of March 31, 2023, compared to $(57,497) as of March 31, 2022[221] Liquidity and Capital - The company maintains a strong liquidity position with capital levels above well-capitalized regulatory ratios and liquidity metrics within internal policy guidelines[283] - The company's stress testing considers various factors including uninsured deposits, deposit flows, interest rate movements, and credit risks[283] - Common equity tier 1 (CET 1) capital ratio improved slightly to 17.55% in Q1 2023 from 17.47% in Q1 2022[302] - The company has available unused borrowing capacity of $809.1 million through its credit lines with the FHLB of Atlanta and unsecured federal fund lines[389] - Deposits exceeding the FDIC insurance limit of $250,000 were $715.1 million at March 31, 2023, down from $843.4 million at December 31, 2022[416] Employee and Compensation - The company had 411 full-time employees as of March 31, 2023, with none covered by collective bargaining agreements[280] - The company issued 24,705 restricted stock units (RSUs) during Q1 2023, compared to 12,160 RSUs in Q1 2022[249] - Total unrecognized compensation costs related to nonvested shares under the 2019 SIP were $4.7 million as of March 31, 2023, expected to be recognized over 2.08 years[227] - The 2023 Stock Incentive Plan (2023 SIP) authorized the issuance of 250,000 shares, with no awards issued as of March 31, 2023[228] Derivatives and Other Financial Instruments - Net gains on free-standing derivative instruments (interest rate lock commitments) were $4.2 thousand as of March 31, 2023, compared to $(74.5) thousand as of March 31, 2022[203] - The notional amount of loan pipeline resulting in interest rate lock commitments was $838 thousand as of March 31, 2023, down from $1.4 million as of March 31, 2022[203] - The ACL on off-balance-sheet credit totaled $267.3 thousand at March 31, 2023[207] Loan Portfolio and Allowance - The company's loans, net of allowance, were $1.813 billion as of March 31, 2023[219] - Total loans outstanding at the end of the period were $1,951,738, with an ending allowance for credit losses of $25,704, representing an allowance coverage ratio of 1.32%[384] - The company maintains policies and procedures to promote sound underwriting and mitigate credit risk[380] - Total deposits increased by $112.0 million from December 31, 2022, to March 31, 2023, driven by a rise in brokered time deposits, which amounted to $389.2 million at March 31, 2023, compared to $100.3 million at December 31, 2022[390] Interest Rate and Margin - Net interest margin improved to 3.06% in Q1 2023 from 2.89% in Q1 2022, while the efficiency ratio increased to 70.25% from 69.47%[302] - The tax-adjusted net interest margin was 3.06% for the three months ended March 31, 2023, compared to 2.89% for the same period in 2022[307]