[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]