Burke & Herbert Financial Services (BHRB) - 2025 Q2 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements and detailed notes for Burke & Herbert Financial Services Corp. for the specified periods Consolidated Balance Sheets This section provides a snapshot of the Company's assets, liabilities, and shareholders' equity at specific points in time Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Total Assets | $8,053,084 | $7,812,185 | | Cash and cash equivalents | $325,146 | $135,314 | | Net loans | $5,523,201 | $5,604,196 | | Total deposits | $6,390,974 | $6,515,239 | | Short-term borrowings | $650,000 | $365,000 | | Total Liabilities | $7,273,066 | $7,082,028 | | Total Shareholders' Equity | $780,018 | $730,157 | - Total Assets increased by $240.9 million to $8.05 billion as of June 30, 2025, from $7.81 billion at December 31, 2024[10][284] - Cash and cash equivalents significantly increased from $135.3 million at December 31, 2024, to $325.1 million at June 30, 2025[10] - Net loans decreased by $81.0 million from $5.6 billion at December 31, 2024, to $5.5 billion at June 30, 2025[10][284] - Total deposits decreased by $124.3 million to $6.4 billion at June 30, 2025, from $6.5 billion at December 31, 2024[10][284] - Short-term borrowings increased by $285.0 million to $650.0 million as of June 30, 2025, from $365.0 million at December 31, 2024[10][284] - Total Shareholders' Equity increased by $49.9 million to $780.0 million at June 30, 2025, from $730.2 million at December 31, 2024, primarily due to increased earnings[10][320] Consolidated Statements of Income (Loss) This section details the Company's revenues, expenses, and net income or loss over specific reporting periods Consolidated Statements of Income (Loss) Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total interest income | $111,858 | $96,097 | $222,644 | $134,842 | | Total interest expense | $37,625 | $36,332 | $75,424 | $52,946 | | Net interest income | $74,233 | $59,765 | $147,220 | $81,896 | | Total provision (recapture) for credit losses | $624 | $23,910 | $1,125 | $23,240 | | Total non-interest income | $12,877 | $9,505 | $22,900 | $13,759 | | Total non-interest expense | $49,305 | $64,432 | $98,969 | $85,597 | | Net income (loss) | $29,897 | $(16,919) | $57,098 | $(11,707) | | Net income (loss) applicable to common shares | $29,672 | $(17,144) | $56,648 | $(11,932) | | Basic EPS | $1.98 | $(1.41) | $3.78 | $(1.22) | | Diluted EPS | $1.97 | $(1.41) | $3.77 | $(1.22) | - Net income applicable to common shares for the six months ended June 30, 2025, was $56.6 million, a significant increase from a net loss of $11.9 million in the prior year, primarily due to a full six months of combined income after the Merger and lower merger-related expenses[226] - Net interest income increased by $65.3 million to $147.2 million for the six months ended June 30, 2025, driven by the Merger's combined income and higher rates on interest-earning assets[227][233] - Credit provision expense decreased significantly to $1.1 million for the six months ended June 30, 2025, from $23.2 million in the prior year, which included a one-time CECL Day 2 provision related to the Merger[228][251] Consolidated Statements of Comprehensive Income (Loss) This section presents the Company's net income and other comprehensive income (loss) components, reflecting changes in equity from non-owner sources Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $29,897 | $(16,919) | $57,098 | $(11,707) | | Total other comprehensive income (loss) | $170 | $524 | $7,866 | $3,064 | | Comprehensive income (loss) | $30,067 | $(16,395) | $64,964 | $(8,643) | - Total other comprehensive income (loss) for the six months ended June 30, 2025, was $7.9 million, an increase from $3.1 million in the prior year, primarily due to higher unrealized gains on securities[14][136] Consolidated Statements of Changes in Shareholders' Equity This section outlines the changes in the Company's shareholders' equity over specific periods, including net income, dividends, and other comprehensive income Changes in Shareholders' Equity (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Balance, beginning of period (Six Months) | $730,157 | $314,750 | | Net income | $57,098 | $(11,707) | | Other comprehensive income (loss) | $7,866 | $3,064 | | Common stock cash dividends, declared | $(16,491) | $(11,808) | | Preferred stock cash dividends, declared | $(450) | $(225) | | Share-based compensation expense, net | $1,838 | $1,607 | | Balance, end of period (Six Months) | $780,018 | $693,126 | - Shareholders' equity increased by $49.9 million from December 31, 2024, to June 30, 2025, primarily driven by net income and other comprehensive income[20][320] Consolidated Statements of Cash Flows This section reports the cash generated and used by the Company's operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Metric | 2025 | 2024 | | :--------------------------------------- | :----- | :----- | | Net cash flows provided by (used in) operating activities | $37,688 | $(38,879) | | Net cash flows provided by investing activities | $9,012 | $165,657 | | Net cash flows provided by financing activities | $143,132 | $40,644 | | Increase in cash and cash equivalents | $189,832 | $167,422 | | Cash and cash equivalents, End of period | $325,146 | $211,920 | - Net cash flows from operating activities significantly improved to $37.7 million provided in 2025, compared to $38.9 million used in 2024[23] - Net cash flows from investing activities decreased substantially from $165.7 million provided in 2024 to $9.0 million provided in 2025[23] - Net cash flows from financing activities increased to $143.1 million provided in 2025, from $40.6 million in 2024, primarily due to increased short-term borrowings[23][25] Note 1— Nature of Business Activities and Significant Accounting Policies This note describes the Company's primary business operations and the key accounting principles and methods used in preparing its financial statements - Burke & Herbert Financial Services Corp. operates as a bank holding company for Burke & Herbert Bank & Trust Company, primarily serving northern Virginia and West Virginia with over 77 branches[27][28][29] - The Company completed a merger with Summit Financial Group, Inc. on May 3, 2024, integrating Summit's operations from that date forward[30][32] - The financial statements are prepared in accordance with GAAP for interim reporting and SEC regulations, with estimates and assumptions that may differ from actual results[33][35] Note 2— Securities This note provides details on the Company's investment securities portfolio, including classifications, fair values, and unrealized gains or losses Securities Available-for-Sale (AFS) Fair Value (in thousands) | Category | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | U.S. Treasuries and government agencies | $153,345 | $149,127 | | Obligations of states and municipalities | $809,133 | $698,724 | | Residential mortgage backed - agency | $55,137 | $53,186 | | Residential mortgage backed - non-agency | $233,004 | $247,876 | | Commercial mortgage backed - agency | $54,449 | $33,071 | | Commercial mortgage backed - non-agency | $130,108 | $154,511 | | Asset-backed | $56,426 | $64,056 | | Other | $31,009 | $31,820 | | Total | $1,522,611 | $1,432,371 | - The fair value of AFS securities increased to $1.52 billion at June 30, 2025, from $1.43 billion at December 31, 2024[40] - Gross unrealized losses on AFS securities decreased from $118.9 million at December 31, 2024, to $111.1 million at June 30, 2025, primarily due to market conditions and interest rate fluctuations, not credit deterioration[40][45][48] - The Company did not record an Allowance for Credit Losses (ACL) on AFS securities, as unrealized losses are considered temporary and not credit-related[48] Note 3— Loans This note provides a breakdown of the Company's loan portfolio by segment, along with information on gross loans and the allowance for credit losses Loan Portfolio Segments (in thousands) | Loan Segment | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Commercial real estate | $2,767,261 | $2,637,802 | | Owner-occupied commercial real estate | $617,811 | $614,362 | | Acquisition, construction & development | $347,659 | $465,537 | | Commercial & industrial | $605,064 | $613,085 | | Single family residential (1-4 units) | $1,148,869 | $1,173,749 | | Consumer non-real estate and other | $103,793 | $167,701 | | Loans, gross | $5,590,457 | $5,672,236 | | Allowance for credit losses | $(67,256) | $(68,040) | | Loans, net | $5,523,201 | $5,604,196 | - Gross loans decreased by $81.8 million to $5.59 billion at June 30, 2025, from $5.67 billion at December 31, 2024, primarily due to exiting loans not aligning with the Company's risk profile[58][293] - Commercial real estate remains the largest segment, increasing to $2.77 billion at June 30, 2025, from $2.64 billion at December 31, 2024[58] Note 4— Allowance for Credit Losses This note details the activity and balances of the allowance for credit losses, including provisions, charge-offs, recoveries, and asset quality ratios Allowance for Credit Losses (ACL) Activity (Six Months Ended June 30, in thousands) | Metric | 2025 | 2024 | | :--------------------------------------- | :----- | :----- | | Balance, beginning of period | $68,040 | $25,301 | | Allowance established for acquired PCD loans | — | $23,910 | | Provision for (recapture of) credit losses | $1,617 | $19,430 | | Charge-offs | $(2,964) | $(641) | | Recoveries | $563 | $17 | | Balance, end of period | $67,256 | $68,017 | - The ACL decreased slightly to $67.3 million at June 30, 2025, from $68.0 million at December 31, 2024[58][63] - Provision for credit losses was $1.6 million for the six months ended June 30, 2025, significantly lower than $19.4 million in the prior year, which included a $23.9 million allowance for acquired Purchase Credit Deteriorated (PCD) loans[63][251][302] - Net loan charge-offs increased to $2.4 million for the six months ended June 30, 2025, from $0.6 million in the prior year[63][305] Asset Quality Ratios | Metric | June 30, 2025 | June 30, 2024 | | :--------------------------------------- | :------------ | :------------ | | Allowance coverage ratio | 1.20% | 1.21% | | Allowance for credit losses as a percentage of non-performing loans | 78.63% | 207.10% | | Net charge-offs to average outstanding loans during the period | 0.04% | 0.02% | | Non-performing loans as a percentage of total loans | 1.53% | 0.58% | | Non-performing assets as a percentage of total assets | 1.10% | 0.46% | - Non-performing loans as a percentage of total loans increased to 1.53% at June 30, 2025, from 0.58% at June 30, 2024[223] Note 5— Deposits This note provides a detailed breakdown of the Company's deposit balances by type, including demand, money market, savings, and time deposits Deposit Balances (in thousands) | Deposit Type | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Demand, non-interest-bearing | $1,363,617 | $1,379,940 | | Demand, interest-bearing | $2,227,501 | $2,223,540 | | Money market and savings | $1,654,665 | $1,658,480 | | Brokered deposits | $132,098 | $244,802 | | Time deposits, other | $1,013,093 | $1,008,477 | | Total deposits | $6,390,974 | $6,515,239 | - Total deposits decreased by $124.3 million to $6.39 billion at June 30, 2025, from $6.52 billion at December 31, 2024, primarily due to a $112.7 million decrease in brokered deposits[10][315][316] - Brokered time deposits decreased from $244.8 million at December 31, 2024, to $132.1 million at June 30, 2025[78][315] Note 6— Borrowed Funds This note outlines the Company's various borrowing activities, including short-term borrowings, subordinated debentures, and available borrowing capacity Borrowed Funds (in thousands) | Borrowing Type | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Short-term borrowings | $650,000 | $365,000 | | Subordinated debentures, net | $97,552 | $94,872 | | Subordinated debentures owed to unconsolidated subsidiary trusts | $17,140 | $17,013 | | Total long-term debt | $114,692 | $111,885 | - Short-term borrowings increased by $285.0 million to $650.0 million at June 30, 2025, from $365.0 million at December 31, 2024[81][314] - The Company has $4.1 billion in unused borrowing capacity from secured lines of credit with the Federal Reserve Bank of Richmond and FHLB of Atlanta, and unsecured federal funds lines[82][313] - Subordinated debentures assumed in the Merger totaled $105.0 million (par value) with varying fixed and variable interest rates and maturities[84][86][89] Note 7— Leased Property This note provides information on the Company's leased properties, including right-of-use assets, lease liabilities, and associated income and costs Lease Information (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Total right-of-use assets | $17,849 | $16,515 | | Total lease liabilities | $18,672 | $17,206 | | Operating lease income (Six Months) | $1,393 | $1,131 | | Total lease cost (Six Months) | $1,873 | $1,486 | - The Company has operating leases for vacant space and finance/operating leases for branches and office space, with terms up to twelve years[90][92] - Operating lease income for the six months ended June 30, 2025, was $1.4 million, an increase from $1.1 million in the prior year[91] Note 8— Regulatory Capital Matters This note details the Company's compliance with regulatory capital requirements and its capital adequacy ratios Regulatory Capital Ratios (Consolidated, as of June 30, 2025) | Capital Ratio | Actual Ratio | Minimum Required (Basel III) | Minimum for Well Capitalized | | :--------------------------------------- | :----------- | :--------------------------- | :--------------------------- | | Total Capital to risk weighted assets | 15.27% | ≥ 10.5% | N/A | | Tier 1 (Core) Capital to risk weighted assets | 12.65% | ≥ 8.5% | N/A | | Common Tier 1 (CET 1) to risk-weighted assets | 12.22% | ≥ 7.0% | N/A | | Tier 1 (Core) Capital to average assets (leverage ratio) | 10.42% | ≥ 4.0% | N/A | - Both the Company and the Bank meet all capital adequacy requirements and are categorized as 'well capitalized' under prompt corrective action regulations as of June 30, 2025[97][98][213] - As of June 30, 2025, approximately $293.6 million of retained earnings was available for dividend declaration[99] Note 9— Derivatives This note describes the Company's use of derivative financial instruments to manage interest rate risk, including their fair values and accounting treatment Derivative Financial Instruments Fair Value (in thousands) | Derivative Type | June 30, 2025 Fair Value | December 31, 2024 Fair Value | | :--------------------------------------- | :------------------------- | :------------------------- | | Interest rate swaps related to cash flow hedges (assets) | $606 | $1,368 | | Interest rate swaps related to cash flow hedges (liabilities) | $163 | $165 | | Interest rate swaps related to customer loans (assets) | $1,970 | $1,823 | | Interest rate swaps related to customer loans (liabilities) | $1,970 | $1,823 | - The Company uses interest rate swap agreements to manage interest rate risk, with some designated as cash flow hedges and others as economic hedges not qualifying for hedge accounting[100][101][104] - For cash flow hedges, an estimated $514.6 thousand will be reclassified as a reduction to interest expense in the next twelve months[103] Note 10— Commitments and Contingencies This note outlines the Company's off-balance sheet commitments, such as credit extensions and letters of credit, and discusses potential legal and environmental contingencies Off-Balance Sheet Commitments (in thousands) | Commitment Type | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Commitments to extend credit | $944,598 | $969,317 | | Commercial letters of credit | $26,064 | $13,333 | - Commitments to extend credit decreased to $944.6 million at June 30, 2025, from $969.3 million at December 31, 2024[114] - Commercial letters of credit increased to $26.1 million at June 30, 2025, from $13.3 million at December 31, 2024[114] - The Allowance for Credit Losses (ACL) on off-balance-sheet credit exposures totaled $3.5 million at June 30, 2025, a decrease from $4.0 million at December 31, 2024[115] Note 11— Fair Value Measurements This note describes the Company's methodology for fair value measurements, categorizing assets and liabilities into Level 1, 2, or 3 based on observability of inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[117][118] Assets Measured at Fair Value on a Recurring Basis (June 30, 2025, in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--------------------------------------- | :------ | :------ | :------ | :------ | | Total investment securities available-for-sale | $153,345 | $1,369,266 | $— | $1,522,611 | | Loans held-for-sale | $— | $1,511 | $— | $1,511 | | Equity investments | $— | $13,038 | $— | $13,038 | | Derivatives | $— | $2,575 | $— | $2,575 | - The majority of investment securities are valued using Level 2 inputs, reflecting market prices of similar securities[120][126] Assets Measured at Fair Value on a Non-Recurring Basis (June 30, 2025, in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--------------------------------------- | :------ | :------ | :------ | :------ | | Collateral dependent loans | $— | $— | $1,582 | $1,582 | | Other real estate owned | $— | $— | $2,742 | $2,742 | - Collateral-dependent loans and other real estate owned are measured at fair value on a non-recurring basis, primarily using Level 3 inputs based on collateral appraisals and management adjustments[127][128][130] Note 12— Accumulated Other Comprehensive Income (Loss) This note details the components and changes in accumulated other comprehensive income (loss), including unrealized gains or losses on securities and pension plan adjustments Changes in Accumulated Other Comprehensive Income (Loss) (Six Months Ended June 30, in thousands) | Component | 2025 | 2024 | | :--------------------------------------- | :----- | :----- | | Beginning Balance | $(95,720) | $(103,494) | | Net unrealized gains (losses) | $8,876 | $3,946 | | Less: net realized (gains) losses reclassified to earnings | $(984) | $(882) | | Net change in pension plan benefits | $(26) | $— | | Ending Balance | $(87,854) | $(100,430) | - Accumulated other comprehensive income (loss) improved from $(95.7) million at December 31, 2024, to $(87.9) million at June 30, 2025, primarily due to net unrealized gains on available-for-sale securities[136][320] Note 13— Other Operating Expense This note provides a breakdown of various operating expenses not categorized elsewhere, including regulatory assessments, consultant fees, and amortization Other Operating Expense (Six Months Ended June 30, in thousands) | Expense Category | 2025 | 2024 | | :--------------------------------------- | :----- | :----- | | FDIC & other regulatory assessments | $2,002 | $1,463 | | Consultant fees | $1,454 | $4,280 | | Donation expense | $84 | $5,119 | | Core deposit intangible amortization | $8,186 | $2,865 | | Other | $10,770 | $5,804 | | Total | $31,755 | $29,037 | - Total other operating expense increased to $31.8 million for the six months ended June 30, 2025, from $29.0 million in the prior year[138] - Merger-related expenses decreased to zero for the six months ended June 30, 2025, from $9.5 million in the prior year, contributing to the overall change in other operating expenses[138] - Core deposit intangible amortization significantly increased to $8.2 million in 2025 from $2.9 million in 2024[138] Note 14— Share-Based Compensation This note details the Company's share-based compensation plans, including costs recognized, unrecognized compensation, and assumed awards from mergers - Total share-based compensation cost charged against income was $2.4 million for the six months ended June 30, 2025, up from $1.4 million in the prior year[140] - The Company has two Stock Incentive Plans (2019 SIP and 2023 SIP) and an Employee Stock Purchase Plan (2023 ESPP) for equity compensation[141][143][148] - As of June 30, 2025, there was $7.8 million of total unrecognized compensation costs related to non-vested shares, expected to be recognized over a weighted average period of 1.48 years[147] - The Company assumed Stock Appreciation Rights (SARs) as part of the Merger, with $383.2 thousand of unrecognized compensation costs remaining as of June 30, 2025[150][151] Note 15— Earnings Per Share This note provides a calculation of basic and diluted earnings per share, including the reconciliation of shares used in the computation Earnings Per Common Share (Six Months Ended June 30) | Metric | 2025 | 2024 | | :--------------------------------------- | :----- | :----- | | Net income (loss) applicable to common shares (in thousands) | $56,648 | $(11,932) | | Weighted average number of shares, basic | 14,987,732 | 9,803,684 | | Weighted average dilutive shares | 15,021,229 | 9,803,684 | | Basic earnings (loss) per common share | $3.78 | $(1.22) | | Diluted earnings (loss) per common share | $3.77 | $(1.22) | - Basic EPS for the six months ended June 30, 2025, was $3.78, a significant improvement from a loss of $1.22 in the prior year[154] - Dilutive shares were 33,497 for the six months ended June 30, 2025, but were anti-dilutive in the prior year due to the net loss[154] Note 16— Business Combination This note details the Company's merger with Summit Financial Group, Inc., including the accounting method, goodwill, and intangible assets recognized - The Company completed its merger with Summit Financial Group, Inc. on May 3, 2024, accounted for using the acquisition method[155][157] - Goodwill of $34.1 million was recognized in connection with the acquisition, which is not amortized but subject to annual impairment testing[157][162] - The fair value of intangible assets related to core deposits was $68.8 million at acquisition, amortized over an estimated weighted average life of 7 years[159][165] - The total consideration paid for Summit was $397.4 million, including 7,405,772 shares of common stock and preferred stock[162] Note 17— Goodwill and Other Intangible Assets This note provides information on the Company's goodwill and other intangible assets, including changes in balances and amortization expense Goodwill and Other Intangible Assets (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Goodwill, End of period | $34,149 | $32,783 | | Total core deposit intangible, End of period | $49,114 | $57,300 | | Total amortization expense (Six Months) | $8,186 | $2,865 | - Goodwill increased by $1.3 million to $34.1 million at June 30, 2025, due to an adjustment related to the Summit acquisition[158][164] - Core deposit intangible assets decreased to $49.1 million at June 30, 2025, from $57.3 million at December 31, 2024, due to amortization[166] Note 18— Segment Information This note clarifies that the Company operates in a single reportable segment, Community Banking, as financial performance is evaluated on a Company-wide basis - The Company operates in a single reportable segment: Community Banking, as financial performance is evaluated on a Company-wide basis[168] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and operating results, including key performance drivers and merger impact, for periods ended June 30, 2025, and December 31, 2024 Overview This section provides a high-level summary of the Company's business, recent financial performance, and significant events like the Summit Financial Group merger - Burke & Herbert Financial Services Corp. is a financial holding company for Burke & Herbert Bank & Trust Company, operating in northern Virginia and West Virginia with over 77 branches[173][174] - As of June 30, 2025, the Company reported total consolidated assets of $8.1 billion, gross loans of $5.6 billion, total deposits of $6.4 billion, and total shareholders' equity of $780.0 million[176] - The merger with Summit Financial Group, Inc. was completed on May 3, 2024, with Summit's operations included from the closing date forward[177][178] Critical Accounting Policies and Estimates This section discusses the accounting policies and estimates that require significant management judgment and can materially impact the Company's financial results - Key critical accounting estimates include business combination and goodwill, allowance for credit losses, and income taxes, which involve significant management judgment and assumptions[181] - Goodwill from acquisitions is recorded at fair value and reviewed annually for impairment, with valuation based on projected cash flows and discount rates[182][183] - The Allowance for Credit Losses (ACL) is estimated quarterly using a Weighted Average Remaining Maturity (WARM) method, incorporating historical experience, current conditions, and macroeconomic forecasts[185][186][188] Non-GAAP Financial Measures This section explains the Company's use of non-GAAP financial measures to supplement GAAP information, providing additional insights into financial condition and operating performance - The Company presents non-GAAP financial measures to provide additional useful information for assessing financial condition and operating performance, noting they are not substitutes for GAAP measures[193] Commercial Real Estate Sector Concentration This section details the Company's exposure to the Commercial Real Estate (CRE) sector, including loan balances, geographic concentrations, and risk management practices - The Company's exposure to Commercial Real Estate (CRE) was $2.8 billion (49.5% of gross loans) at June 30, 2025, excluding owner-occupied and acquisition, construction & development loans[194][195] - Including owner-occupied and acquisition, construction & development, total CRE exposure was $3.7 billion (66.8% of gross loans) and 46.4% of total assets[194][195] - The largest concentration of CRE loans is in Virginia (approximately 47.4%), with office buildings/condos representing 16.6% of total CRE loans[197][199][201] - The Company actively monitors its CRE portfolio through credit risk and concentration reports, assessing asset quality and risk rating migration against board-approved limits[195][200] Liquidity Management This section describes the Company's approach to managing liquidity, ensuring sufficient funds to meet obligations, and outlines primary liquidity sources and assessment methods - Liquidity management involves maintaining the ability to meet customer cash flow requirements and is assessed quarterly through various scenarios, including projected growth, credit deterioration, and interest rate changes[202][203] - Primary liquidity sources include unencumbered AFS securities, loan payments, and deposit accounts, supplemented by FHLB and other borrowings[205][206] - The Company's primary source of liquidity is dividends from the Bank, subject to regulatory restrictions and capital plans[207] Capital This section discusses the Company's capital structure and compliance with regulatory capital requirements, including Basel III standards and 'well capitalized' status - The Company and the Bank are subject to Basel III regulatory capital requirements, including minimum CET 1, Tier 1, and Total Capital ratios, along with a capital conservation buffer[209][210] - As of June 30, 2025, the Bank complied with all regulatory capital standards and qualifies as 'well capitalized' under prompt corrective action regulations[213] Effects of Inflation This section addresses the impact of inflation on the Company's financial results, particularly its ability to manage interest rate changes and their effect on net interest income - Inflation's most significant impact on financial results is the Company's ability to manage interest rate changes, aiming to balance rate-sensitive assets and liabilities to minimize impact on net interest income[215] Key Factors Affecting Financial Performance This section identifies the internal and external factors that significantly influence the Company's financial performance and operational outcomes - Internal factors affecting performance include managing capital and liquidity, controlling costs, managing credit and interest rate risk, attracting customers, and adapting to regulatory changes[218] - External factors include economic conditions, market volatility, actions by federal agencies (Federal Reserve, U.S. Treasury), interest rate movements, competitive landscape, and governmental policy changes[218] Selected Financial Data This section presents a summary of key financial condition and operating data, providing a concise overview of the Company's performance over specified periods Selected Financial Condition Data (in thousands) | Metric | June 30, 2025 | June 30, 2024 | | :--------------------------------------- | :------------ | :------------ | | Total assets | $8,053,084 | $7,810,193 | | Total deposits | $6,390,974 | $6,639,571 | | Total shareholders' equity | $780,018 | $693,126 | Selected Operating Data (Six Months Ended June 30, in thousands) | Metric | 2025 | 2024 | | :--------------------------------------- | :----- | :----- | | Net interest income | $147,220 | $81,896 | | Net income (loss) applicable to common shares | $56,648 | $(11,932) | | Diluted net income (loss) per common share | $3.77 | $(1.22) | | Return on average assets | 1.46% | (0.48)% | | Return on average equity | 15.04% | (5.52)% | | Net interest margin | 4.17% | 3.56% | | Efficiency ratio | 58.18% | 89.49% | Results of Operations for the Six Months Ended June 30, 2025, and June 30, 2024 This section analyzes the Company's financial performance for the six-month periods ended June 30, 2025, and June 30, 2024, highlighting key income and expense trends - Net income applicable to common shares increased by $68.6 million to $56.6 million for the six months ended June 30, 2025, compared to a net loss of $11.9 million in the prior year, primarily due to the full six months of combined income after the Merger and lower merger-related expenses[226] General This sub-section provides a general overview of the Company's financial performance for the six months ended June 30, 2025, compared to the prior year - Net income applicable to common shares for the six months ended June 30, 2025, was $56.6 million, a $68.6 million increase from a net loss of $11.9 million in the prior year, reflecting a full six months of combined income after the Merger and reduced merger-related expenses[226] Net Interest Income and Net Interest Margin This sub-section analyzes the Company's net interest income and net interest margin, explaining the factors influencing changes in these key profitability metrics - Net interest income increased by $65.3 million to $147.2 million for the six months ended June 30, 2025, driven by a full six months of combined income after the Merger, higher rates on interest-earning assets, and higher accretion income[227][233] - The tax-adjusted net interest margin increased to 4.17% for the six months ended June 30, 2025, from 3.56% in the prior year[234] - Accretion income from acquired loans and borrowings totaled $23.0 million in 2025, up from $13.3 million in 2024[233] - The yield on interest-bearing deposits decreased to 2.47% in 2025 from 2.73% in 2024, due to lower market interest rates[237] Interest Income This sub-section details the components of the Company's interest income, including contributions from loans, securities, and other interest-earning assets - Total interest income increased by 65.1% to $222.6 million for the six months ended June 30, 2025, primarily due to the full six months of combined income after the Merger, higher rates on interest-earning assets, and increased accretion income[249] - Interest income on loans increased by $84.2 million, and accretion income from acquired loans and borrowings was $23.0 million[249] Interest Expense This sub-section analyzes the Company's interest expense, breaking down costs associated with interest-bearing deposits, borrowings, and other liabilities - Total interest expense increased to $75.4 million for the six months ended June 30, 2025, from $52.9 million in the prior year, driven by combined operations after the Merger, partially offset by lower rates on interest-bearing liabilities[250] - Interest expense on interest-bearing deposits increased by $19.0 million, and on subordinated debt by $3.6 million[250] Provision for (Recapture of) Credit Losses This sub-section discusses the Company's provision for credit losses, explaining changes in the allowance for credit losses and the impact of specific events like the CECL Day 2 provision - The provision for credit losses was $1.1 million for the six months ended June 30, 2025, a significant decrease from $23.2 million in the prior year, which included a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger[251] Non-interest Income This sub-section examines the Company's non-interest income, detailing revenue streams from sources other than interest, such as service charges, fees, and other operating income - Non-interest income increased by 66.4% to $22.9 million for the six months ended June 30, 2025, compared to $13.8 million in the prior year, primarily due to a full six months of combined income after the Merger[229][252] - Income from company-owned life insurance increased by $2.7 million, and bank debit and other card revenue increased by $2.3 million[252] Non-interest Expense This sub-section analyzes the Company's non-interest expenses, including salaries, occupancy costs, data processing, and other operational expenditures - Non-interest expense increased by $13.4 million, or 15.6%, to $99.0 million for the six months ended June 30, 2025, reflecting a full six months of combined operations after the Merger, partially offset by merger cost savings[230][253] - Salaries and wages increased by $11.8 million, and occupancy costs increased by $3.0 million[253] - Equipment rentals, depreciation and maintenance decreased by $5.8 million[253] Income Tax Expense This sub-section discusses the Company's income tax expense, including the effective tax rate and factors influencing changes in tax liabilities - Income tax expense was $12.9 million for the six months ended June 30, 2025, an increase of $14.4 million from a tax benefit in the prior year, due to increased net income and additional state taxes post-Merger[254] - The effective tax rate for the six months ended June 30, 2025, was 18.5%, compared to an effective tax benefit of 11.2% in the prior year[254] Results of Operations for the Three Months Ended June 30, 2025, and June 30, 2024 This section analyzes the Company's financial performance for the three-month periods ended June 30, 2025, and June 30, 2024, highlighting key income and expense trends - Net income applicable to common shares for the three months ended June 30, 2025, was $29.7 million, a $46.8 million increase from a net loss of $17.1 million in the prior year, reflecting a full three months of combined income after the Merger and reduced merger-related expenses[255] General This sub-section provides a general overview of the Company's financial performance for the three months ended June 30, 2025, compared to the prior year - Net income applicable to common shares for the three months ended June 30, 2025, was $29.7 million, a $46.8 million increase from a net loss of $17.1 million in the prior year, reflecting a full three months of combined income after the Merger and reduced merger-related expenses[255] Net Interest Income and Net Interest Margin This sub-section analyzes the Company's net interest income and net interest margin, explaining the factors influencing changes in these key profitability metrics - Net interest income increased by $14.5 million to $74.2 million for the three months ended June 30, 2025, driven by a full three months of combined income after the Merger and lower rates on interest-bearing liabilities[256][262] - The tax-adjusted net interest margin increased to 4.17% for the three months ended June 30, 2025, from 4.06% in the prior year[263] - Accretion income from acquired loans and borrowings totaled $11.5 million in 2025, compared to $13.4 million in 2024[262] - The yield on interest-bearing deposits decreased to 2.41% in 2025 from 2.90% in 2024, due to lower market interest rates[266] Interest Income This sub-section details the components of the Company's interest income, including contributions from loans, securities, and other interest-earning assets - Total interest income increased by 16.4% to $111.9 million for the three months ended June 30, 2025, primarily due to a full three months of combined income after the Merger[278] - Interest income on loans increased by $15.1 million, while interest income on securities decreased by $0.2 million[278] Interest Expense This sub-section analyzes the Company's interest expense, breaking down costs associated with interest-bearing deposits, borrowings, and other liabilities - Total interest expense increased to $37.6 million for the three months ended June 30, 2025, from $36.3 million in the prior year, driven by combined operations after the Merger, partially offset by lower rates on interest-bearing liabilities[279] - Interest expense on interest-bearing deposits increased by $0.1 million, and on subordinated debt by $0.8 million[279] Provision for (Recapture of) Credit Losses This sub-section discusses the Company's provision for credit losses, explaining changes in the allowance for credit losses and the impact of specific events like the CECL Day 2 provision - The provision for credit losses was $0.6 million for the three months ended June 30, 2025, a significant decrease from $23.9 million in the prior year, which included a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger[280] Non-interest Income This sub-section examines the Company's non-interest income, detailing revenue streams from sources other than interest, such as service charges, fees, and other operating income - Non-interest income increased by 35.5% to $12.9 million for the three months ended June 30, 2025, compared to $9.5 million in the prior year, primarily due to a full three months of combined income after the Merger[258][281] - Income from company-owned life insurance increased by $2.1 million, driven by increased collection of death proceeds[281] Non-interest Expense This sub-section analyzes the Company's non-interest expenses, including salaries, occupancy costs, data processing, and other operational expenditures - Non-interest expense decreased by $15.1 million, or 23.5%, to $49.3 million for the three months ended June 30, 2025, compared to $64.4 million in the prior year, primarily due to merger cost savings[259][282] - Equipment rentals, depreciation and maintenance decreased by $8.6 million[282] Income Tax Expense This sub-section discusses the Company's income tax expense, including the effective tax rate and factors influencing changes in tax liabilities - Income tax expense was $7.3 million for the three months ended June 30, 2025, an increase of $9.4 million from a tax benefit in the prior year, due to increased net income and additional state taxes post-Merger[283] - The effective tax rate for the three months ended June 30, 2025, was 19.6%, compared to an effective tax benefit of 11.3% in the prior year[283] Analysis of Financial Condition for the Period Ended June 30, 2025, and December 31, 2024 This section provides a detailed analysis of the Company's balance sheet, comparing financial condition at June 30, 2025, with December 31, 2024 - Total assets increased by $240.9 million to $8.05 billion as of June 30, 2025, compared to $7.81 billion as of December 31, 2024[284] - Loans, net of ACL, decreased by $81.0 million to $5.5 billion, while deposits decreased by $124.3 million to $6.4 billion[284] - Short-term borrowings increased by $285.0 million to $650.0 million[284] Investment Securities This sub-section analyzes changes in the Company's investment securities portfolio, including fair value movements and unrealized gains or losses - The fair value of the AFS investment portfolio increased, and unrealized losses decreased by $7.9 million during the six months ended June 30, 2025[286] - The Company determined that declines in market value were due to interest rate increases and market movements, not credit factors, thus no ACL was required for AFS securities[287] - The overall weighted average duration of the investment portfolio was 4.6 years at June 30, 2025[290] Lending Activities This sub-section discusses trends in the Company's loan portfolio, including changes in gross loans and the composition of lending segments - The loan portfolio, excluding ACL, decreased by $81.8 million from December 31, 2024, to June 30, 2025, primarily due to exiting loans that do not align with the Company's desired risk profile[293] - The loan portfolio consists primarily of commercial real estate loans, with a variety of products offered to meet borrower needs[292] Asset Quality This sub-section provides an analysis of the Company's asset quality, including non-performing assets, non-accrual loans, and loans past due Non-Performing Assets (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Non-accrual loans | $81,059 | $35,871 | | 90 days past due and still accruing | $4,472 | $2,497 | | Total non-performing loans | $85,531 | $38,368 | | Other real estate owned | $2,742 | $2,783 | | Total non-performing assets | $88,273 | $41,151 | - Total non-performing assets increased by $47.1 million to $88.3 million at June 30, 2025, from $41.2 million at December 31, 2024[298] - Non-accrual loan balances increased by $45.2 million, and loans 90 days past due and still accruing increased by $2.0 million[298] Allowance for Credit Losses This sub-section analyzes the Company's allowance for credit losses, including changes in the provision, charge-offs, and the ACL as a percentage of gross loans - The ACL as a percentage of gross loans, net of unearned income, was 1.20% at June 30, 2025, compared to 1.21% at June 30, 2024[303] - The Company recorded a provision expense of $0.7 million on loans for the three months ended June 30, 2025, compared to $20.1 million in the prior year, which included a $23.9 million provision for acquired PCD loans[302] - Net loan charge-offs increased to $1.2 million for the three months ended June 30, 2025, from $0.6 million in the prior year[305] Derivative Financial Instruments This sub-section discusses the Company's derivative financial instruments, their fair value recognition, and their role in managing interest rate risk - The Company recognizes derivative financial instruments at fair value as either other assets or accrued interest and other liabilities on the Consolidated Balance Sheets[309] Off-Balance Sheet Arrangements This sub-section describes the Company's off-balance sheet arrangements, such as commitments to extend credit and letters of credit, and their associated risks - Off-balance sheet arrangements include commitments to extend credit, standby letters of credit, and financial guarantees, which involve credit and interest rate risk[310] Funding Activities This sub-section analyzes the Company's funding sources, including deposits and various borrowings, and its available borrowing capacity - Deposits are the primary source of funds, supplemented by borrowings from the FHLB, Federal Reserve Borrower-In-Custody program, and federal funds lines of credit[311][312] - As of June 30, 2025, the Company had $4.1 billion in unused borrowing capacity[313] Short-term and Long-term Borrowings (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | Short-term borrowings | $650,000 | $365,000 | | Weighted average interest yield (short-term) | 3.91% | 3.35% | | Total long-term debt | $114,692 | $111,885 | | Weighted average interest yield (long-term) | 9.62% | 10.08% | Deposits This sub-section analyzes trends in the Company's deposit base, including changes in total deposits, brokered deposits, and uninsured deposit levels - Total deposits decreased by $124.3 million from December 31, 2024, to June 30, 2025, primarily due to a $112.7 million decrease in brokered deposits[315] - Brokered time deposits decreased to $132.1 million at June 30, 2025, from $244.8 million at December 31, 2024[315] - The Company has $2.0 billion in deposits exceeding the FDIC insurance limit at June 30, 2025[317] Shareholders' Equity This sub-section discusses changes in the Company's shareholders' equity, including the impact of earnings and accumulated other comprehensive income (loss) - Total shareholders' equity increased by $49.9 million to $780.0 million at June 30, 2025, from $730.2 million at December 31, 2024, mainly due to increased earnings[320] - Accumulated other comprehensive income/(loss) improved by $7.9 million, from $(95.7) million to $(87.9) million, due to a decrease in unrealized losses in the securities portfolio[320] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the Company's exposure to market risk, primarily interest rate risk, and its strategies for management, including quantitative analyses of interest rate sensitivity and economic value of equity under various scenarios Market Risk This section defines the Company's market risk, primarily interest rate risk, and outlines the objectives and governance structure for its management - Market risk primarily stems from interest rate risk in lending, investment, and deposit-taking activities, which is actively monitored and managed by the Asset/Liability Committee (ALCO) and the Board[322] - The primary objective is to minimize the adverse impact of interest rate changes on net interest income and capital, while maximizing the yield-cost spread[323] Interest Rate Sensitivity This section analyzes the Company's interest rate sensitivity, detailing how changes in interest rates could impact earnings and the economic value of equity - Interest rate risk arises from repricing mismatches, embedded options, yield curve changes, and basis risk, impacting interest expense, income, and asset/liability values[325][326] - The Company uses interest rate sensitivity analysis, market value of portfolio equity analysis, and interest rate simulations to manage interest rate risk[329] Estimated Percentage Change in Earnings from Parallel Interest Rate Shift (Next 12 Months) | Change in Interest Rates (in Basis Points) | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | 200 | (2.7)% | (2.1)% | | 100 | (1.1)% | (0.7)% | | (100) | 0.1% | 0.5% | | (200) | (0.3)% | 0.5% | | (300) | (0.2)% | 0.5% | Estimated Percentage Change in Economic Value of Equity (EVE) from Parallel Interest Rate Shift | Change in Interest Rates (in Basis Points) | June 30, 2025 | December 31, 2024 | | :--------------------------------------- | :------------ | :---------------- | | 200 | (8.1)% | (8.7)% | | 100 | (3.7)% | (3.6)% | | (100) | 2.7% | 1.9% | | (200) | 3.2% | 0.5% | | (300) | 2.2% | (3.4)% | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2025, concluding they are effective, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated as effective as of June 30, 2025, ensuring timely and accurate reporting[335] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[336] Part II - Other Information Item 1. Legal Proceedings The Company is involved in routine legal claims and proceedings incidental to its business, but management believes that any liabilities arising from currently pending or threatened litigation will not have a material adverse effect on the Company's financial position - The Company is not party to any material legal proceedings, and none are threatened, with management believing any liabilities will not be material[338] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to risk factors were reported since the December 31, 2024, Form 10-K filing[339] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company's Board authorized a $50.0 million share repurchase program on April 25, 2025, but no open market or private purchases were made under this program for the six months ended June 30, 2025, though some shares were transferred from employees for tax withholding - A $50.0 million share repurchase program was authorized on April 25, 2025[340][342] - No shares were purchased under the repurchase program for the six months ended June 30, 2025[340][342] - 354 shares in April and 8,563 shares in May were transferred from employees to satisfy tax withholding obligations related to restricted stock unit vesting[341] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities for the period - No defaults upon senior securities were reported[343] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[344] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2025 - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2025[345] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including articles of incorporation, bylaws, offer letters, certifications (CEO, CFO), and Inline XBRL financial statements - Exhibits include corporate governance documents, executive offer letters, Sarbanes-Oxley certifications, and Inline XBRL formatted financial statements[346] Signatures The report is duly signed on behalf of Burke & Herbert Financial Services Corp. by its Chairman of the Board and Chief Executive Officer, David P. Boyle, and Executive Vice President, Chief Financial Officer, Roy E. Halyama, on August 8, 2025 - The report was signed by David P. Boyle, Chairman of the Board and CEO, and Roy E. Halyama, EVP and CFO, on August 8, 2025[349]