Companies: 11,269     total market cap: A$215.513 T
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Burke & Herbert Financial Services
BHRB
#5646
Rank
A$2.02 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
A$100.28
Share price
-0.18%
Change (1 day)
N/A
Change (1 year)
  1. Burke & Herbert Financial Services
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2024 Q2

Burke & Herbert Financial Services - 10-Q quarterly report FY2024 Q2


Text size:
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Table of Contents
           
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to
Commission file number 001-41633
Burke & Herbert Financial Services Corp.
(Exact name of registrant as specified in its charter)
Virginia92-0289417
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
100 S. Fairfax Street, Alexandria, Virginia
22314
(Address of principal executive offices)(Zip Code)
703-666-3555
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading symbolName of Exchange on which registered
Common Stock, par value $0.50 per shareBHRBThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer oAccelerated filer o
Non-accelerated filer☒Smaller reporting company o
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 8, 2024, there were 14,944,967 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS
Page
1
Item 1. Financial Statements
1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
46
Item 3. Quantitative and Qualitative Disclosures About Market Risk
77
Item 4. Controls and Procedures
79
80
Item 1. Legal Proceedings
80
Item 1A. Risk Factors
80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
80
Item 3. Defaults Upon Senior Securities
80
Item 4. Mine Safety Disclosures
80
Item 5. Other Information
80
Item 6. Exhibits
81
Signatures
82
i
Part I - Financial Information
Item 1.     Financial Statements
Burke & Herbert Financial Services Corp. Consolidated Financial Statements:
Page
2
3
4
5
7
9
1
Burke & Herbert Financial Services Corp.
Consolidated Balance Sheets
(In thousands, except share and per share data)
June 30, 2024
(Unaudited)
December 31, 2023
(Audited)
Assets
Cash and due from banks$35,072 $8,896 
Interest-earning deposits with banks176,848 35,602 
Cash and cash equivalents211,920 44,498 
Securities available-for-sale, at fair value1,414,870 1,248,439 
Restricted stock, at cost15,169 5,964 
Loans held-for-sale, at fair value3,268 1,497 
Loans5,616,724 2,087,756 
Allowance for credit losses(68,017)(25,301)
Net loans5,548,707 2,062,455 
Premises and equipment, net135,581 61,128 
Other real estate owned3,334 — 
Accrued interest receivable33,371 15,895 
Intangible assets65,895 — 
Goodwill32,783 — 
Company-owned life insurance182,112 94,159 
Other assets163,183 83,544 
Total Assets
$7,810,193 $3,617,579 
Liabilities and Shareholders’ Equity
Liabilities
Non-interest-bearing deposits$1,397,030 $830,320 
Interest-bearing deposits5,242,541 2,171,561 
Total deposits6,639,571 3,001,881 
Short-term borrowings285,161 272,000 
Subordinated debentures, net92,178 — 
Subordinated debentures owed to unconsolidated subsidiary trusts16,886 — 
Accrued interest and other liabilities83,271 28,948 
Total Liabilities
7,117,067 3,302,829 
Commitments and contingent liabilities (see Note 10)
Shareholders’ Equity
Preferred stock and related surplus, $1.00 par value per share; 2,000,000 shares authorized; 1,500 shares issued and outstanding at June 30, 2024; no shares issued and outstanding at December 31, 2023
10,413 — 
Common Stock7,752 4,000 
$0.50 par value; 20,000,000 shares authorized, 15,503,459 shares issued and 14,932,169 shares outstanding at June 30, 2024; 8,000,000 shares issued and 7,428,710 shares outstanding at December 31, 2023
Common stock, additional paid-in capital399,553 14,495 
Retained earnings403,422 427,333 
Accumulated other comprehensive income (loss)(100,430)(103,494)
Treasury stock(27,584)(27,584)
571,290 shares, at cost, at June 30, 2024, and 571,290 shares, at cost, at December 31, 2023
Total Shareholders’ Equity
693,126 314,750 
Total Liabilities and Shareholders’ Equity
$7,810,193 $3,617,579 

See Notes to Consolidated Financial Statements.
2
Burke & Herbert Financial Services Corp.
Consolidated Statements of Income (Loss)
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Interest income
Taxable loans, including fees$81,673 $25,300 $109,718 $48,060 
Tax-exempt loans, including fees33 — 33 — 
Taxable securities10,930 9,419 19,873 19,221 
Tax-exempt securities2,556 1,409 3,917 2,867 
Other interest income905 988 1,301 1,296 
Total interest income96,097 37,116 134,842 71,444 
Interest expense
Deposits30,373 10,030 43,304 15,431 
Short-term borrowings4,071 3,279 7,726 7,417 
Subordinated debt1,860 — 1,860 — 
Other interest expense28 15 56 30 
Total interest expense36,332 13,324 52,946 22,878 
Net interest income
59,765 23,792 81,896 48,566 
Credit loss expense - loans and available-for-sale securities20,100 310 19,430 833 
Credit loss expense - off-balance sheet credit exposures3,810 (96)3,810 (104)
Total provision for credit losses23,910 214 23,240 729 
Net interest income after credit loss expense35,855 23,578 58,656 47,837 
Non-interest income
Fiduciary and wealth management2,211 1,305 3,630 2,642 
Service charges and fees4,088 1,741 5,694 3,376 
Net gains (losses) on securities613 (111)613 (111)
Income from company-owned life insurance922 571 1,469 1,131 
Other non-interest income1,671 1,119 2,353 1,801 
Total non-interest income9,505 4,625 13,759 8,839 
Non-interest expense
Salaries and wages20,895 9,922 30,413 19,416 
Pensions and other employee benefits5,303 2,406 7,668 4,874 
Occupancy2,997 1,545 4,535 3,002 
Equipment rentals, depreciation and maintenance12,663 1,457 13,944 2,796 
Other operating22,574 6,018 29,037 11,625 
Total non-interest expense64,432 21,348 85,597 41,713 
Income (loss) before income taxes(19,072)6,855 (13,182)14,963 
Income tax expense (benefit)
(2,153)821 (1,475)1,405 
Net income (loss)(16,919)6,034 (11,707)13,558 
Preferred stock dividends225 — 225 — 
Net income (loss) applicable to common shares$(17,144)$6,034 $(11,932)$13,558 
Earnings (loss) per common share:
Basic$(1.41)$0.81 $(1.22)$1.82 
Diluted(1.41)0.80 (1.22)1.80 
See Notes to Consolidated Financial Statements.
3
Burke & Herbert Financial Services Corp.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Net income (loss)$(16,919)$6,034 $(11,707)$13,558 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized gain (loss) arising during period, net of tax of ($221) and $1,397 for the three months ended June 30, 2024, and June 30, 2023, respectively, net of tax of ($104) and ($3,180) for the six months ended June 30, 2024, and June 30, 2023, respectively
833 (5,254)392 11,964 
Reclassification adjustment for loss (gain) on securities, net of tax of $129 and ($23) for the three months ended June 30, 2024, and June 30, 2023, respectively, net of tax of $129 and ($23) for the six months ended June 30, 2024, and June 30, 2023, respectively
(484)88 (484)88 
Reclassification adjustment for loss (gain) on fair value hedge, net of tax of $9 and ($728) for the three months ended June 30, 2024, and June 30, 2023, respectively, net of tax of $17 and ($232) for the six months ended June 30, 2024, and June 30, 2023, respectively
(32)2,739 (64)873 
Unrealized gain (loss) on cash flow hedge:
Unrealized holding gain (loss) on cash flow hedge, net of tax of ($238) and $73 for the three months ended June 30, 2024, and June 30, 2023, respectively, net of tax of ($945) and $61 for the six months ended June 30, 2024, and June 30, 2023, respectively
894 (275)3,554 (228)
Reclassification adjustment for losses (gains) included in net income, net of tax $183 and ($89) for the three months ended June 30, 2024, and June 30, 2023, respectively, net of tax of $89 and ($165) for the six months ended June 30, 2024, and June 30, 2023, respectively
(687)334 (334)621 
Total other comprehensive income (loss)524 (2,368)3,064 13,318 
Comprehensive income (loss)
$(16,395)$3,666 $(8,643)$26,876 

See Notes to Consolidated Financial Statements.
4
Burke & Herbert Financial Services Corp.
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended June 30, 2024, and 2023
(In thousands, except share and per share data)
(Unaudited)
Preferred Stock and SurplusCommon StockRetained
Earnings		Comprehensive
Income (Loss)		Treasury
Stock		Shareholders’
Equity
Shares OutstandingAmountAdditional Paid-in
Capital
Balance March 31, 2024$— 7,440,025 $4,006 $15,308 $428,532 $(100,954)$(27,584)$319,308 
Acquisition of Summit Financial Group, Inc.10,413 7,405,772 3,703 383,329 — — — 397,445 
Net income (loss)— — — — (16,919)— — (16,919)
Other comprehensive income (loss)— — — — — 524 — 524 
(Purchase) sale of treasury stock, net— — — — — — — — 
Common stock cash dividends, declared— — — — (7,869)— — (7,869)
Preferred stock cash dividends, declared— — — — (225)— — (225)
Share-based compensation expense, net— 86,372 43 916 (97)— — 862 
Balance June 30, 2024$10,413 14,932,169 $7,752 $399,553 $403,422 $(100,430)$(27,584)$693,126 
Balance March 31, 2023$— 7,427,840 $4,000 $12,686 $424,532 $(123,809)$(27,626)$289,783 
Net income— — — — 6,034 — — 6,034 
Other comprehensive income (loss)— — — — — (2,368)— (2,368)
(Purchase) sale of treasury stock, net— 870 — — — — 42 42 
Common stock cash dividends, declared— — — — (3,936)— — (3,936)
Share-based compensation expense, net— — — 522 (5)— — 517 
Balance June 30, 2023$— 7,428,710 $4,000 $13,208 $426,625 $(126,177)$(27,584)$290,072 
See Notes to Consolidated Financial Statements.












5
Burke & Herbert Financial Services Corp.
Consolidated Statements of Changes in Shareholders’ Equity
For the Six Months Ended June 30, 2024, and 2023
(In thousands, except share and per share data)
(Unaudited)
Preferred Stock and SurplusCommon StockRetained
Earnings		Comprehensive
Income (Loss)		Treasury
Stock		Shareholders’
Equity
Shares OutstandingAmountAdditional Paid-in
Capital
Balance December 31, 2023$— 7,428,710 $4,000 $14,495 $427,333 $(103,494)$(27,584)$314,750 
Acquisition of Summit Financial Group, Inc.10,413 7,405,772 3,703 383,329 — — — 397,445 
Net income (loss)— — — — (11,707)— — (11,707)
Other comprehensive income (loss)— — — — — 3,064 — 3,064 
(Purchase) sale of treasury stock, net— — — — — — — — 
Common stock cash dividends, declared— — — — (11,808)— — (11,808)
Preferred stock cash dividends, declared— — — — (225)— — (225)
Share-based compensation expense, net— 97,687 49 1,729 (171)— — 1,607 
Balance June 30, 2024$10,413 14,932,169 $7,752 $399,553 $403,422 $(100,430)$(27,584)$693,126 
Balance December 31, 2022$— 7,425,760 $4,000 $12,282 $424,391 $(139,495)$(27,725)$273,453 
Cumulative effect adjustment due to the adoption of CECL, net of tax— — — — (3,439)— — (3,439)
Net income— — — — 13,558 — — 13,558 
Other comprehensive income (loss)— — — — — 13,318 — 13,318 
(Purchase) sale of treasury stock, net— 2,950 — — — — 141 141 
Common stock cash dividends, declared— — — — (7,872)— — (7,872)
Share-based compensation expense, net— — — 926 (13)— — 913 
Balance June 30, 2023$— 7,428,710 $4,000 $13,208 $426,625 $(126,177)$(27,584)$290,072 
See Notes to Consolidated Financial Statements.
6
Burke & Herbert Financial Services Corp.
Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
(Unaudited)
Six Months Ended June 30,
20242023
Cash Flows from Operating Activities
Net Income (loss)$(11,707)$13,558 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of fixed assets2,315 1,354 
Amortization of other intangible assets2,865 — 
Accretion on assumed liabilities2,526 — 
Accretion income related to acquired loans13,302 — 
Amortization of housing tax credits2,745 2,796 
Realized (gain) loss on sales of available-for-sale securities(613)111 
Realized (gain) on sales of OREO property(26)— 
Provision for credit losses23,240 729 
Income from company-owned life insurance(1,469)(1,131)
Deferred tax (benefit)(38,461)(1,560)
Loss on disposal of fixed assets473 — 
Accretion of securities(1,654)(815)
Amortization of securities4,631 4,643 
Share-based compensation expense1,496 1,188 
Repayment of operating lease liabilities(1,111)(1,631)
(Gain) on loans held-for-sale(199)(28)
Proceeds from sale of loans held-for-sale14,105 2,845 
Change in fair value of loans held-for-sale28 6 
Originations of loans held-for-sale(15,705)(3,307)
(Increase) decrease in accrued interest receivable(1,501)700 
(Increase) decrease in other assets(39,733)2,750 
Increase in accrued interest payable and other liabilities32,178 656 
Net cash flows provided by (used in) operating activities$(12,275)$22,864 
Cash Flows from Investing Activities
Proceeds from maturities, prepayments, and calls of securities available-for-sale, net128,020 52,500 
Proceeds from sale of securities available-for-sale, net365,990 77,780 
Purchases of securities available-for-sale, net(480,920)— 
Cash (paid) from merger, net(750)— 
Sales of restricted stock24,201 27,447 
Purchases of restricted stock(33,406)(14,918)
Purchases of property and equipment, net of disposals(2,523)(4,367)
(Purchase of) proceeds from company-owned life insurance1,433 (6)
(Increase) decrease in loans made to customers, net137,008 (113,748)
Net cash flows provided by investing activities$139,053 $24,688 
Cash Flows from Financing Activities
Net (decrease) in non-interest-bearing accounts(14,966)(84,296)
Net increase (decrease) in interest-bearing accounts(56,300)169,159 
Net increase (decrease) in other short-term borrowings122,064 (94,100)
Repayment of finance lease liabilities(107)(80)
Cash dividends paid(12,033)(7,872)
Proceeds from employee stock purchase program208 — 
Issuance of common stock1,778 — 
7
Burke & Herbert Financial Services Corp.
Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
(Unaudited)
Sale of treasury stock— 141 
Net cash flows provided by (used in) financing activities$40,644 $(17,048)
Increase in cash and cash equivalents167,422 30,504 
Cash and cash equivalents
Beginning of period44,498 50,295 
End of period$211,920 $80,799 
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors$41,716 $14,302 
Interest paid on short-term borrowings14,004 8,379 
Interest paid on subordinated debt and trust preferred securities1,860 — 
Interest paid on finance leases56 30 
Income taxes775 275 
Change in unrealized gains on available-for-sale securities— 15,255 
Lease liability arising from obtaining right-of-use assets10,362 — 
Common stock issued for merger, net387,032 — 
Preferred stock issued for merger, net10,413 — 
See Notes to Consolidated Financial Statements.

8
Table of Contents
Note 1— Nature of Business Activities and Significant Accounting Policies
Nature of operations
Burke & Herbert Financial Services Corp. (“Burke & Herbert”) was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for Burke & Herbert Bank & Trust Company (“the Bank” and, together with Burke & Herbert, the “Company”). Burke & Herbert commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of Burke & Herbert. In September 2023, Burke & Herbert elected to be a financial holding company. As a financial holding company, Burke & Herbert is subject to regulation and supervision by the Federal Reserve. Burke & Herbert has no material operations and owns 100% of the Bank. The Bank is a Virginia chartered commercial bank that commenced operations in 1852. The Bank is supervised and regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “Virginia BFI”).
Merger with Summit Financial Group, Inc.

Effective on May 3, 2024 (the “Closing Date”), Burke & Herbert completed its previously announced merger with Summit Financial Group, Inc., a West Virginia corporation (“Summit”), pursuant to the Agreement and Plan of Reorganization and accompanying Plan of Merger dated August 24, 2023, between Burke & Herbert and Summit (the “Merger Agreement”). Below is a description of the nature of the event as of the merger Closing Date.

Pursuant to the Merger Agreement, on the Closing Date, (i) Summit merged with and into Burke & Herbert, with Burke & Herbert continuing as the surviving corporation (the “Merger”), and (ii) immediately following the Merger, Summit Community Bank, Inc., a West Virginia chartered bank and a wholly-owned subsidiary of Summit (“SCB”), merged with and into the Bank, with the Bank as the surviving bank.

In the Merger, holders of Summit common stock outstanding at the effective time of the Merger received 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they owned, subject to the payment of cash in lieu of fractional shares. The total aggregate consideration payable in the Merger was approximately 7,405,772 shares of Burke & Herbert Common Stock. Additionally, each share of Summit’s 6.0% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series 2021 (the “Summit Series 2021 Preferred Stock”) issued and outstanding was converted into the right to receive a share of a newly created series of preferred stock, the Burke & Herbert Series 2021 Preferred Stock (the “Burke & Herbert Series 2021 Preferred Stock”). Summit’s results of operations are included from the Closing Date.

The Bank’s primary market area includes northern Virginia and West Virginia, and it has over 75 branches and other commercial loan offices across Delaware, Kentucky, Maryland, Virginia, and West Virginia. The Company’s branch locations accept business and consumer deposits from a diverse customer base. The Company’s deposit products include checking, savings, and term certificate accounts. The Company’s loan portfolio includes commercial and consumer loans, a substantial portion of which are secured by real estate.

Basis of Presentation
The accompanying consolidated financial statements include Burke & Herbert Financial Services Corp. and its wholly owned subsidiary Burke & Herbert Bank & Trust Company and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). The accounting and reporting policies of the Company conform to GAAP and reflect practices of the banking industry. They do not include all of the information and notes required by GAAP for complete financial statements. As such, these unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ending December 31, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2024 and as amended on April 12, 2024.
The consolidated financial statements include the accounts of the Company and the Bank (as its wholly-owned subsidiary). All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that
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Table of Contents
Note 1— Nature of Business Activities and Significant Accounting Policies (continued)
affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three and six months ended June 30, 2024, are not necessarily indicative of the results to be expected for any other interim period or for the full year. All December 31, 2023 amounts and disclosures included in this quarterly report were derived from the Company’s audited consolidated financial statements. Certain items in the prior period have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or on shareholders’ equity.
Purchased Credit Deteriorated (PCD) Loans
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are loans on nonaccrual status, are greater than 60 days past due at any time since loan origination or have a risk rating of special mention, substandard, doubtful, or loss. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through credit loss expense.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed. The Company has selected September 30 as the date to perform the annual impairment test. Intangible assets with finite useful lives are amortized over their estimated useful lives to their estimated residual values. Amortized intangibles must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. An impairment loss related to intangible assets with finite useful lives is recognized if the carrying amount of the intangible asset is not recoverable and its carrying amount exceeds its fair value. After the impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
Other intangible assets consists of core deposit intangible assets arising from whole bank and branch acquisitions and is amortized using an accelerated method over their estimated useful lives of seven years.
Recently adopted accounting standards
In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU was effective for us January 1, 2024, and did not have a material impact on our consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU was effective for us January 1, 2024, and did not have a material impact on our consolidated financial statements.
Pending adoption of new accounting standards
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide
10
Table of Contents
Note 1— Nature of Business Activities and Significant Accounting Policies (continued)
additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. We do not expect the adoption of ASU 2023-09 to have a material impact on our consolidated financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We do not expect the adoption of ASU 2023-06 to have a material impact on our consolidated financial statements.
Note 2— Securities
The carrying amount of available-for-sale (“AFS”) securities and their approximate fair values at June 30, 2024, and December 31, 2023, are summarized as follows (in thousands):
June 30, 2024
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Securities Available-for-Sale
U.S. Treasuries and government agencies$166,380 $— $18,950 $147,430 
Obligations of states and municipalities714,449 1,237 77,932 637,754 
Residential mortgage backed - agency58,104 230 4,166 54,168 
Residential mortgage backed - non-agency282,667 19 15,373 267,313 
Commercial mortgage backed - agency35,968 28 954 35,042 
Commercial mortgage backed - non-agency165,675 — 6,312 159,363 
Asset-backed77,568 179 795 76,952 
Other38,300 81 1,533 36,848 
Total$1,539,111 $1,774 $126,015 $1,414,870 
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Table of Contents
Note 2— Securities (continued)
December 31, 2023
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Securities Available-for-Sale
U.S. Treasuries and government agencies$197,026 $— $17,955 $179,071 
Obligations of states and municipalities535,229 21 72,047 463,203 
Residential mortgage backed - agency47,074 — 4,836 42,238 
Residential mortgage backed - non-agency284,826 17 18,812 266,031 
Commercial mortgage backed - agency36,151 28 1,294 34,885 
Commercial mortgage backed - non-agency183,454 — 6,393 177,061 
Asset-backed79,315 23 1,402 77,936 
Other9,500 — 1,486 8,014 
Total$1,372,575 $89 $124,225 $1,248,439 
At June 30, 2024, and December 31, 2023, AFS securities with amortized costs of $1.1 billion and $826.5 million, respectively, and with estimated fair values of $953.0 million and $742.5 million, respectively, were pledged to serve as collateral for secured borrowings, derivative exposures, or to secure public deposits as required or permitted by law.
The proceeds from sales, calls, and maturities of debt securities available-for-sale, including principal payments received, and the related gross gains and losses realized, for the six months ended June 30, 2024, and June 30, 2023, were as follows (in thousands):
Proceeds fromGross realized
Six months ended, June 30SalesCalls and maturitiesPrincipal PaymentsGainsLosses
2024$365,990 $32,801 $95,219 $2,637 $2,024 
202377,780 1,400 52,123 773 884 

The tax benefit (provision) related to these net realized gains and losses for June 30, 2024, and June 30, 2023, was ($128.7) thousand, and $23.3 thousand, respectively.
The maturities of AFS securities at June 30, 2024, were as follows (in thousands): (Expected maturities of securities not due at a single maturity date are based on average life at estimated prepayment speed. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay some obligations with or without call or prepayment penalties).
June 30, 2024
Amortized Cost
One Year or LessOne to Five YearsFive to Ten YearsAfter Ten YearsTotal
Securities Available-for-Sale
U.S. Treasuries and government agencies$— $141,054 $25,326 $— $166,380 
Obligations of states and municipalities— 87,560 399,572 227,317 714,449 
Residential mortgage backed - agency— 20,097 28,424 9,583 58,104 
Residential mortgage backed - non-agency68,491 67,340 141,397 5,439 282,667 
Commercial mortgage backed - agency45 26,548 9,375 — 35,968 
Commercial mortgage backed - non-agency67,421 93,124 5,130 — 165,675 
Asset-backed3,437 35,543 38,588 — 77,568 
Other— 2,730 21,197 14,373 38,300 
Total$139,394 $473,996 $669,009 $256,712 $1,539,111 
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Note 2— Securities (continued)
June 30, 2024
Fair Value
One Year or LessOne to Five YearsFive to Ten YearsAfter Ten YearsTotal
Securities Available-for-Sale
U.S. Treasuries and government agencies$— $125,507 $21,923 $— $147,430 
Obligations of states and municipalities— 84,498 360,928 192,328 637,754 
Residential mortgage backed - agency— 19,678 24,704 9,786 54,168 
Residential mortgage backed - non-agency67,727 64,248 130,248 5,090 267,313 
Commercial mortgage backed - agency45 25,880 9,117 — 35,042 
Commercial mortgage backed - non-agency66,023 89,186 4,154 — 159,363 
Asset-backed3,422 35,392 38,138 — 76,952 
Other— 2,779 19,707 14,362 36,848 
Total$137,217 $447,168 $608,919 $221,566 $1,414,870 
At June 30, 2024, and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in any amount greater than 10% of shareholders’ equity.
The following table shows the gross unrealized losses and fair value of the Company’s securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2024, and December 31, 2023.
AFS securities in a continuous unrealized loss position for less than twelve months and more than twelve months are as follows (in thousands):
June 30, 2024
Less Than Twelve MonthsMore Than Twelve Months
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesTotal Unrealized Losses
Securities Available-for-Sale
U.S. Treasuries and government agencies$— $— $147,430 $18,950 $18,950 
Obligations of states and municipalities68,811 887 451,029 77,045 77,932 
Residential mortgage backed - agency381 — 42,669 4,166 4,166 
Residential mortgage backed - non-agency63,948 1,093 200,697 14,280 15,373 
Commercial mortgage backed - agency1,529 35 32,750 919 954 
Commercial mortgage backed - non-agency36,236 310 123,128 6,002 6,312 
Asset-backed16,381 55 36,658 740 795 
Other22,474 103 8,070 1,430 1,533 
Total$209,760 $2,483 $1,042,431 $123,532 $126,015 
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Note 2— Securities (continued)
December 31, 2023
Less Than Twelve MonthsMore Than Twelve Months
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesTotal Unrealized Losses
Securities Available-for-Sale
U.S. Treasuries and government agencies$— $— $179,071 $17,955 $17,955 
Obligations of states and municipalities501 14 458,113 72,033 72,047 
Residential mortgage backed - agency36 — 42,203 4,836 4,836 
Residential mortgage backed - non-agency632 2 263,184 18,810 18,812 
Commercial mortgage backed - agency— — 34,080 1,294 1,294 
Commercial mortgage backed - non-agency23,437 254 153,625 6,139 6,393 
Asset-backed3,721 9 56,106 1,393 1,402 
Other— — 8,014 1,486 1,486 
Total$28,327 $279 $1,194,396 $123,946 $124,225 
The Company is required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance requires the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor.
This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost, an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis under the current expected credit loss (“CECL”) standard, and declines due to non-credit factors are recorded in accumulated other comprehensive income (“AOCI”), net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in accumulated other comprehensive income, net of taxes, in the consolidated statements of financial condition. Prior to implementation of the CECL standard, unrealized losses caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach.
The Company did not record an ACL on the AFS securities as of June 30, 2024 or December 31, 2023. The Company considers the unrealized losses on the AFS securities to be related to fluctuations in market conditions, primarily interest rates, and not reflective of deterioration in credit. The Company had 445 securities in an unrealized loss position as of June 30, 2024. The Company has evaluated AFS securities in an unrealized loss position for credit-related impairment at June 30, 2024, and concluded no impairment existed based on a combination of factors, which included: (1) the securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) the contractual terms of the investments do not permit the issuer(s) to settle the securities at a price less than the par value of each investment, (4) issuers continue to make timely principal and interest payments, and (5) the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis. As such, there was no ACL on AFS securities at June 30, 2024.
Securities of U.S. Treasury and Federal Agencies and Federal Agency Mortgage (Residential and Commercial) Backed Securities
At June 30, 2024, the unrealized losses associated with 11 U.S. Treasuries and Government Agency securities, 16 Residential Mortgage Backed – Agency securities, and 15 Commercial Mortgage Backed – Agency securities were generally driven by changes in interest rates and not due to credit losses given the explicit or implicit guarantees provided
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Note 2— Securities (continued)
by the U.S. government. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at June 30, 2024.
Securities of U.S. States and Municipalities
At June 30, 2024, the unrealized losses associated with 257 State and Municipal securities were primarily caused by changes in interest rates and not the credit quality of the securities. These securities are investment grade and were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of our ongoing impairment analysis but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. As a result, we expect to recover the entire amortized cost basis of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at June 30, 2024.
Residential & Commercial Mortgage Backed – Non-Agency Securities
At June 30, 2024, the unrealized losses associated with 84 Residential Mortgage Backed – Non-Agency securities and 31 Commercial Mortgage Backed – Non-Agency securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses. We assess for credit impairment by estimating the present value of expected cash flows. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at June 30, 2024.
Asset-Backed Securities
At June 30, 2024, the unrealized losses associated with 19 Asset-Backed securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses. We assess for credit impairment by estimating the present value of expected cash flows. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at June 30, 2024.
Other Securities
At June 30, 2024, the unrealized losses associated with 12 securities were primarily driven by interest rates and not the credit quality of the securities. These investments were underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. Based on our assessment of the expected credit losses, we expect to recover the entire amortized cost basis of the securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at June 30, 2024.
Restricted stock, at cost
The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $15.1 million and $5.9 million at June 30, 2024, and December 31, 2023, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be impaired at June 30, 2024, and no impairment has been recognized. FHLB stock is included in a separate line item Restricted stock, at cost on the Consolidated Balance Sheets and is not part of the Company’s AFS securities portfolio. The Company’s Restricted stock line item on the Consolidated Balance Sheets also includes an investment in Community Bankers’ Bank, totaling $50 thousand at both June 30, 2024, and December 31, 2023, which is carried at cost and is not impaired at June 30, 2024.
Note 3— Loans
The Company’s loan portfolio segments, as reported in the tables below, include (i) commercial real estate, (ii) owner-occupied commercial real estate, (iii) acquisition, construction & development, (iv) commercial & industrial, (v) single family residential (1-4 units), and (vi) consumer non-real estate and other. The risks associated with lending activities differ
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Note 3— Loans (continued)

among the various loan segments and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions.
•Commercial real estate loans carry risk associated with either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral. Other risk factors include the credit-worthiness of the sponsor and the value of the collateral.
•Owner-occupied commercial real estate loans carry risk associated with the operations of the business that occupies the property and the value of the collateral.
•Acquisition, construction & development loans carry risk associated with the credit-worthiness of the borrower, project completion within budget, sale after completion, and the value of the collateral.
•Commercial & industrial loans carry the risk associated with the operations of the business and the value of the collateral, if any.
•Single family residential (1-4 units) loans for consumer purposes carry risk associated with the continued credit-worthiness of the borrower and the value of the collateral. Single family residential (1-4 units) loans for investment purpose carry risk associated with the continued credit-worthiness of the borrower, the value of the collateral, and either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral.
•Consumer non-real estate and other loans, which includes overdrafts, carry risk associated with the credit-worthiness of the borrower and the value of the collateral, if any.
Loan balances as of June 30, 2024, and December 31, 2023, by portfolio segment were as follows (in thousands):
June 30, 2024December 31, 2023
Commercial real estate$2,543,668 $1,309,084 
Owner-occupied commercial real estate626,375 131,381 
Acquisition, construction & development479,937 49,091 
Commercial & industrial499,892 67,847 
Single family residential (1-4 units)1,219,984 527,980 
Consumer non-real estate and other246,868 2,373 
Loans, gross5,616,724 2,087,756 
Allowance for credit losses(68,017)(25,301)
Loans, net$5,548,707 $2,062,455 
Net deferred loan fees included in the above loan categories totaled $3.2 million and $3.5 million at June 30, 2024, and December 31, 2023, respectively. The Company holds $1.0 million and $3.0 million in Paycheck Protection Program loans, net of deferred fees and costs, as of June 30, 2024, and December 31, 2023, respectively.
Note 4— Allowance for Credit Losses
On January 1, 2023, the Company adopted the CECL methodology as required under Accounting Standards Codification (“ASC”) 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. All information presented as of June 30, 2024, is in accordance with ASC 326.
The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the Consolidated Statement of Income. Management calculates the quantitative portion of collectively evaluated loans for all loan categories using the weighted average remaining maturity (“WARM”) method. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics.
Loans that do not share similar risk characteristics are evaluated on an individual loan basis and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on non-accrual
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Note 4— Allowance for Credit Losses (continued)
status and may include accruing loans that do not share similar risk characteristics to other accruing loans that are collectively evaluated on a loan pool basis. A specific reserve analysis may be applied to the individually evaluated loans, which considers collateral value, an observable market price, or the present value of the expected future cash flows. A specific reserve is assigned if the measured value of the loan using one of the before mentioned methods is less than the carrying value of the loan.
Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the information that is used to calculate a reasonable and supportable forecast and a reversion period forecast on collectively evaluated loans. Management may consider an additional or reduced reserve as warranted through qualitative risk factors based on the current and expected conditions as measured in supplemental information relative to the macroeconomic variable loss drivers used to calculate a reasonable and supportable forecast and a reversion period forecast. These qualitative risk factors considered by management are largely comparable to legacy factors prior to the adoption of CECL.
The following tables present the activity in the ACL for the three months and six months ended June 30, 2024, and for the three months and six months ended June 30, 2023, including the impact of the adoption of CECL for the six months ended June 30, 2023, and the impact of the allowance established for PCD loans for the three months and six months ended June 30, 2024, (in thousands).

Commercial real estateOwner-occupied commercial real estateAcquisition, construction & developmentCommercial & industrialSingle family residential (1-4 units)Consumer non-real estate and otherUnallocatedTotal
Three months ended
June 30, 2024
Balance, beginning of period$18,977 $782 $674 $824 $3,272 $77 $— $24,606 
Allowance established for acquired PCD loans7,503 1,931 5,968 5,684 2,608 216 — 23,910 
Provision for (recapture of) credit losses1,030 2,327 11,997 (1,594)5,805 535 — 20,100 
Charge-offs(210)— — (146)(37)(218)— (611)
Recoveries4 — — — — 8 — 12 
Balance, end of period$27,304 $5,040 $18,639 $4,768 $11,648 $618 $— $68,017 
June 30, 2023
Balance, beginning of period$18,409 $556 $1,852 $700 $4,030 $157 $— $25,704 
Provision for (recapture of) credit losses227 163 (533)(59)487 25 — 310 
Charge-offs— — — (29)— (75)— (104)
Recoveries3 — — — 3 3 — 9 
Balance, end of period$18,639 $719 $1,319 $612 $4,520 $110 $— $25,919 
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Note 4— Allowance for Credit Losses (continued)
Commercial real estateOwner-occupied commercial real estateAcquisition, construction & developmentCommercial & industrialSingle family residential (1-4 units)Consumer non-real estate and otherUnallocatedTotal
Six months ended
June 30, 2024
Balance, beginning of period$20,633 $783 $368 $645 $2,797 $75 $— $25,301 
Allowance established for acquired PCD loans7,503 1,931 5,968 5,684 2,608 216 — 23,910 
Provision for (recapture of) credit losses(629)2,326 12,303 (1,415)6,279 566 — 19,430 
Charge-offs(210)— — (146)(37)(248)— (641)
Recoveries7 — — — 1 9 — 17 
Balance, end of period$27,304 $5,040 $18,639 $4,768 $11,648 $618 $— $68,017 
June 30, 2023
Balance, beginning of period$15,477 $635 $2,082 $438 $2,379 $28 $— $21,039 
Impact of adoption CECL2,686 (6)(640)237 1,661 187 — 4,125 
Provision for (recapture of) credit losses445 90 (123)(34)474 (19)— 833 
Charge-offs— — — (29)— (92)— (121)
Recoveries31 — — — 6 6 — 43 
Balance, end of period$18,639 $719 $1,319 $612 $4,520 $110 $— $25,919 
The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. The following table presents the aging of the recorded investment in past due loans as of June 30, 2024, and December 31, 2023, by portfolio segment (in thousands):
June 30, 2024
30 - 59 Days Past Due60 - 89 Days Past Due90 Days or More Past DueTotal Past DueCurrent LoansTotal Loans90 Days Past Due & Still AccruingNon-accrual loans
Commercial real estate$4,771 $4,059 $20 $8,850 $2,534,818 $2,543,668 $— $20,573 
Owner-occupied commercial real estate242 457 2,184 2,883 623,492 626,375 — 3,035 
Acquisition, construction & development2,187 — 225 2,412 477,525 479,937 — 632 
Commercial & industrial351 68 1,273 1,692 498,200 499,892 — 1,833 
Single family residential (1-4 units)5,268 2,629 2,106 10,003 1,209,981 1,219,984 115 6,405 
Consumer non-real estate and other864 297 115 1,276 245,592 246,868 1 248 
Total$13,683 $7,510 $5,923 $27,116 $5,589,608 $5,616,724 $116 $32,726 
December 31, 2023
30 - 59 Days Past Due60 - 89 Days Past Due90 Days or More Past DueTotal Past DueCurrent LoansTotal Loans90 Days Past Due & Still AccruingNon-accrual loans
Commercial real estate$10,496 $— $— $10,496 $1,298,588 $1,309,084 $— $— 
Owner-occupied commercial real estate— — 790 790 130,591 131,381 — 1,000 
Acquisition, construction & development— — — — 49,091 49,091 — — 
Commercial & industrial195 364 — 559 67,288 67,847 — — 
Single family residential (1-4 units)1,657 289 1,532 3,478 524,502 527,980 — 2,744 
Consumer non-real estate and other3 — — 3 2,370 2,373 — — 
Total$12,351 $653 $2,322 $15,326 $2,072,430 $2,087,756 $— $3,744 
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current economic information, and other factors. The Company analyzes loans individually by classifying the loans by credit risk. The Company internally grades all commercial loans at the time of origination. In addition, the Company performs an annual review on the top twenty-five non-homogenous commercial loan relationships as measured by total Company exposure to each borrower. The Company uses the following definitions for credit risk classifications:
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Note 4— Allowance for Credit Losses (continued)
Pass: These include satisfactory loans that have acceptable levels of risk.
Special Mention: Loans classified as special mention have a potential credit weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of debt. Loans classified as substandard are inadequately protected by sound net worth, payment capacity of the borrower, or of the collateral pledged. If weaknesses go uncorrected, there is potential for partial loss of principal and/or interest.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and unlikely.
Loss: Loans classified as a loss are considered to be uncollectible and cannot be justified to continue as viable assets. While there may be the possibility of some recovery in the future, it is not practical or desirable to defer writing off these loans at the present time.
The Company has a portfolio of smaller homogenous loans that are not individually risk rated that are included within the single family residential and consumer non-real estate and other loan classes. Generally, these loan classes are rated as “Pass” unless these loans are on non-accrual and are then classified as substandard.
The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of June 30, 2024, and December 31, 2023 (in thousands):
June 30, 2024
Term Loans
20242023202220212020PriorRevolving LoansTotal
Commercial real estate
Pass$70,985 $355,955 $507,302 $380,673 $164,754 $730,919 $61,043 $2,271,631 
Special Mention— 25,607 40,739 27,804 10,033 14,293 1,960 120,436 
Substandard— 2,375 30,230 35,806 9,871 73,141 178 151,601 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total $70,985 $383,937 $578,271 $444,283 $184,658 $818,353 $63,181 $2,543,668 
Year to date gross charge-offs$— $— $— $— $— $210 $— $210 
Owner-occupied commercial real estate
Pass$33,439 $61,048 $95,694 $149,655 $39,494 $196,507 $16,667 $592,504 
Special Mention— — — 11,000 2,780 — — 13,780 
Substandard— — 5,482 1,498 6,095 6,525 170 19,770 
Doubtful— — — — — 321 — 321 
Loss— — — — — — — — 
Total$33,439 $61,048 $101,176 $162,153 $48,369 $203,353 $16,837 $626,375 
Year to date gross charge-offs$— $— $— $— $— $— $— $— 
Acquisition, construction & development
Pass$10,910 $110,658 $118,310 $148,727 $14,221 $18,600 $14,794 $436,220 
Special Mention— — — 11,071 16,331 — — 27,402 
Substandard— 768 6,065 2,984 3,769 2,322 — 15,908 
Doubtful— — — — — 407 — 407 
Loss— — — — — — — — 
Total$10,910 $111,426 $124,375 $162,782 $34,321 $21,329 $14,794 $479,937 
Year to date gross charge-offs$— $— $— $— $— $— $— $— 
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Note 4— Allowance for Credit Losses (continued)
Commercial & industrial
Pass$46,499 $57,405 $74,931 $34,978 $12,850 $14,844 $210,018 $451,525 
Special Mention— — 11,738 — — — — 11,738 
Substandard248 697 5,263 15,088 991 3,211 11,131 36,629 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$46,747 $58,102 $91,932 $50,066 $13,841 $18,055 $221,149 $499,892 
Year to date gross charge-offs$— $— $50 $87 $— $9 $— $146 
Single family residential (1-4 units)
Pass$52,828 $165,732 $235,592 $161,973 $81,116 $378,767 $137,571 $1,213,579 
Special Mention— — — — — — — — 
Substandard11 194 283 330 260 5,086 241 6,405 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$52,839 $165,926 $235,875 $162,303 $81,376 $383,853 $137,812 $1,219,984 
Year to date gross charge-offs$— $— $— $— $— $37 $— $37 
Consumer non-real estate and other
Pass$18,765 $26,284 $16,475 $9,170 $8,602 $19,558 $128,898 $227,752 
Special Mention— — — — — — 11,582 11,582 
Substandard949 1,095 3,538 180 74 1,639 59 7,534 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$19,714 $27,379 $20,013 $9,350 $8,676 $21,197 $140,539 $246,868 
Year to date gross charge-offs$245 $— $— $— $— $3 $— $248 
Totals$234,634 $807,818 $1,151,642 $990,937 $371,241 $1,466,140 $594,312 $5,616,724 
December 31, 2023
Term Loans
20232022202120202019PriorRevolving LoansTotal
Commercial real estate
Pass$195,857 $261,817 $166,253 $22,791 $75,170 $416,774 $36,761 $1,175,423 
Special Mention— 12,235 35,449 — 4,876 — — 52,560 
Substandard— 15,420 12,847 — 2,209 50,625 — 81,101 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$195,857 $289,472 $214,549 $22,791 $82,255 $467,399 $36,761 $1,309,084 
Year to date gross charge-offs$— $— $— $— $— $— $— $— 
Owner-occupied commercial real estate
Pass$9,309 $31,725 $11,229 $14,103 $10,279 $43,616 $6,184 $126,445 
Special Mention— — — — — — — — 
Substandard— 532 — — — 4,404 — 4,936 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$9,309 $32,257 $11,229 $14,103 $10,279 $48,020 $6,184 $131,381 
Year to date gross charge-offs$— $— $— $— $— $— $— $— 
Acquisition, construction & development
Pass$8,535 $24,286 $13,698 $— $728 $241 $1,603 $49,091 
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Note 4— Allowance for Credit Losses (continued)
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$8,535 $24,286 $13,698 $— $728 $241 $1,603 $49,091 
Year to date gross charge-offs$— $— $— $— $— $— $— $— 
Commercial & industrial
Pass$29,111 $15,204 $4,344 $162 $15 $1,335 $16,854 $67,025 
Special Mention— — — — — — — — 
Substandard— — 822 — — — — 822 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$29,111 $15,204 $5,166 $162 $15 $1,335 $16,854 $67,847 
Year to date gross charge-offs$— $— $— $29 $— $— $— $29 
Single family residential (1-4 units)
Pass$78,222 $122,067 $60,202 $32,158 $40,938 $137,376 $54,273 $525,236 
Special Mention— — — — — — — — 
Substandard— — 291 243 — 2,171 39 2,744 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$78,222 $122,067 $60,493 $32,401 $40,938 $139,547 $54,312 $527,980 
Year to date gross charge-offs$— $— $— $— $— $— $— $— 
Consumer non-real estate and other
Pass$334 $150 $43 $151 $386 $325 $984 $2,373 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Loss— — — — — — — — 
Total$334 $150 $43 $151 $386 $325 $984 $2,373 
Year to date gross charge-offs$— $165 $— $— $— $— $— $165 
Totals$321,368 $483,436 $305,178 $69,608 $134,601 $656,867 $116,698 $2,087,756 

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Note 4— Allowance for Credit Losses (continued)
The following tables present information about collateral-dependent loans that were individually evaluated for purposes of determining the ACL as of June 30, 2024, and December 31, 2023 (in thousands):
June 30, 2024
With AllowanceWith No Related AllowanceTotal
Amortized CostRelated AllowanceAmortized CostAmortized CostRelated Allowance
June 30, 2024
Commercial real estate$8,260 $5,282 $9,294 $17,554 $5,282 
Owner-occupied commercial real estate321 244 2,472 2,793 244 
Acquisition, construction & development644 411 — 644,000 411 
Commercial & industrial756 756 2,298 3,054 756 
Single family residential (1-4 units)— — 3,183 3,183 — 
Consumer non-real estate and other— — — — — 
Total$9,981 $6,693 $17,247 $27,228 $6,693 
December 31, 2023
With AllowanceWith No Related AllowanceTotal
Amortized CostRelated AllowanceAmortized CostAmortized CostRelated Allowance
December 31, 2023
Commercial real estate$— $— $— $— $— 
Owner-occupied commercial real estate— — 1,000 1,000 — 
Acquisition, construction & development— — — — — 
Commercial & industrial— — — — — 
Single family residential (1-4 units)— — 2,744 2,744 — 
Consumer non-real estate and other— — — — — 
Total$— $— $3,744 $3,744 $— 
Purchased Credit Deteriorated Loans
The Company has purchased loans for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans, at acquisition, is as follows (in thousands):
Amounts
Purchase price of loans at acquisition$380,795 
Allowance for credit losses at acquisition23,910 
Non-credit discount/(premium) at acquisition37,640 
Par value of acquired loans at acquisition$442,344 
Loan Modifications
On January 1, 2023, the Company adopted ASU 2022-02 on a modified retrospective basis. ASU 2022-02 eliminates the troubled debt restructuring (“TDR”) accounting model and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty, and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan. This change required all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables — Nonrefundable Fees and Other Costs, and subjects entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty.
The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction, or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on
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Note 4— Allowance for Credit Losses (continued)
an individual loan. For the three and six months ended June 30, 2024, and for the year ended, December 31, 2023, the Company did not extend any modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan.
Other Real Estate Owned
Real estate owned activity was as follows (in thousands):
June 30, 2024December 31, 2023
Beginning balance$— $— 
Loans acquired/transferred to real estate owned3,432 — 
Capital expenditures— — 
Direct write-downs— — 
Sales of real estate owned(97)— 
End of period balance$3,334 $— 
Note 5— Deposits
The aggregate amount of time deposits that meet or exceed the FDIC Insurance Limit of $250,000, was approximately $247.1 million and $92.3 million on June 30, 2024, and December 31, 2023, respectively. Brokered time deposits, which are fully insured, totaled $403.7 million and $389.0 million as of June 30, 2024, and December 31, 2023, respectively. Time deposits through the Certificate of Deposit Account Registry Service (“CDARS”) program totaled $41.0 million at June 30, 2024, compared to $24.2 million at December 31, 2023.
At June 30, 2024, the scheduled maturities of time deposits for the remaining six months ending June 30, 2024, and the following five years were as follows (in thousands):
As of June 30, 2024
Remaining six months ending, December 31, 2024$750,178 
2025325,278 
2026109,174 
202760,035 
202885,608 
20294,105 
Thereafter4,065 
Total$1,338,443 
At June 30, 2024, and December 31, 2023, amounts included in time deposits for individual retirement accounts totaled $123.6 million and $28.5 million, respectively.
Overdrafts of $5.0 million and $110 thousand were reclassified to loans as of June 30, 2024, and the year ended December 31, 2023, respectively.
Note 6— Borrowed Funds
Short-term borrowings
The Company had borrowings of $285.2 million and $272.0 million at June 30, 2024, and December 31, 2023, respectively. At June 30, 2024, the interest rate on this debt ranged from 4.87% to 5.46%. At December 31, 2023, the interest rate on this debt ranged from 4.38% to 5.57%. The average balance outstanding during the six months ending June 30, 2024, and the year ending December 31, 2023, was $334.8 million and $293.9 million, respectively. The Company has a finance lease liability that is not included in these balances - see Note 7 - Leased Property for a discussion of this liability that is included in the accrued interest and other liabilities line in the Consolidated Balance Sheets.
The Company has available secured lines of credit with the Federal Reserve Bank of Richmond, such as the Borrower-In-Custody program, the FHLB of Atlanta, and unsecured federal funds lines of credit from correspondent banking
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Note 6— Borrowed Funds (continued)
relationships. Through these sources, the Company has unused capacity of $2.2 billion in remaining borrowing capacity as of June 30, 2024. The advances on credit lines are secured by both securities and loans. The lendable collateral value of securities and loans pledged against available lines of credit as of June 30, 2024, and December 31, 2023, was $1.3 billion and $797.8 million, respectively. As of June 30, 2024, all of the Company’s borrowings will mature within one calendar year.
The contractual maturities of these borrowings, which all occur within one year of the reporting date, are as follows as of June 30, 2024, (in thousands):
Due in 2024$265,161 
Due in 202520,000 
Total$285,161 
Long-term borrowings
Subordinated Debentures
As part of the Merger, Burke & Herbert assumed $75 million of subordinated debentures, that were fair valued at $61.5 million with a $13.5 million discount being amortized into interest expense over the stated maturity. As of June 30, 2024, the net balance was $62.4 million. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter, the amount qualifying as Tier 2 capital is reduced 20% each year until maturity. The subordinated debentures were issued in the fourth quarter of 2021. This subordinated debt bears interest at a fixed rate of 3.25% per year, from acquisition date to, but excluding, December 1, 2026, payable semi-annually in arrears. From and including, December 1, 2026 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 230 basis points, payable quarterly in arrears. This debt has a 10-year term, and generally, is not prepayable by us within the first 5 years from issuance, which was fourth quarter 2021.
Through the Merger, Burke & Herbert also assumed $30 million of subordinated debentures that were fair valued at $30 million with a $0.2 million discount being amortized into interest expense over the stated maturity. As of June 30, 2024, the net balance was $30 million. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter, the amount qualifying as Tier 2 capital is reduced by 20% each year until its maturity. The subordinated debentures were issued in the third quarter of 2020. This subordinated debt bears interest at a fixed rate of 5.00% per year from the date of assumption to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025, to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 487 basis points, payable quarterly in arrears. This debt has a 10-year term, and generally, is not prepayable by us within the first 5 years from issuance, which was third quarter 2020.
Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts
As part of the Merger, Burke & Herbert became the sponsor for SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III. For each of these trusts, 100% of the common equity is owned by us. SFG Capital Trust I issued $3.5 million in capital securities and $109 thousand in common securities and invested the proceeds in $3.61 million of debentures, which were assumed by Burke & Herbert in the Merger. SFG Capital Trust II issued $7.5 million in capital securities and $232 thousand in common securities and invested the proceeds in $7.73 million of debentures, which were assumed by Burke & Herbert in the Merger. SFG Capital Trust III issued $8.0 million in capital securities and $248 thousand in common securities and invested the proceeds in $8.25 million of debentures, which were assumed by Burke & Herbert in the Merger. Distributions on the capital securities issued by the trusts are payable quarterly at a variable rate equal to 3 month LIBOR plus 345 basis points for SFG Capital Trust I, 3 months of LIBOR plus 280 basis points for SFG Capital Trust II, and 3 month LIBOR plus 145 basis points for SFG Capital Trust III, and equals the interest rate earned on the debentures held by the trusts and is recorded as interest expense by us. The capital securities are subject to mandatory redemption in whole, or in part, upon repayment of the debentures. We have entered into agreements which, taken
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Note 6— Borrowed Funds (continued)
collectively, fully and unconditionally guarantee the capital securities subject to the terms of the guarantee. The debentures of each Capital Trust are redeemable by us quarterly.
The capital securities issued by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under the Federal Reserve guidelines. In accordance with these Guidelines, trust preferred securities are limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.
The remaining maturities of subordinated debentures as of June 30, 2024, are as follows (in thousands):
Subordinated debentures
Subordinated debentures owed to unconsolidated subsidiary trusts
Remaining six months ending, December 31, 2024$— $— 
2025— — 
2026— — 
2027— — 
2028— — 
Thereafter105,000 19,589 
Total$105,000 $19,589 
Note 7— Leased Property
Lessor Arrangements
The Company enters into operating leases with customers to lease vacant space in certain owned premises that is not being used by the Company. These operating leases are typically payable in monthly installments with terms ranging from around two years to around sixteen years and may contain renewal options. The components of lease income, which was included in non-interest expense on the Consolidated Statements of Income, were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Operating lease income$556 $575 $1,131 $1,150 
Total lease income$556 $575 $1,131 $1,150 
The remaining maturities of operating lease receivables as of June 30, 2024, are as follows (in thousands):
Operating Leases
Remaining six months ending, December 31, 2024$1,083 
20252,182 
20261,936 
20271,836 
20281,862 
Thereafter4,732 
Total lease receivables$13,631 
Lessee Arrangements
The Company has entered into leases for branches and office space. The leases are evaluated for whether the lease will be classified as either a finance or operating lease. Certain leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. Including renewal options, the terms of the Company’s leases range from less than one year to around thirteen years. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
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Note 7— Leased Property (continued)
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. These cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.
Right-of-use assets and liabilities by lease type, and the associated balance sheet classifications are as follows (in thousands):
Balance Sheet ClassificationJune 30, 2024December 31, 2023
Right-of-use assets:
Operating leasesOther assets$14,532 $5,110 
Finance leasesOther assets3,455 3,590 
Total right-of-use assets$17,987 $8,700 
Lease liabilities:
Operating leasesOther liabilities$15,094 $5,327 
Finance leasesOther liabilities3,729 3,840 
Total lease liabilities$18,823 $9,167 
The components of total lease cost were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Finance lease cost
Right-of-use asset amortization$71 $51 $143 $102 
Interest expense28 15 56 30 
Operating lease cost717 839 1,287 1,667 
Total lease cost$816 $905 $1,486 $1,799 
The Company’s future undiscounted lease payments for finance and operating leases with initial terms of one year or more as of June 30, 2024, are as follows (in thousands):
Operating LeasesFinance Leases
Remaining six months ending, December 31, 2024$3,203 $330 
20242,577 337 
20252,380 344 
20262,041 350 
20271,883 357 
Thereafter6,543 2,810 
Total undiscounted lease payments18,627 4,528 
Less: discount(3,533)(799)
Net lease liabilities$15,094 $3,729 
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Note 7— Leased Property (continued)
The following table presents additional information about the Company’s leases as of June 30, 2024, and December 31, 2023.
Supplemental lease information (dollars in thousands)June 30, 2024December 31, 2023
Finance lease weighted average remaining lease term (years)12.2412.66
Finance lease weighted average discount rate3.06 %2.96 %
Operating lease weighted average remaining lease term (years)7.593.71
Operating lease weighted average discount rate4.59 %3.33 %
Six Months Ended June 30,
Cash paid for amounts included in the measurement of lease liabilities20242023
Operating cash flows from operating leases$1,350 $1,739 
Operating cash flows from finance leases56 30 
Financing cash flows from finance leases107 80 
Right-of-use assets obtained in exchange for new finance lease liabilities— — 
Right-of-use assets obtained in exchange for new operating lease liabilities10,362 — 
Note 8— Regulatory Capital Matters
Banks and financial holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, “prompt corrective action” regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on AFS securities is not included in computing regulatory capital. Management believes as of June 30, 2024, the Company and the Bank meet all capital adequacy requirements to which they are subject.
“Prompt corrective action” regulations provide five classifications: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”, although these terms are not used to represent overall financial condition. If “adequately capitalized”, regulatory approval is required to accept brokered deposits. If “undercapitalized”, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of June 30, 2024, and December 31, 2023, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for “prompt corrective action”.
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Note 8— Regulatory Capital Matters (continued)
The following table presents the actual and required capital amounts and ratios for the Company and the Bank at June 30, 2024, and December 31, 2023 (in thousands except for ratios):
ActualMinimum Required Capital - Basel IIIMinimum Required to be Well Capitalized
AmountRatioAmountRatioAmountRatio
As of June 30, 2024
Total Capital to risk weighted assets
Consolidated$889,854 13.91 %$671,804 
≥ 10.5%
$639,813 
N/A
Burke & Herbert Bank & Trust864,853 13.53 671,181 
≥ 10.5
639,220 
≥ 10.0
Tier 1 (Core) Capital to risk weighted assets
Consolidated725,595 11.34 543,841 
≥ 8.5
511,850 
N/A
Burke & Herbert Bank & Trust792,772 12.40 543,337 
≥ 8.5
511,376 
≥ 8.0
Common Tier 1 (CET 1) to risk-weighted assets
Consolidated698,296 10.91 447,869 
≥ 7.0
415,878 
N/A
Burke & Herbert Bank & Trust792,772 12.40 447,454 
≥ 7.0
415,493 
≥ 6.5
Tier 1 (Core) Capital to average assets (leverage ratio)
Consolidated725,595 9.04 320,911 
≥ 4.0
401,139 
N/A
Burke & Herbert Bank & Trust792,772 9.89 320,638 
≥ 4.0
400,798 
≥ 5.0
As of December 31, 2023
Total Capital to risk weighted assets
Consolidated$443,799 17.88 %$260,694 
≥ 10.5%
$248,280 
N/A
Burke & Herbert Bank & Trust442,414 17.82 260,626 
≥ 10.5
248,215 
≥ 10.0
Tier 1 (Core) Capital to risk weighted assets
Consolidated418,244 16.85 211,038 
≥ 8.5
198,624 
N/A
Burke & Herbert Bank & Trust416,859 16.79 210,983 
≥ 8.5
198,572 
≥ 8.0
Common Tier 1 (CET 1) to risk-weighted assets
Consolidated418,244 16.85 173,796 
≥ 7.0
161,382 
N/A
Burke & Herbert Bank & Trust416,859 16.79 173,751 
≥ 7.0
161,340 
≥ 6.5
Tier 1 (Core) Capital to average assets (leverage ratio)
Consolidated418,244 11.31 147,965 
≥ 4.0
184,957 
N/A
Burke & Herbert Bank & Trust416,859 11.27 147,986 
≥ 4.0
184,982 
≥ 5.0
The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of June 30, 2024, approximately $193.7 million of retained earnings was available for dividend declaration consistent with the Company’s capital plan.
Note 9— Derivatives
The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
Cash flow hedges of interest rate risk
The Company’s objective in using interest rate derivatives is to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps, caps, and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Other interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments
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Note 9— Derivatives (continued)
over the life of the agreements without exchange of the underlying notional amount. During 2024, such derivatives were used to hedge the variable cash flows associated with variable-rate assets.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense or interest income in the same period(s) during which the hedged transaction affects earnings. During the next twelve months, the Company estimates that an additional $2.8 million will be reclassified as a reduction to interest expense.

Derivatives not designated as hedges
The Company enters into interest rate swaps with its loan customers to facilitate their financing requests. Upon entering into swaps with our loan customers, the Company will enter into corresponding offsetting derivatives with third parties. These derivatives represent economic hedges and do not qualify as hedges for accounting. These back-to-back interest rate swaps are reported at fair value in “other assets” and “other liabilities” in the Company’s Consolidated Balance Sheets. Changes in the fair value of interest rate swaps are recorded in other non-interest expense and sum to zero because of offsetting terms of swaps with borrowers and swaps with dealer counterparties.
The table below presents the fair value of the Company’s derivative financial instruments, which includes accrued interest, as well as their classification on the Consolidated Balance Sheets as of June 30, 2024, and December 31, 2023 (in thousands):
June 30, 2024
Balance Sheet LocationNotional AmountFair Value
Derivatives designated as hedges:
Interest rate swaps related to cash flow hedgesOther assets$90,725 $1,422 
Derivatives not designated as hedges:
Interest rate swaps related to customer loansOther assets$33,293 $532 
Interest rate swaps related to customer loansOther liabilities33,293 532 
December 31, 2023
Balance Sheet LocationNotional AmountFair Value
Derivatives designated as hedges:
Interest rate swaps related to cash flow hedgesOther assets$100,000 $65 
Interest rate swaps related to cash flow hedgesOther liabilities150,000 1,047 
Derivatives not designated as hedges:
Interest rate swaps related to customer loansOther assets$72,572 $998 
Interest rate swaps related to customer loansOther liabilities72,572 998 
The table below presents the effect of cash flow hedge accounting on AOCI for the three months ended June 30, 2024, and June 30, 2023, as follows (in thousands):

Derivatives in Cash Flow
Hedging Relationships		June 30, 2024Location of Gain or (Loss) Reclassified from AOCI into IncomeJune 30, 2024
Amount of Gain or (Loss) Recognized in OCI on Derivative
Amount of Gain or (Loss) Recognized in OCI Included ComponentAmount of Gain or (Loss) Recognized in OCI Excluded ComponentAmount of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest Rate Products$(2)$(2)$— Interest Income$(128)$(128)$— 
Interest Rate Products1,133 1,133 — Interest Expense997 997 — 
Total$1,131 $1,131 $— $869 $869 $— 
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Note 9— Derivatives (continued)
Derivatives in Cash Flow
Hedging Relationships		June 30, 2023Location of Gain or (Loss) Reclassified from AOCI into IncomeJune 30, 2023
Amount of Gain or (Loss) Recognized in OCI on Derivative
Amount of Gain or (Loss) Recognized in OCI Included ComponentAmount of Gain or (Loss) Recognized in OCI Excluded ComponentAmount of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest Rate Products$(348)$(348)$— Interest Income$(423)$(423)$— 
Total$(348)$(348)$— $(423)$(423)$— 
The table below presents the effect of cash flow hedge accounting on AOCI for the six months ended June 30, 2024, and June 30, 2023, as follows (in thousands):

Derivatives in Cash Flow
Hedging Relationships		June 30, 2024Location of Gain or (Loss) Reclassified from AOCI into IncomeJune 30, 2024
Amount of Gain or (Loss) Recognized in OCI on Derivative
Amount of Gain or (Loss) Recognized in OCI Included ComponentAmount of Gain or (Loss) Recognized in OCI Excluded ComponentAmount of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest Rate Products$(19)$(19)$— Interest Income$(611)$(611)$— 
Interest Rate Products4,518 4,518 — Interest Expense1,034 1,034 — 
Total$4,499 $4,499 $— $423 $423 $— 

Derivatives in Cash Flow
Hedging Relationships		June 30, 2023Location of Gain or (Loss) Reclassified from AOCI into IncomeJune 30, 2023
Amount of Gain or (Loss) Recognized in OCI on Derivative
Amount of Gain or (Loss) Recognized in OCI Included ComponentAmount of Gain or (Loss) Recognized in OCI Excluded ComponentAmount of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest Rate Products$(289)$(289)$— Interest Income$(786)$(786)$— 
Total$(289)$(289)$— $(786)$(786)$— 

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three and six months ended June 30, 2024, and June 30, 2023 (in thousands).
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Note 9— Derivatives (continued)
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
Three months ended
June 30, 2024June 30, 2023
Interest Income Interest ExpenseInterest IncomeInterest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded.$(88)$997 $(914)$— 
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items (1)
40 — (3,468)— 
Derivatives designated as hedging instruments— — 2,977 — 
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from AOCI into income (128)997 (423)— 
Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring— — — — 
Amount of gain or (loss) reclassified from AOCI into income - included component
(128)997 (423)— 
Amount of gain or (loss) reclassified from AOCI into income - excluded component
— — — — 
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
Six months ended
June 30, 2024June 30, 2023
Interest Income Interest ExpenseInterest IncomeInterest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded.$(531)$1,034 $(1,116)$— 
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items (1)
80 — (1,106)— 
Derivatives designated as hedging instruments— — 776 — 
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from AOCI into income(611)1,034 (786)— 
Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring— — — — 
Amount of gain or (loss) reclassified from AOCI into income - included component
(611)1,034 (786)— 
Amount of gain or (loss) reclassified from AOCI into income - excluded component
— — — — 
(1) The Company voluntarily discontinued a fair value hedging relationship and these amounts include the gain or (loss) and the hedging adjustment on a voluntary discontinued hedging relationship. The Company has allocated the basis adjustment to the remaining individual assets in the closed portfolio and will amortize the basis adjustment over a period consistent with amortization of other discounts or premiums on the assets.

Credit-risk-related Contingent Features
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Note 9— Derivatives (continued)
As of June 30, 2024, the Company has no derivatives in a net liability position that would require the posting of collateral.
Note 10— Commitments and Contingencies
Credit extension commitments
The Company’s financial statements do not reflect various financial instruments which arise in the normal course of business and which involve elements of credit risk, interest rate risk, and liquidity risk. These financial instruments include commitments to extend credit (e.g., revolving lines of credit) and commercial letters of credit.
Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of our commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
A summary of the contractual amounts of the Company’s financial instruments outstanding at June 30, 2024, and December 31, 2023, is as follows (in thousands):
June 30, 2024December 31, 2023
Commitments to extend credit$1,091,678 $278,923 
Commercial letters of credit68,965 10,718 
Commitments to extend credit and commercial letters of credit both include exposure to some credit loss in the event of non-performance of the customer. The Company’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Consolidated Balance Sheets. Many of these instruments have fixed maturity dates, and many of them will expire without being drawn upon; accordingly, they do not generally present any significant liquidity risk to the Company.
Allowance for credit losses - off-balance-sheet credit exposures
The Company recorded a provision for credit losses on unfunded commitments of $3.8 million for the three and six months ended June 30, 2024. The Company recorded a recapture of credit losses on unfunded commitments of $96.0 thousand and $104.0 thousand for the three and six months ended June 30, 2023. The ACL on off-balance-sheet credit totaled $4.1 million and $254.2 thousand as of June 30, 2024 and December 31, 2023, and is included in accrued interest and other liabilities on the accompanying Consolidated Balance Sheets.
Litigation
The Company is a party to litigation, claims, and proceedings arising in the normal course of business that are ordinary and routine to the nature of the Company’s business and operations. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from any currently pending or threatened litigation, claims, or proceedings will not be material to the Company’s financial position.
Note 11— Fair Value Measurements
Determination of Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
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Note 11— Fair Value Measurements (continued)
Level 3 – Significant unobservable inputs that reflect our own assumptions that market participants would use in pricing an asset or liability.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Investment securities
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Equity Investments
Equity investments are recorded at fair value on a recurring basis, with changes in fair value reported in net income. Through the Merger, at June 30, 2024, we acquired an investment in an S&P 500 index mutual fund that is actively traded on an exchange, and we classify it as Level 1.
Through the Merger, we acquired perpetual preferred stock of a bank holding company issued in October 2022 in a private offering. The perpetual preferred stock does not trade on an exchange or in an active over-the-counter market; therefore, we estimate its fair value using the present value of its future cash flows using observed discount rates of similar publicly-traded securities, adjusted for a liquidity premium. We classify the perpetual preferred stock as Level 2.
Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment. Such equity securities are included in Equity Investments on the accompanying consolidated balance sheets.
Derivatives
The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Company has contracted with a third-party vendor to provide valuations for interest rate swaps using standard swap valuation techniques. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities. The Company recognizes interest rate lock commitments at fair value. Fair value of interest rate lock commitments is based on the price of underlying loans obtained from an investor for loans that will be delivered on a best effort basis (Level 2).
Loans held-for-sale, at fair value
The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). These loans currently consist of one-to-four family residential loans originated for sale in the secondary market.
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Note 11— Fair Value Measurements (continued)
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements at June 30, 2024, Using:
Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(Level 1)(Level 2)(Level 3)Total
Financial assets
Investment Securities
U.S. Treasuries and government agencies$147,430 $— $— $147,430 
Obligations of states and municipalities— 637,754 — 637,754 
Residential mortgage backed - agency— 54,168 — 54,168 
Residential mortgage backed - non-agency— 267,313 — 267,313 
Commercial mortgage backed - agency— 35,042 — 35,042 
Commercial mortgage backed - non-agency— 159,363 — 159,363 
Asset-backed— 76,952 — 76,952 
Other— 36,848 — 36,848 
Total investment securities available-for-sale$147,430 $1,267,440 $— $1,414,870 
Loans held-for-sale, at fair value$— $3,268 $— $3,268 
Equity investments$7,351 $4,671 $— $12,022 
Derivatives$— $1,954 $— $1,954 
Financial liabilities
Derivatives$— $532 $— $532 
Fair Value Measurements at December 31, 2023, Using:
Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(Level 1)(Level 2)(Level 3)Total
Financial assets
Investment Securities
U.S. Treasuries and government agencies$179,071 $— $— $179,071 
Obligations of states and municipalities— 463,203 — 463,203 
Residential mortgage backed - agency— 42,238 — 42,238 
Residential mortgage backed - non-agency— 266,031 — 266,031 
Commercial mortgage backed - agency— 34,885 — 34,885 
Commercial mortgage backed - non-agency— 177,061 — 177,061 
Asset-backed— 77,936 — 77,936 
Other— 8,014 — 8,014 
Total investment securities available-for-sale$179,071 $1,069,368 $— $1,248,439 
Loans held-for-sale, at fair value$— $1,497 $— $1,497 
Derivatives$— $1,063 $— $1,063 
Financial liabilities
Derivatives$— $2,045 $— $2,045 
The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a non-recurring basis in the financial statements:
Collateral dependent loans
Loans for which the borrower is experiencing financial difficulty and repayment is dependent upon the operation or sale of collateral, are considered collateral dependent. For collateral-dependent loans, the fair value is measured based on the value
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Note 11— Fair Value Measurements (continued)
of the collateral securing the loans, less estimated costs of disposal. Collateral may be in the form of real estate or business assets, including equipment, inventory, and accounts receivable. The vast majority of the collateral underlying collateral dependent loans is real estate, the fair value of which is measured through an appraisal. The appraisals of the collateral supporting collateral dependent loans may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.
Other real estate owned
Assets acquired through foreclosure or other proceedings are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The fair value of foreclosed properties is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data. Updated appraisals of foreclosed properties are generally obtained if the existing appraisal is more than 18 months old or more frequently if there is a known deterioration in value. However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends. Upon foreclosure, any fair value adjustment is charged against the allowance for credit losses on loans. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense in the consolidated statements of income.
Assets that were measured at fair value on a non-recurring basis during the period are summarized below (in thousands):
Fair Value Measurements at June 30, 2024, Using:
Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(Level 1)(Level 2)(Level 3)Total
Collateral dependent loans
Commercial real estate$— $— $2,978 $2,978 
Owner-occupied commercial real estate— — 77 77 
Acquisition, construction & development— — 233 233 
Commercial & industrial— — — — 
Single family residential— — — — 
Consumer non-real estate and other— — — — 
Other real estate owned— — 3,334 3,334 
Fair Value Measurements at December 31, 2023, Using:
Quoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(Level 1)(Level 2)(Level 3)Total
Collateral dependent loans
Commercial real estate$— $— $— $— 
Owner-occupied commercial real estate— — — — 
Acquisition, construction & development— — — — 
Commercial & industrial— — — — 
Single family residential— — — — 
Consumer non-real estate and other— — — — 
Other real estate owned— — — — 
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Note 11— Fair Value Measurements (continued)
The following table presents quantitative information about Level 3 Fair Value Measurements for assets measured at fair value on a non-recurring basis at June 30, 2024, and December 31, 2023 (in thousands except for percentages):
DescriptionFair ValueValuation TechniquesUnobservable InputsRange
June 30, 2024
Collateral dependent loans$3,288 Appraisal of collateralManagement adjustments (e.g. liquidity, selling costs, etc.)
5.0% to 20.0% for liquidity, 6.0% to 8.0% for selling costs
Other real estate owned3,334 Appraisal of collateralManagement adjustments (e.g. liquidity, selling costs, etc.)
5.0% to 20.0% for liquidity, 6.0% to 8.0% for selling costs
December 31, 2023
Collateral dependent loans$— Appraisal of collateralManagement adjustments (e.g. liquidity, selling costs, etc.)
5.0% to 20.0% for liquidity, 6.0% to 8.0% for selling costs
Fair value of financial instruments
The carrying amounts and estimated fair values of financial instruments not carried at fair value, at June 30, 2024, and December 31, 2023, were as follows (in thousands):
Fair Value Measurements at June 30, 2024, Using:
Carrying AmountQuoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(Level 1)(Level 2)(Level 3)Total
Financial Assets
Cash and due from banks$35,072 $35,072 $— $— $35,072 
Interest-earning deposits with banks176,848 176,848 — — 176,848 
Loans, net5,548,707 — 5,262,394 — 5,262,394 
Accrued interest33,371 — 33,371 — 33,371 
Financial Liabilities
Non-interest-bearing deposits$1,397,030 $— $1,397,030 $— $1,397,030 
Interest-bearing deposits5,242,541 — 5,230,701 — 5,230,701 
Short-term borrowings285,161 — 281,404 — 281,404 
Subordinated debentures, net92,178 — 92,178 — 92,178 
Subordinated debentures owed to unconsolidated subsidiary trusts16,886 — 16,886 — 16,886 
Accrued interest7,476 — 7,476 — 7,476 
Fair Value Measurements at December 31, 2023, Using:
Carrying AmountQuoted Prices in Active Markets for Identical AssetsSignificant Other Observable InputsSignificant Unobservable Inputs
(Level 1)(Level 2)(Level 3)Total
Financial Assets
Cash and due from banks$8,896 $8,896 $— $— $8,896 
Interest-bearing deposits with banks35,602 35,602 — — 35,602 
Loans, net2,062,455 — — 1,897,459 1,897,459 
Accrued interest15,895 — 15,895 — 15,895 
Financial Liabilities
Non-interest-bearing deposits$830,320 $— $830,320 $— $830,320 
Interest-bearing deposits2,171,561 — 2,167,218 — 2,167,218 
Short-term borrowings272,000 — 271,716 — 271,716 
Accrued interest8,954 — 8,954 — 8,954 
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Note 12— Accumulated Other Comprehensive Income (Loss)
The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and six months ended June 30, 2024, and June 30, 2023 (in thousands):
Three months ended June 30, 2024
Gains and Losses on Cash Flow HedgesUnrealized Gains and Losses on Available-for-Sale SecuritiesDefined Benefit Pension ItemsAccumulated Other Comprehensive Income
Beginning Balance$2,523 $(97,732)$(5,745)$(100,954)
Net unrealized gains (losses)894 833 — 1,727 
Less: net realized (gains) losses reclassified to earnings(687)(516)— (1,203)
Net change in pension plan benefits— — — — 
Ending Balance$2,730 $(97,415)$(5,745)$(100,430)
Three months ended June 30, 2023
Gains and Losses on Cash Flow HedgesUnrealized Gains and Losses on Available-for-Sale SecuritiesDefined Benefit Pension ItemsAccumulated Other Comprehensive Income
Beginning Balance$(1,255)$(115,523)$(7,031)$(123,809)
Net unrealized gains (losses)(275)(5,254)— (5,529)
Less: net realized (gains) losses reclassified to earnings334 2,827 — 3,161 
Net change in pension plan benefits— — — — 
Ending Balance$(1,196)$(117,950)$(7,031)$(126,177)
Six months ended June 30, 2024
Gains and Losses on Cash Flow HedgesUnrealized Gains and Losses on Available-for-Sale SecuritiesDefined Benefit Pension ItemsAccumulated Other Comprehensive Income
Beginning Balance$(490)$(97,259)$(5,745)$(103,494)
Net unrealized gains (losses)3,554 392 — 3,946 
Less: net realized (gains) losses reclassified to earnings(334)(548)— (882)
Net change in pension plan benefits— — — — 
Ending Balance$2,730 $(97,415)$(5,745)$(100,430)
Six months ended June 30, 2023
Gains and Losses on Cash Flow HedgesUnrealized Gains and Losses on Available-for-Sale SecuritiesDefined Benefit Pension ItemsAccumulated Other Comprehensive Income
Beginning Balance$(1,589)$(130,875)$(7,031)$(139,495)
Net unrealized gains (losses)(228)11,964 — 11,736 
Less: net realized (gains) losses reclassified to earnings621 961 — 1,582 
Net change in pension plan benefits— — — — 
Ending Balance$(1,196)$(117,950)$(7,031)$(126,177)
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Note 12— Accumulated Other Comprehensive Income (Loss) (continued)
The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2024, and June 30, 2023 (in thousands).
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified From Accumulated Other Comprehensive IncomeAffected Line Item in the Statements of Income
Three months ended
Six months ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
Cash flow hedges:
Interest rate contracts$(128)$(423)$(611)$(786)Interest income
Interest rate contracts997 — 1,034 — Interest expense
Tax effect(182)89 (89)165 Income tax expense (benefit)
Net of tax$687 $(334)$334 $(621)
Available-for-sale securities:
Realized gains (losses) on securities$613 $(111)$613 $(111)Net gains/(losses) on securities
Realized gains (losses) on basis adjustment for fair value hedges40 (3,467)81 (1,105)Interest income
Tax effect(137)751 (146)255 Income tax expense (benefit)
Net of tax$516 $(2,827)$548 $(961)
Total reclassifications, net of tax$1,203 $(3,161)$882 $(1,582)Net income
Note 13— Other Operating Expense
Other operating expense from the Consolidated Statements of Income for the three and six months ended June 30, 2024, and June 30, 2023, is as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
FDIC assessment$947 $686 $1,463 $1,033 
Historic tax credit amortization631 631 1,263 1,263 
IT related 704 466 1,254 957 
Consultant fees3,699 508 4,280 978 
ATM, card, & network expense1,108 483 1,659 912 
Directors' fees961 434 1,454 844 
Audit expense261 213 604 520 
Legal expense870 328 1,215 633 
Virginia franchise tax675 630 1,350 1,260 
Marketing expense378 119 707 338 
Donation expense5,119 — 5,119 — 
Core deposit intangible amortization2,865 — 2,865 — 
Other4,356 1,520 5,804 2,887 
Total$22,574 $6,018 $29,037 $11,625 
The Company incurred Merger-related expenses of $9.5 million for the six months ended June 30, 2024, including $8.9 million of which were incurred during the three months ended June 30, 2024. These expenses are included in the consultant fees, audit fees, legal expense, donation, and other line items detailed in other operating expenses.
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Note 14— Share-Based Compensation
The Company has a share-based incentive plan described below that allows it to offer a variety of equity compensation awards subject to approval. Total compensation cost that has been charged against income for the share-based awards granted was $937.6 thousand and $607.2 thousand for the three months ended June 30, 2024, and June 30, 2023, respectively. The total income tax benefit was $196.9 thousand and $127.5 thousand for the three months ended June 30, 2024, and June 30, 2023, respectively.
Total compensation cost that has been charged against income for the share-based awards granted was $1.4 million and $1.2 million for the six months ended June 30, 2024, and June 30, 2023, respectively. The total income tax benefit was $291.5 thousand and $249.4 thousand for the six months ended June 30, 2024, and June 30, 2023, respectively.
2019 Stock Incentive Plan
In 2019, the Company’s Stock Incentive Plan (“2019 SIP”) was approved by the Bank’s Board of Directors. The 2019 SIP provides for the issuance of share-based awards to directors and employees of the Company. The 2019 SIP authorized 240,000 units to be issued, and the Company’s practice is using authorized unissued shares to satisfy these share-based awards. Each unit represents a contingent right to receive one common share or an equivalent amount of cash, or a combination of the two, at the discretion of the Company. Currently, we have a sufficient number of authorized unissued shares to satisfy all outstanding equity awards.
Under the 2019 SIP, the Company has issued restricted stock unit (“RSU”) awards that are both time-based and performance-based. Each RSU award will indicate the number of shares, the conditions (e.g., service, performance, and/or a combination), and the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the award at grant date.
2023 Stock Incentive Plan
In 2023, a new stock incentive plan (“2023 SIP”) was approved by the Company’s Board of Directors and shareholders. Upon the 2023 SIP’s shareholder approval date of March 30, 2023, no further share-based awards will be issued under the 2019 SIP. The 2023 SIP provides for the issuance of share-based awards to directors and employees of the Company. The 2023 SIP authorized the issuance of 250,000 shares, subject to an annual increase in available shares.
A total of 48,450 and 24,705 shares were issued during the six months ended June 30, 2024, and June 30, 2023, respectively.
For time-based RSUs, the fair value was determined by using the closing stock price on the date prior to the grant date. These RSUs vest over three to five years.
The Board, from time to time, approves performance-based RSU awards that may be earned between a three to five year performance period. Whether or not units are earned at the end of the performance period will be determined based on the achievement of performance and/or market targets (e.g., market capitalization target) over the performance period. If the conditions are achieved, the grant recipient will receive 100% of the units granted as these awards do not provide for a multiplier effect. The performance / market targets are determined by the Board of Directors.

The fair value for performance-based RSU awards was determined by using a Monte Carlo simulation analysis to estimate the achievement of the market capitalization target determined by the Board of Directors. The Monte Carlo simulation analysis required the following inputs: (1) expected term, (2) expected volatility, (3) risk-free rate, and (4) dividend yield. The expected term was based on the stated performance period. Management used the expected volatility from a peer group. The risk-free interest rate is based on the U.S. Treasury yield curve over the performance period. The dividend yield assumption was based on historical and anticipated dividend payouts.

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Note 14— Share-Based Compensation (continued)
The following is a summary of all the Company’s RSU awards issued under both the 2019 SIP and 2023 SIP:
Non-vested SharesSharesWeighted-Average Grant-Date Fair Value
Non-vested at December 31, 2023143,585 $51.21 
Granted48,450 51.14 
Vested(103,560)46.87 
Forfeited(600)73 
Non-vested at June 30, 202487,875 $56.15 
As of June 30, 2024, there was $3.3 million of total unrecognized compensation costs related to non-vested shares granted under the 2019 SIP. The cost is expected to be recognized over a weighted average period of 1.86 years.
2023 Employee Stock Purchase Plan
In 2023, a new employee stock purchase plan (“2023 ESPP”) was approved by the Company’s Board of Directors and shareholders. Upon the 2023 ESPP’s shareholder approval date of March 30, 2023, the 2023 ESPP reserved 250,000 shares of common stock for issuance to employees. At June 30, 2024, 243,620 shares were available to be issued. Whole shares are sold to participants in the 2023 ESPP at 85% of the lower of the stock price at the beginning or end of each semi-annual offering period that began on September 1, 2023. Eligible employees may purchase shares in an amount that does not exceed the lesser of the IRS limit of $25,000 or 15% of their annual salary.
The following table presents information for the 2023 ESPP at the end of June 30, 2024:
June 30, 2024
Shares purchased6,380
Weighted average price of shares purchased$43.11 
Compensation expense recognized (in 000's)81.1 
Stock Appreciation Rights (“SAR”)
Upon completion of the Merger and as a part of the Merger Agreement, Burke & Herbert assumed SAR awards that had been issued to existing employees that would continue with the same terms and conditions adjusted for the exchange ratio of 0.5043. As part of the Merger, a significant portion of SAR awards accelerated their vesting and thus did not require any future service component. Management used the Black-Scholes option-pricing model to fair value these accelerated SAR awards and included this value as part of the purchase price consideration discussed in Note 16 - Business Combination.
The Company also used the Black-Scholes option-pricing model to fair value the non-accelerated SAR awards that were not fully vested. The SAR awards that have been assumed by the Company, were issued in 2019, 2021, and 2023, and these SAR awards become exercisable ratably over seven years (14.3% per year) and contractually expire ten years after the grant date.
Upon completion of the Merger, the Company determined the fair value per SAR using the following assumptions:
2019 SAR
2021 SAR
2023 SAR
# of years to full vesting7 years7 years7 years
# of awards unvested as of June 30, 2024
3,20217,32225,921
Fair value $14.89 $16.92 $14.56 
Risk-free interest rate4.51 %4.32 %4.14 %
Expected dividend yield3.95 %3.95 %3.95 %
Expected common stock volatility32.56 %32.56 %32.56 %
Expected contractual life (in years)
4.777.208.77
A summary of SAR and option activity during the six months ended June 30, 2024, is as follows:
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Note 14— Share-Based Compensation (continued)
Weighted Average
Dollars in thousands, expect per share information
SARs
Aggregate Fair ValueRemaining Contractual Term (Yrs.)Exercise Price
Outstanding, December 31, 2023—$— —$— 
Granted (or acquired)299,5564,996 5.6745.24 
Exercised—— —— 
Forfeited—— —— 
Expired—— —— 
Outstanding, June 30, 2024299,556$4,996 5.67$45.24 
Exercisable SARs:
 At June 30, 2024253,111$4,278 5.29$44.63 
The total fair value of SARs exercised was zero during the six months ended June 30, 2024. The total fair value of SARs vested was zero during the six months ended June 30, 2024. As of June 30, 2024, there was $691.1 thousand of total unrecognized compensation costs related to non-vested SARs acquired through the Merger. The cost is expected to be recognized over a weighted average period of 4.75 years.
Note 15— Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential impact of contingently issuable shares. The Company uses the treasury stock method as described by ASC 260 - Earnings Per Share for each dilutive instrument when computing diluted earnings per share.
The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares dilutive potential common stock. Dilutive potential common stock has no effect on income available to common shareholders.
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Net income (loss) applicable to common shares (in thousands)$(17,144)$6,034 $(11,932)$13,558 
Weighted average number of shares12,174,169 7,428,079 9,803,684 7,427,363 
Options effect of dilutive shares— 86,876 — 82,468 
Weighted average dilutive shares12,174,169 7,514,955 9,803,684 7,509,831 
Basic earnings (loss) per common share$(1.41)$0.81 $(1.22)$1.82 
Diluted earnings (loss) per common share(1.41)0.80 (1.22)1.80 
For the three months ended June 30, 2024, and the six months ended June 30, 2024, the options effect of dilutive shares is anti-dilutive and not considered in calculating diluted EPS. Stock awards equivalent to 323,902 and zero shares of common stock were not considered in computing diluted earnings per common share for the three months ended June 30, 2024, and June 30, 2023, respectively, because they are antidilutive. Stock awards equivalent to 329,572 and zero shares of common stock are not considered in computing diluted earnings per share for the six months ended June 30, 2024, and June 30, 2023, respectively, because they are antidilutive.
Note 16— Business Combination
Effective on May 3, 2024, Burke & Herbert completed the Merger with Summit, pursuant to the Merger Agreement.

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Note 16— Business Combination (continued)
In the Merger, holders of Summit common stock outstanding at the effective time of the Merger received 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they owned, subject to the payment of cash in lieu of fractional shares. The total aggregate consideration payable in the Merger was approximately 7,405,772 shares of Burke & Herbert common stock. Additionally, each share of Summit’s 6.0% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series 2021 issued and outstanding was converted into the right to receive a share of Burke & Herbert Series 2021 Preferred Stock.

Summit’s results of operations from May 3, 2024 were included in the Company’s results beginning with reporting as of June 30, 2024. Net interest income and pre-tax net income for Summit were estimated to be $25.3 million and $27.5 million, respectively, since the date of the acquisition through June 30, 2024 and are included in the Company’s Consolidated Statement of Income. Merger-related costs of $24.4 million are included in non-interest expense in the Company’s income statement for the six months ended, June 30, 2024. A portion of these Merger-related costs are captured in the line item Other Operating Non-Interest Expense on the consolidated Income Statement with further description in Note 13 - Other Operating Expense. An additional $14.9 million is captured in line items for Salaries and Wages, Pensions and Other Employee Benefits, Occupancy, and Equipment Rentals, depreciation and maintenance. These costs captured in those line items represent change-in-control payments, acceleration of benefit due to the change-in-control, software breakage, and other lease breakage fees. The fair value of the common shares issued as part of the consideration paid for Summit was determined in the basis of the closing price of the Company’s common shares on the date of completion of the merger.

We accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of Summit were recorded at their respective fair values on the date of completion of the merger. The fair values of assets and liabilities are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $32.8 million in connection with the acquisition, which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The goodwill arising from the transaction is not deductible for tax purposes and consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies.

The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 7 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The fair value of $68.8 million of intangible assets related to core deposits is subject to change pending the receipt of the final valuation.

The fair value of purchased financial assets with credit deterioration was $380.8 million on the date of the acquisition. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $442.3 million. The Company estimates, on the date of the acquisition, that $23.9 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected.

The following table details the total consideration paid for Summit on May 3, 2024, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill at the acquisition date.

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Note 16— Business Combination (continued)
($ in thousands, except share information)
ConsiderationMay 3, 2024
Common stock of Summit Financial Group, Inc.14,686,738
Exchange ratio0.5043
Expected Burke & Herbert common stock to be issued7,406,522 
Actual Burke & Herbert common stock issued7,405,772 
Fractional common stock to be paid in cash750 
Actual Burke & Herbert common stock issued7,405,772 
Price per share of Burke & Herbert common stock issued$51.67 
Purchase price consideration for common stock issued382,656 
Fractional common stock to be paid in cash750 
Average 10 day closing price used to pay fractional common stock$53.66 
Cash paid for fractional shares40 
Implied value of stock appreciation rights ("SARs") and restricted stock units4,336 
Fair value of preferred stock issued by Burke & Herbert10,413 
Fully diluted transaction value$397,445 
Preliminary Goodwill$32,783 

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Note 16— Business Combination (continued)
As RecordedEstimatedEstimated
by SummitFair ValueFair Value
($ in thousands)May 3, 2024AdjustmentsMay 3, 2024
Total purchase price consideration$397,445 
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and equivalents$53,357 $— $53,357 
Securities, available-for-sale, at fair value491,608 — 491,608 
Securities, held-to-maturity, at amortized cost93,573 (7,430)86,143 
Equity and other investments36,085 — 36,085 
Loans, gross3,707,940 (153,306)3,554,634 
Allowance for credit losses(49,471)25,991 (23,480)
Loans, net of allowance3,658,469 (127,315)3,531,154 
Premises and equipment, net62,255 13,276 75,531 
Accrued interest receivable19,610 — 19,610 
Company-owned life insurance86,363 — 86,363 
Goodwill and intangibles73,144 (4,384)68,760 
Other assets83,381 11,322 94,703 
Total identifiable assets acquired4,657,845 (114,531)4,543,314 
Deposits3,704,072 (7,136)3,696,936 
Borrowings323,610 — 323,610 
Subordinated debentures and trust preferred securities123,533 (16,466)107,067 
Unfunded reserve liability6,692 (3,190)3,502 
Accrued interest and other liabilities47,537 — 47,537 
Total liabilities4,205,444 (26,792)4,178,652 
Total identifiable net assets$452,401 $(87,739)364,662 
Preliminary Goodwill$32,783 

Post merger, all of the securities, held-to-maturity were reclassified as available-for-sale.

The following table presents supplemental pro forma information as if the Merger had occurred on January 1, 2023. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed dates.

Three Months Ended June 30,Six Months Ended June 30,
($ in thousands)2024202320242023
Net Interest Income$70,290 $74,848 $140,972 $144,555 
Net Income25,683 18,815 51,668 4,245 


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Note 17— Goodwill and Other Intangible Assets
The following table presents the change in goodwill for the three and six months ended June 30, 2024, and June 30, 2023, (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Beginning of period$— $— $— $— 
Acquired goodwill32,783 — 32,783 — 
Impairment— — — — 
End of period$32,783 $— $32,783 $— 
During the three months ended, June 30, 2024, the Company recorded $32.8 million of preliminary goodwill associated with the acquisition of Summit. See Note 16 - Business Combination to the consolidated financial statements for additional detail regarding this transaction.
The Company will perform the annual goodwill impairment test on September 30 every year.
Other intangible assets consist of the core deposit intangible which is being amortized on an accelerated basis over its estimated useful life of 7 years. During the three months ended, June 30, 2024, the Company recorded $68.8 million of core deposit intangibles associated with the acquisition of Summit.
The gross carrying amounts and accumulated amortization of other intangible assets for the three and six months ended June 30, 2024, and June 30, 2023, was as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Core deposit intangible$68,760 $— $68,760 $— 
Accumulated amortization(2,865)— (2,865)— 
Total intangible assets$65,895 $— $65,895 $— 
The Company reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Total amortization expense associated with intangible assets was $2.9 million for the three months ended June 30, 2024.
Estimated amortization expense for future years is as follows (in thousands):
Estimated Amortization
6 months ended December 31, 2024$8,595 
202515,553 
202613,097 
202710,641 
20288,186 
Thereafter9,823 
Total$65,895 
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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and results of operations of the Company should be read in conjunction with the preceding consolidated financial statements and notes presented in Item 1. Financial Statements of this Form 10-Q, as well as with the audited consolidated financial statements and notes for the year ended December 31, 2023, included in our Form 10-K filed with the SEC on March 22, 2024, and as amended on April 12, 2024 (the “Form 10-K”). Historical results of operations and the percentage relationships among any amounts included and any trends that may appear may not indicate trends in operations or results of operations for any future periods. We are a financial holding company, and we conduct all of our material business operations through the Bank. As a result, the discussion and analysis below primarily relate to activities conducted at the Bank.
Disclosure Regarding Forward-Looking Statements
This Form 10-Q contains statements that we believe are, or may be considered to be, “forward-looking statements”. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current beliefs, expectations, or assumptions regarding the future of the business, future plans and strategies, operational results, and other future conditions of the Company. All statements other than statements of historical fact included in this Form 10-Q regarding the prospects of our industry or our prospects, plans, financial position, or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “plans,” “expects” or “does not expect,” “is expected,” “look forward to,” “budget,” “scheduled,” “estimates,” “forecasts,” “will continue,” “intends,” “the intent of,” “have the potential,” “anticipates,” “does not anticipate,” “believes,” “should,” “should not,” or variations of such words and phrases that indicate that certain actions, events, or results “may,” “could,” “would,” “might,” or “will,” “be taken,” “occur,” or “be achieved,” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections, and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates, and intentions expressed in such forward-looking statements. Important risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company, as applicable, to be materially different from any expected future results, performance, or achievements expressed or implied by such forward-looking information and statements include, but are not limited to, the risks described in Item 1A, under the caption “Risk Factors” in our Form 10-K, and in Part II, Item 1A. Risk Factors in this Form 10-Q.

Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Form 10-Q, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-Q.
We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements.
Overview
Burke & Herbert Financial Services Corp. was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for the Bank. Burke & Herbert commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of Burke & Herbert. In September 2023, Burke
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& Herbert elected financial holding company status. As a financial holding company, Burke & Herbert is subject to regulation and supervision by the Federal Reserve. Burke & Herbert has no material operations and owns 100% of the Bank. The Bank is a Virginia chartered commercial bank that commenced operations in 1852. The Bank is supervised and regulated by the FDIC and the Virginia BFI.
Merger with Summit Financial Group, Inc.
Effective on the Closing Date, Burke & Herbert completed the Merger with Summit, pursuant to the August 24, 2023 Merger Agreement.

Pursuant to the Merger Agreement, on the Closing Date, (i) Summit merged with and into Burke & Herbert through the Merger, and (ii) immediately following the Merger, SCB merged with and into the Bank, with the Bank as the surviving bank.

In the Merger, holders of Summit common stock outstanding at the effective time of the Merger received 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they owned, subject to the payment of cash in lieu of fractional shares. The total aggregate consideration payable in the Merger was approximately 7,405,772 shares of Burke & Herbert Common Stock. Additionally, each share of the Summit Series 2021 Preferred Stock issued and outstanding was converted into the right to receive a share of the new Burke & Herbert Series 2021 Preferred Stock. Summit results of operations are included from the Closing Date forward.

The Bank’s primary market area includes northern Virginia and West Virginia, and it has over 75 branches and other commercial loan offices across Delaware, Kentucky, Maryland, Virginia, and West Virginia. The Company’s branch locations accept business and consumer deposits from a diverse customer base. The Company’s deposit products include checking, savings, and term certificate accounts. The Company’s loan portfolio includes commercial and consumer loans, a substantial portion of which are secured by real estate.

The Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ACL to absorb expected credit losses on existing loans that may become uncollectible. The Bank establishes and maintains this ACL by charging a provision for credit losses against operating earnings. In order to maintain its operations and branch locations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.
As of June 30, 2024, we had total consolidated assets of $7.8 billion, gross loans of $5.6 billion, total deposits of $6.6 billion, and total shareholders’ equity of $693.1 million. As of June 30, 2024, we had 850 full-time employees. None of our employees are covered by a collective bargaining agreement.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions, and judgments based on available information. These estimates, assumptions, and judgments affect the amounts reported in the financial statements and accompanying notes and are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions, and judgments inherent in those policies, are critical in understanding our financial statements.
Our most significant accounting policies are presented in the notes to the accompanying consolidated financial statements. These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, we have identified business combination and goodwill, the
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determination of the allowance for credit losses, and income taxes to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new information becomes available.
Business Combination and Goodwill
For acquisitions, we are required to record the assets acquired, including identified intangible assets such as core deposit intangibles, and the liabilities assumed at their respective fair values. The difference between consideration and the net fair value of assets acquired is recorded as goodwill. Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized within acquisition accounting. The allowance for credit losses for non-PCD assets is recognized as provision for credit losses in the same reporting period as the acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated life of the acquired assets or assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the acquisition. The use of different assumptions could produce significantly different valuation results, which could have material positive or negative effects on our results of operations. The carrying value of goodwill recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill.
The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. In addition, we engage third party specialists to assist in the development of fair values. Preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period. Management uses various valuation methodologies to estimate the fair value of these assets and liabilities, and often involves a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets, and certain other assets and liabilities.
Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of assets, including goodwill and liabilities, which could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides.
Allowance for Credit Losses
The allowance for credit losses represents our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and projections including reasonable and supportable forecasts, reversion, and post-reversion forecasts. It is a valuation account that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial asset. Financial assets are charged-off against the allowance when management believes the uncollectibility of a financial asset is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The Company’s loan portfolio is the largest financial asset that is in scope of this critical accounting estimate. Determining the amount of the allowance for credit losses is considered a critical accounting estimate, because it is based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts, and prepayment experience as related to credit contractual terms. Management estimates the allowance balance using relevant available information from internal and external sources. Historical credit loss experience provides the basis for the estimation of expected credit losses; adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, and delinquency levels, as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. The model methodology used for funded credits, along with taking into consideration the probability of drawdowns or funding on unfunded commitments and whether such commitments are irrevocable or not by the Company, is how the Company determines the allowance for credit losses for unfunded commitments. These evaluations are conducted at least quarterly and more frequently, if deemed necessary.
The Company is using an internally developed model that produces an estimate of the allowance for credit losses as the lifetime expected credit losses of the loan portfolio. This model uses a remaining useful life or WARM method within defined-contractual terms by federal call codes. The model forecasts net charge-off rates by call codes using ordinary least
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squares (“OLS”) regression models that use macroeconomic variables to forecast the Company’s and peer banks’ net charge-off rates. These models are used to produce reasonable and supportable forecasts of net charge-off rates. The macroeconomic variables utilized by the Company include variables that meet defined criteria in forecasting credit losses for our loan portfolio. These variables include, but are not limited to, unemployment rates, housing and commercial real estate prices, gross domestic product levels, equity market conditions or interest rates, as well as other variables that are portfolio-specific, such as those pertaining to commercial real estate or to residential loan portfolios. The Company sources the macroeconomic variables and the macroeconomic variable forecasts that it uses in its ACL model from the Standard & Poor’s Global Market Intelligence and from CoStar Group.

The Company currently has set an initial reasonable and supportable period of two years with a subsequent straight-line loss-rate reversion for the following four quarters before then utilizing historical average loss rates in remaining periods of the modeled contractual terms. Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond information used to calculate reasonable and supportable, reversion and post-reversion period forecasts on collectively evaluated loans. As the reasonable and supportable and reversion period forecasts reflect the use of the macroeconomic variable loss drivers, management may consider that an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions, including those that utilize supplemental information relative to the macroeconomic variable loss drivers. Qualitative adjustments considered by management include the following: (i) management’s assessment of macroeconomic forecasts used in the model and how those forecasts align with management’s overall evaluation of current expected credit conditions; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature and size of the portfolio, and external factors that may ultimately impact credit quality; and (iii) underwriting and delinquency trends. The qualitative factors applied at June 30, 2024, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management’s assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model. Management reviews supplemental data sources including historical net charge-off rates and data measuring other specific credit outcomes from its systems of record in supporting qualitative factors. However, qualitative factor evaluations are inherently imprecise and require significant management judgement.
Income Taxes
The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated taxes due. The calculation of each component of the Company’s income tax provision is complex and requires the use of estimates and judgments in its determination. As part of the Company’s evaluation and implementation of business strategies, consideration is given to the regulations and tax laws that apply to the specific facts and circumstances for any tax positions under evaluation. Management closely monitors tax developments on both the federal and state level in order to evaluate the effect they may have on the Company’s overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company must consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and the results of recent operations. A valuation allowance is recognized for a deferred tax asset if, based on the available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. See Note 8 — Income Taxes, in Notes to the December 31, 2023 Consolidated Financial Statements of the Company for additional information.
Non-GAAP Financial Measures
We prepare our financial statements in accordance with U.S. GAAP and also present certain non-GAAP financial measures that exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with U.S. GAAP. Non-GAAP measures are provided as additional useful information to assess our financial condition and results of operations (including period-to-period operating performance). These non-GAAP measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP measures with similar names used by other companies. For more information, including the reconciliation of these non-GAAP financial measures to their corresponding GAAP financial measures, see the respective sections where the measures are presented.
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Current Economic Environment in the Financial Services Industry
Commercial Real Estate Sector Concentration
The commercial real estate (“CRE”) sector has been impacted significantly by rising interest rates and higher vacancies, increasing the prospect of default that borrowers may face due to the record amount of upcoming maturities. In addition, the office market continues to struggle with fewer employees in the office after the COVID-19 pandemic. The Bank continues to monitor its commercial real estate portfolio by reviewing various credit risk and concentration reports. The Bank’s exposure to commercial real estate at June 30, 2024, was $2.5 billion or 45.3% of its gross loan portfolio, not including owner-occupied commercial real estate and acquisition, construction & development. Commercial real estate as a percent of total assets at June 30, 2024, was 32.6%, not including owner-occupied commercial real estate and acquisition, construction & development. Including owner-occupied commercial real estate and acquisition, construction & development, total exposure was at $3.6 billion or 65.0% of our total gross loans and 46.7% of total assets at June 30, 2024.
Loan balances by portfolio segment amortized cost (in thousands) and by percentage of our total gross loan portfolio at June 30, 2024, were as follows:
June 30, 2024
Amortized CostPercentage
Commercial real estate$2,543,668 45.3 %
Owner-occupied commercial real estate626,375 11.2 
Acquisition, construction & development479,937 8.5 
Commercial & industrial499,892 8.9 
Single family residential (1-4 units)1,219,984 21.7 
Consumer non-real estate and other246,868 4.4 
Total gross loans$5,616,724 100.0 %
Monitoring of the CRE concentration is performed at both the loan level and at the portfolio level. The Credit Risk Management team provides management and the board of directors with periodic reports on the credit portfolio, which include the CRE portfolio (including owner-occupied CRE and acquisition, construction & development loans). These reports provide an assessment of asset quality and risk rating migration and monitor concentrations against the board approved concentration limits (including sub-limits). The tables below present the Bank’s commercial real estate, owner-occupied commercial real estate, and acquisition, construction & development portfolios by collateral type and geographic location as of June 30, 2024 (in thousands).
Commercial Real Estate by Collateral Type and Geographic Location
VAWVMDDCOtherTotalPercentage
Retail Real Estate$287,723 $64,765 $137,319 $42,110 $48,418 $580,335 22.8 %
Multi-Family227,908 105,067 44,800 84,230 26,713 488,718 19.2 
Office Buildings/Condos193,342 37,294 120,123 27,861 29,852 408,472 16.2 
Hotels/Motels124,780 53,723 66,626 52,357 77,704 375,190 14.7 
Industrial/Warehouse202,797 4,222 20,921 — — 227,940 9.0 
Self-Storage67,962 29,883 1,500 — 33,029 132,374 5.2 
Nursing-Assisted Living44,128 — 3,629 — 21,715 69,472 2.7 
Restaurants19,457 1,835 7,763 10,606 6,065 45,726 1.8 
Gas Stations7,358 1,862 2,117 14,812 3,069 29,218 1.1 
Other105,280 3,871 19,938 43,640 13,494 186,223 7.3 
Total$1,280,735 $302,522 $424,736 $275,616 $260,059 $2,543,668 100.0 %

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Owner-Occupied Commercial Real Estate by Collateral Type and Geographic Location
VAWVMDDCOtherTotalPercentage
Office Buildings/Condos$69,160 $30,923 $21,671 $635 $14,398 $136,787 21.8 %
Retail45,284 50,396 14,611 126 24,014 134,431 21.5 
Industrial/Warehouse49,586 16,672 1,798 — 16,147 84,203 13.4 
Gas Stations26,914 11,331 10,076 — 29,225 77,546 12.4 
Restaurants6,678 8,264 3,951 — 15,974 34,867 5.6 
Churches/Religious Organizations21,088 8,388 1,628 241 3,462 34,807 5.6 
Coal, oil, gas, and natural resource extraction927 10,493 — — 134 11,554 1.8 
Private School7,563 — — — — 7,563 1.2 %
Other29,493 19,858 8,001 361 46,904 104,617 16.7 
Total$256,693 $156,325 $61,736 $1,363 $150,258 $626,375 100.0 %

Acquisition, Construction & Development by Collateral Type and Geographic Location
VAWVMDDCOtherTotalPercentage
Multi-Family$11,560 $3,569 $26,599 $46,744 $57,332 $145,804 30.4 %
Land56,808 32,113 11,174 61 12,584 112,740 23.5 
Office Buildings/Condos11,849 — 2,304 27,593 31,456 73,202 15.3 
Self-Storage8,004 569 22,336 — 21,767 52,676 11.0 
Retail Real Estate13,678 4,640 10,336 — 2,574 31,228 6.5 
Residential For-Sale5,500 5,257 882 3,822 3,008 18,469 3.8 
Other22,184 4,350 11,958 — 7,326 45,818 9.5 
Total$129,583 $50,498 $85,589 $78,220 $136,047 $479,937 100.0 %

CRE loans are monitored through various processes that include payment monitoring, financial reporting, and covenant compliance monitoring, and annual reviews for larger relationships. Furthermore, construction loans are monitored throughout the life of the project and the construction loan administration function is centralized within the Credit Risk Management team. Monitoring the market conditions is also an important component of prudent CRE risk management. Quarterly construction progress reviews are also completed on all acquisition, construction & development loans. For each loan, management reviews the adequacy of the construction budget, adequacy of the interest reserve, pace of construction, and review of any loan covenants.
The Bank believes its underwriting and monitoring standards for commercial real estate loans are sufficient to evaluate its loan portfolio and keep it from incurring significant losses. The largest concentration of the Bank’s commercial real estate loans are in Virginia (approximately 45.7%) and the Bank does not have significant exposure to any economic areas of the country that are underperforming the national economy. Additionally, the Bank’s overall exposure to the “Office Building / Condo” collateral type is 16.9% of total commercial real estate loans, including owner-occupied commercial real estate and acquisition, construction & development. The Bank believes that the combined loan portfolio is well-diversified, generally seasoned, manageable, and will outperform the industry in terms of performance through the economic cycle; however, our underwriting, review, and monitoring cannot eliminate all of the risks related to these loans. For further discussion see Part II, Item 1A. “Risk Factors”.
2023 Banking Failures and Ensuing Banking Industry Liquidity Concerns
In response to the bank failures that occurred during March and May 2023 and the attendant stress on economic agents, including various financial markets, the Company took multiple proactive measures to mitigate any potential financial and operational impacts. Such measures included, but were not limited to:
•dissemination of internal communication to inform the Board and employees of current events and the Company’s condition and desired market response;
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•testing of available liquidity sources;
•real-time analysis of our deposit composition and deposit concentrations;
•assessment of our investment securities portfolio; and
•stress testing of liquidity and capital metrics based on observed financial conditions with particular emphasis on the causes of such risk events.
For further discussion see Part II, Item 1A. “Risk Factors”. The measures taken followed meetings convened by a subcommittee provided for in our Asset/Liability policy more fully described in Item 3. — Quantitative and Qualitative Disclosures About Market Risk.
The Company’s key inputs and certain assumptions of the stress testing included, but were not limited to, uninsured deposits, deposit composition and deposit flows, borrowings and borrowing capacity, interest rate movements and sensitivity, unrealized losses in the investment securities portfolio, loan balances and loan demand, credit risks, and current allowances for credit losses. Results of the stress tests indicated capital levels that remained above the well capitalized regulatory ratios and liquidity metrics remained within internal policy guidelines. For additional information related to capital, see Notes to the Consolidated Financial Statements – Note 8 — Regulatory Capital Matters. The Company intends to continue conducting such stress tests on a periodic basis.
Liquidity Management
Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves.
The Company assesses the need for liquidity in a variety of scenarios. Those scenarios may include projected growth, credit deterioration, deposit decay, interest rate changes, and a variety of other economic scenarios that can impact the liquidity position of the Company. These analyses are performed on a quarterly basis in conjunction with the Company’s Asset/Liability meetings, and findings are reported to the Asset/Liability Committee (the “ALCO”) and to the Board. From time to time, management may change the frequency of such testing or update certain inputs as a result of abnormal market conditions.
Findings, as a result of the Company’s prudent liquidity modeling, may result in the change of certain products offered to customers or adjust the way the Company manages its balance sheet. Such changes could include adjusting interest rates offered on certain deposit products, changes to interest rates charged in lending activities, or the suspension of certain products and activities altogether. Times of significant economic stress may cause the mix of funding to shift and increase the likelihood of changes to certain products in order to manage the Company’s overall liquidity and capital position.
The asset portion of the balance sheet provides liquidity primarily through unencumbered securities available-for-sale, loan principal and interest payments, maturities and prepayments of investment securities, and, to a lesser extent, sales of investment securities available-for-sale. Other short-term investments available to the Company that could act as potential sources of liquidity are federal funds sold, securities purchased under agreements to resell, and maturing interest-bearing deposits with other banks.
The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts and through FHLB and other borrowings. Brokered deposits, federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings are additional sources of liquidity and basically represent the Company’s incremental borrowing capacity. These sources of liquidity are used as necessary to fund asset growth and meet short-term liquidity needs.
In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a financial holding company that is a separate legal entity from the Bank. The Company requires cash for various operating needs that could include payment of dividends to its shareholders, the servicing of debt, and the payment of general corporate expenses. The primary source of liquidity for the Company is dividends paid by the Bank. Applicable
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federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits, and other such items. Any future dividends must be set forth in the Company’s capital plans before any dividends can be paid.
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. See Note 6 - Advances and Other Borrowings and Note 10 - Commitments and Contingencies, in Notes to Consolidated Financial Statements for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.
Capital
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
Applicable Basel III Capital Rules require the Company and the Bank to maintain minimum Common Equity Tier 1 (“CET 1”), Tier 1, and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and counter-cyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “counter-cyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.
Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Additionally, federal banking laws require regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not satisfy minimum capital requirements. The extent of these powers depends upon whether the institution in question is “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized”, as such terms are defined under federal banking agency regulations. Depository institutions that do not meet minimum capital requirements will face constraints on payment of dividends, equity repurchases, and compensation based on the amount of shortfall. A depository institution that is not “well capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, may be subject to asset growth limitations, and may be required to submit capital restoration plans.
As of June 30, 2024, and December 31, 2023, the Bank complied with all regulatory capital standards and qualifies as “well capitalized”. Note 8 - Regulatory Capital Matters in Notes to Consolidated Financial Statements contains additional discussion and analysis regarding the Company and the Bank’s regulatory capital requirements.
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary in nature; therefore, a financial institution differs greatly from most commercial and industrial companies, which have significant investments in fixed assets or inventories that are greatly impacted by inflation. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher-than-normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also affects other expenses that tend to rise during periods of general inflation.
Management believes the most significant potential impact of inflation on financial results is a direct result of the Company’s ability to manage the impact of changes in interest rates. Management attempts to maintain a balanced position between rate-sensitive assets and liabilities over an economic cycle in order to minimize the impact of interest rate
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fluctuations on net interest income. However, this goal can be difficult to completely achieve in times of rapidly changing interest rates and is one of many factors considered in determining the Company’s interest rate positioning.
Key Factors Affecting Financial Performance
We face a variety of risks that may impact various aspects of our financial performance from time to time. The extent of such impacts may vary depending on factors such as the current business and economic conditions, political and regulatory environment, and operational challenges. Many of these risks and our risk management strategies are described in more detail elsewhere in this Report as well as with the audited consolidated financial statements and notes for the year ended December 31, 2023, included in our Form 10-K.
Our success will depend upon, among other things, the following factors that we manage or control:
•Effectively managing capital and liquidity, including:
•Continuing to maintain and, over time, grow our deposit base as a low-cost stable funding source,
•Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing, and liquidity standards, and
•Actions we take within the capital and other financial markets,
•Our ability to manage any material costs related to the execution of our strategic priorities, including increased employees, infrastructure, compliance, and other costs in a profitable manner over the long term,
•Management of credit risk and interest rate risk in our portfolio,
•Our ability to manage and implement strategic business objectives within the changing regulatory environment,
•The impact of legal and regulatory-related contingencies,
•The appropriateness of critical accounting estimates and related contingencies,
•Our ability to manage operational risks related to new products and services, changes in processes and procedures, or the implementation of new technology,
•The ability to make investments to promote compliance with existing and evolving regulatory requirements that will increase as the Company grows and will result in increased administrative expenses that we did not previously incur, which costs may materially increase our general and administrative expenses, and
•The ability to execute our strategic objectives, including successfully integrating Summit’s operations, people, and technology with ours, and continuing to efficiently satisfy the obligations associated with being a public company, all of which will require significant resources and management attention and may divert management’s attention from our business operations.
Our financial performance is also substantially affected by a number of external factors outside of our control, including the following:
•Economic conditions, including the length and extent of the economic impacts of events affecting the financial services market generally as well as pandemics and political instability and conflicts, and any actions taken to mitigate and manage such impacts,
•The effect of climate change on our business and performance, including indirectly through impacts on our customers,
•The actions by the Federal Reserve, U.S. Treasury, and other government agencies, including those that impact money supply and market interest rates and inflation,
•The level of, and direction, timing, and magnitude of movement in interest rates and the shape of the interest rate yield curve,
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•The functioning and other performance of and availability of liquidity in U.S. and global financial markets, including capital markets,
•The impact of tariffs and other trade policies of the U.S. and its global trading partners,
•Changes in the competitive landscape,
•Impacts of changes in federal, state, and local governmental policy, including on the regulatory landscape, capital markets, taxes, infrastructure spending, and social programs,
•The impact of market credit spreads on asset valuations,
•The ability of customers, counterparties, and issuers to perform in accordance with contractual terms and the resulting impact on our asset quality,
•Loan demand, utilization of credit commitments, and standby letters of credit,
•The impact on customers and changes in customer behavior due to changing business and economic conditions or regulatory or legislative initiatives,
•Our ability to successfully integrate into our operations Summit’s assets, liabilities, and systems, as well as new management personnel and customers, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto.
The impact of these items, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operation. For additional information on the risks we face, see Part II, Item 1A. - Risk Factors.


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Selected Financial Data
The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of June 30, 2024, and June 30, 2023, and the selected income statement data for the three months and six months ended June 30, 2024, and June 30, 2023, have been derived from our consolidated financial statements included elsewhere in this Form 10-Q and in other filings we have submitted with the SEC and should be read in conjunction with the other information contained in this Form 10-Q.
As of the Three Months Ended June 30,
As of the Six Months Ended June 30,
(In thousands, except ratios, share and per share data)2024202320242023
Selected Financial Condition Data:
Total assets$7,810,193 $3,569,226 $7,810,193 $3,569,226 
Total cash and cash equivalents211,920 80,799 211,920 80,799 
Total investment securities, at fair value1,414,870 1,252,190 1,414,870 1,252,190 
Net loans5,548,707 1,975,050 5,548,707 1,975,050 
Company-owned life insurance182,112 93,625 182,112 93,625 
Premises and equipment, net135,581 56,183 135,581 56,183 
Total deposits6,639,571 3,005,263 6,639,571 3,005,263 
Advances and other borrowings285,161 249,000 285,161 249,000 
Total shareholders’ equity693,126 290,072 693,126 290,072 
Common shareholders’ equity
682,713 290,072 682,713 290,072 
As of or for the Three Months Ended June 30,
As of or for the Six Months Ended June 30,
2024202320242023
Selected Operating Data:
Interest income$96,097 $37,116 $134,842 $71,444 
Interest expense36,332 13,324 52,946 22,878 
Net interest income59,765 23,792 81,896 48,566 
Provision for (recapture of) credit losses23,910 214 23,240 729 
Total non-interest income9,505 4,625 13,759 8,839 
Total non-interest expenses64,432 21,348 85,597 41,713 
Income (loss) before income taxes
(19,072)6,855 (13,182)14,963 
Income tax expense (benefit)
(2,153)821 (1,475)1,405 
Preferred stock dividends
225 — 225 — 
Net income (loss) applicable to common shares
(17,144)6,034 (11,932)13,558 
Per Share Data:
Average shares of common stock outstanding, basic
12,174,169 7,428,079 9,803,684 7,427,363 
Average shares of common stock outstanding, diluted
12,174,169 7,514,955 9,803,684 7,509,831 
Total shares of common stock outstanding
14,932,169 7,428,710 14,932,169 7,428,710 
Basic net income (loss) per common share
$(1.41)$0.81 $(1.22)$1.82 
Diluted net income (loss) per common share
(1.41)0.80 (1.22)1.80 
Dividends declared per common share
0.53 0.53 1.06 1.06 
Common stock dividend payout ratio (1)
(37.59)%66.25 %(86.89)%58.89 %
Book value per common share (at period end)
$45.72 $39.05 $45.72 $39.05 

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As of or for the Three Months Ended June 30,
As of or for the Six Months Ended June 30,
2024202320242023
Performance Ratios:
Return on average assets(1.06)%0.67 %(0.48)%0.76 %
Return on average equity(12.44)8.34 (5.52)9.56 
Interest rate spread (2)
3.35 2.25 2.84 2.41 
Net interest margin (3)
4.06 2.87 3.56 2.96 
Efficiency ratio (4)
93.02 75.12 89.49 72.66 
Capital Ratios:
Common equity tier 1 (CET 1) capital to risk-weighted assets10.91 %17.60 %10.91 %17.60 %
Total risk-based capital to risk-weighted assets13.91 18.71 13.91 18.71 
Tier 1 capital to risk-weighted assets11.34 17.60 11.34 17.60 
Tier 1 capital to average assets (leverage ratio)
9.04 11.20 9.04 11.20 
Asset Quality Ratios:
Allowance coverage ratio1.21 %1.30 %1.21 %1.30 %
Allowance for credit losses as a percentage of non-performing loans207.10 886.73 207.10 886.73 
Net charge-offs to average outstanding loans during the period0.01 0.00 0.02 0.00 
Non-performing loans as a percentage of total loans0.58 0.15 0.58 0.15 
Non-performing assets as a percentage of total assets0.46 0.08 0.46 0.08 
Other Data:
Number of full-service branches75237523
Number of full-time equivalent employees850407850407
(1) The dividend payout ratio represents per share dividends declared divided by diluted earnings per share.
(2) The interest rate spread represents the difference between the fully taxable-equivalent weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.
(3) The net interest margin represents fully taxable-equivalent net interest income as a percent of average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income.
Results of Operations
Results of Operations for the Six Months Ended June 30, 2024, and June 30, 2023
General
Net loss applicable to common shares for the six months ended June 30, 2024, was $11.9 million compared to net income applicable to common shares of $13.6 million for the six months ended June 30, 2023. The $25.5 million decrease in net income applicable to common shares was primarily the result of merger related expenses and one-time CECL Day 2 provision for non-PCD assets acquired in the Merger for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.
Net interest income increased by $33.3 million to $81.9 million for the six months ended June 30, 2024, compared to $48.6 million for the six months ended June 30, 2023. The main driver for this increase was the impact of the Merger.
For the six months ended June 30, 2024, the Company recorded credit provision expense of $23.2 million compared to a provision of $0.7 million for the six months ended June 30, 2023. For the six months ended June 30, 2024, the Company recognized a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger, which resulted in a higher credit provision expense for the six months ended June 30, 2024, compared to the six months ended, June 30, 2023.
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Non-interest income increased by $4.9 million, or 55.7%, to $13.8 million for the six months ended June 30, 2024, as compared to $8.8 million for the six months ended June 30, 2023, as a result of the Merger. In addition, the Company liquidated the majority of the acquired securities portfolio that resulted in a gain on sale of securities of $0.6 million.
Non-interest expense increased by $43.9 million, or 105.2%, to $85.6 million for the six months ended June 30, 2024, compared to $41.7 million for the six months ended June 30, 2023. The increase was primarily due to effect of the Merger and also included higher legal fees, consulting fees, audit fees, investment banking fees, software contract terminations, change-in-control salary and benefit payments, funding a charitable donation (as part of the Merger Agreement), and other expenses related to the Merger. For the six months ended June 30, 2024, the Company incurred $24.4 million of expenses related to the Merger with Summit.
Net Interest Income and Net Interest Margin
Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest margin, stated as a percentage, is the yield obtained by dividing the difference between interest income generated on earning assets and the interest expense paid on all funding sources by average earning assets.
Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest-bearing liabilities can impact net interest income and net interest margin. Management closely monitors both total net interest income and the net interest margin and seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities.
Net interest income totaled $81.9 million for the six months ended June 30, 2024, compared to $48.6 million for the six months ended June 30, 2023. The increase in net interest income was primarily driven by the Merger which resulted in higher average balances of interest-earning assets beyond the higher average balances of interest-bearing liabilities.
The tax-adjusted net interest margin was 3.56% for the six months ended June 30, 2024, compared to 2.96% for the six months ended June 30, 2023. The increase in tax-adjusted net interest margin was primarily driven by the effect of the Merger and the acquisition of additional, higher-yielding interest-earning assets.
The yield for the loan portfolio was 6.72% for the six months ended June 30, 2024, compared to 4.94% for the six months ended June 30, 2023. The increase was primarily the result of the effect of the Merger which resulted in the acquisition of additional, higher-yielding loans.
The tax-adjusted yield on the total investment securities portfolio was 3.76% for the six months ended June 30, 2024, compared to 3.45% for the six months ended June 30, 2023. The increase was partly due to higher yields in our investment portfolio in addition to the Merger, which resulted in the acquisition of additional securities with higher tax-adjusted yields.
The yield on interest-bearing deposits increased to 2.73% during the six months ended June 30, 2024, from 1.50% during the six months ended June 30, 2023. The increase was a result of the Merger which resulted in the assumption of additional interest-bearing deposits with higher interest rates and to a lesser extent by higher market interest rates.
The yield on our short-term borrowings for the six months ended June 30, 2024, was 4.58%, compared to 4.66% for the six months ended June 30, 2023. The decrease was due to the cash flow hedges that effectively lowered our yield on short-term borrowings. The yield on our subordinated debt acquired in the Merger was 10.30%.
The following table sets forth the major components of net interest income and the related yields and rates for the six months ended June 30, 2024, and June 30, 2023, for comparison (dollars in thousands).
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For the Six Months Ended June 30,
20242023
Average Outstanding BalanceInterest Income/Expense
Average Yield / Rate
Average Outstanding BalanceInterest Income/Expense
Average Yield / Rate
Assets:
Taxable loans (1)(2)
$3,283,909 $109,718 6.72 %$1,961,309 $48,060 4.94 %
Tax-exempt loans (1)(2)
1,520 42 5.56 — — N/A
Interest-earning deposits and fed funds sold68,229 1,229 3.62 59,107 1,296 4.42 
Taxable securities989,183 19,945 4.05 1,065,868 19,221 3.64 
Tax-exempt securities (3)
342,895 4,958 2.91 269,575 3,629 2.71 
Total securities1,332,078 24,903 3.76 1,335,443 22,850 3.45 
Total interest-earning assets4,685,736 135,892 5.83 3,355,859 72,206 4.34 
Non-interest-earning assets363,336 250,483 
Total assets$5,049,072 $3,606,342 
Liabilities and shareholders’ equity:
Deposits:
Non-interest-bearing demand$1,009,821 $901,297 
Interest-bearing demand1,038,847 12,599 2.44 %563,405 763 0.27 %
Savings1,201,858 10,145 1.70 998,826 6,872 1.39 
Time943,852 20,560 4.38 510,912 7,796 3.08 
Total interest-bearing deposits3,184,557 43,304 2.73 2,073,143 15,431 1.50 
Total deposits4,194,378 43,304 2.08 2,974,440 15,431 1.05 
Borrowings:
Short-term borrowings
341,754 7,782 4.58 322,157 7,447 4.66 
Subordinated debt borrowings
36,321 1,860 10.30 — — N/A
Total interest-bearing liabilities3,562,632 52,946 2.99 2,395,300 22,878 1.93 
Non-interest-bearing liabilities78,489 23,749 
Equity434,451 285,996 
Total liabilities and equity$5,049,072 $3,606,342 
Taxable-equivalent net interest income /net interest spread (4)
82,946 2.84 %49,328 2.41 %
Taxable-equivalent net interest margin (5)
3.56 %2.96 %
Taxable-equivalent net adjustment(1,050)(762)
Net interest income$81,896 $48,566 
Net interest-earning assets$1,123,104 $960,559 
(1)Non-accrual loans are included in average loan balances.
(2)Loan fees are included in the calculation of interest income.
(3)Yields and interest income on tax-exempt assets are computed on a taxable-equivalent basis assuming a 21% tax rate.
(4)The interest rate spread represents the difference between the fully taxable-equivalent weighted-average yield on interest-earning assets and the weighted-average yield of interest-bearing liabilities for the period.
(5)The net interest margin represents fully taxable-equivalent net interest income as a percent of average interest-earning assets for the period.
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Taxable-equivalent net interest margin, as presented above, is calculated by dividing fully-taxable equivalent (“FTE”) net interest income by total average earning assets. Net interest income, on an FTE basis, is a non-GAAP financial measure that the Company believes to provide a more accurate picture of the interest margin for comparative purposes. Management believes FTE net interest income is a standard practice in the banking industry, and when net interest income is adjusted on an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. FTE net interest income is calculated by adding the tax benefit on certain financial interest-earning assets, whose interest is tax-exempt, to total interest income then subtracting total interest expense. As a non-GAAP measure, FTE net interest income should not be considered as a substitute for the nearest comparable GAAP measure, net interest income. Net interest income shown elsewhere in this presentation is GAAP net interest income. The following table reconciles GAAP net interest income to FTE net interest income (in thousands).

Six Months Ended
June 30, 2024June 30, 2023
GAAP Financial Measurements
Interest Income - Loans$109,718 $48,060 
Interest Income - Tax-exempt loans33 — 
Interest Income - Securities taxable19,873 19,221 
Interest Income - Securities tax-exempt3,917 2,867 
Interest Income - Other interest income1,301 1,296 
Interest Expense - Deposits43,304 15,431 
Interest Expense - Borrowed funds7,726 7,417 
Interest Expense - Subordinated debt1,860 — 
Interest Expense - Other56 30 
Total Net Interest Income$81,896 $48,566 
Non-GAAP Financial Measurements
Add: Tax Benefit on Tax-Exempt Interest Income - Securities$1,050 $762 
Total Tax Benefit on Tax-Exempt Interest Income (1)
1,050 762 
Tax-Equivalent Net Interest Income$82,946 $49,328 
(1)Tax benefit was calculated using the federal statutory tax rate of 21%.
Yield/Rate and Volume Analysis
The following table sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Interest income and interest expense for the six months ended June 30, 2024, and June 30, 2023, are annualized using an actual days over calendar year method. The volume variances are equal to the increase or decrease in average balance multiplied by current period rates, and rate variances are equal to the increase or decrease in rate times prior period average balances. Variances attributable to both rate and volume changes are calculated by multiplying the change in rate by the change in average balance and are allocated to the volume variance. See table below (in thousands).
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Six Months Ended June 30, 2024, compared to June 30, 2023
Dollar Increase (Decrease) Due to Change in:
Average Volume
Average Yield / Rate
Net
Change
Income from the interest-earning assets:
Loans (1), gross
$111,849 $7,077 $118,926 
Securities (1)
1,720 4,072 5,792 
Interest-bearing deposits and fed funds sold588 (418)170 
Total interest income on interest-earning assets114,157 10,731 124,888 
Expense from the interest-bearing liabilities:
Interest-bearing demand deposits12,053 10,972 23,025 
Savings deposits3,982 602 4,584 
Time deposits15,748 4,533 20,281 
Total interest expense on interest-bearing deposits31,783 16,107 47,890 
Borrowings5,785 (338)5,447 
Total interest expense on interest-bearing liabilities37,568 15,769 53,337 
Taxable-equivalent net interest income
$76,589 $(5,038)$71,551 
(1)Yields and interest income on tax-exempt securities have been computed on a taxable-equivalent basis.
Interest Income
Total interest income was $134.8 million for the six months ended June 30, 2024, compared to $71.4 million for the six months ended June 30, 2023, an increase of 88.7%. The increase in interest income was due to the effect of the Merger and the acquisition of additional interest-earning assets. Interest income on loans increased by $61.7 million and interest income on securities increased $1.7 million, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.
Interest Expense
Total interest expense was $52.9 million for the six months ended June 30, 2024, compared to $22.9 million for the six months ended June 30, 2023. The increase in interest expense was a result of the Merger and the assumption of additional interest-bearing liabilities. Interest expense on interest-bearing deposits and borrowed funds increased by $27.9 million and $0.3 million, respectively, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Interest on subordinated debt assumed in the Merger was $1.9 million for the six months ended June 30, 2024.
Provision for (Recapture of) Credit Losses
The provision for credit losses was $23.2 million for the six months ended June 30, 2024, compared to a provision of $0.7 million for the six months ended June 30, 2023. The increased provision expense was due to a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger and acquired commitments for unfunded commitments for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. See Note 4 - Allowance for Credit Losses in Notes to Consolidated Financial Statements for further information.
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Non-interest Income
The following table sets forth the various components of our non-interest income for the periods indicated (in thousands):
Six Months Ended June 30,Increase (Decrease)
20242023AmountPercent
Fiduciary and wealth management$3,630 $2,642 $988 37.4 %
Service charges and fees5,694 3,376 2,318 68.7 
Net gains (losses) on securities613 (111)724 652.3 
Income from company-owned life insurance1,469 1,131 338 29.9 
Other non-interest income2,353 1,801 552 30.6 
Total$13,759 $8,839 $4,920 55.7 %
Non-interest income increased 55.7% for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase was primarily driven by the Merger. The largest increase was a $2.3 million increase in service charges and fees for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. A majority of the securities acquired in the Merger were sold, resulting in gains of $0.6 million for the six months ended June 30, 2024, compared to losses of $0.1 million during the six months ended June 30, 2023. Loan swap fees included in other non-interest income increased $0.1 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Other categories of non-interest income also increased due to the Merger, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.
Non-interest Expense
The following table sets forth the various components of our non-interest expense for the periods indicated (in thousands):
Six Months Ended June 30,Increase (Decrease)
20242023AmountPercent
Salaries and wages$30,413 $19,416 $10,997 56.6 %
Pensions and other employee benefits7,668 4,874 2,794 57.3 
Occupancy4,535 3,002 1,533 51.1 
Equipment rentals, depreciation and maintenance13,944 2,796 11,148 398.7 
Other29,037 11,625 17,412 149.8 
Total$85,597 $41,713 $43,884 105.2 %
Non-interest expense increased $43.9 million or 105.2% for the six months ended June 30, 2024, compared to June 30, 2023. The increase was primarily due to effect of the Merger and also included higher legal fees, consulting fees, audit fees, investment banking fees, software contract terminations, change-in-control salary and benefit payments, funding a charitable donation (as contemplated by the Merger Agreement), and other expenses related to the Merger. For the six months ended June 30, 2024, the Company incurred $24.4 million of non-interest expense related to the Merger with Summit that are included in non-interest expense for the six months ended June 30, 2024. Other non-interest expense included $9.5 million of these costs, while the remaining amount of the total is included in the other line items of non-interest expense. See Note 16 — Business Combination in Notes to Consolidated Financial Statements for further information on Merger-related expenses and Note 13 — Other Operating Expenses in Notes to Consolidated Financial Statements for further information on “Other” non-interest expense.
Income Tax Expense (Benefit)
Income tax benefit was $1.5 million for the six months ended June 30, 2024, a decrease of $2.9 million from the tax provision for the six months ended June 30, 2023. The decrease was due to the decrease in net income and resulting net loss for the six months ended June 30, 2024, when compared to the six months ended June 30, 2023. For the six months ended June 30, 2024, the effective tax benefit was 11.2% while the effective tax rate was 9.4%, for June 30, 2023.
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Results of Operations for the Three Months Ended June 30, 2024, and June 30, 2023
General
Net loss applicable to common shares for the three months ended June 30, 2024, was $17.1 million, compared to net income applicable to common shares of $6.0 million during the three months ended June 30, 2023. The $23.2 million decrease was primarily the result of Merger related expenses and one-time CECL Day 2 provision for non-PCD assets acquired in the merger for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.
Net interest income increased by $36.0 million to $59.8 million for the three months ended June 30, 2024, compared to $23.8 million for the three months ended June 30, 2023. The main driver for this increase was the impact of the Merger.
For the three months ended June 30, 2024, the Company recorded credit provision expense of $23.9 million compared to a provision of $0.2 million for the three months ended June 30, 2023. For the three months ended June 30, 2024, the Company recognized a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger, which resulted in a higher credit provision expense for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.
Non-interest income increased by $4.9 million, or 105.5%, to $9.5 million for the three months ended June 30, 2024, as compared to $4.6 million for the three months ended June 30, 2023, as a result of the Merger. In addition, the Company liquidated the majority of the acquired securities portfolio that resulted in a gain on sale of securities of $0.6 million.
Non-interest expense increased by $43.1 million, or 201.8%, to $64.4 million for the three months ended June 30, 2024, as compared to $21.3 million for the three months ended June 30, 2023. The increase was primarily due to effect of the Merger and also included higher legal fees, consulting fees, audit fees, investment banking fees, software contract terminations, change-in-control salary and benefit payments, funding a charitable donation (as part of the Merger Agreement), and other expenses related to the Merger. For the three months ended June 30, 2024, the Company incurred $23.8 million of expenses related to the Merger with Summit.
Net Interest Income and Net Interest Margin
Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest margin, stated as a percentage, is the yield obtained by dividing the difference between interest income generated on earning assets and the interest expense paid on all funding sources by average earning assets.
Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest-bearing liabilities can impact net interest income and net interest margin. Management closely monitors both total net interest income and the net interest margin and seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities.
Net interest income totaled $59.8 million for the three months ended June 30, 2024, compared to $23.8 million for the three months ended June 30, 2023. The increase in net interest income was primarily driven by the merger which resulted in higher average balances on interest-earning assets beyond the higher average balances on interest-bearing liabilities.
The tax-adjusted net interest margin was 4.06% for the three months ended June 30, 2024, compared to 2.87% for the three months ended June 30, 2023. The increase in tax-adjusted net interest margin was primarily driven by the effect of the merger and the acquisition of additional, higher-yielding interest-earning assets.
The yield for the loan portfolio was 7.33% for the three months ended June 30, 2024, compared to 5.07% for the three months ended June 30, 2023. The increase was primarily the result of the effect of the Merger which resulted in the acquisition of additional, higher-yielding loans.
The tax-adjusted yield on the total investment securities portfolio was 4.05% for the three months ended June 30, 2024, compared to 3.45% for the three months ended June 30, 2023. The increase was partly due to higher yields in our investment portfolio in addition to the Merger, which resulted in the acquisition of additional securities with higher tax-adjusted yields.
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The yield on interest-bearing deposits increased to 2.90% during the three months ended June 30, 2024, from 1.88% during the three months ended June 30, 2023. The increase was a result of the Merger which resulted in the assumption of additional interest-bearing deposits with higher interest rates and to a lesser extent by higher market interest rates.
The yield on our short-term borrowings for the three months ended June 30, 2024, was 4.38%, compared to 4.61% for the three months ended June 30, 2023. The decrease was due to cash flow hedges that effectively lowered our yield on short-term borrowings. The yield on our subordinated debt assumed in the Merger was 10.30%.
The following table sets forth the major components of net interest income and the related yields and rates for the three months ended June 30, 2024, and June 30, 2023, for comparison (dollars in thousands).
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For the Three Months Ended June 30,
20242023
Average Outstanding BalanceInterest Income/Expense
Average Yield / Rate
Average Outstanding BalanceInterest Income/Expense
Average Yield / Rate
Assets:
Loans, gross (1)(2)
$4,481,993 $81,673 7.33 %$2,002,482 $25,300 5.07 %
Tax-exempt loans (1)(2)
3,041 42 5.55 — — N/A
Interest-earning deposits and fed funds sold94,765 833 3.54 74,074 988 5.35 
Taxable securities988,492 11,002 4.48 1,036,576 9,418 3.64 
Tax-exempt securities (3)
426,092 3,235 3.05 266,402 1,784 2.69 
Total securities1,414,584 14,237 4.05 1,302,978 11,202 3.45 
Total interest-earning assets5,994,383 96,785 6.49 3,379,534 37,490 4.45 
Non-interest-earning assets484,149 243,498 
Total assets$6,478,532 $3,623,032 
Liabilities and shareholders’ equity:
Deposits:
Non-interest-bearing demand$1,207,443 $879,794 
Interest-bearing demand1,587,914 11,834 3.00 %554,364 564 0.41 %
Savings1,480,985 5,616 1.53 979,020 4,199 1.72 
Time1,141,758 12,923 4.55 608,949 5,267 3.47 
Total interest-bearing deposits4,210,657 30,373 2.90 2,142,333 10,030 1.88 
Total deposits5,418,100 30,373 2.25 3,022,127 10,030 1.33 
Borrowings:
Short-term borrowings
376,063 4,099 4.38 286,584 3,294 4.61 
Subordinated debt borrowings
72,643 1,860 10.30 — — N/A
Total interest-bearing liabilities4,659,363 36,332 3.14 2,428,917 13,324 2.20 
Non-interest-bearing liabilities129,884 24,036 
Equity554,485 290,285 
Total liabilities and equity$6,478,532 $3,623,032 
Taxable-equivalent net interest income /net interest spread (4)
60,453 3.35 %24,166 2.25 %
Taxable-equivalent net interest margin (5)
4.06 %2.87 %
Taxable-equivalent net adjustment(688)(374)
Net interest income$59,765 $23,792 
Net interest-earning assets$1,335,020 $950,617 
(1)Non-accrual loans are included in average loan balances.
(2)Loan fees are included in the calculation of interest income.
(3)Yields and interest income on tax-exempt assets are computed on a taxable-equivalent basis assuming a 21% tax rate.
(4)The interest rate spread represents the difference between the fully taxable-equivalent weighted-average yield on interest-earning assets and the weighted-average yield of interest-bearing liabilities for the period.
(5)The net interest margin represents FTE net interest income as a percent of average interest-earning assets for the period.
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Taxable-equivalent net interest margin, as presented above, is calculated by dividing FTE net interest income by total average earning assets. Net interest income, on an FTE basis, is a non-GAAP financial measure that the Company believes to provide a more accurate picture of the interest margin for comparative purposes. Management believes FTE net interest income is a standard practice in the banking industry, and when net interest income is adjusted on an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. FTE net interest income is calculated by adding the tax benefit on certain financial interest-earning assets, whose interest is tax-exempt, to total interest income then subtracting total interest expense. As a non-GAAP measure, FTE net interest income should not be considered as a substitute for the nearest comparable GAAP measure, net interest income. Net interest income shown elsewhere in this presentation is GAAP net interest income. The following table reconciles GAAP net interest income to FTE net interest income (in thousands).

Three Months Ended
June 30, 2024June 30, 2023
GAAP Financial Measurements
Interest Income - Loans$81,673 $25,300 
Interest Income - Tax-exempt loans33 — 
Interest Income - Securities taxable10,930 9,419 
Interest Income - Securities tax-exempt2,556 1,409 
Interest Income - Other interest income905 988 
Interest Expense - Deposits30,373 10,030 
Interest Expense - Borrowed funds4,071 3,279 
Interest Expense - Subordinated debt1,860 — 
Interest Expense - Other28 15 
Total Net Interest Income$59,765 $23,792 
Non-GAAP Financial Measurements
Add: Tax Benefit on Tax-Exempt Interest Income - Securities$688 $374 
Total Tax Benefit on Tax-Exempt Interest Income (1)
688 374 
Tax-Equivalent Net Interest Income$60,453 $24,166 
(1)Tax benefit was calculated using the federal statutory tax rate of 21%.
Yield/Rate and Volume Analysis
The following table sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Interest income and interest expense for the three months ended June 30, 2024, and June 30, 2023, are annualized using an actual days over calendar year method. Volume variances are equal to the increase or decrease in average balance multiplied by current period rates, and rate variances are equal to the increase or decrease in rate times prior period average balances. Variances attributable to both rate and volume changes are calculated by multiplying the change in rate by the change in average balance and are allocated to the volume variance. See table below (in thousands).
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Three Months Ended June 30, 2024, compared to June 30, 2023
Dollar Increase (Decrease) Due to Change in:
Average Volume
Average Yield / Rate
Net Change
Income from the interest-earning assets:
Loans (1), gross
$219,348 $7,509 $226,857 
Securities (1)
5,192 7,782 12,974 
Interest-bearing deposits and fed funds sold1,513 (462)1,051 
Total interest income on interest-earning assets226,053 14,829 240,882 
Expense from the interest-bearing liabilities:
Interest-bearing demand deposits31,272 14,014 45,286 
Savings deposits7,834 (1,066)6,768 
Time deposits25,504 5,408 30,912 
Total interest expense on interest-bearing deposits64,610 18,356 82,966 
Borrowings10,941 (919)10,022 
Total interest expense on interest-bearing liabilities75,551 17,437 92,988 
Taxable-equivalent net interest income
$150,502 $(2,608)$147,894 
(1)Yields and interest income on tax-exempt securities have been computed on a taxable-equivalent basis.
Interest Income
Total interest income was $96.1 million for the three months ended June 30, 2024, compared to $37.1 million for the three months ended June 30, 2023, an increase of 158.9%. The increase in interest income was due to the effect of the Merger and the acquisition of additional interest-earning assets. Interest income on loans increased by $56.4 million and interest income on securities increased $2.7 million, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.
Interest Expense
Total interest expense was $36.3 million for the three months ended June 30, 2024, compared to $13.3 million for the three months ended June 30, 2023. The increase in interest expense was a result of the Merger and the assumption of additional interest-bearing liabilities. Interest expense on interest-bearing deposits and borrowed funds increased by $20.3 million and $0.8 million, respectively, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Interest on subordinated debt acquired in the Merger was $1.9 million for the three months ended June 30, 2024.
Provision for (Recapture of) Credit Losses
The provision for credit losses was $23.9 million for the three months ended June 30, 2024, compared to a provision of $0.2 million for the three months ended June 30, 2023. The increased provision expense was due to a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger and acquired commitments for unfunded commitments for three months ended June 30, 2023, compared to the three months ended June 30, 2023. See Note 4 - Allowance for Credit Losses in Notes to Consolidated Financial Statements for further information.
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Non-interest Income
The following table sets forth the various components of our non-interest income for the periods indicated (in thousands):
Three months ended June 30,
Increase (Decrease)
20242023AmountPercent
Fiduciary and wealth management$2,211 $1,305 $906 69.4 %
Service charges and fees4,088 1,741 2,347 134.8 
Net gains (losses) on securities613 (111)724 652.3 
Income from company-owned life insurance922 571 351 61.5 
Other non-interest income1,671 1,119 552 49.3 
Total$9,505 $4,625 $4,880 105.5 %
Non-interest income increased 105.5% for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The increase was primarily driven by the Merger. The largest increase was a $2.3 million increase in service charges and fees for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. A portion of securities acquired in the Merger were sold, resulting in gains of $0.6 million for the three months ended June 30, 2023, compared to losses of $0.1 million during the three months ended June 30, 2023. Loan swap fees included in other non-interest income increased $0.1 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Other categories of non-interest income also increased due to the Merger, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.
Non-interest Expense
The following table sets forth the various components of our non-interest expense for the periods indicated (in thousands):
Three months ended June 30,
Increase (Decrease)
20242023AmountPercent
Salaries and wages$20,895 $9,922 $10,973 110.6 %
Pensions and other employee benefits5,303 2,406 2,897 120.4 
Occupancy2,997 1,545 1,452 94.0 
Equipment rentals, depreciation and maintenance12,663 1,457 11,206 769.1 
Other22,574 6,018 16,556 275.1 
Total$64,432 $21,348 $43,084 201.8 %
Non-interest expense increased $43.1 million or 201.8% for the three months ended June 30, 2024, compared to June 30, 2023. The increase was primarily due to effect of the Merger and also included higher legal fees, consulting fees, audit fees, investment banking fees, software contract terminations, change-in-control salary and benefit payments, funding a charitable donation (as part of the Merger Agreement), and other Merger-related expenses. For the three months ended June 30, 2024, the Company incurred $23.8 million of non-interest expense related to the Merger with Summit that are included in other non-interest expense for the three months ended June 30, 2024. See Note 16 — Business Combination in Notes to Consolidated Financial Statements for further information on Merger-related expenses and Note 13 — Other Operating Expenses in Notes to Consolidated Financial Statements for further information on “Other” non-interest expense.
Income Tax Expense (Benefit)
Income tax benefit was $2.2 million for the three months ended June 30, 2024, a decrease of $3.0 million from the tax provision for the three months ended June 30, 2023. The decrease was due to the decrease in net income and resulting net loss for the three months ended June 30, 2024, when compared to the three months ended June 30, 2023. For the three months ended June 30, 2024, the effective tax benefit was 11.3% while the effective tax rate was 12.0% for June 30, 2023.
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Analysis of Financial Condition for the Period Ended June 30, 2024, and December 31, 2023
Due mostly to the Merger, assets increased by $4.19 billion to $7.81 billion as of June 30, 2024, compared to $3.62 billion as of December 31, 2023. Loans, net of ACL, increased by $3.49 billion from $2.06 billion as of December 31, 2023, to $5.55 billion as of June 30, 2024. Deposits increased by $3.64 billion and amounted to $6.64 billion at June 30, 2024, compared to $3.00 billion at December 31, 2023. Borrowed funds increased by $13.2 million to $285.2 million as of June 30, 2024, compared to $272.0 million at December 31, 2023. Subordinated debt and subordinated debt owed to unconsolidated subsidiary trusts, which were assumed in the Merger, totaled $109.1 million at June 30, 2024, compared to zero at December 31, 2023.
Investment Securities
Our investment policy is established and reviewed annually by the Board. We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, time deposits of federally insured institutions, certain bankers’ acceptances, and federal funds. Our securities are all classified as AFS.
Our investments provide a source of liquidity because we can pledge them to support borrowed funds or can liquidate them to generate cash proceeds. Our investment portfolio is also a resource in managing interest rate risk because the maturity and interest rate characteristics of this asset class can be modified to match changes in the loan and deposit portfolios. The majority of our AFS investment portfolio is comprised of obligations of states and municipalities and residential mortgage-backed securities. During the six months ended June 30, 2024, the unrealized losses on our holdings remained mostly unchanged from December 31, 2023.
The Company determined that the declines in market value were due to increases in interest rates and market movements and not due to credit factors. Therefore, the Company has concluded that the unrealized losses for the AFS securities do not require an ACL at June 30, 2024, and at December 31, 2023.
The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. Management believes the structure of the Bank’s investment portfolio is appropriately aligned with the rest of the balance sheet to protect against significant and unexpected charges against earnings and capital.
The following tables reflect the amortized cost and fair market values for the total portfolio for each category of investment for June 30, 2024, and December 31, 2023 (in thousands):
June 30, 2024
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Securities Available-for-Sale
U.S. Treasuries and government agencies$166,380 $— $18,950 $147,430 
Obligations of states and municipalities714,449 1,237 77,932 637,754 
Residential mortgage backed - agency58,104 230 4,166 54,168 
Residential mortgage backed - non-agency282,667 19 15,373 267,313 
Commercial mortgage backed - agency35,968 28 954 35,042 
Commercial mortgage backed - non-agency165,675 — 6,312 159,363 
Asset backed77,568 179 795 76,952 
Other38,300 81 1,533 36,848 
Total$1,539,111 $1,774 $126,015 $1,414,870 
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December 31, 2023
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Securities Available-for-Sale
U.S. Treasuries and government agencies$197,026 $— $17,955 $179,071 
Obligations of states and municipalities535,229 21 72,047 463,203 
Residential mortgage backed - agency47,074 — 4,836 42,238 
Residential mortgage backed - non-agency284,826 17 18,812 266,031 
Commercial mortgage backed - agency36,151 28 1,294 34,885 
Commercial mortgage backed - non-agency183,454 — 6,393 177,061 
Asset backed79,315 23 1,402 77,936 
Other9,500 — 1,486 8,014 
Total
$1,372,575 $89 $124,225 $1,248,439 
The investment maturity table below summarizes contractual maturities for our investment securities at June 30, 2024. The actual timing of principal payments may differ from remaining contractual maturities because obligors may have the right to repay certain obligations with or without penalties. The overall weighted average duration of the Company’s investment portfolio is 4.5 years at June 30, 2024. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security (dollars in thousands). Interest on securities below excludes tax-equivalent adjustments.
June 30, 2024
One Year or LessOne to Five YearsFive to Ten YearsAfter Ten YearsTotal
Amortized CostWeighted Average YieldAmortized CostWeighted Average YieldAmortized CostWeighted Average YieldAmortized CostWeighted Average YieldAmortized CostWeighted Average Yield
Securities Available-for-Sale
U.S. Treasuries and government agencies$— — %$141,054 1.30 %$25,326 1.36 %$— — %$166,380 1.31 %
Obligations of states and municipalities— — 87,560 2.96 399,572 2.43 227,317 2.68 714,449 2.58 
Residential mortgage backed - agency— — 20,097 5.75 28,424 2.79 9,583 4.31 58,104 4.07 
Residential mortgage backed - non-agency68,491 4.40 67,340 3.92 141,397 3.94 5,439 5.57 282,667 4.08 
Commercial mortgage backed - agency45 5.80 26,548 5.48 9,375 5.64 — — 35,968 5.52 
Commercial mortgage backed - non-agency67,421 5.22 93,124 4.24 5,130 1.43 — — 165,675 4.55 
Asset backed3,437 5.66 35,543 6.58 38,588 6.47 — — 77,568 6.48 
Other— — 2,730 8.29 21,197 5.88 14,373 9.15 38,300 7.28 
Total$139,394 4.83 %$473,996 3.42 %$669,009 3.11 %$256,712 3.17 %$1,539,111 3.37 %
Lending Activities
Our loan portfolio consists primarily of commercial real estate loans, but we offer a variety of products to meet the credit needs of our borrowers. The risks associated with lending activities differ among loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans and also impact the associated collateral. Additional discussion on the classes of loans the Company makes and related risks is included in Note 3 — Loans in Notes to Consolidated Financial Statements.
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The following tables set forth the composition of our loan portfolio as of the dates indicated (in thousands):
June 30, 2024
December 31, 2023
Commercial real estate$2,543,668 $1,309,084 
Owner-occupied commercial real estate626,375 131,381 
Acquisition, construction & development479,937 49,091 
Commercial & industrial499,892 67,847 
Single family residential (1-4 units)1,219,984 527,980 
Consumer non-real estate and other246,868 2,373 
Loans, gross5,616,724 2,087,756 
Allowance for credit losses(68,017)(25,301)
Loans, net$5,548,707 $2,062,455 
The loan portfolio, excluding ACL, at June 30, 2024, increased by $3.53 billion primarily due to the Merger.
The following table shows the maturity distribution for total loans outstanding as of June 30, 2024. The maturity distribution is grouped by remaining scheduled principal payments that are due in the following periods. The principal balance of loans is indicated by both fixed and floating rate categories in the table below (in thousands).
June 30, 2024
Within One YearOne Year to Five YearsFive Years to 15 YearsAfter 15 Years
Fixed RatesAdjustable RatesFixed RatesAdjustable RatesFixed RatesAdjustable RatesFixed RatesAdjustable RatesTotal
Loans:
Commercial real estate$170,318 $91,571 $971,122 $220,500 $380,129 $380,139 $12,078 $317,811 $2,543,668 
Owner-occupied commercial real estate35,489 30,420 134,344 37,606 110,053 148,311 16,911 113,241 626,375 
Acquisition, construction & development30,348 96,049 64,283 123,809 26,830 21,913 4,564 112,141 479,937 
Commercial & industrial8,626 124,100 108,248 175,872 30,381 50,294 1,486 885 499,892 
Total commercial loans244,781 342,140 1,277,997 557,787 547,393 600,657 35,039 544,078 4,149,872 
Single family residential (1-4 units)14,796 14,007 40,582 18,448 103,257 80,878 457,717 490,299 1,219,984 
Consumer non-real estate and other10,866 132,554 48,449 1,194 15,552 16,709 4,107 17,437 246,868 
Total loans$270,443 $488,701 $1,367,028 $577,429 $666,202 $698,244 $496,863 $1,051,814 $5,616,724 
Asset Quality
The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Credit Officer is responsible for establishing credit risk policies and procedures, including underwriting guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions.
A loan is placed on non-accrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection.
The Company’s asset quality remained stable through the second quarter of 2024, but the nonaccrual loan balance increased $29.0 million from December 31, 2023 due to the merger. The Company’s non-performing assets, which includes non-performing loans consisting of non-accrual loans, loans that are more than 90 days past due and still accruing, and other real estate owned as of June 30, 2024, totaled $36.2 million.
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The following table summarizes the Company’s non-performing assets as of June 30, 2024, and December 31, 2023 (in thousands):
June 30, 2024December 31, 2023
Non-accrual loans$32,726 $3,744 
90 days past due and still accruing116 — 
Total non-performing loans32,842 3,744 
Other real estate owned3,334 — 
Total non-performing assets$36,176 $3,744 
Allowance for Credit Losses
Refer to the discussion in Note 1. Nature of Business Activities and Significant Accounting Policies in Notes to Consolidated Financial Statements for management’s approach to estimating the ACL.
The Company maintains the ACL at a level deemed adequate by management for expected credit losses. On January 1, 2023, the Company implemented CECL and increased the ACL, previously the allowance for loan losses, with a cumulative-effect adjustment to the ACL for credit losses of $4.4 million, which included a cumulative-effect adjustment to the ACL for off-balance sheet exposures of $274.8 thousand. The Company’s ACL is calculated quarterly with any adjustment recorded to the provision for credit losses in the consolidated Statement of Income. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, non-performing loans and other risk assets, and qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated.
The Company recorded a provision of $20.1 million and a provision of $310.0 thousand on loans for the three months ended June 30, 2024, and June 30, 2023, respectively, and a provision of $19.4 million and a provision of $0.8 million on loans for the six months ended June 30, 2024, and June 30, 2023, respectively. This additional provision expense was due to an increase in loans that were classified as non-PCD. The Company also recorded a $23.9 million provision to establish an allowance for acquired PCD loans for the quarter ended June 30, 2024.
Gross charged-off loans were $611.0 thousand and $104.0 thousand for the three months ended June 30, 2024, and June 30, 2023, respectively, and $641.0 thousand and $121.0 thousand for the six months ended June 30, 2024, and June 30, 2023, respectively. Gross recoveries totaled $12.0 thousand and $9.0 thousand for the three months ended June 30, 2024, and June 30, 2023, respectively, and $17.0 thousand and $43.0 thousand for the six months ended June 30, 2024, and June 30, 2023, respectively. The ACL as a percentage of gross loans, net of unearned income, was 1.21% and 1.30% as of June 30, 2024, and June 30, 2023, respectively.

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The following table summarizes the changes in the Company’s credit loss experience by portfolio as of the three and six months ended June 30, 2024, and 2023 (dollars in thousands):
Three months ended
Six months ended
June 30, 2024
June 30, 2023
June 30, 2024
June 30, 2023
Loans outstanding at end of period$5,616,724 $2,000,969 $5,616,724 $2,000,969 
Balance of allowance at beginning of period(24,606)(25,704)(25,301)(21,039)
Impact of the adoption of CECL— — (4,125)
Allowance established for acquired PCD Loans(23,910)— (23,910)— 
Loans charged-off:
Commercial real estate210 — 210 — 
Owner-occupied commercial real estate— — — — 
Acquisition, construction & development— — — — 
Commercial & industrial146 29 146 29 
Residential37 — 37 — 
Consumer non-real estate and other218 75 248 92 
Total loans charged-off611 104 641 121 
Recoveries of loans charged-off:
Commercial real estate(4)(3)(7)(31)
Owner-occupied commercial real estate— — — — 
Acquisition, construction & development— — — — 
Commercial & industrial— — — — 
Residential— (3)(1)(6)
Consumer non-real estate and other(8)(3)(9)(6)
Total recoveries of loans charged-off(12)(9)(17)(43)
Net loan charge-offs (recoveries)599 95 624 78 
Provision for (recapture of) credit losses for the period20,100 310 19,430 833 
Ending allowance$(68,017)$(25,919)$(68,017)$(25,919)
Average loans outstanding during the period$4,481,993 $2,002,482 $3,283,909 $1,961,309 
Allowance coverage ratio (1)
1.21 %1.30 %1.21 %1.30 %
Net charge-offs to average outstanding loans during the period (2)
0.01 0.00 0.02 0.00 
Allowance for credit losses as a percentage of non-performing loans (3)
207.10 886.73 207.10 886.73 
(1)The allowance coverage ratio is calculated by dividing the ACL at the end of the period by gross loans, net of unearned income at the end of the period.
(2)The Net charge-offs to average outstanding loans during the period is calculated by dividing total net loan charge-offs (recoveries) during the year by average gross loans outstanding during the year.
(3)The Allowance for credit losses as a percentage of non-performing loans ratio is calculated by dividing the ACL at the end of the period by non-accrual loans at the end of the period.
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The following table summarizes the ACL by portfolio with a comparison of the percentage composition in relation to total ACL and allowance for credit losses and total loans as of June 30, 2024, and December 31, 2023 (dollars in thousands).
June 30, 2024
Allowance for credit lossesPercent of Allowance in Each Category to Total Allocated ACLPercent of Loans in Each Category to Total Loans
Commercial real estate$27,304 40.14 %45.29 %
Owner-occupied commercial real estate5,040 7.41 11.15 
Acquisition, construction & development18,639 27.40 8.54 
Commercial & industrial4,768 7.01 8.90 
Residential11,648 17.13 21.72 
Consumer non-real estate and other618 0.91 4.40 
Total$68,017 100.00 %100.00 %
December 31, 2023
Allowance for credit lossesPercent of Allowance in Each Category to Total Allocated AllowancePercent of Loans in Each Category to Total Loans
Commercial real estate$20,633 81.56 %62.71 %
Owner-occupied commercial real estate783 3.09 6.29 
Acquisition, construction & development368 1.45 2.35 
Commercial & industrial645 2.55 3.25 
Residential2,797 11.05 25.29 
Consumer non-real estate and other75 0.30 0.11 
Total$25,301 100.00 %100.00 %
Derivative Financial Instruments
The Company utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. The Company recognizes derivative financial instruments at fair value as either other assets or other liabilities on the Consolidated Balance Sheets. The Company’s use of derivative financial instruments is described more fully in Note 9 — Derivatives in Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit, and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and/or use these commitments. See Note 10 — Commitments and Contingencies in Notes to Consolidated Financial Statements for a discussion of credit extension commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Funding Activities
The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. Deposits are the primary source of funds for lending and investing activities; however, the Company will use borrowings to meet liquidity needs and for temporary funding. The Company has available secured lines of credit with the Federal Reserve Bank of Richmond, such as the Borrower-In-Custody program, the FHLB of Atlanta, and unsecured federal funds
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lines of credit from correspondent banking relationships. The Company also utilizes brokered time deposits. For more discussion of brokered time deposits, see the Deposits heading below this section.
As of June 30, 2024, the Company has available unused borrowing capacity of $2.2 billion through its available lines of credit with the FHLB of Atlanta, the Federal Reserve Borrower-In-Custody Program line, and unsecured federal fund lines of credit from correspondent banking relationships. Advances on credit lines are secured by both securities and loans.
The following table shows certain information regarding short-term borrowings as of the three months ended June 30, 2024, and December 31, 2023, respectively (dollars in thousands):
Balance at end of periodJune 30, 2024December 31, 2023
Short-term borrowings$285,161 $272,000 
Weighted average interest yield at end of period4.38%4.75%
The following table shows certain information regarding long-term debt as of the three months ended June 30, 2024, and December 31, 2023, respectively (dollars in thousands):
Balance at end of periodJune 30, 2024December 31, 2023
Subordinated debentures, net$92,178 $— 
Subordinated debentures owed to unconsolidated subsidiary trusts16,886 — 
Total long-term debt$109,064 $— 
Weighted average interest yield at end of period10.30%N/A
Deposits
Total deposits increased by $3.6 billion from December 31, 2023, to June 30, 2024, primarily due to the completion of the Merger with Summit. The Company has brokered time deposits that amounted to $403.7 million as of June 30, 2024, and $389.0 million at December 31, 2023. The following table sets forth the balance of each category of deposits as of the dates indicated (in thousands):
June 30, 2024
December 31, 2023
BalanceBalance
Demand, non-interest-bearing$1,397,030 $830,320 
Demand, interest-bearing2,507,259 509,646 
Money market and savings1,396,839 925,853 
Brokered deposits403,668 389,011 
Time deposits, other934,775 347,051 
Total interest-bearing5,242,541 2,171,561 
Total deposits$6,639,571 $3,001,881 
The Company continues to seek organic growth in both interest-bearing and non-interest-bearing deposits consistent with our relationship-based strategy. Management evaluates its utilization of brokered deposits, taking into consideration the interest rate curve and regulatory views on non-core funding sources, and balances this funding source with its funding needs based on growth initiatives.
The Company has deposits that meet or exceed the FDIC insurance limit of $250,000 in the amounts of $1.9 billion and $677.3 million at June 30, 2024, and December 31, 2023, respectively, with the increase being primarily attributable to the Merger.
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The following table sets forth maturity ranges of time deposits as of June 30, 2024, that meet or exceed the FDIC insurance limit (in thousands).
June 30, 2024
Due within 3 months or less$100,355 
Due after 3 months and within 6 months97,881 
Due after 6 months and within 12 months32,755 
Due after 12 months16,128 
Total uninsured, time deposits$247,119 
Shareholders’ Equity
Total shareholders’ equity at June 30, 2024, was $693.1 million, compared to $314.8 million at December 31, 2023. Shareholders’ equity increased by $378.4 million mostly due to the Merger since December 31, 2023. Accumulated other comprehensive income/(loss) decreased $3.1 million from December 31, 2023, to June 30, 2024, from $(103.5) million to $(100.4) million.
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Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in lending, investment, and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure, and on at least a quarterly basis, in conjunction with the Company’s Asset/Liability meetings, reports its findings to the ALCO and to the Board. From time to time, management may change the frequency of such testing or update certain inputs as a result of abnormal market conditions. Our profitability is affected by fluctuations in interest rates; a sudden and substantial change in interest rates may adversely impact our earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. We monitor the impact of changes in interest rates on net interest income using several tools. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Recent Events in the Financial Services Industry.

Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while configuring our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk.
In addition, the Company’s Asset/Liability policy provides for a subcommittee of the ALCO, comprised of executive and senior management that, upon the determination that abnormal market risks are occurring or may be forthcoming, will convene with the responsibility of making all decisions related to mitigation of potential negative impacts to the Company. This subcommittee acts as a clearinghouse for information on Company earnings, credit risk, lending and deposit activities, and liquidity management necessary for internal communications, including to the Board, and external communications.
Interest Rate Sensitivity
Interest rate risk is the risk to earnings and fair value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time, depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve, where interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).
The rates on some interest-bearing financial instruments may adjust promptly with changes in market rates, while others adjust only periodically or are fixed for a predefined term. Such instances can cause a mismatch between the sensitivity and behavior of financial assets and liabilities. Interest rate fluctuations and economic factors, coupled with repricing mismatches and embedded options inherent in these financial assets and liabilities, may impact the Company’s interest expense, interest income, and the value of certain financial assets and liabilities. Through the ALCO, we attempt to manage the balance sheet in a manner that increases the benefit or reduces the negative impacts from such events.
The overall impact of changes in interest rates, including, but not limited to, the impact to our net interest income and to our securities portfolio, can be enhanced or diluted depending on the variability of interest rates. From time to time, the Company may hedge its interest rate risk position, which can impact earnings. We generally do not hedge all of our interest rate risk, nor can we guarantee that any attempts to do so will be successful. See Note 9 - Derivatives in Notes to Consolidated Financial Statements for a discussion of our hedging activity.
The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The ALCO, using policies and procedures approved by the Company’s Board, is responsible for the management of the Company’s interest rate sensitivity position. The Company manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms, and through wholesale funding. Wholesale funding consists of, but is not limited to, borrowings with the FHLB, federal funds purchased, and brokered time deposits.
The Company uses several tools to manage its interest rate risk, including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios, and net interest margin
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reports. The results of these reports are compared to limits established by the Company’s ALCO policies, and appropriate adjustments are made if the results are outside the established limits.
There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Company’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Company’s overall asset/liability management process, which is to facilitate meaningful strategy development and implementation.
Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios; the collective impact of which will enable the Company to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.
The following tables demonstrate the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock”, in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected income over the next 12 months. This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months.
As of June 30, 2024
As of December 31, 2023
Change in Interest Rates (in Basis Points)Percentage Change in EarningsPercentage Change in Earnings
200 (0.6)%0.9 %
100 0.1 1.2 
(100)0.1 (1.0)
(200)0.3 (0.8)
(300)0.5 (0.3)
Economic Value of Equity Analysis (“EVE”). We analyze the sensitivity of our financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between predicted changes in the fair value of our assets and predicted changes in the present value of our liabilities, assuming various changes in current interest rates. The table below represents an analysis of our interest rate risk as measured by the estimated changes in our economic value of equity, resulting from an instantaneous and sustained parallel shift in the yield curve at June 30, 2024, and December 31, 2023.
As of June 30, 2024
As of December 31, 2023
Change in Interest Rates (in Basis Points)Percentage Change in EVEPercentage Change in EVE
200 (3.5)%(12.1)%
100 (0.8)(5.8)
(100)(0.5)2.3 
(200)(4.2)1.7 
(300)(10.3)(1.8)
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Item 4.    Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2024. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and regulations are designed and operating in an effective manner.
Effective on May 3, 2024, Burke & Herbert completed its Merger with Summit. During the second quarter of 2024, management commenced an evaluation of the design and operating effectiveness of internal controls over financial reporting related to the Summit acquired business. The evaluation of changes to processes, technology systems, and other components of internal control over financial reporting related to the Summit acquired business is ongoing. Except for the changes made in connection with the Merger, there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II - Other Information
Item 1.    Legal Proceedings
Legal Proceedings
In the ordinary course of our operations, and from time to time, the Company and its subsidiary are parties to various legal claims, lawsuits and proceedings incidental to the ordinary nature of the Company’s business. Currently, we are not party to any material legal proceedings, and no such proceedings are, to management’s knowledge, threatened against us. Although the ultimate outcome of any pending legal proceedings cannot be ascertained at this time, it is the opinion of management that the liabilities (if any) resulting from such legal proceedings will not have a material adverse effect on the Company’s business, including its consolidated financial position, results of operations, or cash flows, or otherwise require disclosure under the federal securities laws.
Item 1A.    Risk Factors
There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in our Form 10-K for the year ended December 31, 2023.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.    Defaults Upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
Not Applicable.
Item 5.    Other Information
(c) Insider Trading Arrangements

During the three months ended June 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933, as amended).
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Item 6.     Exhibits
Exhibit No.Description
2.1*
3.1#
3.2*
4.1*
4.2*
10.1*†
10.2*†
10.3*†
31.1#
31.2#
32.1#
__________________            
*Previously filed
†     Management Contract or compensatory plan or arrangement
#    Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 13, 2024
Burke & Herbert Financial Services Corp.
By:/s/ David P. Boyle
Name:David P. Boyle
Title:Chief Executive Officer
By:/s/ Roy E. Halyama
Name:Roy E. Halyama
Title:Executive Vice President, Chief Financial Officer
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