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What changed in Burke & Herbert Financial Services Corp.'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Burke & Herbert Financial Services Corp.'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+436 added−490 removedSource: 10-K (2025-03-17) vs 10-K (2024-03-22)

Top changes in Burke & Herbert Financial Services Corp.'s 2024 10-K

436 paragraphs added · 490 removed · 217 edited across 9 sections

Item 1. Business

Business — how the company describes what it does

101 edited+23 added−25 removed137 unchanged
Biggest changeOn October 18, 2022, the FDIC adopted a final rule to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. This increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio reaches 1.35% by the statutory deadline of September 30, 2028.
Biggest changeFor the years ended December 31, 2024, December 31, 2023, and December 31, 2022, the Company recorded expense of $3.0 million, $1.65 million, and $958 thousand, respectively, for FDIC insurance premiums. 17 Table of Contents On October 18, 2022, the FDIC adopted a final rule to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023.
The permitted activities of a bank holding company are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines by regulation or order to be closely related to banking or managing or controlling banks.
Permitted Activities. The permitted activities of a bank holding company are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines by regulation or order to be closely related to banking or managing or controlling banks.
These rules require the Bank to comply with the following minimum capital ratios: (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of 4.5%, plus a 2.5% capital conservation buffer, resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of 7.0%, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the 2.5% capital conservation buffer, resulting in a minimum Tier 1 capital ratio of 8.5%, (iii) a minimum ratio of total risk-based capital to risk-weighted assets of 8.0%, plus the 2.5% capital conservation buffer, resulting in a minimum total risk-based capital ratio of 10.5%, and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
These capital rules require the Bank to comply with the following minimum capital ratios: (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of 4.5%, plus a 2.5% capital conservation buffer, resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of 7.0%, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the 2.5% capital conservation buffer, resulting in a minimum Tier 1 capital ratio of 8.5%, (iii) a minimum ratio of total risk-based capital to risk-weighted assets of 8.0%, plus the 2.5% capital conservation buffer, resulting in a minimum total risk-based capital ratio of 10.5%, and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
The Company’s SEC filings will be posted and available at no cost on its website as soon as reasonably practicable after the reports are filed electronically with the SEC. The Company’s website address is at http://investor.burkeandherbertbank.com. The information on the Company’s website is not incorporated into this report or any other filing the Company makes with the SEC.
The Company’s SEC filings will be posted and available at no cost on its website as soon as reasonably practicable after the reports are filed or furnished electronically with the SEC. The Company’s website address is at http://investor.burkeandherbertbank.com. The information on the Company’s website is not incorporated into this report or any other filing the Company makes with the SEC.
Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors.
Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire Board.
Loan officers have relatively low individual discretionary loan authority levels, which generally results in the loan committee vetting to uphold appropriate structure and terms prior to approval. Loan committee meetings are held regularly and on an as-needed basis to promote prompt decisions.
Loan officers have relatively low individual discretionary loan authority levels, which generally results in loan committee vetting to uphold appropriate structure and terms prior to approval. Loan committee meetings are held regularly and on an as-needed basis to promote prompt decisions.
The Federal Reserve, the FDIC, and the Virginia State Corporation Commission, through the Virginia BFI, regulate and monitor operations of the Company and the Bank. The Federal Reserve, the FDIC, and the Virginia BFI conduct periodic onsite and offsite examinations. We must comply with a wide variety of reporting requirements and banking regulations.
The Federal Reserve and the Virginia State Corporation Commission, through the Virginia BFI, regulate and monitor operations of the Company and the Bank. The Federal Reserve and the Virginia BFI conduct periodic onsite and offsite examinations. We must comply with a wide variety of reporting requirements and banking regulations.
In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases, restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered, and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution, and income level.
In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases, restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to 20 Table of Contents mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered, and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution, and income level.
The CFPB is responsible for implementing, examining, and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets.
The CFPB is responsible for examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets.
In determining whether to approve a proposed bank acquisition, the Federal Reserve will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties’ managerial resources and risk management and governance processes and systems, the parties’ compliance with the Bank Secrecy Act (“BSA”) and anti-money laundering requirements, and the acquiring institution’s performance under the Community Reinvestment Act of 1977 and compliance with fair housing and other consumer protection laws.
In determining whether to approve a proposed bank acquisition, the Federal Reserve will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties’ managerial resources and risk management and governance processes and systems, the parties’ compliance with the Bank Secrecy Act (“BSA”) and anti-money laundering requirements, and the acquiring institution’s performance under the CRA and compliance with fair housing and other consumer protection laws.
These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate 19 Table of Contents Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing.
These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing.
See “ Adoption of New Accounting Standards ” under Note 1 — Nature of Banking Activities and Significant Accounting Policies in Notes to the December 31, 2023 Consolidated Financial Statements for further information regarding the implementation of CECL. Prompt Corrective Action.
See “ Adoption of New Accounting Standards ” under Note 1 — Nature of Banking Activities and Significant Accounting Policies in Notes to the December 31, 2024 Consolidated Financial Statements for further information regarding the implementation of CECL. Prompt Corrective Action.
Borrowers may be required to advance funds with each monthly payment of principal and interest to a loan escrow account from which we make disbursements for items, 10 Table of Contents such as real estate taxes and mortgage insurance premiums. Appraisers approved by us appraise the properties securing substantially all of our residential mortgage loans.
Borrowers may be required to advance funds with each monthly payment of principal and interest to a loan escrow account from which we make disbursements for items, such as real estate taxes and mortgage insurance premiums. Appraisers approved by us appraise the properties securing substantially all of our residential mortgage loans.
Refer to the Lending Activities section within Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the composition of our loan portfolio as of December 31, 2023, and December 31, 2022.
Refer to the Lending Activities section within Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the composition of our loan portfolio as of December 31, 2024, and December 31, 2023.
The Bank actively checks high-risk OFAC areas, such as new accounts, wire transfers, and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons. Consumer Financial Protection.
The Bank actively checks high-risk OFAC areas, such as new accounts, wire transfers, and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons. 19 Table of Contents Consumer Financial Protection.
The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities they serve, including low-income and moderate-income neighborhoods. If the Bank receives a rating from the FDIC of less than “satisfactory” under the CRA, restrictions on operating activities would be imposed.
The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities they serve, including low-income and moderate-income neighborhoods. If the Bank receives a rating from the Federal Reserve of less than “satisfactory” under the CRA, restrictions on operating activities would be imposed.
We believe that we have a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned professionals with decisions made at the local level. We strive to be the leading community bank in our markets.
We believe that we have a solid franchise that meets the financial needs of our clients and communities by 5 Table of Contents providing an array of personalized products and services delivered by seasoned professionals with decisions made at the local level. We strive to be the leading community bank in our markets.
There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution insolvency, receivership, or default.
There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the Deposit Insurance Fund (“DIF”) in the event of a depository institution insolvency, receivership, or default.
Despite prior approval or permissibility, the Federal Reserve may order the Company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness, or stability of any bank subsidiary may result from such an activity.
Despite prior approval or permissibility, the Federal Reserve may order the Company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to 13 Table of Contents believe that a serious risk to the financial safety, soundness, or stability of any bank subsidiary may result from such an activity.
Each FHLB serves as a reserve, or central bank, for the members within its assigned region, and makes loans to its members in accordance with policies and procedures established by the 18 Table of Contents board of directors of the applicable FHLB. As a member, the Bank must purchase and maintain stock in the FHLB of Atlanta. Privacy Legislation.
Each FHLB serves as a reserve, or central bank, for the members within its assigned region, and makes loans to its members in accordance with policies and procedures established by the board of directors of the applicable FHLB. As a member, the Bank must purchase and maintain stock in the FHLB of Atlanta. Privacy Legislation.
The investment portfolio is actively managed and consists of investments classified as available-for-sale and under the available-for-sale classification, investment instruments may be sold as deemed appropriate by management. On a monthly basis, the investment portfolio is marked to market as required by ASC 320 - Investments - Debt & Equity Securities .
The investment portfolio is actively managed and consists of investments classified as available-for-sale and under the available-for-sale classification, investment instruments may be sold as deemed appropriate by 11 Table of Contents management. On a monthly basis, the investment portfolio is marked to market as required by ASC 320 - Investments - Debt & Equity Securities .
Our residential real estate lending policy requires each loan to have viable repayment sources. Residential real estate loans are evaluated for the adequacy of these repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values.
Our residential real estate lending policy requires each loan to have viable repayment sources. Residential real estate loans are 10 Table of Contents evaluated for the adequacy of these repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values.
Loan terms, including interest rates, loan-to-value ratios, and maturities, are tailored to meet the needs of the borrower. A special effort is made to keep loan products as flexible as possible within the guidelines of prudent banking practices in terms of interest rate and credit risk.
Loan terms, including interest rates, loan-to-value ratios, and maturities, are tailored to meet the needs of the borrower. A 8 Table of Contents special effort is made to keep loan products as flexible as possible within the guidelines of prudent banking practices in terms of interest rate and credit risk.
Until the financial holding company returns to compliance, the Federal Reserve may impose limitations or conditions on the conduct of its activities, and 13 Table of Contents the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve.
Until the financial holding company returns to compliance, the Federal Reserve may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve.
Reporting Obligations under Securities Laws The Company is subject to the periodic and other reporting requirements of the Exchange Act, including the filing of annual, quarterly, and other reports with the SEC.
Reporting Obligations under Securities Laws The Company is subject to the periodic and other reporting requirements of the Exchange Act, including the filing of annual, quarterly, and other reports, and amendments to those reports, with the SEC.
Management believes that the Company is well positioned to build on its core performance and continue to grow profitably. Although we have successfully attracted new associates, providing depth and talent in key 5 Table of Contents positions, additional employees and infrastructure are expected to be needed to manage the increasing customer relationships that will come with sustained growth.
Management believes that the Company is well positioned to build on its core performance and continue to grow profitably. Although we have successfully attracted new associates, providing depth and talent in key positions, additional employees and infrastructure are expected to be needed to manage the increasing customer relationships that will come with sustained growth.
These laws and 15 Table of Contents regulations also affect business practices, such as the payment of interest on deposits, the charging of interest on loans, credit policies, the types of business conducted, and the location of offices. Certain of these laws and regulations are referenced above under “The Company.” Capital Requirements.
These laws and regulations also affect business practices, such as the payment of interest on deposits, the charging of interest on loans, credit policies, the types of business conducted, and the location of offices. Certain of these laws and regulations are referenced above under “The Company.” Capital Requirements.
The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect 20 Table of Contents to mortgage loans and borrowers. The Bank’s mortgage origination activities are subject to Regulation Z, which implements the Truth in Lending Act.
The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank’s mortgage origination activities are subject to Regulation Z, which implements the Truth in Lending Act.
See Note 12 — Regulatory Capital Matters , in Notes to the December 31, 2023 Consolidated Financial Statements of the Company (the “Notes to Consolidated Financial Statements”) for additional information.
See Note 12 — Regulatory Capital Matters , in Notes to the December 31, 2024 Consolidated Financial Statements of the Company (the “Notes to Consolidated Financial Statements”) for additional information.
The Bank may also incorporate a combination of sales of investment securities or Federal Funds purchased to augment the Bank’s funding position. The current investment policy authorizes the Bank to invest in debt securities issued by the United States Government, agencies of the United States Government, or United States Government-sponsored enterprises.
The Bank may also incorporate a combination of sales of investment securities or Federal Funds purchased to augment the Bank’s funding position. The current investment policy authorizes the Bank to invest in debt securities issued by the United States Government, agencies of the United States Government, or GSEs.
The Company has retained a nationally recognized asset/liability management consultancy, and we believe our balance sheet is well positioned for organic growth and potential acquisitions. Competition The banking business is highly competitive, and we face competition in our market area from many other local, regional, and national financial institutions.
The Company has retained a nationally recognized asset/liability management consultancy, and we believe our balance sheet is well positioned for organic growth and potential acquisitions. 7 Table of Contents Competition The banking business is highly competitive, and we face competition in our market area from many other local, regional, and national financial institutions.
A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the SEC under Section 12 of the Exchange Act or no other person will own a greater percentage of that class of voting securities immediately after the acquisition.
A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the SEC under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or no other person will own a greater percentage of that class of voting securities immediately after the acquisition.
Treasury management solutions include a suite of digital banking, payables, receivables, risk management, and automated cash flow, such as enhanced reporting, automated clearing house (“ACH”), wires, remote deposit capture, bill pay, lockbox, credit and debit cards, merchant services, fraud protection, and deposit and loan sweeps. Employees As of December 31, 2023, we had 400 full-time employees.
Treasury management solutions include a suite of digital banking, payables, receivables, risk management, and automated cash flow, such as enhanced reporting, automated clearing house (“ACH”), wires, remote deposit capture, bill pay, lockbox, credit and debit cards, merchant services, fraud protection, and deposit and loan sweeps. Employees As of December 31, 2024, we had 815 full-time equivalent employees.
As directed by the EGRRCPA, on November 4, 2019, the federal banking agencies jointly issued a final rule that permits qualifying banks that have less than $10 billion in total consolidated assets to elect to be subject to a 9% “community bank leverage ratio” (“CBLR”).
On November 4, 2019, the federal banking agencies jointly issued a final rule that permits qualifying banks that have less than $10 billion in total consolidated assets to elect to be subject to a 9% “community bank leverage ratio” (“CBLR”).
Under the Federal Deposit Insurance Act (“FDIA”), federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, data security, loan documentation, credit underwriting, interest rate exposure, risk management vendor management, corporate governance, asset growth, and compensation, fees, and benefits.
Under the FDIA, federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, data security, loan documentation, credit underwriting, interest rate exposure, risk management vendor management, corporate governance, asset growth, and compensation, fees, and benefits.
Any capital loans 14 Table of Contents by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks.
The laws and regulations governing us generally have been promulgated to protect depositors and the federal deposit insurance funds and not to protect shareholders. Additionally, we must bear the cost of compliance with the reporting and regulations; these costs can be significant and may have an effect on our financial performance.
The laws and regulations governing us generally have been promulgated to protect depositors, borrowers, the financial system, and the federal Deposit Insurance Fund (“DIF”) and not to protect shareholders. Additionally, we must bear the cost of compliance with the reporting and regulations; these costs can be significant and may have an effect on our financial performance.
The Bank met the definition of being “well capitalized” as of December 31, 2023, and December 31, 2022. See “The Bank – Capital Requirements,” above. Deposit Insurance. The deposits of the Bank are insured up to applicable limits by the DIF. The basic limit on FDIC deposit insurance coverage is $250,000 per depositor.
The Bank met the definition of being “well capitalized” as of December 31, 2024, and December 31, 2023. See “The Bank – Capital Requirements,” above. Deposit Insurance. The deposits of the Bank are insured by the FDIC up to applicable limits by the DIF. The basic limit on FDIC deposit insurance coverage is $250,000 per ownership category.
Commercial Lending Services Commercial lending services includes commercial real estate loans, acquisition, construction & development, and commercial & industrial loans . Our commercial loan clients represent a diverse cross-section of small to mid-size local businesses within our market footprint, whose owners and employees are often established Bank 8 Table of Contents customers.
Commercial Lending Services Commercial lending services include commercial real estate loans, acquisition, construction & development, and commercial & industrial loans . Our commercial loan clients represent a diverse cross-section of small to mid-size local businesses within our market footprint, whose owners and employees are often established Bank customers.
The appropriate federal banking agency for an “undercapitalized” institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the Deposit Insurance Fund of the FDIC (“DIF”), subject in certain cases to specified procedures.
The appropriate federal banking agency for an “undercapitalized” institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures.
In addition, Virginia law requires prior approval from the Virginia BFI for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia.
In addition, Virginia law requires prior approval from the Virginia BFI for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia. 14 Table of Contents Source of Strength.
A risk rating system is applied to the commercial loan portfolio to measure credit risk and differentiate the level of risk posed by individual credits. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Current Economic Environment in the Financial Services Industry for further information.
A risk rating system is applied to the commercial loan portfolio to measure credit risk and differentiate the level of risk posed by individual credits. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview for further information.
The Bank anticipates that final and formal changes to interagency CRA regulations will require an extended process, and any such changes are uncertain and cannot be predicted at this time. Federal Home Loan Banks (“FHLBs”).
The Bank anticipates that final and formal changes to interagency CRA regulations will require an extended process, and any such changes are uncertain and cannot be predicted at this time.
In addition to salaries, these programs include annual bonus opportunities, a 401(k) plan with an employer matching contribution, healthcare and insurance benefits, flexible spending accounts, paid time off, and an employee assistance program. 12 Table of Contents General Corporate Information Our headquarters is located at 100 S.
We provide a competitive compensation and benefits program to our employees. In addition to salaries, these programs include annual bonus opportunities, a 401(k) plan with an employer matching contribution, healthcare and insurance benefits, flexible spending accounts, paid time off, and an employee assistance program. General Corporate Information Our headquarters is located at 100 S.
The Federal Reserve and FDIC have adopted a rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard, which the Company has not elected to implement.
The Federal Reserve has adopted a rule providing for an optional three-year phase-in period 16 Table of Contents for the day-one adverse regulatory capital effects upon adopting the standard, which the Company has not elected to implement.
While the Bank, like all banks, is subject to federal consumer protection rules enacted by the CFPB, because the Company and the Bank have total consolidated assets of less than $10 billion, the FDIC oversees most consumer protection aspects of the Dodd-Frank Act and other laws and regulations applicable to the Bank.
While the Bank, like all banks, is subject to federal consumer protection rules enacted by the CFPB, because the Company and the Bank have total consolidated assets of less than $10 billion, the Federal Reserve oversees most of the consumer financial protection laws and regulations applicable to the Bank.
Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall.
The Company’s authorized capital also consists of up to two million (2,000,000) shares of serial preferred stock, par value $1.00 (“Serial Preferred Stock”) of which there were no shares issued or outstanding as of the date of this Form 10-K.
The Company’s authorized capital also consists of up to two million (2,000,000) shares of serial preferred stock, par value $1.00 (“Serial Preferred Stock”) of which there were 1,500 outstanding shares of the Burke & Herbert Series 2021 Preferred Stock (the “Burke & Herbert Series 2021 Preferred Stock”) as of the date of this Form 10-K.
The Company is authorized to issue twenty million (20,000,000) shares of common stock, par value $0.50 per share (“Common Stock”), of which there were 7,440,025 outstanding as of the date of this Form 10-K.
The Company is authorized to issue forty million (40,000,000) shares of common stock, par value $0.50 per share (“Common Stock”), of which there were 14,982,655 outstanding as of the date of this Form 10-K.
We offer a competitive compensation and benefits package and support dedicated campaigns that communicate directly to employees about wellness. Employee well-being is further supported through policies such as remote work, paid parental leave, military service leave, educational assistance, and bereavement leave policies. We provide a competitive compensation and benefits program to our employees.
We define wellness comprehensively and include mental, physical, emotional, financial, psychological, and environmental considerations. We offer a competitive compensation and benefits package and support dedicated campaigns that communicate directly to employees about wellness. Employee well-being is further supported through policies such as remote work, paid parental leave, military service leave, educational assistance, and bereavement leave policies.
CAMELS composite ratings set a maximum insurance assessment for CAMELS 1 (highest) and 2 rated banks and set minimum assessments for lower rated institutions. In March 2016, the FDIC implemented by final rule certain Dodd-Frank Act provisions by raising the DIF’s minimum reserve ratio from 1.15% to 1.35%.
CAMELS composite ratings set a maximum insurance assessment for CAMELS 1 (highest) and 2 rated banks and set minimum assessments for lower rated institutions. In March 2016, the FDIC raised the DIF’s minimum reserve ratio from 1.15% to 1.35%.
Our 10 largest borrowing relationships accounted for approximately 22.4% of our total loans at December 31, 2023.
Our 10 largest borrowing relationships accounted for approximately 8.8% of our total loans at December 31, 2024.
The Tier 1, common equity Tier 1, and total capital to risk-weighted asset ratios of the Bank were 16.79%, 16.79%, and 17.82%, respectively, as of December 31, 2023, also exceeding the minimum requirements for “well capitalized” status.
The Tier 1, common equity Tier 1, and total capital to risk-weighted asset ratios of the Bank were 13.29%, 13.29%, and 14.41%, respectively, as of December 31, 2024, also exceeding the minimum requirements for “well capitalized” status.
This loan category is designed to support borrowers who have a proven ability to service debt. We generally require a first lien position on all collateral and require guarantees from owners having at least a 10% interest in the involved business. Interest rates on C&I term loans are generally floating or fixed for a term not to exceed seven years.
C&I loans are made to provide funds for equipment and general corporate needs. This loan category is designed to support borrowers who have a proven ability to service debt. We generally require a first lien position on all collateral and require guarantees from owners having at least a 10% interest in the involved business.
The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under current regulations, prior approval from the Federal Reserve is required if cash dividends declared by the Bank or the Company may be limited by other factors, such as requirements to maintain capital above regulatory guidelines.
Under current regulations, prior approval from the Federal Reserve is required if cash dividends declared by the Bank or the Company would be an unsafe or unsound practice, and may be limited by other factors, such as requirements to maintain capital above regulatory guidelines.
The Tier 1, common equity Tier 1, and total capital to risk-weighted asset ratios of the Company were 16.85%, 16.85%, and 17.88%, respectively, as of December 31, 2023, thus exceeding the minimum requirements for “well capitalized” status.
The Tier 1, common equity Tier 1, and total capital to risk-weighted asset ratios of the Company were 11.96%, 11.53%, and 14.57%, respectively, as of December 31, 2024, thus exceeding the minimum requirements for “well capitalized” status.
As a relationship-oriented organization, we seek generally to obtain deposit relationships with our loan clients. Through our membership in the IntraFi Network®, we can arrange FDIC insurance of up to $135 million of demand deposits, $100 million of savings, or a combination of $175 million. In addition, we can arrange FDIC insurance up to $50 million on certificates of deposits.
Through our membership in the IntraFi Network®, we can arrange FDIC insurance of up to $135 million of demand deposits, $100 million of savings, or a combination of $175 million. In addition, we can arrange FDIC insurance up to $50 million on certificates of deposits.
These fees are charged to/received from each affiliated company based upon various specific allocation methods measuring the estimated usage of such services by that company. The fees are eliminated from reported financial statements in the consolidation process. The Bank General. The Bank is supervised and regularly examined by the FDIC and the Virginia BFI.
These fees are charged to/received from each affiliated company based upon various specific allocation methods measuring 15 Table of Contents the estimated usage of such services by that company. The fees are eliminated from reported financial statements in the consolidation process. The Bank General. The Bank is subject to federal and state regulation, supervision, and examination.
As of December 31, 2023, we had total consolidated assets of $3.6 billion, gross loans of $2.1 billion, total deposits of $3.0 billion, and total shareholders’ equity of $315 million. Our Business We are a community-oriented financial institution.
As of December 31, 2024, we had total consolidated assets of $7.8 billion, gross loans of $5.6 billion, total deposits of $6.5 billion, and total shareholders’ equity of $730 million. Our Business We are a community-oriented financial institution.
Item 1. Business Overview Burke & Herbert Financial Services Corp. was organized as a Virginia corporation in 2022 to serve as the holding company for Burke & Herbert Bank & Trust Company. The Company commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company.
Item 1. Business Overview Burke & Herbert Financial Services Corp. was organized as a Virginia corporation in 2022 to serve as the holding company for Burke & Herbert Bank & Trust Company.
The Bank offers a broad array of consumer and commercial deposit products that include digital banking, demand, negotiable order of withdrawal (“NOW”), money market and savings accounts, as well as certificates of deposit. The Bank typically pays a competitive rate on the 11 Table of Contents interest-bearing deposits.
The Bank offers a broad array of consumer and commercial deposit products that include digital banking, demand, negotiable order of withdrawal (“NOW”), money market and savings accounts, as well as certificates of deposit. The Bank typically pays a competitive rate on the interest-bearing deposits. As a relationship-oriented organization, we seek generally to obtain deposit relationships with our loan clients.
These policies generate income and can be liquidated, if necessary, with associated tax costs. We are focused on growing business relationships and building core deposits, profitable loans, and non-interest income.
We are the owner and beneficiary of Company-owned life insurance policies on certain current and former Bank employees. These policies generate income and can be liquidated, if necessary, with associated tax costs. We are focused on growing business relationships and building core deposits, profitable loans, and non-interest income.
In addition, when underwriting specific loans, the proposed debt should be supported by cash flows that are stable, predictable, diverse, and sufficient for adequate repayment at acceptable margins. Furthermore, we stress test each aspect of the cash flow, including stressing the interest rate levels.
In addition, when underwriting specific loans, the proposed debt should be supported by cash flows that are stable, predictable, diverse, and sufficient for adequate repayment at acceptable margins.
As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), that has elected financial holding company status, the Company is subject to supervision, regulation, and examination by the Federal Reserve.
As a bank holding company that has elected financial holding company status under the BHCA, the Company is subject to regulation, supervision, and examination by the Federal Reserve (through the Federal Reserve Bank of Richmond). The Company is a bank holding company under the banking laws of Virginia, and is subject to regulation, supervision, and examination by the Virginia BFI.
In addition, some of our competitors have assets, capital, and lending limits greater than that of the Bank, have greater access to capital markets, and can offer a broader range of products and services than the Bank.
Some of our non-banking competitors, such as fintech companies, have fewer regulatory constraints and may have lower cost structures. In addition, some of our competitors have assets, capital, and lending limits greater than that of the Bank, have greater access to capital markets, and can offer a broader range of products and services than the Bank.
The most recent economic data suggests that the relative economic strength of our market area will continue, enabling us to further grow our customer base and provide opportunities to grow our market share.
The market area in which we operate has seen considerable population and economic growth over the past several decades. The most recent economic data suggests that the relative economic strength of our market area will continue, enabling us to further grow our customer base and provide opportunities to grow our market share.
Management monitors industry and collateral concentrations to avoid loan exposures to a large group of similar industries or similar collateral. C&I loans are evaluated for historical and projected cash flow attributes, balance sheet strength, and primary and alternate resources of personal guarantors. C&I term loan documents require borrowers to forward regular financial information on both the business and personal guarantors.
Interest rates on C&I loans are generally floating or fixed for a term not to exceed seven years. Management monitors industry and collateral concentrations to avoid loan exposures to a large group of similar industries or similar collateral. C&I loans are evaluated for historical and projected cash flow attributes, balance sheet strength, and primary and alternate resources of personal guarantors.
The Federal Reserve and the other federal banking agencies have issued risk-based and leverage capital guidelines applicable to U.S. banking organizations. Those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.
Those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.
Section 29 of the FDIA and FDIC regulations generally limit the ability of any bank to accept, renew, or roll over any brokered deposit unless it is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” However, as a result of EGRRCPA, the FDIC undertook a comprehensive review of its regulatory approach to brokered deposits, including reciprocal deposits, and interest rate caps applicable to banks that are less than “well capitalized.” On December 15, 2020, the FDIC issued rules to revise brokered deposit regulations in light of modern deposit-taking methods.
Section 29 of the FDIA and FDIC regulations generally limit the ability of any bank to accept, renew, or roll over any brokered deposit unless it is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” On December 15, 2020, the FDIC issued rules to revise brokered deposit regulations in light of modern deposit-taking methods.
Source of Strength. Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement.
Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks, which was codified in Section 38A of the Federal Deposit Insurance Act (“FDIA”).
Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates,” or to make loans to insiders, is limited.
Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2%, and again when it reaches 2.5%. Transactions with Affiliates. Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates,” or to make loans to insiders, is limited.
Federal banking regulators are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their capital requirements. The federal bank regulatory agencies 16 Table of Contents have additional enforcement authority with respect to “undercapitalized” depository institutions.
Federal banking regulators are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their capital requirements. The federal bank regulatory agencies have additional enforcement authority with respect to “undercapitalized” depository institutions. As described above, the final rules to implement the Basel III Framework also integrated new requirements into the “prompt corrective action” framework.
To the extent statutory or regulatory provisions or proposals are described in this Form 10-K, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. The Company General.
The following description briefly addresses certain provisions of federal and state laws and regulations and their potential effects on the Company and the Bank. To the extent statutory or regulatory provisions or proposals are described in this Form 10-K, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. The Company General.
A sophisticated suite of treasury management products is a key feature of our customer focused, relationship driven marketing. Lending Services We provide a range of commercial lending services, including commercial real estate loans, acquisition, construction & development, commercial and industrial loans, and residential real estate loans to customers generally located or conducting business in our market area.
Lending Services We provide a range of commercial lending services, including commercial real estate loans, acquisition, construction & development, commercial and industrial loans, consumer and mortgage warehouse lines of credit, and residential real estate loans to customers generally located or conducting business in our market area.
Investor real estate loans secured by non-owner-occupied properties involve investment properties for multi-family, warehouse, retail, and office space with a history of occupancy and cash flow.
Investor real estate loans secured by non-owner-occupied properties involve investment properties for multi-family, warehouse, retail, and office space with a history of occupancy and cash flow. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview for further information on commercial real estate sector concentration.
The comment period for these proposed rules has closed, and a final rule has not yet been published; however, in September 2023, the SEC and the federal banking agencies indicated that the incentive compensation proposal would be on their collective 2024 regulatory agenda.
The comment period for these proposed rules has closed, and although the agencies indicated that the incentive compensation proposal would be on their collective 2024 regulatory agenda, a final rule has not yet been published. If the rules are adopted as currently proposed, they will restrict the manner in which executive compensation is structured. Mortgage Banking Regulation.
Further regulatory positions taken by the CFPB may influence how other regulatory agencies may apply the subject consumer financial protection laws and regulations. Incentive Compensation .
Further regulatory positions taken by the CFPB may influence how other regulatory agencies may apply the subject consumer financial protection laws and regulations. Notwithstanding the foregoing, the recent changes in the U.S. presidential administration and the composition of the U.S.
We expect the Washington D.C. MSA will build upon its rank as a stable and growing economy by fostering education, technological innovation, job creation, capital formation, and economic diversification. We believe the size, growth, economic diversity, and banking consolidation within the Washington MSA, when combined with our business strategy, will provide the Company with excellent opportunities for long-term, sustainable growth.
We believe the size, growth, economic diversity, and banking consolidation within the Washington D.C. MSA, when combined with our business strategy, will provide the Company with excellent opportunities for long-term, sustainable growth.
This portfolio includes commercial and residential land development loans, one-to-four family housing construction, both pre-sold and speculative in nature, multifamily housing construction, non-residential building construction, and undeveloped land. This commercial real estate lending business extends to providing commercial construction financing of owner-occupied properties as well as non-owner-occupied properties.
Acquisition, Construction & Development Loans Acquisition, construction & development loans are loans made for the purpose of financing construction or development projects. This portfolio includes commercial and residential land development loans, one-to-four family housing construction, both pre-sold and speculative in nature, multifamily housing construction, non-residential building construction, and undeveloped land.
Making any formal changes to the framework for evaluating bank mergers would require an extended process, and any such changes are uncertain and cannot be predicted at this time. However, the adoption of more expansive or stringent standards may have an impact on the Company’s ability to engage in acquisition activities.
It is possible that the current President could rescind the executive order, and any changes related to implementation of the Bank Merger Act are uncertain and cannot be predicted at this time. However, the adoption of more expansive or stringent standards may have an impact on the Company’s ability to engage in acquisition activities.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThe Risk Factors Summary that follows should be read in conjunction with the detailed description of risk factors following this summary section. 22 Table of Contents Risk Factor Summary o Risk Related to Our Lending Activities • We may not be able to measure and limit our credit risk adequately. • Our decisions regarding credit risk could be inaccurate and our allowance for credit losses may be inadequate, which could materially and adversely affect our business, financial condition, results of operations, cash flows, and/or future prospects. • If our non-performing assets increase, our earnings will be adversely affected. • Our focus on lending to small to medium-sized businesses may increase our credit risk. • Adverse changes in the real estate market or economy in our market area could lead to higher levels of problem loans and charge-offs, adversely affecting our earnings and financial condition. • We are exposed to higher credit risk by commercial real estate, commercial and industrial, and acquisition, construction & development-based lending, as well as large lending relationships. • We engage in lending secured by real estate and may be forced to foreclose on the collateral. • A significant percentage of our loans are attributable to a relatively small number of borrowers. • The appraisals and other valuation techniques we use may not accurately reflect the net value of the asset. o Risks Related to Funding and Liquidity • Liquidity risk could impair our ability to fund operations and meet our obligations as they become due. • Loss of deposits or a change in deposit mix could increase our cost of funding. • Limits on our ability to use brokered deposits as part of our funding strategy may affect our profitability. o Risks Related to Our Business, Industry, and Markets • We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers. • Our financial performance may be negatively affected if we are unable to execute our strategy. • Failure to keep up with the rapid technological changes in the financial services industry could have an adverse effect on our competitive position and profitability. • We follow a relationship-based operating model, and our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our performance. • We are dependent on our management team and key employees. • Changes in interest rates and monetary policy may negatively affect our earnings, income and financial condition, as well as the value of our assets. • We are subject to physical and financial risks associated with climate change impacts. o Risks Related to Our Operations • We face risks related to our operational, technological, and organizational infrastructure. • System failure or breaches of our network security, including as a result of cyber-attacks or data security breaches, could subject us to increased operating costs, litigation, and other liabilities. • We rely on third parties to provide key components of our business infrastructure, and a failure of these parties to perform for any reason could disrupt our operations. • We could be subject to losses, regulatory action, or reputational harm due to fraudulent and negligent acts on the part of loan applicants, our employees, and vendors. • We are subject to claims and litigation pertaining to intellectual property. • We may be adversely affected by the lack of soundness of other financial institutions or other market participants. • Our risk management framework may not be effective in mitigating risks and/or losses to us. • Demand for the Company’s services is influenced by general economic and consumer trends. o Risks Related to Our Regulatory Environment • Our industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations. • We are subject to stringent capital requirements, which could have an adverse effect on our operations. 23 Table of Contents • We face a risk of noncompliance and enforcement action with the BSA and other anti-money laundering statutes and regulations. • We are subject to laws regarding the privacy, information security, and protection of personal information and any violation of these laws or other incident involving personal, confidential, or proprietary information of individuals could damage our reputation and otherwise adversely affect our business. • Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention. • Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability. • Increased scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to Environmental, Social, and Governance (“ESG”) practices may impose additional costs on us or expose us to new or additional risks. o Risks Related to an Investment in Our Common Stock • We currently qualify as an “emerging growth company”, and the reduced disclosures and relief from certain other significant disclosure requirements that are available to emerging growth companies may make our Common Stock less attractive to investors. • The obligations associated with being a public company require significant resources and management attention, which may divert from our business operations. • If we fail to design, implement, and maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud. • We may issue additional equity securities, or engage in other transactions, which could affect the priority of our Common Stock, which may adversely affect the market price of our Common Stock. • An investment in our Common Stock is not an insured deposit and is not guaranteed by the FDIC. • Our Bylaws designate the United States District Court for the Eastern District of Virginia, Alexandria Division, or in the event that court lacks jurisdiction, the Circuit Court of the City of Alexandria, Virginia, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which may not be enforced and could discourage lawsuits against us and our directors and officers. o Risks Relating to the Consummation of the Merger and Burke & Herbert Following the Merger • We expect to incur substantial costs related to the merger and integration. • Combining Burke & Herbert and Summit may be more difficult, costly, or time-consuming than expected, and Burke & Herbert and Summit may fail to realize the anticipated benefits of the merger. • Our results following the merger may suffer if we do not effectively manage our expanded operations, including complying with any enhanced regulatory requirements. • The continuing corporation may be unable to retain Burke & Herbert and/or Summit personnel successfully after the merger is completed. • Regulatory approvals necessary for the merger to close may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the continuing corporation following the merger. • The merger agreement may be terminated and the merger may not be completed. • Failure to complete the merger could negatively impact us. • In connection with the merger, we will assume Summit’s outstanding debt obligations, and our level of indebtedness following the completion of the merger could adversely affect our ability to raise additional capital and to meet our obligations under its existing indebtedness. • We will be subject to business uncertainties and contractual restrictions while the merger is pending. • The elevated interest rate environment may adversely impact the fair value adjustments of investments and loans acquired in the merger. • Our shareholders will have reduced ownership and voting interest in the continuing corporation after the consummation of the merger and will exercise less influence over management. 24 Table of Contents Risk Related to Our Lending Activities We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.
Biggest changeThe Risk Factors Summary that follows should be read in conjunction with the detailed description of risk factors following this summary section. 22 Table of Contents Risk Factor Summary o Risks Related to Our Lending Activities • We may not be able to measure and limit our credit risk adequately. • Our decisions regarding credit risk could be inaccurate and our allowance for credit losses may be inadequate. • If our non-performing assets increase, our earnings will be adversely affected. • Our focus on lending to small to medium-sized businesses may increase our credit risk. • Adverse changes in the real estate market or economy in our market area could lead to higher levels of problem loans and charge-offs, adversely affecting our earnings and financial condition. • We are exposed to higher credit risk by commercial real estate, commercial and industrial, and acquisition, construction & development-based lending, as well as large lending relationships. • We engage in lending secured by real estate and may be forced to foreclose on the collateral. • A significant percentage of our loans are attributable to a relatively small number of borrowers. • The appraisals and other valuation techniques we use may not accurately reflect the net value of the asset. o Risks Related to Funding and Liquidity • Liquidity risk could impair our ability to fund operations and meet our obligations as they become due. • Loss of deposits or a change in deposit mix could increase our cost of funding. • Limits on our ability to use brokered deposits as part of our funding strategy may affect our profitability. o Risks Related to Our Business, Industry, and Markets • We operate in a highly competitive market and face increasing competition. • Our financial performance may be negatively affected if we are unable to execute our strategy. • Failure to keep up with the rapid technological changes in the financial services industry could have an adverse effect on our competitive position and profitability. • We follow a relationship-based operating model, and our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our performance. • We are dependent on our management team and key employees. • Changes in interest rates and monetary policy may negatively affect our earnings, income and financial condition, as well as the value of our assets. • We are subject to physical and financial risks associated with climate change impacts. o Risks Related to Our Operations • We face risks related to our operational, technological, and organizational infrastructure. • System failure or breaches of our network security, including as a result of cyber-attacks or data security breaches, could subject us to increased operating costs, litigation, and other liabilities. • We rely on third parties to provide key components of our business infrastructure. • We could be subject to losses, regulatory action, or reputational harm due to fraudulent and negligent acts on the part of loan applicants, our employees, and vendors. • We are subject to claims and litigation pertaining to intellectual property. • We may be adversely affected by the lack of soundness of other financial institutions and market participants. • Our risk management framework may not be effective in mitigating risks and/or losses to us. • Demand for the Company’s services is influenced by general economic and consumer trends. • Our results may suffer if we do not effectively manage our expanded operations, including complying with any enhanced regulatory requirements. o Risks Related to Our Regulatory Environment • Our industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations. • We are subject to stringent capital requirements, which could have an adverse effect on our operations. 23 Table of Contents • We face a risk of noncompliance and enforcement action with the BSA and other anti-money laundering statutes and regulations. • We are subject to laws regarding the privacy, information security, and protection of personal information. • Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention. • Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability. • Evolving expectations from customers, regulators, investors, and other stakeholders with respect to Environmental, Social, and Governance (“ESG”) practices may impose additional costs on us or expose us to new or additional risks. o Risks Related to an Investment in Our Common Stock • We currently qualify as an “emerging growth company”, and the reduced disclosures and relief from certain other significant disclosure requirements that are available to emerging growth companies may make our Common Stock less attractive to investors. • If we fail to design, implement, and maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud. • We may issue additional equity securities, or engage in other transactions, which could affect the priority of our Common Stock, which may adversely affect the market price of our Common Stock. • An investment in our Common Stock is not an insured deposit and is not guaranteed by the FDIC. • Holders of our junior subordinated debentures and preferred stock have rights that are senior to those of our common stockholders. • Our Bylaws designate the United States District Court for the Eastern District of Virginia, Alexandria Division, or in the event that court lacks jurisdiction, the Circuit Court of the City of Alexandria, Virginia, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which may not be enforced and could discourage lawsuits against us and our directors and officers. 24 Table of Contents Risk Related to Our Lending Activities We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.
Our methodology for the determination of the adequacy of the allowance for credit losses is set forth in Note 4 — Allowance for Credit Losses of the accompanying Consolidated Financial Statements. Additionally, federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for credit losses.
Our methodology for the determination of the adequacy of the allowance for credit losses is set forth in Note 4 — Allowance for Credit Losses in the accompanying Consolidated Financial Statements. Additionally, federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for credit losses.
Banking 27 Table of Contents regulatory authorities typically give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement enhanced risk management practices, including stricter underwriting, internal controls, risk management policies, more granular reporting, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposure.
Banking regulatory authorities typically give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement enhanced risk management practices, including stricter 27 Table of Contents underwriting, internal controls, risk management policies, more granular reporting, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposure.
Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, or supervisory action, may have a material impact on our operations. The earnings of the Bank, and therefore the earnings of the Company, are affected by changes in federal and state legislation and actions of various regulatory authorities.
Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, or supervisory action, may have a material impact on our operations. The earnings of the Bank, and therefore the earnings of the Company, are affected by changes in federal and state legislation and the actions of various regulatory authorities.
Additionally, if economic conditions in the area deteriorate, or there is volatility or weakness in the economy or any significant sector of the economy in our markets, our ability to develop our business relationships may be diminished, the quality and collectability of our loans may be adversely affected, our provision for credit losses may increase, the value of collateral may decline, and loan demand may be reduced.
Additionally, if economic conditions in our market area deteriorate, or there is volatility or weakness in the economy or any significant sector of the economy in our markets, our ability to develop our business relationships may be diminished, the quality and collectability of our loans may be adversely affected, our provision for credit losses may increase, the value of collateral may decline, and loan demand may be reduced.
However, loan demand may exceed the rate at which we are able to build core deposits for which there is substantial competition from a variety of different competitors, so we may rely on interest-sensitive deposits, including brokered deposits, as sources of funds.
However, loan demand may exceed the rate at which we are able to build core deposits for which there is substantial competition from a variety of different competitors, so we may rely on more interest-sensitive deposits, including brokered deposits, as sources of funds.
We are an “emerging growth company,” as defined in the federal securities laws, and we intend to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies.
We are an “emerging growth company,” as defined in the federal securities laws, and we intend to continue to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies.
As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors or that such vendors have not 40 Table of Contents performed adequately, we could be subject to administrative penalties or fines as well as requirements for consumer remediation, any of which could have a material adverse effect on our business, financial condition, and results of operations.
As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors or that such vendors have not 39 Table of Contents performed adequately, we could be subject to administrative penalties or fines as well as requirements for consumer remediation, any of which could have a material adverse effect on our business, financial condition, and results of operations.
Should we lose our “well capitalized” status, these restrictions could materially and adversely affect our ability to access lower costs funds, and thereby decrease our future earnings capacity. 31 Table of Contents Risks Related to Our Business, Industry and Markets We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers.
Should we lose our “well capitalized” status, these restrictions could materially and adversely affect our ability to access lower costs funds, and thereby decrease our future earnings capacity. 30 Table of Contents Risks Related to Our Business, Industry and Markets We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers.
Our risk management framework is governed by various committees, including the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Enterprise Risk Management Committee, the Credit Risk Management Committee, the Asset/Liability Committee, the Trust & Wealth Management Committee, and the Regulatory Risk Committee.
Our risk management framework is governed by various committees, including the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Enterprise Risk Management Committee, the Credit Risk Management Committee, the Asset and Liability Management Committee, the Trust & Wealth Management Committee, the Technology Committee, and the Regulatory Risk Committee.
The BSA, the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports, such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money 39 Table of Contents laundering requirements.
The BSA, the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports, such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money 38 Table of Contents laundering requirements.
Loss from e-fraud occurs when cybercriminals extract funds directly from our customer accounts. Attempts to breach sensitive customer data, 35 Table of Contents such as account numbers and social security numbers, present significant reputational, legal, and/or regulatory costs to us, if successful.
Loss from e-fraud occurs when cybercriminals extract funds directly from our customer accounts. Attempts to breach sensitive customer data, 34 Table of Contents such as account numbers and social security numbers, present significant reputational, legal, and/or regulatory costs to us, if successful.
The plaintiffs in these actions frequently seek injunctions and substantial damages. 36 Table of Contents Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted litigation.
The plaintiffs in these actions frequently seek injunctions and substantial damages. 35 Table of Contents Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted litigation.
If we need to make significant and unanticipated increases in the loss allowance in the future, or to take additional charge- 25 Table of Contents offs for which we have not established adequate reserves, our business, financial condition, and results of operations could be adversely affected at that time.
If we need to make significant and unanticipated increases in the loss allowance in the future, or to take additional charge-offs for which we have not established adequate reserves, our business, financial condition, and results of operations could be adversely affected at that time.
These higher credit risks are further heightened when the loans are concentrated in a small number of larger borrowers leading to relationship exposure. As of December 31, 2023, we had 17 relationships that each had over $25 million of outstanding borrowings.
These higher credit risks are further heightened when the loans are concentrated in a small number of larger borrowers leading to relationship exposure. As of December 31, 2024, we had 31 relationships that each had over $25 million of outstanding borrowings.
Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.
Many of our competitors 31 Table of Contents have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.
There is no precise method of predicting credit losses, and therefore, we always face the risk that losses in future periods will exceed our allowance for credit losses and that we would need to make additional provisions to our allowance for credit losses.
There is no precise method of predicting credit losses, and therefore, we always face the risk that losses in future periods will exceed our allowance for credit losses and that we would need to make additional provisions to our allowance for credit losses, which would reduce our earnings.
Failure to keep pace successfully with technological change affecting the financial 32 Table of Contents services industry could harm our ability to compete effectively and could have an adverse effect on our business, financial condition, and results of operations.
Failure to keep pace successfully with technological change affecting the financial services industry could harm our ability to compete effectively and could have an adverse effect on our business, financial condition, and results of operations.
The continuing corporation may also face increased scrutiny from governmental authorities as a result of the increased size of its business, including if the total assets of the continuing corporation grow to exceed $10 billion as of December 31 of any calendar year.
The Company may face increased scrutiny from governmental authorities as a result of the size of its business, including if the total assets of the Company grow to exceed $10 billion as of December 31 of any calendar year.
See “Recent Accounting Pronouncements” under Note 1 — Nature of Business Activities and Significant Accounting Policies of this Form 10-K, for further information regarding the implementation of CECL. If our non-performing assets increase, our earnings will be adversely affected. At December 31, 2023, we had $3.7 million in non-performing assets.
See “Recent Accounting Pronouncements” under Note 1 — Nature of Business Activities and Significant Accounting Policies of this Form 10-K, for further information regarding the implementation of CECL. If our non-performing assets increase, our earnings will be adversely affected. At December 31, 2024, we had $41.2 million in non-performing assets.
These regulatory agencies may require us to increase our provision for credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours.
These regulatory agencies may require us to increase our provision for credit 25 Table of Contents losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours.
Under the “source of strength” doctrine that was codified by the Dodd-Frank Act, the Federal Reserve may require a bank holding company to make capital injections into a subsidiary bank at times when the bank holding company may not be inclined to do so and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank.
Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a subsidiary bank at times when the bank holding company may not be inclined to do so and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank.
Such regulation and supervision govern the activities in which we and the Bank may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of our Common Stock. Various consumer compliance laws also affect our operations.
Such regulation, supervision, and examination govern the activities in which we and the Bank may engage and are intended primarily for the protection of the depositors and borrowers of the Bank, the financial system, and the DIF rather than for holders of our Common Stock. Various consumer compliance laws also affect our operations.
Banks with $10 billion or more in total assets are, among other things: examined directly by the CFPB with respect to various federal consumer financial laws; subject to reduced dividends on any holdings of Federal Reserve Bank of Richmond common stock; subject to limits on interchange fees pursuant to the Durbin amendment to the Dodd-Frank Act; subject to certain enhanced prudential standards; no longer treated as a “small institution” for FDIC deposit insurance assessment purposes; and no longer eligible to elect to be subject to the “community bank leverage ratio”.
Banks with $10 billion or more in total assets are, among other things: examined directly by the CFPB with respect to various federal consumer financial laws; subject to reduced dividends on any holdings of Federal Reserve Bank of Richmond common stock; subject to limits on interchange fees pursuant to Section 920 of the Electronic Funds Transfer Act (known as the Durbin Amendment); subject to certain enhanced prudential standards; no longer treated as a “small institution” for FDIC deposit insurance assessment purposes; and no longer eligible to elect to be subject to the CBLR.
If Burke & Herbert and Summit are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, Burke & Herbert and Summit could face disruptions in their operations, loss of existing customers, loss of key information, expertise, or know-how, and unanticipated additional recruitment costs.
If the Company is unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, the Company could face disruptions in its operations, loss of existing customers, loss of key information, expertise, or know-how, and unanticipated additional recruitment costs.
Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer would result in limitations on an institution’s ability to make capital distributions and discretionary bonus payments.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer would result in limitations on an institution’s ability to make capital distributions and discretionary bonus payments.
Factors that could detrimentally affect our access to liquidity sources may be beyond our control and include, among other things, market disruptions, changes in our credit ratings or the sentiment of our investors, the state of the regulatory environment and monetary and fiscal policies, competitive dynamics, reputational damage, the confidence of depositors in us or the financial-services industry, generally, a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, and an adverse regulatory action against us.
Factors that could detrimentally affect our access to liquidity sources may be beyond our control and include, among other things, market disruptions, changes in our credit ratings, lack of sufficient qualifying collateral to support borrowings, competitive dynamics, reputational damage, the confidence of depositors in us or the financial-services industry, generally, a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, and an adverse regulatory action against us.
Not being able to attract deposits, or to retain or replace them as they mature, would adversely affect our liquidity. Paying higher deposit rates to attract, retain, or replace those deposits could have a negative effect on our net interest margin and operating results. Loss of deposits or a change in deposit mix could increase our cost of funding.
Not being able to attract deposits, or to retain or replace them as they mature, would adversely affect our liquidity. Paying higher deposit rates to attract, retain, or replace those deposits could have a negative effect on our net interest margin and operating results.
Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, results of operations, and financial condition. 44 Table of Contents Risks Relating to the Consummation of the Merger and Burke & Herbert Following the Merger We expect to incur substantial costs related to the merger and integration.
Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, results of operations, and financial condition. 43 Table of Contents
As of December 31, 2023, the following loan types accounted for the stated percentages of our loan portfolio: commercial real estate – 62.7%; owner-occupied commercial real estate – 6.3%; commercial and industrial – 3.2%; and acquisition, construction & development – 2.4%. These types of loans also involve larger loan balances to a single borrower or groups of related borrowers.
As of December 31, 2024, the following loan types accounted for the stated percentages of our loan portfolio: commercial real estate – 46.5%; owner-occupied commercial real estate – 10.8%; commercial and industrial – 10.8%; and acquisition, construction & development – 8.2%. These types of loans also involve larger loan balances to a single borrower or groups of related borrowers.
Investor advocacy groups, investment funds, and influential investors are increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues.
Investor advocacy groups, investment funds, and influential investors are increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues, with various stakeholders advocating both for and against such policies.
Their use also affects interest rates charged on loans or paid on deposits. 33 Table of Contents Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates.
Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits.
Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank 32 Table of Contents deposits.
These concentrations expose us to the risk that adverse developments in the real estate market, or in the general economic conditions in such areas, or the continuation of such adverse developments, could increase the levels of non-performing loans and charge-offs, and reduce loan demand and deposit growth. In that event, we would likely experience lower earnings or losses.
A substantial portion of our loans are secured by real estate. These concentrations expose us to the risk that adverse developments in the real estate market, or in the general economic conditions in such areas, or the continuation of such adverse developments, could increase the levels of non-performing loans and charge-offs, and reduce loan demand and deposit growth.
Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets, rising interest rates, the possibility of the U.S. government defaulting on its debt, or negative views and expectations about the prospects for the financial services industry.
Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets, increased inflation, tariffs or other disruptions to global trade, trade agreements or supply chains, rising interest rates, the state of the regulatory environment and monetary and fiscal policies, the possibility of the U.S. government defaulting on its debt, or negative views and expectations about the prospects for the financial services industry or the global economy more broadly.
We attempt to maintain an appropriate allowance for credit losses to provide for our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. As of December 31, 2023, the allowance for credit losses was $25.3 million or 1.21% of total gross loans.
We attempt to maintain an appropriate allowance for credit losses to provide for our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
We are subject to extensive regulation, supervision, and examination by the Federal Reserve, our primary federal regulator, the Virginia BFI, our chartering authority, and the FDIC, as insurer of our deposits.
Both the Company and the Bank are subject to extensive regulation, supervision, and examination by the Federal Reserve, our primary federal regulator and the Virginia BFI, our chartering authority. The Bank is also subject to certain regulations of the FDIC, the insurer of the Bank’s deposits.
Moreover, the federal banking regulators are increasingly focused on the physical and financial risks to financial institutions associated with climate change, which may result in increased requirements regarding the disclosure and management of climate risks and related lending activities, as well as increased compliance costs. 34 Table of Contents Risks Related to Our Operations We face risks related to our operational, technological, and organizational infrastructure.
Moreover, over the past few years, federal banking regulators increasingly focused on the physical and financial risks to financial institutions associated with climate change, which may result in increased requirements regarding the disclosure and management of climate risks and related lending activities, as well as increased compliance costs.
If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of our OREO, if any, and our allowance for credit losses may not reflect accurate loan impairments.
If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of our OREO, if any, and our allowance for credit losses may not reflect accurate loan impairments. Inaccurate valuation of OREO or inaccurate provisioning for credit losses could have an adverse effect on our business, financial condition, and results of operations.
The Company did not have any OREO as of December 31, 2023. 29 Table of Contents Risk Related to Funding and Liquidity Liquidity risk could impair our ability to fund operations and meet our obligations as they become due. Liquidity is essential to our business.
The Company’s OREO amounted to $2.8 million as of December 31, 2024. 28 Table of Contents Risk Related to Funding and Liquidity Liquidity risk could impair our ability to fund operations and meet our obligations as they become due. Liquidity is essential to our business.
Increased scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to Environmental, Social, and Governance (“ESG”) practices may impose additional costs on us or expose us to new or additional risks.
Evolving expectations from customers, regulators, investors, and other stakeholders with respect to Environmental, Social, and Governance (“ESG”) practices may impose additional costs on us or expose us to new or additional risks. As a regulated financial institution listed on a national exchange, we face evolving scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure.
Sales of substantial amounts of our Common Stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our Common Stock.
Our Board may determine from time to time, that we need to raise additional capital by issuing additional shares of our Common Stock or other securities. Sales of substantial amounts of our Common Stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our Common Stock.
There can be no assurance that our business and corresponding financial performance will not be adversely affected by general economic or consumer trends or events, including those affecting the financial services industry, in general, as well as pandemics, public health crises, weather catastrophes, acts of terrorism, war, and political instability.
There can be no assurance that our business and corresponding financial performance will not be adversely affected by general economic or consumer trends or events, including those affecting the financial services industry.
As of December 31, 2023, acquisition, construction & development loans were 11.1% of our total risk-based capital, and commercial real estate, including owner-occupied loans, were 325.6% of our total risk-based capital. Commercial real estate loans, including acquisition, construction & development and owner-occupied loans, have increased 19.7% during the prior 36 months.
As of December 31, 2024, acquisition, construction & development loans were 50.6% of our total risk-based capital, and commercial real estate, including owner-occupied loans, were 353.6% of our total risk-based capital. Commercial real estate loans, including acquisition, construction & development and owner-occupied loans, have increased 193.5% during the prior 36 months, mostly due to the Merger.
If, as a result, some investors find our Common Stock less attractive, there may be a less active trading market for our Common Stock, which could result in reductions and greater volatility in the prices of our Common Stock. The obligations associated with being a public company require significant resources and management attention, which may divert from our business operations.
If, as a result, some investors find our Common Stock less attractive, there may be a less active trading market for our Common Stock, which could result in reductions and greater volatility in the prices of our Common Stock.
Holders of our Common Stock are not entitled to preemptive rights or other protections against dilution. 43 Table of Contents An investment in our Common Stock is not an insured deposit and is not guaranteed by the FDIC, so you could lose some or all of your investment.
An investment in our Common Stock is not an insured deposit and is not guaranteed by the FDIC, so you could lose some or all of your investment.
Our 10 largest borrowing relationships accounted for approximately 22.4% of our total loans at December 31, 2023. Our largest single borrowing relationship accounted for approximately 3.0% of our total loans at December 31, 2023.
Our 10 largest borrowing relationships accounted for approximately 8.8% of our total loans at December 31, 2024. Our largest single borrowing relationship accounted for approximately 1.2% of our total loans at December 31, 2024.
ESG-related costs, including costs with respect to compliance with any additional regulatory or disclosure requirements or expectations, could adversely impact our results of operations. 41 Table of Contents Risks Related to an Investment in Our Common Stock We currently qualify as an “emerging growth company”, and the reduced disclosures and relief from certain other significant disclosure requirements that are available to emerging growth companies may make our Common Stock less attractive to investors.
Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain customers and business partners, and stock price. 40 Table of Contents Risks Related to an Investment in Our Common Stock We currently qualify as an “emerging growth company”, and the reduced disclosures and relief from certain other significant disclosure requirements that are available to emerging growth companies may make our Common Stock less attractive to investors.
Our Bylaws designate the United States District Court for the Eastern District of Virginia, Alexandria Division, or in the event that court lacks jurisdiction, the Circuit Court of the City of Alexandria, Virginia, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which may not be enforced and could discourage lawsuits against us and our directors and officers.
While the regular dividends payable on such preferred stock are non-cumulative, we are not permitted to pay dividends on or repurchase our common stock to the extent we do not pay dividends on such preferred stock for each applicable dividend period. 42 Table of Contents Our Bylaws designate the United States District Court for the Eastern District of Virginia, Alexandria Division, or in the event that court lacks jurisdiction, the Circuit Court of the City of Alexandria, Virginia, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which may not be enforced and could discourage lawsuits against us and our directors and officers.
Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our Common Stock, or both.
Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our Common Stock, or both. Holders of our Common Stock are not entitled to preemptive rights or other protections against dilution.
If such conditions continue, recur or worsen, this may have a material adverse effect on the Company’s business, financial condition, and results of operations. Furthermore, such economic conditions have produced downward pressure on share prices and on the availability of credit for financial institutions and corporations, while also driving up interest rates, further complicating borrowing and lending activities.
Furthermore, such economic conditions have produced downward pressure on 36 Table of Contents share prices and on the availability of credit for financial institutions and corporations, while also driving up interest rates, further complicating borrowing and lending activities.
In a rising interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates.
In a rising interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates. In 2024, the Federal Reserve’s interest rate policy shifted as inflationary pressure began to ease and economic growth moderated.
When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. 42 Table of Contents If we fail to design, implement and maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.
If we fail to design, implement and maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.
We may issue additional equity securities, or engage in other transactions, which could affect the priority of our Common Stock, which may adversely affect the market price of our Common Stock.
If we have deficiencies in our disclosure controls and procedures or internal control over financial reporting, such deficiencies may adversely affect us. 41 Table of Contents We may issue additional equity securities, or engage in other transactions, which could affect the priority of our Common Stock, which may adversely affect the market price of our Common Stock.
Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, and the incurrence of significant expenses, which could have a significant adverse effect on Burke & Herbert’s financial condition or results of operations.
Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, and the incurrence of significant expenses, which could have a significant adverse effect on the Company’s financial condition or results of operations. 37 Table of Contents Risks Related to our Regulatory Environment Our industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.
In lieu of a Chief Risk Officer, the Chief Credit Officer, the Executive Vice President for Enterprise Risk, and the Chief Financial Officer have primary responsibility for credit risk, enterprise risk, including regulatory risk, and asset and liability management risk, respectively, with each directly reporting to the Chief Executive Officer.
The Chief Risk Officer has oversight responsibility for credit risk, enterprise risk, including regulatory risk, and asset and liability management risk, directly reporting to the Chief Executive Officer.
Depending on the interest rate environment and competitive factors, low-cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. Limits on our ability to use brokered deposits as part of our funding strategy may affect our profitability.
Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources. Depending on the interest rate environment and competitive factors, low-cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income.
If current levels of market disruption and volatility continue or increase, the Company might experience reductions in business activity, increases in funding costs, decreases in asset values, additional write-downs and impairment charges, and lower profitability. 38 Table of Contents Risks Related to our Regulatory Environment Our industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.
If current levels of market disruption and volatility continue or increase, the Company might experience reductions in business activity, increases in funding costs, decreases in asset values, additional write-downs and impairment charges, and lower profitability. Our results may suffer if we do not effectively manage our expanded operations, including complying with any enhanced regulatory requirements.
If our merger with Summit is completed before June 30, 2024, as expected, we anticipate that we would no longer qualify as an emerging growth company. Investors and securities analysts may find it more difficult to evaluate our Common Stock because we rely on one or more of these exemptions.
Investors and securities analysts may find it more difficult to evaluate our Common Stock because we rely on one or more of these exemptions.
“Well capitalized” banks are permitted to accept brokered deposits, but all banks that are not well capitalized could be restricted from accepting such deposits.
As of December 31, 2024, brokered deposits represented approximately 3.8% of our total deposits. Banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. “Well capitalized” banks are permitted to accept brokered deposits, but all banks that are not well capitalized could 29 Table of Contents be restricted from accepting such deposits.
A “brokered deposit” is any deposit that is obtained from, or through the mediation or assistance of, a deposit broker. These deposit brokers attract deposits from individuals and companies throughout the country and internationally whose deposit decisions are based almost exclusively on obtaining the highest interest rates.
These deposit brokers attract deposits from individuals and companies throughout the country and internationally whose deposit decisions are based almost exclusively on obtaining the highest interest rates. We have used brokered deposits in the past, and we may continue to use brokered deposits as one of our funding sources to support future growth.
Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal control over financial reporting, such deficiencies may adversely affect us.
Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud.
The continuing corporation may be unable to retain Burke & Herbert and/or Summit personnel successfully after the merger is completed. The success of the merger will depend, in part, on our ability to retain the talents and dedication of key employees currently employed by Burke & Herbert and Summit.
Our ability to execute on our strategy will also depend, in part, on our ability to retain the talents and dedication of key employees currently employed by the Company. It is possible that these employees may decide not to remain with the Company.
While the Company did not experience significant unusual deposit withdrawals related to these events in early 2023, we cannot be assured that similar unusual deposit withdrawal activity will not affect banks, generally, or us in the future. Among other sources of funds, we rely heavily on deposits for funds to make loans and provide for our other liquidity needs.
Among other sources of funds, we rely heavily on deposits for funds to make loans and provide for our other liquidity needs.
Deposits are generally a low-cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources.
As of December 31, 2024, approximately 29.6% of our deposits were uninsured and we rely on these deposits for liquidity. Loss of deposits or a change in deposit mix could increase our cost of funding. Deposits are generally a low-cost and stable source of funding. We compete with banks and other financial institutions for deposits.
As a result, if you acquire our Common Stock, you could lose some or all of your investment.
As a result, if you acquire our Common Stock, you could lose some or all of your investment. Holders of our junior subordinated debentures and preferred stock have rights that are senior to those of our common stockholders. We have three statutory business trusts for which we became sponsors in connection with the Merger.
Hence, borrowers under credit agreements, letters of credit and certain other financial instruments with any financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder. Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Removed
We make loans primarily to borrowers in the Washington, D.C. MSA, focusing on the Virginia counties of Arlington, Fairfax, Loudoun and Prince William and the independent cities located within those counties, and Washington, D.C., and its Maryland suburbs. A substantial portion of our loans are secured by real estate.
Added
As of December 31, 2024, the allowance for credit losses was $68.0 million or 1.20% of total gross loans; however, there is no guarantee that it will be sufficient to address credit losses.
Removed
Inaccurate 28 Table of Contents valuation of OREO or inaccurate provisioning for credit losses could have an adverse effect on our business, financial condition, and results of operations.
Added
In that event, we would likely experience lower earnings or losses.
Removed
For example, in March 2023, two large financial institutions were closed and entered into FDIC receivership in part due to significant deposit withdrawals, which resulted in further significant deposit withdrawals at certain other financial institutions.
Added
Furthermore, as we and other banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed “too big to fail” or to remove deposits from the banking system entirely.
Removed
We have used brokered deposits in the past, and we may continue to use brokered deposits as one of our funding sources to support future growth. As of December 31, 2023, brokered deposits represented approximately 13.0% of our total deposits. Banks may be restricted in their ability to accept brokered deposits, depending on their capital classification.
Added
Limits on our ability to use brokered deposits as part of our funding strategy may affect our profitability. A “brokered deposit” is any deposit that is obtained from, or through the mediation or assistance of, a deposit broker.
Removed
The FDIC may, on a case-by-case basis, permit banks that are adequately 30 Table of Contents capitalized to accept brokered deposits, if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank.
Added
These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. Until recently, we were in a rising rate environment.
Removed
See “Risks Relating to the Consummation of the Merger and Burke & Herbert Following the Merger” in this Item 1A — Risk Factors for additional information regarding the risks related to our pending merger with Summit.
Added
Following a period of aggressive rate hikes in 2022 and 2023 aimed at curbing inflation, the Federal Reserve began lowering rates in 2024, with the Federal Funds target rate ranging from 5.25% to 5.5% at year-end 2023, compared to its range of 4.25% to 4.50% at year end 2024.
Removed
In an interest rate environment such as the one we experienced in 2023, loan origination and refinancing activity may decline and the rate of interest we pay on our interest-bearing deposits, borrowings, and other liabilities may increase more quickly than the rate of interest we receive on loans, securities, and other earning assets.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeWith the increase in cyber-threat vectors and enhanced focus on 51 Table of Contents cybersecurity, the Company and the Bank continue to monitor legislative, regulatory, and supervisory developments related thereto. 52 Table of Contents
Biggest changeHowever, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. With the increase in cyber-threat vectors and enhanced focus on cybersecurity, the Company and the Bank continue to monitor legislative, regulatory, and supervisory developments related thereto. 46 Table of Contents
Through these committees the Company keeps abreast of significant matters of actual, threatened, or potential breaches of cybersecurity protocols, monitors the effectiveness of the information security program through regular review of key metrics and assessment reports, discusses topical events requiring consideration, and if necessary, recommends changes to the Information Security Policy for approval by the Company’s Board, which retains the ultimate responsibility for overseeing our enterprise risk management, including cybersecurity.
Through these committees the Company keeps abreast of significant matters of actual, threatened, or potential breaches of cybersecurity protocols, monitors the effectiveness of the 45 Table of Contents information security program through regular review of key metrics and assessment reports, discusses topical events requiring consideration, and if necessary, recommends changes to the Information Security Policy for approval by the Company’s Board, which retains the ultimate responsibility for overseeing our enterprise risk management, including cybersecurity.
As part of these processes, we engage well-established and professional third-party information security consultants to aid in the assessment and development of our monitoring and threat-detection processes and work with our internal teams. All employees receive security training upon hiring, annual refresher training for all employees, and phishing exercises to raise employee awareness.
As part of these processes, we engage well-established and professional third-party information security consultants to aid in the assessment and development of our monitoring and threat-detection processes and work with our internal information technology and audit teams. Additionally, all employees receive security training upon hiring, annual refresher training for all employees, and phishing exercises to raise employee awareness.
Information security protocols are a part of the Company’s Information Security Policy that is reviewed and approved annually by the Company’s Board. The ongoing oversight of cybersecurity risk is accomplished primarily through the Information Technology Steering Committee, comprised of management, the Regulatory Risk Committee, and the Enterprise Risk Management Committee, both comprised of management and members of the Board.
The ongoing oversight of cybersecurity risk is accomplished primarily through the Information Technology Steering Committee, comprised of management, the Regulatory Risk Committee, Technology Committee and the Enterprise Risk Management Committee, each comprised of management and members of the Board.
Removed
To date, we have not experienced a material cyber-attack that would require such reporting, though there can be no guarantee that such will not occur in the future, and any such attack could have a negative effect on our business and results of operations.
Added
To date, we have not experienced cybersecurity incidents that we believe has, or is reasonably likely to, materially affect our business operations, strategy, or financial condition. However, we continually assess the potential impact of cybersecurity threats, ensuring that any incident is evaluated for materiality in relation to our business strategy, operational results, and financial condition.
Added
Our cybersecurity program is led by our Chief Information Security Officer who has served in this capacity for 8 years and brings an additional 16 years of experience in information security program management, global cybersecurity operations and incident response. This experience extends to the strategic design, implementation, and management of security programs tailored to mitigate risks.
Added
His expertise is underscored by a Certified Information Systems Security Professional (CISSP) and multiple technology certifications. Information security protocols are a part of the Company’s Information Security Policy that is reviewed and approved annually by the Company’s Board.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties The Company is headquartered in Alexandria, Virginia, and conducts business through its headquarters, corporate center, and operational offices, twenty-three full-service bank branches, and four loan production offices. We own fourteen of our twenty-three full-service branches. The Company owns its principal executive office at 100 S.
Biggest changeItem 2. Properties The Company is headquartered in Alexandria, Virginia, and conducts business through its headquarters, corporate center, operational offices, full-service bank branches, and loan production offices. The Company owns its principal executive office at 100 S. Fairfax Street, Alexandria, VA, and its corporate center located at 5680 King Centre Drive in Alexandria, Virginia.
We believe that our current facilities and planned relocation are adequate to meet our present and foreseeable needs, subject to possible future expansion. For each property that we lease, we believe that upon expiration of the lease we will be able to extend the lease on satisfactory terms or relocate to another acceptable location. 53 Table of Contents
For each property that we lease, we believe that upon expiration of the lease we will be able to extend the lease on satisfactory terms or relocate to another acceptable location. 47 Table of Contents
Removed
Fairfax Street, Alexandria, VA, and its corporate center located at 5680 King Centre Drive in Alexandria, Virginia.
Added
We also maintain executive offices and a key operations center in Moorefield, West Virginia to support bank-wide operations across our market footprint.
Removed
We own or lease other premises for use in conducting our business activities, including bank branches, an operations center, and offices in Alexandria, Annandale, Arlington, Ashburn, Burke, Centreville, Falls Church, Fredericksburg, Manassas, McLean, Loudoun County, Richmond, Springfield, Vienna, Woodbridge Counties, VA, and in Bethesda, MD.
Added
At December 31, 2024, the Company operated seventy-seven branches in the five states as follows: Number of Branch Offices Office Locations by State Owned Leased Total Virginia 24 13 37 West Virginia 25 4 29 Maryland 5 4 9 Delaware — 1 1 Kentucky — 1 1 Total 54 23 77 We believe that our current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeAlthough the ultimate outcome of 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. 54 Table of Contents
Biggest changeAlthough the ultimate outcome of 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. 48 Table of Contents

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

6 edited+1 added−0 removed3 unchanged
Biggest changeOn January 26, 2024, the Company announced a cash dividend of $0.53 per share on the Company’s outstanding Common Stock, payable on March 1, 2024, to shareholders of record as of February 15, 2024. Holders of our Common Stock are only entitled to receive dividends when, as, and if declared by the Board out of funds legally available for dividends.
Biggest changeHolders of our Common Stock are only entitled to receive dividends when, as, and if declared by the Board out of funds legally available for dividends.
The cumulative total shareholder return assumes a $100 investment, on December 31, 2018, in the common stock of the Company, and each index and the cumulative return is measured as of each subsequent fiscal year-end.
The cumulative total shareholder return assumes a $100 investment, on December 31, 2019, in the common stock of the Company, and each index and the cumulative return is measured as of each subsequent fiscal year-end.
Performance Graph Set forth below is a line graph comparing the cumulative total return of Burke & Herbert’s common stock assuming reinvestment of dividends, with that of the NASDAQ Composite Total Return Index and the Keefe, Bruyette & Woods Regional Banking Total Return Index for the five-year period, ending December 31, 2023.
Performance Graph Set forth below is a line graph comparing the cumulative total return of the Company’s Common Stock assuming reinvestment of dividends, with that of the Nasdaq Composite Total Return Index and the Keefe, Bruyette & Woods Regional Banking Total Return Index for the five-year period, ending December 31, 2024.
There is no assurance that the Company’s common stock performance will continue in the future with the same or similar trends as depicted in the graph. 56 Table of Contents For the Year Ended 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Burke & Herbert Financial Services Corp. 100.00 77.48 60.52 81.01 107.26 98.65 NASDAQ Composite Total Return Index 100.00 136.69 198.09 242.03 163.27 236.15 Keefe, Bruyette & Woods Regional Banking Total Return Index 100.00 123.82 113.04 154.46 143.76 143.18 The Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Burke & Herbert specifically incorporates it by reference into such filing. 57 Table of Contents Item 6.
There is no assurance that the Company’s common stock performance will continue in the future with the same or similar trends as depicted in the graph. 50 Table of Contents For the Year Ended 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 Burke & Herbert Financial Services Corp. 100.00 78.11 104.56 138.44 127.32 130.55 NASDAQ Composite Total Return Index 100.00 144.92 177.06 119.44 172.76 223.85 Keefe, Bruyette & Woods Regional Banking Total Return Index 100.00 91.29 124.74 116.10 115.64 130.90 The Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing. 51 Table of Contents Item 6.
As of March 21, 2024, the Company had 7,440,025 shares of Common Stock outstanding and there were 207 holders of record of our common stock. Dividends There are no restrictions in the Company’s corporate articles on its ability to pay dividends. The Company has historically paid cash dividends to its shareholders and expects to pay comparable dividends in the future.
As of March 10, 2025, the Company had 14,982,655 shares of Common Stock outstanding and there were 1,189 holders of record of our common stock. Dividends There are no restrictions in the Company’s corporate articles on its ability to pay dividends.
Purchases of Equity Securities by the Issuer There were no repurchases of our common stock during the three months ended December 31, 2023.
Purchases of Equity Securities by the Issuer During the years ended December 31, 2024 and 2023, we had no active share repurchase programs.
Added
The Company has historically paid quarterly cash dividends to its shareholders and expects to pay comparable dividends in the future. On January 24, 2025, the Company announced a cash dividend of $0.55 per share on the Company’s outstanding Common Stock, payable on March 3, 2025, to shareholders of record as of February 14, 2025.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

1 edited+2 added−0 removed0 unchanged
Biggest changeItem 6. (Reserved) 58 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 59 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 87 Item 8. Financial Statements and Supplementary Data 89 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 149 Item 9A. Controls and Procedures 150
Biggest changeItem 6. (Reserved) 52 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 53 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 80 Item 8. Financial Statements and Supplementary Data 82 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 150 Item 9A. Controls and Procedures 151 Item 9B.
Added
Other Information 152 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 153 Part III. Item 10. Directors, Executive Officers, and Corporate Governance 154 Item 11. Executive Compensation 155 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 156 Item 13. Certain Relationships and Related Transactions, and Director Independence 157 Item 14.
Added
Principal Accounting Fees and Services 158 Part IV. Item 15. Exhibi t s and Financial Statement Schedules 159

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

29 edited+167 added−8 removed28 unchanged
Biggest changeIn addition, each share of Summit series 2021 preferred stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive one share of a newly created series of Burke & Herbert preferred stock having rights, preferences, privileges, and voting powers, and limitations, and restrictions, thereof, that are not materially less or more favorable to the holders of the Summit series 2021 preferred stock.
Biggest changeThe total aggregate consideration payable in the Merger was approximately 7,405,772 shares of the Company 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 newly created Burke & Herbert Series 2021 Preferred Stock.
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 Credit Risk Management team provides management and the Board 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 model methodology used for funded credits, along with taking into consideration the probability of drawdowns or funding om 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 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 qualitative factors applied at December 31, 2023, 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.
The qualitative factors applied at December 31, 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.
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 the 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.
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 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.
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.
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 Consolidated Financial Statements of the Company for additional information.
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.
Management reviews supplemental data sources including historical net charge-off rates and data measuring other specific credit 56 Table of Contents outcomes from its systems of record in supporting qualitative factors. However, qualitative factor evaluations are inherently imprecise and require significant management judgement.
Based on management’s analysis, adjustments may be applied 61 Table of Contents 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.
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.
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, reversion, and post-reversion forecasts.
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 55 Table of Contents supportable, reversion, and post-reversion forecasts.
These estimates, assumptions, and judgments affect the amounts reported in the financial 60 Table of Contents 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.
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.
Actual results may differ materially from those contained in these forward-looking statements. 59 Table of Contents 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.
Actual results may differ materially from those contained in these forward-looking statements. 53 Table of Contents Overview Burke & Herbert Financial Services Corp. was organized as a Virginia corporation in 2022 to serve as the holding company for Burke & Herbert Bank & Trust Company.
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 December 31, 2023, we had total consolidated assets of $3.6 billion, gross loans of $2.1 billion, total deposits of $3.0 billion, and total shareholders’ equity of $314.8 million.
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 December 31, 2024, we had total consolidated assets of $7.8 billion, gross loans of $5.7 billion, total deposits of $6.5 billion, and total shareholders’ equity of $730.2 million.
Item 7. 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 our consolidated financial statements and notes thereto presented in I tem 8. Financial Statement s and Supplementa ry Data .
Item 7. 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 our consolidated financial statements and notes thereto presented in Item 8. Financial Statements and Supplementary Data .
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.
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 Item 1A, under the caption “Risk Factors” .
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 (in thousands).
The tables below present the Company’s commercial real estate, owner-occupied commercial real estate, and acquisition, construction & development portfolios by collateral type and geographic location as of December 31, 2024 (in thousands).
Additionally, the Bank’s overall exposure to the “Office” collateral type is 14.0% of total commercial real estate loans, including owner-occupied commercial real estate and acquisition, construction & development.
Additionally, the Bank’s overall exposure to the “Office Building/Condo” collateral type is 16.4% of total commercial real estate loans, including owner-occupied commercial real estate and acquisition, construction & development.
The majority of the Bank’s commercial real estate loans are in Virginia (approximately 63.8%) and within the Greater Washington, DC MSA area, and it does not have significant exposure to any economic areas of the country that are underperforming the national economy.
The majority of the Company’s commercial real estate loans are in Virginia (approximately 46.7%), and it does not have significant exposure to any economic areas of the country that are underperforming the national economy.
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.
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.
The Bank’s exposure to commercial real estate at December 31, 2023, was $1.3 billion or 62.7% 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 December 31, 2023, was 36.2%, not including owner-occupied commercial real estate and acquisition, construction & development.
The Bank’s exposure to commercial real estate at December 31, 2024, was $2.6 billion or 46.5% of its gross loan portfolio, not including owner-occupied commercial real estate and acquisition, construction & development.
As a financial holding company, the Company is subject to regulation and supervision by the Federal Reserve. The Company 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.
In September 2023, the Company elected to become a financial holding company under the BHCA. As a financial holding company of a Virginia state bank, the Company is subject to regulation, supervision, and examination by the Federal Reserve and the Virginia BFI. The Bank is a Virginia chartered commercial bank that commenced operations in 1852.
The Company 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 the Company. In September 2023, the Company elected financial holding company status.
The Company became a bank holding company when it commenced operations on October 1, 2022, following a reorganization transaction in which it acquired control of the Bank under the BHCA. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. The Company has no material operations other than owning the Bank.
Loan balances by portfolio segment amortized cost (in thousands) and by percentage of our total gross loan portfolio at December 31, 2023, were as follows: December 31, 2023 Amortized Cost Percentage Commercial real estate $ 1,309,084 62.7 % Owner-occupied commercial real estate 131,381 6.3 Acquisition, construction & development 49,091 2.4 Commercial & industrial 67,847 3.2 Single family residential (1-4 units) 527,980 25.3 Consumer non-real estate and other 2,373 0.1 Total gross loans $ 2,087,756 100.0 % Monitoring of the CRE concentration is performed at both the loan level and at the portfolio level.
Loan balances by portfolio segment amortized cost (in thousands) and by percentage of our total gross loan portfolio at December 31, 2024, were as follows: December 31, 2024 Amortized Cost Percentage Commercial real estate $ 2,637,802 46.5 % Owner-occupied commercial real estate 614,362 10.8 Acquisition, construction & development 465,537 8.2 Commercial & industrial 613,085 10.8 Single family residential (1-4 units) 1,173,749 20.7 Consumer non-real estate and other 167,701 3.0 Total gross loans $ 5,672,236 100.0 % Monitoring of the CRE concentration is performed at both the loan level and at the portfolio level.
As of December 31, 2023, we had 400 full-time employees. None of our employees are covered by a collective bargaining agreement. Pending Merger with Summit Financial Group, Inc.
As of December 31, 2024, we had 815 full-time equivalent employees. None of our employees are covered by a collective bargaining agreement. Merger with Summit Financial Group, Inc. Effective on the Closing Date, the Company completed the M erger with Summit, pursuant to the August 24, 2023 Merger Agreement.
In the merger, Summit shareholders will receive 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they own (the “exchange ratio”), subject to the payment of cash in lieu of fractional shares.
In the Merger, holders of Summit common stock outstanding at the effective time of the Merger received 0.5043 shares of the Company Common Stock for each share of Summit common stock they owned, subject to the payment of cash in lieu of fractional shares.
Including owner-occupied commercial real estate and acquisition, construction & development, total exposure was $1.5 billion or 71.4% of our total gross loans and 41.2% of total assets at December 31, 2023.
Commercial real estate as a percent of total assets at December 31, 2024, was 33.8%, not including owner-occupied commercial real estate and acquisition, construction & development. 57 Table of Contents Including owner-occupied commercial real estate and acquisition, construction & development, total exposure was $3.7 billion or 65.5% of our total gross loans and 47.7% of total assets at December 31, 2024.
The merger is expected to close in the second quarter of 2024, subject to regulatory approvals and certain other customary closing conditions. The impact of this transaction, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 Operations.
Critical Accounting Policies and Estimates Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) 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.
The impact of this transaction, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. 54 Table of Contents Critical Accounting Policies and Estimates Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the industry in which we operate.
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. 62 Table of Contents Current Economic Environment in the Financial Services Industry Commercial Real Estate Concerns 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.
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.
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 continues to monitor its commercial real estate portfolio by reviewing various credit risk and concentration reports. However, in late 2024 interest rates began falling, and in January 2025 the U.S. president signed an executive order requiring all federal employees to return to offices on a five day a week basis.
Removed
The Bank offers a full range of business and personal financial solutions designed to meet customers’ banking, borrowing, and investment needs and has over 20 branches throughout the Northern Virginia region and commercial loan offices in Fredericksburg, Loudoun County, and Richmond, Virginia, and in Bethesda, Maryland.
Added
The Bank became a member of the Federal Reserve System on December 31, 2024. The Bank is subject to regulation, supervision, and examination by the Federal Reserve (through the Federal Reserve Bank of Richmond) and the Virginia BFI.
Removed
On August 24, 2023, the Company and Summit Financial Group, Inc., entered into a merger agreement pursuant to which Summit will merge with and into Burke & Herbert, with Burke & Herbert as the continuing corporation.
Added
The Bank’s primary market area includes northern Virginia and West Virginia, and it has over 77 branches and 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.
Removed
Immediately following the merger, Summit Community Bank, Inc., a West Virginia banking corporation and a wholly-owned direct subsidiary of Summit, will merge with and into the Bank, with the Bank as the continuing bank.
Added
Pursuant to the Merger Agreement, on the Closing Date, (i) Summit merged with and into the Company, with the Company as the surviving entity and (ii) immediately following the Merger, SCB merged with and into the Bank, with the Bank as the surviving bank.
Removed
On December 6, 2023, the Company and Summit, Inc. announced that at special meetings of their respective shareholders held on December 6, 2023, Burke & Herbert and Summit shareholders each approved the merger of Summit with and into Burke & Herbert, pursuant to the merger agreement.
Added
Summit’s results of operations are included from the Closing Date forward.
Removed
Commercial Real Estate by Collateral Type and Geographic Location VA MD DC Other Total Percentage Retail Real Estate $ 189,214 $ 115,863 $ 29,742 $ 4,964 $ 339,783 26.0 % Industrial/Warehouse 190,210 23,406 — — 213,616 16.3 Multi-Family 124,415 19,462 50,597 906 195,380 14.9 Office Buildings/Condos 125,978 36,297 24,725 — 187,000 14.3 Hotels/Motels 36,577 40,139 53,179 13,876 143,771 11.0 Self-Storage 59,685 — — — 59,685 4.6 Nursing-Assisted Living 38,375 — — — 38,375 2.9 Restaurants 19,066 7,545 10,738 867 38,216 2.9 Gas Stations 7,483 1,693 14,953 — 24,129 1.8 Other 25,989 12,219 30,921 — 69,129 5.3 Total $ 816,992 $ 256,624 $ 214,855 $ 20,613 $ 1,309,084 100.0 % 63 Table of Contents Owner-Occupied Commercial Real Estate by Collateral Type and Geographic Location VA MD DC Other Total Percentage Industrial/Warehouse $ 39,131 $ 602 $ — $ 5,971 $ 45,704 34.8 % Office Buildings/Condos 20,965 606 635 — 22,206 16.9 Churches/Religious Organizations 20,126 1,267 246 — 21,639 16.5 Retail 10,296 — 139 — 10,435 7.9 Private School 7,670 — — — 7,670 5.8 Gas Stations 5,353 1,096 — — 6,449 4.9 Restaurants 2,275 177 — — 2,452 1.9 Other 13,761 690 375 — 14,826 11.3 Total $ 119,577 $ 4,438 $ 1,395 $ 5,971 $ 131,381 100.0 % Acquisition, Construction & Development by Collateral Type and Geographic Location VA MD DC Other Total Percentage Multi-Family $ — $ — $ 11,205 $ 11,171 $ 22,376 45.5 % Industrial/Warehouse — 11,335 — — 11,335 23.1 Land 7,056 1,150 — — 8,206 16.7 Residential For-Sale 3,711 — — — 3,711 7.6 Other 3,463 — — — 3,463 7.1 Total $ 14,230 $ 12,485 $ 11,205 $ 11,171 $ 49,091 100.0 % CRE loans are monitored through various processes that include payment monitoring, financial reporting, and covenant compliance monitoring, and annual reviews for larger relationships.
Added
To prepare financial statements in conformity with GAAP, management makes estimates, assumptions, and judgments based on available information.
Removed
For further discussion see Item 1A, under the caption “Risk Factors” . 64 Table of Contents 2023 Banking Failures and Ensuing 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.
Added
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.
Removed
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; • 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.
Added
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 purchased credit deteriorated (“PCD”) loans is recognized within acquisition accounting.
Removed
For further discussion see Item 1A, under the caption “Risk Factors” . The measures taken followed meetings convened by a subcommittee provided for in our Asset/Liability policy more fully described in
Added
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.
Added
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.
Added
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.
Added
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.
Added
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.
Added
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.
Added
Examples of such items include loans, deposits, identifiable intangible assets, and certain other assets and liabilities.
Added
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.
Added
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.
Added
Additionally, several large private-sector employers instituted similar return to office mandates in 2024. Given our concentration in the Washington, D.C.
Added
MSA we would expect that the federal return to office mandate, combined with mandates at private sector employers and decreases interest rates could help the region’s struggling CRE market; however, we cannot be certain that this would be the case or the degree to which such mandates may improve the CRE picture in 2025, if at all.
Added
Commercial Real Estate by Collateral Type and Geographic Location VA WV MD DC Other Total Percentage Retail Real Estate $ 279,620 $ 78,356 $ 127,684 $ 39,395 $ 52,692 $ 577,747 22.0 % Multi-Family 234,278 108,721 41,989 80,839 26,097 491,924 18.6 Office Buildings/Condos 184,346 36,268 119,032 28,511 30,174 398,331 15.1 Hotels/Motels 131,070 48,409 67,318 51,515 77,121 375,433 14.2 Industrial/Warehouse 232,820 9,274 20,538 — — 262,632 10.0 Self-Storage 67,214 24,902 1,471 — 31,085 124,672 4.7 Nursing-Assisted Living 63,239 26,250 6,195 — 37,162 132,846 5.0 Restaurants 16,142 1,887 7,517 6,972 7,911 40,429 1.5 Gas Stations 7,323 1,646 2,074 14,667 2,644 28,354 1.1 Other 130,730 5,173 13,156 43,537 12,838 205,434 7.8 Total $ 1,346,782 $ 340,886 $ 406,974 $ 265,436 $ 277,724 $ 2,637,802 100.0 % 58 Table of Contents Owner-Occupied Commercial Real Estate by Collateral Type and Geographic Location VA WV MD DC Other Total Percentage Office Buildings/Condos $ 68,349 $ 34,002 $ 19,520 $ 635 $ 7,872 $ 130,378 21.2 % Retail 43,918 39,084 14,218 — 24,402 121,622 19.8 Industrial/Warehouse 47,221 15,370 1,310 — 18,226 82,127 13.4 Gas Stations 30,800 10,362 5,170 — 23,033 69,365 11.3 Restaurants 7,234 8,069 3,561 — 11,259 30,123 4.9 Churches/Religious Organizations 21,173 8,517 1,334 236 3,329 34,589 5.6 Coal, oil, gas, and natural resource extraction 677 10,176 — — 118 10,971 1.8 Private School 7,453 — — — — 7,453 1.2 Other 49,183 19,734 44,585 347 13,885 127,734 20.8 Total $ 276,008 $ 145,314 $ 89,698 $ 1,218 $ 102,124 $ 614,362 100.0 % Acquisition, Construction & Development by Collateral Type and Geographic Location VA WV MD DC Other Total Percentage Multi-Family $ 6,228 $ 2,912 $ 7,708 $ 52,950 $ 71,216 $ 141,014 30.3 % Land 61,376 25,071 10,970 — 7,305 104,722 22.5 Office Buildings/Condos 11,904 — — 28,967 41,099 81,970 17.6 Self-Storage 9,161 569 22,823 — 22,548 55,101 11.8 Retail Real Estate 14,216 2,804 10,723 — 2,474 30,217 6.5 Residential For-Sale 2,603 5,192 1,123 2,641 471 12,030 2.6 Other 5,548 5,967 14,360 — 14,608 40,483 8.7 Total $ 111,036 $ 42,515 $ 67,707 $ 84,558 $ 159,721 $ 465,537 100.0 % CRE loans are monitored through various processes that include payment monitoring, financial reporting, and covenant compliance monitoring, and annual reviews for larger relationships.
Added
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.
Added
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 59 Table of Contents withdraw funds or borrowers requiring funds to meet their credit needs.
Added
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.
Added
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.
Added
These analyses are performed on a quarterly basis in conjunction with the Company’s Asset/Liability meetings, and findings are reported to the Asset and Liability Management 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.
Added
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.
Added
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.
Added
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.
Added
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.
Added
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.
Added
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.
Added
The primary source of liquidity for the Company is dividends paid by the Bank. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank.
Added
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.
Added
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. See Note 7 — Borrowed Funds and Note 14 — Commitments and Contingencies , in Notes to Consolidated Financial Statements for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.
Added
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.
Added
Applicable capital rules under the Basel III Framework 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.
Added
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 60 Table of Contents 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.
Added
The Basel III Framework 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.
Added
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.
Added
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.
Added
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.
Added
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.
Added
As of December 31, 2024, and December 31, 2023, the Bank complied with all regulatory capital standards and qualifies as “well capitalized”. Note 12 — Regulatory Capital Matters in Notes to the Consolidated Financial Statements contains additional discussion and analysis regarding the Company and the Bank’s regulatory capital requirements.
Added
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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+1 added−157 removed20 unchanged
Biggest changeOur 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.
Biggest changeWe monitor the impact of changes in interest rates on net interest income using several tools. 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.
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 December 31, 2023, and December 31, 2022.
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 December 31, 2024, and December 31, 2023.
The Company manages interest rate sensitivity by changing the mix, pricing, and re-pricing characteristics of its assets 87 Table of Contents and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms, and through wholesale funding.
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, 80 Table of Contents and through wholesale funding.
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.
Item 7A. 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.
As of December 31, 2023 As of December 31, 2022 Change in Interest Rates (in Basis Points) Percentage Change in Net Interest Income Percentage Change in Net Interest Income 300 0.8 % (9.2) % 200 0.9 (6.2) 100 1.2 (3.0) (100) (1.0) (2.0) (200) (0.8) (5.8) Economic Value of Equity Analysis (“EVE”).
As of December 31, 2024 As of December 31, 2023 Change in Interest Rates (in Basis Points) Percentage Change in Earnings Percentage Change in Earnings 200 (2.1) % 0.9 % 100 (0.7) 1.2 (100) 0.5 (1.0) (200) 0.5 (0.8) (300) 0.5 (0.3) Economic Value of Equity Analysis (“EVE”).
As of December 31, 2023 As of December 31, 2022 Change in Interest Rates (in Basis Points) Percentage Change in EVE Percentage Change in EVE 300 (16.7) % (15.8) % 200 (12.1) (10.5) 100 (5.8) (4.7) (100) 2.3 0.1 (200) 1.7 (3.2) 88 Table of Contents
As of December 31, 2024 As of December 31, 2023 Change in Interest Rates (in Basis Points) Percentage Change in EVE Percentage Change in EVE 200 (8.7) % (12.1) % 100 (3.6) (5.8) (100) 1.9 2.3 (200) 0.5 1.7 (300) (3.4) (1.8) 81 Table of Contents
Removed
Item 7A. — Quantitative and Qualitative Disclosures About Market Risk .
Added
We rely primarily on our asset-liability structure to control interest rate risk.
Removed
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.
Removed
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 12 — Regulatory Capital Matters . The Company intends to continue conducting such stress tests on a periodic basis.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
Other short-term investments available to the Company that 65 Table of Contents 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.
Removed
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.
Removed
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.
Removed
The primary source of liquidity for the Company is dividends paid by the Bank. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank.
Removed
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.
Removed
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. See Note 7 — Advances and Other Borrowings and Note 14 — Commitments and Contingencies , in Notes to Consolidated Financial Statements for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.
Removed
Capital Management 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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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. 66 Table of Contents As of December 31, 2023, and December 31, 2022, the Bank complied with all regulatory capital standards and qualifies as “well capitalized”.
Removed
Note 12 — Regulatory Capital Matters in Notes to the Consolidated Financial Statements contains additional discussion and analysis regarding the Company and the Bank’s regulatory capital requirements.
Removed
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.
Removed
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.
Removed
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 fluctuations on net interest income.
Removed
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.
Removed
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.
Removed
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 67 Table of Contents • The ability to execute our strategic objectives, including completing our pending merger with Summit, 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.
Removed
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 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.
Removed
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, • 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, • The possibility that the Summit merger will not close when expected, or at all, because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis, or at all, and • Our ability to eventually and 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.
Removed
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 Operations.
Removed
For additional information on the risks we face, see Item 1A. — Risk Factors . 68 Table of Contents Selected Financial Data The following table sets forth selected historical consolidated financial information for each of the periods indicated.
Removed
This information should be read together with Management’s Discussion and Analysis of Financial Condition and Results of Operations , below, and with the accompanying consolidated financial statements included in this Form 10-K.
Removed
The historical information indicated as of and for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, has been derived from the Company’s audited consolidated financial statements for the years ended December 31, 2023, December 31, 2022, and December 31, 2021.
Removed
Historical results set forth below and elsewhere in this Form 10-K are not necessarily indicative of future performance.
Removed
As of December 31, (In thousands, except ratios, share, and per share data) 2023 2022 2021 Selected Financial Condition Data: Total assets $ 3,617,579 $ 3,562,898 $ 3,621,743 Total cash and cash equivalents 44,498 50,295 77,363 Total investment securities, at fair value 1,248,439 1,371,757 1,605,681 Net loans 2,062,455 1,866,182 1,713,364 Company-owned life insurance 94,159 92,487 91,062 Premises and equipment, net 61,128 53,170 36,875 Total deposits 3,001,881 2,920,400 2,933,417 Advances and other borrowings 272,000 343,100 275,000 Total shareholders’ equity 314,750 273,453 389,627 As of or for the Year Ended December 31, Selected Operating Data: 2023 2022 2021 Interest income $ 146,896 $ 112,633 $ 100,820 Interest expense 53,137 8,941 4,217 Net interest income 93,759 103,692 96,603 Provision for (recapture of) credit losses 214 (7,466) (1,002) Total non-interest income 17,952 17,087 17,251 Total non-interest expenses 86,436 75,946 74,414 Income before income taxes 25,061 52,299 40,442 Income tax expense 2,369 8,286 4,277 Net income 22,692 44,013 36,165 Per Share Data: Average shares of Common Stock outstanding, basic 7,428,042 7,425,088 7,424,405 Average shares of Common Stock outstanding, diluted 7,506,855 7,467,717 7,430,064 Total shares of Common Stock outstanding 7,428,710 7,425,760 7,423,760 Basic net income per share $ 3.05 $ 5.93 $ 4.87 Diluted net income per share 3.02 5.89 4.87 Dividends declared per share 2.12 2.12 2.00 Dividend payout ratio (1) 70.20 % 35.99 % 41.07 % Book value (at period end) $ 42.37 $ 36.82 $ 52.48 69 Table of Contents As of or for the Year Ended December 31, 2023 2022 2021 Performance Ratios: Return on average assets 0.63 % 1.24 % 1.02 % Return on average equity 8.00 14.28 9.35 Interest rate spread (2) 2.23 3.06 2.91 Net interest margin (3) 2.85 3.19 2.97 Efficiency ratio (4) 77.37 62.88 65.36 Capital Ratios: Common equity tier 1 (CET 1) capital to risk-weighted assets (5) 16.85 % 17.97 % 17.59 % Total risk-based capital to risk-weighted assets (5) 17.88 18.88 18.84 Tier 1 capital to risk-weighted assets (5) 16.85 17.97 17.59 Tier 1 capital to average assets (5) 11.31 11.34 10.81 Average equity to average assets (5) 7.90 8.65 10.93 Asset Quality Ratios: Allowance coverage ratio 1.21 % 1.11 % 1.82 % Allowance for credit losses as a percentage of non-performing loans 675.77 382.74 120.75 Net charge-offs to average outstanding loans during the period — 0.18 — Non-performing loans as a percentage of total loans 0.18 0.29 1.50 Non-performing assets as a percentage of total assets 0.10 0.15 0.73 Other Data: Number of full-service branches 23 23 24 Number of full-time equivalent employees 400 411 397 __________________ (1) Dividend payout ratio represents per share dividends declared divided by diluted earnings per share.
Removed
(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.
Removed
(4) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income. (5) Capital ratios are for Burke & Herbert Financial Services Corp. in 2023 and 2022 and Burke & Herbert Bank & Trust Company in 2021.
Removed
See Note 12 — Regulatory Capital Matters in Notes to the December 31, 2023 Consolidated Financial Statements of the Company for additional information. 70 Table of Contents Results of Operations Results of Operations for Years Ended December 31, 2023, and December 31, 2022 General Consolidated net income for the year ended December 31, 2023, was $22.7 million compared to $44.0 million earned during the year ended December 31, 2022.
Removed
The $21.3 million or 48.4% decrease in net income in 2023 compared to 2022 was primarily due to increased funding costs, Nasdaq listing costs, merger-related costs, and the change in provision for credit losses that included a recapture of the allowance for loan losses in the prior year ended December 31, 2022.
Removed
Net interest income totaled $93.8 million for the year ended December 31, 2023, compared to $103.7 million for the year ended December 31, 2022.
Removed
The $9.9 million decrease in net interest income was primarily driven by higher deposit and borrowing interest expense and was partially offset by higher interest income from loan growth as well as increases in interest rates for loans and securities. Savings and time deposits were the primary driver of increased net interest expense due to both volume and rate.
Removed
For the year ended December 31, 2023, the Company recorded credit provision expense of $0.2 million compared to a recapture of provision of $7.5 million for the year ended December 31, 2022.
Removed
For the year ended December 31, 2022, the Company was able to recapture a provision related to the initial uncertainty of the COVID-19 pandemic and the sale of a non-performing loan note. This non-performing loan had a specific reserve prior to the sale of the note.
Removed
For the current period, the adoption of CECL (which requires the Company to estimate provision of credit losses using an expected life-time loss approach versus an incurred model), along with increased loan portfolio balances resulted in a higher credit expense for the year ended December 31, 2023, compared to the year ended December 31, 2022.
Removed
Non-interest income increased by $0.9 million, or 5.1%, to $18.0 million for the year ended December 31, 2023, compared to $17.1 million for the year ended December 31, 2022.
Removed
The increase in non-interest income was primarily due to a $0.5 million increase in other non-interest income, which included an increase in dividend income from FHLB stock, and an increase in fee income from customer swap activity compared to the year ended December 31, 2022.
Removed
The Company also realized lower losses on the sale of securities resulting in an increase of $0.3 million in net gains/(losses) from securities compared to the year ended December 31, 2022. Non-interest expense increased by $10.5 million, or 13.8%, to $86.4 million for the year ended December 31, 2023, compared to $75.9 million for the year ended December 31, 2022.
Removed
The increase was primarily due an increase in pensions and other employee benefit costs of $1.7 million, costs associated with the listing of our common stock on the Nasdaq stock exchange, including the filing of a Form 10 Registration Statement, costs incurred for the pending merger with Summit, and the sale of corporate buildings that lowered non-interest expense by $4.6 million for the year ended December 31, 2022.
Removed
For the year ended December 31, 2023, the Company incurred $3.0 million of legal, consulting, and audit fees related to the announced merger with Summit Financial Group, Inc.
Removed
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.
Removed
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.
Removed
Fluctuations in interest rates as well as changes in the volume and mix of earnings assets and interest-bearing liabilities can impact net interest income and net interest margin.
Removed
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.
Removed
Interest rate risk is managed by monitoring the pricing, maturity, and repricing options of all classes of interest-bearing assets and liabilities. 71 Table of Contents Net interest income totaled $93.8 million for the year ended December 31, 2023, compared to $103.7 million for the year ended December 31, 2022.
Removed
The $9.9 million decrease in net interest income was primarily driven by higher deposit and borrowing interest expense and was partially offset by higher interest income from loan growth as well as increases in interest rates for loans and securities. Interest-bearing deposits were the primary driver of increased net interest expense due to both volume and rate.
Removed
The increase in volume for the interest-bearing deposits was due to the shift from non-interest-bearing deposit accounts to these accounts. The taxable-equivalent net interest margin was 2.85% for the year ended December 31, 2023, compared to 3.19% for the year ended December 31, 2022.
Removed
The decrease in tax-adjusted net interest margin was primarily driven by the increase in market rates that increased the cost of deposits and other borrowings in excess of the increase in interest income from interest-earning assets.
Removed
The yield for the year ended December 31, 2023, for the loan portfolio was 5.07% compared to 4.15% for the year ended December 31, 2022. The increase was primarily the result of new loan production in a rising rate environment.
Removed
For the year ended December 31, 2023, the tax-adjusted yield on the total investment securities portfolio was 3.44% compared to 2.71% for the year ended December 31, 2022. The increase was primarily due to higher market interest rates that increased the effective rate earned on investment securities.
Removed
The rate paid on interest-bearing deposits increased to 1.86% during the year ended December 31, 2023, from 0.19% during the year ended December 31, 2022. The increase was a result of market and economic conditions, which led to an increase in rates paid on selected parts of our deposit portfolio.
Removed
Increases in deposit rates rose at a faster pace due to the increases in the Federal Funds Rate through 2023. The rate paid on our borrowings for the year ended December 31, 2023, was 4.69% compared to 1.93% for the year ended December 31, 2022.
Removed
The increase was due to the increase in short-term borrowing costs, driven by increases in the Federal Funds Rate through 2023. 72 Table of Contents The following table sets forth the major components of net interest income and the related yields and rates for the years ended December 31, 2023, and December 31, 2022, for comparison (dollars in thousands).
Removed
For the Years Ended 2023 2022 Average Outstanding Balance Interest Income/Expense Rate Earned/Paid Average Outstanding Balance Interest Income/Expense Rate Earned/ Paid Assets: Loans, gross (1)(2) $ 2,007,030 $ 101,800 5.07 % $ 1,773,883 $ 73,640 4.15 % Interest-bearing deposits and fed funds sold 52,002 2,302 4.43 42,695 436 1.02 Taxable securities 1,020,707 37,179 3.64 1,149,023 29,616 2.58 Tax-exempt securities (3) 265,608 7,108 2.68 361,671 11,316 3.13 Total securities 1,286,315 44,287 3.44 1,510,694 40,932 2.71 Total interest-earning assets 3,345,347 148,389 4.44 3,327,272 115,008 3.46 Non-interest-earning assets 249,008 234,062 Total assets $ 3,594,355 $ 3,561,334 Liabilities and shareholders’ equity: Deposits: Non-interest-bearing demand $ 878,740 $ 971,618 Interest-bearing demand 544,651 2,312 0.42 % 580,901 202 0.03 % Savings 967,306 15,819 1.64 1,116,941 1,551 0.14 Time 597,796 21,064 3.52 293,418 1,989 0.68 Total interest-bearing deposits 2,109,753 39,195 1.86 1,991,260 3,742 0.19 Total deposits 2,988,493 39,195 1.31 2,962,878 3,742 0.13 Borrowings: FHLB advances and other (4) 297,111 13,942 4.69 269,576 5,199 1.93 Total interest-bearing liabilities 2,406,864 53,137 2.21 2,260,836 8,941 0.40 Non-interest-bearing liabilities 24,949 20,721 Equity 283,802 308,159 Total liabilities and equity $ 3,594,355 $ 3,561,334 Taxable-equivalent net interest income /net interest spread (5) 95,252 2.23 % 106,067 3.06 % Taxable-equivalent net interest margin (6) 2.85 % 3.19 % Taxable-equivalent net adjustment (1,493) (2,375) Net interest income $ 93,759 $ 103,692 Net interest-earning assets $ 938,483 $ 1,066,436 (1) Non-accrual loans are included in average loan balances.
Removed
(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) FHLB Advances and other includes finance lease liabilities.
Removed
(5) 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. (6) The net interest margin represents fully taxable equivalent net interest income as a percent of average interest-earning assets for the period.
Removed
Taxable-equivalent net interest margin, as presented above, is calculated by dividing fully tax-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.
Removed
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.
Removed
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 and 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.

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