Burke & Herbert Financial Services Corp. 10-Q

Item 1. Financial Statements Burke & Herbert Financial Services Corp. Consolidated Financial Statements: Page Consolidated Balance Sheets as of September 30, 2024 (Unaudited), and December 31, 2023 2 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2024, and September 30, 2023 (Unaudited) 3 Consolidated Statements of Comprehensive Income (Loss) for the Three and Nin e Months Ended September 30, 2024, and September 30, 2023 (Unaudited) 4 Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2024, and September 30, 2023 (Unaudited) 5 Consolidated Statements of Cash Flows for the Nine Months Ended Septem ber 30, 2024, and September 30, 2023 (Unaudited) 7 Notes to the Consolidated Financial Statements (Unaudited) 9 1 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Balance Sheets (In thousands, except share and per share data) September 30, 2024 (Unaudited) December 31, 2023 (Audited) Assets Cash and due from banks $ 44,902 $ 8,896 Interest-earning deposits with banks 246,863 35,602 Cash and cash equivalents 291,765 44,498 Securities available-for-sale, at fair value 1,436,431 1,248,439 Restricted stock, at cost 16,832 5,964 Loans held-for-sale, at fair value 4,216 1,497 Loans 5,574,037 2,087,756 Allowance for credit losses ( 67,817 ) ( 25,301 ) Net loans 5,506,220 2,062,455 Premises and equipment, net 134,770 61,128 Other real estate owned 2,576 — Accrued interest receivable 32,791 15,895 Intangible assets 61,598 — Goodwill 32,783 — Company-owned life insurance 182,380 94,159 Other assets 162,551 83,544 Total Assets $ 7,864,913 $ 3,617,579 Liabilities and Shareholders’ Equity Liabilities Non-interest-bearing deposits $ 1,392,123 $ 830,320 Interest-bearing deposits 5,208,702 2,171,561 Total deposits 6,600,825 3,001,881 Short-term borrowings 320,163 272,000 Subordinated debentures, net 93,532 — Subordinated debentures owed to unconsolidated subsidiary trusts 16,950 — Accrued interest and other liabilities 95,384 28,948 Total Liabilities 7,126,854 3,302,829 Commitments and contingent liabilities (see Note 10) Shareholders’ Equity Preferred stock and related surplus, $ 1.00 par value per share; 2,000,000 shares authorized; 1,500 shares issued and outstanding at September 30, 2024; no shares issued and outstanding at December 31, 2023 10,413 — Common Stock 7,767 4,000 $ 0.50 par value; 40,000,000 shares authorized, 15,534,293 shares issued and 14,963,003 shares outstanding at September 30, 2024; 20,000,000 shares authorized, 8,000,000 shares issued and 7,428,710 shares outstanding at December 31, 2023 Common stock, additional paid-in capital 400,377 14,495 Retained earnings 422,844 427,333 Accumulated other comprehensive income (loss) ( 75,758 ) ( 103,494 ) Treasury stock ( 27,584 ) ( 27,584 ) 571,290 shares, at cost, at September 30, 2024, and 571,290 shares, at cost, at December 31, 2023 Total Shareholders’ Equity 738,059 314,750 Total Liabilities and Shareholders’ Equity $ 7,864,913 $ 3,617,579 See Notes to Consolidated Financial Statements. 2 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Income (In thousands, except share and per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest income Taxable loans, including fees $ 103,682 $ 26,425 $ 213,400 $ 74,485 Tax-exempt loans, including fees 48 — 81 — Taxable securities 10,076 8,909 29,949 28,130 Tax-exempt securities 3,135 1,376 7,052 4,243 Other interest income 1,585 562 2,886 1,858 Total interest income 118,526 37,272 253,368 108,716 Interest expense Deposits 39,441 11,277 82,745 26,708 Short-term borrowings 3,080 3,078 10,806 10,495 Subordinated debt 2,798 — 4,658 — Other interest expense 28 28 84 58 Total interest expense 45,347 14,383 98,293 37,261 Net interest income 73,179 22,889 155,075 71,455 Credit loss expense - loans 85 200 19,515 1,034 Credit loss expense (recapture) - off-balance sheet credit exposures 62 35 3,872 ( 70 ) Total provision for credit losses 147 235 23,387 964 Net interest income after credit loss expense 73,032 22,654 131,688 70,491 Non-interest income Fiduciary and wealth management 2,352 1,354 5,982 3,996 Service charges and fees 5,453 1,583 11,147 4,959 Net gains (losses) on securities — ( 1 ) 613 ( 112 ) Income from company-owned life insurance 1,330 589 2,799 1,720 Other non-interest income 1,481 764 3,834 2,565 Total non-interest income 10,616 4,289 24,375 13,128 Non-interest expense Salaries and wages 20,858 9,867 51,271 29,283 Pensions and other employee benefits 4,678 2,242 12,346 7,116 Occupancy 3,412 1,462 7,947 4,464 Equipment rentals, depreciation and maintenance 4,699 1,435 18,643 4,231 Other operating 17,179 7,417 46,216 19,042 Total non-interest expense 50,826 22,423 136,423 64,136 Income before income taxes 32,822 4,520 19,640 19,483 Income tax expense 5,200 464 3,725 1,869 Net income 27,622 4,056 15,915 17,614 Preferred stock dividends 225 — 450 — Net income applicable to common shares $ 27,397 $ 4,056 $ 15,465 $ 17,614 Earnings per common share: Basic $ 1.83 $ 0.55 $ 1.34 $ 2.37 Diluted 1.82 0.55 1.33 2.35 See Notes to Consolidated Financial Statements. 3 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Comprehensive Income (Loss) (In thousands, except share and per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net income $ 27,622 $ 4,056 $ 15,915 $ 17,614 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities: Unrealized gain (loss) arising during period, net of tax of ($ 7,610 ) and $ 5,392 for the three months ended September 30, 2024, and September 30, 2023, respectively, net of tax of ($ 7,714 ) and $ 2,212 for the nine months ended September 30, 2024, and September 30, 2023, respectively 28,628 ( 20,285 ) 29,019 ( 8,322 ) Reclassification adjustment for loss (gain) on securities, net of tax of $ 0 and $ 0 for the three months ended September 30, 2024, and September 30, 2023, respectively, net of tax of $ 129 and ($ 23 ) for the nine months ended September 30, 2024, and September 30, 2023, respectively — — ( 484 ) 88 Reclassification adjustment for loss (gain) on fair value hedge, net of tax of $ 9 and $ 9 for the three months ended September 30, 2024, and September 30, 2023, respectively, net of tax of $ 25 and ($ 224 ) for the nine months ended September 30, 2024, and September 30, 2023, respectively ( 32 ) ( 32 ) ( 95 ) 842 Unrealized gain (loss) on cash flow hedge: Unrealized holding gain (loss) on cash flow hedge, net of tax of $ 816 and $ 10 for the three months ended September 30, 2024, and September 30, 2023, respectively, net of tax of ($ 128 ) and $ 71 for the nine months ended September 30, 2024, and September 30, 2023, respectively ( 3,071 ) ( 38 ) 483 ( 267 ) Reclassification adjustment for losses (gains) included in net income, net of tax $ 227 and ($ 99 ) for the three months ended September 30, 2024, and September 30, 2023, respectively, net of tax of $ 315 and ($ 264 ) for the nine months ended September 30, 2024, and September 30, 2023, respectively ( 853 ) 373 ( 1,187 ) 995 Total other comprehensive income (loss) 24,672 ( 19,982 ) 27,736 ( 6,664 ) Comprehensive income (loss) $ 52,294 $ ( 15,926 ) $ 43,651 $ 10,950 See Notes to Consolidated Financial Statements. 4 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Changes in Shareholders’ Equity For the Three Months Ended September 30, 2024, and 2023 (In thousands, except share and per share data) (Unaudited) Preferred Stock and Surplus Common Stock Retained Earnings Comprehensive Income (Loss) Treasury Stock Shareholders’ Equity Shares Outstanding Amount Additional Paid-in Capital Balance June 30, 2024 $ 10,413 14,932,169 $ 7,752 $ 399,553 $ 403,422 $ ( 100,430 ) $ ( 27,584 ) $ 693,126 Net income — — — — 27,622 — — 27,622 Other comprehensive income (loss) — — — — — 24,672 — 24,672 (Purchase) sale of treasury stock, net — — — — — — — — Common stock cash dividends, declared — — — — ( 7,921 ) — — ( 7,921 ) Preferred stock cash dividends, declared — — — — ( 225 ) — — ( 225 ) Share-based compensation expense, net — 30,834 15 824 ( 54 ) — — 785 Balance September 30, 2024 $ 10,413 14,963,003 $ 7,767 $ 400,377 $ 422,844 $ ( 75,758 ) $ ( 27,584 ) $ 738,059 Balance June 30, 2023 $ — 7,428,710 $ 4,000 $ 13,208 $ 426,625 $ ( 126,177 ) $ ( 27,584 ) $ 290,072 Net income — — — — 4,056 — — 4,056 Other comprehensive income (loss) — — — — — ( 19,982 ) — ( 19,982 ) (Purchase) sale of treasury stock, net — — — — — — — — Common stock cash dividends, declared — — — — ( 3,937 ) — — ( 3,937 ) Share-based compensation expense, net — — — 610 — — — 610 Balance September 30, 2023 $ — 7,428,710 $ 4,000 $ 13,818 $ 426,744 $ ( 146,159 ) $ ( 27,584 ) $ 270,819 See Notes to Consolidated Financial Statements. 5 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Changes in Shareholders’ Equity For the Nine Months Ended September 30, 2024, and 2023 (In thousands, except share and per share data) (Unaudited) Preferred Stock and Surplus Common Stock Retained Earnings Comprehensive Income (Loss) Treasury Stock Shareholders’ Equity Shares Outstanding Amount Additional Paid-in Capital Balance December 31, 2023 $ — 7,428,710 $ 4,000 $ 14,495 $ 427,333 $ ( 103,494 ) $ ( 27,584 ) $ 314,750 Acquisition of Summit Financial Group, Inc. 10,413 7,405,772 3,703 383,329 — — — 397,445 Net income — — — — 15,915 — — 15,915 Other comprehensive income (loss) — — — — — 27,736 — 27,736 (Purchase) sale of treasury stock, net — — — — — — — — Common stock cash dividends, declared — — — — ( 19,729 ) — — ( 19,729 ) Preferred stock cash dividends, declared — — — — ( 450 ) — — ( 450 ) Share-based compensation expense, net — 128,521 64 2,553 ( 225 ) — — 2,392 Balance September 30, 2024 $ 10,413 14,963,003 $ 7,767 $ 400,377 $ 422,844 $ ( 75,758 ) $ ( 27,584 ) $ 738,059 Balance December 31, 2022 $ — 7,425,760 $ 4,000 $ 12,282 $ 424,391 $ ( 139,495 ) $ ( 27,725 ) $ 273,453 Cumulative effect adjustment due to the adoption of CECL, net of tax — — — — ( 3,439 ) — — ( 3,439 ) Net income — — — — 17,614 — — 17,614 Other comprehensive income (loss) — — — — — ( 6,664 ) — ( 6,664 ) (Purchase) sale of treasury stock, net — 2,950 — — — — 141 141 Common stock cash dividends, declared — — — — ( 11,809 ) — — ( 11,809 ) Share-based compensation expense, net — — — 1,536 ( 13 ) — — 1,523 Balance September 30, 2023 $ — 7,428,710 $ 4,000 $ 13,818 $ 426,744 $ ( 146,159 ) $ ( 27,584 ) $ 270,819 See Notes to Consolidated Financial Statements. 6 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Cash Flows (In thousands, except share and per share data) (Unaudited) Nine Months Ended September 30, 2024 2023 Cash Flows from Operating Activities Net Income $ 15,915 $ 17,614 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of fixed assets 4,130 2,050 Amortization of other intangible assets 7,204 — Amortization on assumed liabilities 6,324 — Accretion income related to acquired loans ( 28,836 ) — Amortization of housing tax credits 4,117 4,194 Realized (gain) loss on sales of available-for-sale securities ( 613 ) 112 Realized (gain) on sales of OREO property ( 172 ) — Provision for credit losses 23,387 964 Income from company-owned life insurance ( 2,799 ) ( 1,720 ) Deferred tax (benefit) ( 41,052 ) ( 2,101 ) Loss on disposal of fixed assets 1,167 — Accretion of securities ( 2,743 ) ( 1,210 ) Amortization of securities 7,072 6,922 Share-based compensation expense 2,184 1,798 Repayment of operating lease liabilities ( 2,013 ) ( 2,393 ) (Gain) on loans held-for-sale ( 297 ) ( 79 ) Proceeds from sale of loans held-for-sale 28,002 7,243 Change in fair value of loans held-for-sale 28 6 Originations of loans held-for-sale ( 30,452 ) ( 10,181 ) (Increase) in accrued interest receivable ( 104 ) ( 117 ) (Increase) decrease in other assets ( 43,413 ) 2,904 Increase in accrued interest payable and other liabilities 61,882 6,329 Net cash flows provided by operating activities $ 8,918 $ 32,335 Cash Flows from Investing Activities Proceeds from maturities, prepayments, and calls of securities available-for-sale, net 190,224 76,053 Proceeds from sale of securities available-for-sale, net 365,990 77,780 Purchases of securities available-for-sale, net ( 530,863 ) ( 23,321 ) Cash (paid) from merger, net ( 750 ) — Sales of restricted stock 24,914 27,447 Purchases of restricted stock ( 35,781 ) ( 18,250 ) Purchases of property and equipment, net of disposals ( 4,273 ) ( 6,394 ) (Purchase of) proceeds from company-owned life insurance 2,213 ( 6 ) (Increase) decrease in loans made to customers, net 190,979 ( 183,395 ) Net cash flows provided by (used in) investing activities $ 202,653 $ ( 50,086 ) Cash Flows from Financing Activities Net (decrease) in non-interest-bearing accounts ( 19,833 ) ( 107,307 ) Net increase (decrease) in interest-bearing accounts ( 85,295 ) 172,525 Net increase (decrease) in other short-term borrowings 158,485 ( 44,100 ) Repayment of finance lease liabilities ( 161 ) ( 130 ) Cash dividends paid ( 20,179 ) ( 11,809 ) Proceeds from employee stock purchase program 62 — Issuance of common stock 2,617 — 7 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Cash Flows (In thousands, except share and per share data) (Unaudited) Sale of treasury stock — 141 Net cash flows provided by financing activities $ 35,696 $ 9,320 Increase (decrease) in cash and cash equivalents 247,267 ( 8,431 ) Cash and cash equivalents Beginning of period 44,498 50,295 End of period $ 291,765 $ 41,864 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 78,835 $ 25,454 Interest paid on short-term borrowings 19,157 6,860 Interest paid on subordinated debt and trust preferred securities 4,658 — Interest paid on finance leases 83 58 Income taxes 775 445 Change in unrealized gains on available-for-sale securities 36,265 ( 10,422 ) Lease liability arising from obtaining right-of-use assets 11,130 1,214 Common stock issued for merger, net 387,032 — Preferred stock issued for merger, net 10,413 — See Notes to Consolidated Financial Statements. 8 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies Nature of operations Burke & Herbert Financial Services Corp. (“Burke & Herbert”) was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for Burke & Herbert Bank & Trust Company (“the Bank” and, together with Burke & Herbert, the “Company”). Burke & Herbert commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of Burke & Herbert. In September 2023, Burke & Herbert elected to be a financial holding company. As a financial holding company, Burke & Herbert is subject to regulation and supervision by the Federal Reserve. Burke & Herbert has no material operations and owns 100 % of the Bank. The Bank is a Virginia chartered commercial bank that commenced operations in 1852. The Bank is supervised and regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “Virginia BFI”). Merger with Summit Financial Group, Inc. Effective on May 3, 2024 (the “Closing Date”), Burke & Herbert completed its previously announced merger with Summit Financial Group, Inc., a West Virginia corporation (“Summit”), pursuant to the Agreement and Plan of Reorganization and accompanying Plan of Merger dated August 24, 2023, between Burke & Herbert and Summit (the “Merger Agreement”). Below is a description of the nature of the event as of the merger Closing Date. Pursuant to the Merger Agreement, on the Closing Date, (i) Summit merged with and into Burke & Herbert, with Burke & Herbert continuing as the surviving corporation (the “Merger”), and (ii) immediately following the Merger, Summit Community Bank, Inc., a West Virginia chartered bank and a wholly-owned subsidiary of Summit (“SCB”), merged with and into the Bank, with the Bank as the surviving bank. In the Merger, holders of Summit common stock outstanding at the effective time of the Merger received 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they owned, subject to the payment of cash in lieu of fractional shares. The total aggregate consideration payable in the Merger was approximately 7,405,772 shares of Burke & Herbert Common Stock. Additionally, each share of Summit’s 6.0 % Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series 2021 (the “Summit Series 2021 Preferred Stock”) issued and outstanding was converted into the right to receive a share of a newly created series of preferred stock, the Burke & Herbert Series 2021 Preferred Stock (the “Burke & Herbert Series 2021 Preferred Stock”). Summit’s results of operations are included from the Closing Date. The Bank’s primary market area includes northern Virginia and West Virginia, and it has over 75 branches and commercial loan offices across Delaware, Kentucky, Maryland, Virginia, and West Virginia. The Company’s branch locations accept business and consumer deposits from a diverse customer base. The Company’s deposit products include checking, savings, and term certificate accounts. The Company’s loan portfolio includes commercial and consumer loans, a substantial portion of which are secured by real estate. Basis of Presentation The accompanying consolidated financial statements include Burke & Herbert Financial Services Corp. and its wholly owned subsidiary Burke & Herbert Bank & Trust Company and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). The accounting and reporting policies of the Company conform to GAAP and reflect practices of the banking industry. They do not include all of the information and notes required by GAAP for complete financial statements. As such, these unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ending December 31, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2024, and as amended on April 12, 2024. The consolidated financial statements include the accounts of the Company and the Bank (as its wholly-owned subsidiary). All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that 9 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of the results to be expected for any other interim period or for the full year. All December 31, 2023, amounts and disclosures included in this quarterly report were derived from the Company’s audited consolidated financial statements. Certain items in the prior period have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or on shareholders’ equity. Purchased Credit Deteriorated (PCD) Loans The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are loans on nonaccrual status, are greater than 60 days past due at any time since loan origination or have a risk rating of special mention, substandard, doubtful, or loss. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through credit loss expense. Goodwill and Other Intangible Assets Goodwill arises from business combinations and is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed. The Company has selected September 30 as the date to perform the annual impairment test. Intangible assets with finite useful lives are amortized over their estimated useful lives to their estimated residual values. Amortized intangibles must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. An impairment loss related to intangible assets with finite useful lives is recognized if the carrying amount of the intangible asset is not recoverable and its carrying amount exceeds its fair value. After the impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Other intangible assets consists of core deposit intangible assets arising from whole bank and branch acquisitions and is amortized using an accelerated method over their estimated useful lives of seven years . Recently adopted accounting standards In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU was effective for us January 1, 2024, and did not have a material impact on our consolidated financial statements. In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU was effective for us January 1, 2024, and did not have a material impact on our consolidated financial statements. Pending adoption of new accounting standards In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) : Improvements to Income Tax Disclosures . The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide 10 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. We do not expect the adoption of ASU 2023-09 to have a material impact on our consolidated financial statements. In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative . This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We do not expect the adoption of ASU 2023-06 to have a material impact on our consolidated financial statements. Note 2— Securities The carrying amount of available-for-sale (“AFS”) securities and their approximate fair values at September 30, 2024, and December 31, 2023, are summarized as follows (in thousands): September 30, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available-for-Sale U.S. Treasuries and government agencies $ 166,000 $ — $ 13,383 $ 152,617 Obligations of states and municipalities 713,040 3,986 61,380 655,646 Residential mortgage backed - agency 57,563 793 3,590 54,766 Residential mortgage backed - non-agency 285,808 1,613 9,945 277,476 Commercial mortgage backed - agency 34,848 42 840 34,050 Commercial mortgage backed - non-agency 157,569 — 3,875 153,694 Asset-backed 71,073 229 667 70,635 Other 38,401 428 1,282 37,547 Total $ 1,524,302 $ 7,091 $ 94,962 $ 1,436,431 11 Table of Contents Note 2— Securities (continued) December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available-for-Sale U.S. Treasuries and government agencies $ 197,026 $ — $ 17,955 $ 179,071 Obligations of states and municipalities 535,229 21 72,047 463,203 Residential mortgage backed - agency 47,074 — 4,836 42,238 Residential mortgage backed - non-agency 284,826 17 18,812 266,031 Commercial mortgage backed - agency 36,151 28 1,294 34,885 Commercial mortgage backed - non-agency 183,454 — 6,393 177,061 Asset-backed 79,315 23 1,402 77,936 Other 9,500 — 1,486 8,014 Total $ 1,372,575 $ 89 $ 124,225 $ 1,248,439 At September 30, 2024, and December 31, 2023, AFS securities with amortized costs of $ 1.2 billion and $ 826.5 million, respectively, and with estimated fair values of $ 1.1 billion and $ 742.5 million, respectively, were pledged to serve as collateral for secured borrowings, derivative exposures, or to secure public deposits as required or permitted by law. The proceeds from sales, calls, and maturities of debt securities available-for-sale, including principal payments received, and the related gross gains and losses realized, for the nine months ended September 30, 2024, and September 30, 2023, were as follows (in thousands): Proceeds from Gross realized Nine months ended September 30, Sales Calls and maturities Principal Payments Gains Losses 2024 $ 365,990 $ 38,137 $ 152,087 $ 2,637 $ 2,024 2023 77,780 1,427 76,187 772 884 The tax benefit (provision) related to these net realized gains and losses for September 30, 2024, and September 30, 2023, was ($ 128.7 ) thousand, and $ 23.5 thousand, respectively. The maturities of AFS securities at September 30, 2024, were as follows (in thousands): (Expected maturities of securities not due at a single maturity date are based on average life at estimated prepayment speed. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay some obligations with or without call or prepayment penalties). September 30, 2024 Amortized Cost One Year or Less One to Five Years Five to Ten Years After Ten Years Total Securities Available-for-Sale U.S. Treasuries and government agencies $ — $ 166,000 $ — $ — $ 166,000 Obligations of states and municipalities — 145,926 395,005 172,109 713,040 Residential mortgage backed - agency 490 19,427 28,117 9,529 57,563 Residential mortgage backed - non-agency 47,696 78,607 123,102 36,403 285,808 Commercial mortgage backed - agency 32 25,752 9,064 — 34,848 Commercial mortgage backed - non-agency 91,673 60,771 5,125 — 157,569 Asset-backed 5,551 39,747 25,775 — 71,073 Other — 2,741 21,263 14,397 38,401 Total $ 145,442 $ 538,971 $ 607,451 $ 232,438 $ 1,524,302 12 Table of Contents Note 2— Securities (continued) September 30, 2024 Fair Value One Year or Less One to Five Years Five to Ten Years After Ten Years Total Securities Available-for-Sale U.S. Treasuries and government agencies $ — $ 152,617 $ — $ — $ 152,617 Obligations of states and municipalities — 141,900 362,826 150,920 655,646 Residential mortgage backed - agency 513 19,079 24,940 10,234 54,766 Residential mortgage backed - non-agency 47,513 75,542 117,237 37,184 277,476 Commercial mortgage backed - agency 32 25,182 8,836 — 34,050 Commercial mortgage backed - non-agency 90,456 58,876 4,362 — 153,694 Asset-backed 5,528 39,588 25,519 — 70,635 Other — 2,850 20,355 14,342 37,547 Total $ 144,042 $ 515,634 $ 564,075 $ 212,680 $ 1,436,431 At September 30, 2024, and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in any amount greater than 10% of shareholders’ equity. The following table shows the gross unrealized losses and fair value of the Company’s securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2024, and December 31, 2023. AFS securities in a continuous unrealized loss position for less than twelve months and more than twelve months are as follows (in thousands): September 30, 2024 Less Than Twelve Months More Than Twelve Months Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Total Unrealized Losses Securities Available-for-Sale U.S. Treasuries and government agencies $ — $ — $ 152,618 $ 13,383 $ 13,383 Obligations of states and municipalities 14,635 863 456,489 60,517 61,380 Residential mortgage backed - agency — — 43,091 3,590 3,590 Residential mortgage backed - non-agency 11,589 55 163,733 9,890 9,945 Commercial mortgage backed - agency 1,361 32 29,576 808 840 Commercial mortgage backed - non-agency 10,798 105 142,896 3,770 3,875 Asset-backed 15,134 19 33,552 648 667 Other 21,808 131 8,349 1,151 1,282 Total $ 75,325 $ 1,205 $ 1,030,304 $ 93,757 $ 94,962 13 Table of Contents Note 2— Securities (continued) December 31, 2023 Less Than Twelve Months More Than Twelve Months Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Total Unrealized Losses Securities Available-for-Sale U.S. Treasuries and government agencies $ — $ — $ 179,071 $ 17,955 $ 17,955 Obligations of states and municipalities 501 14 458,113 72,033 72,047 Residential mortgage backed - agency 36 — 42,203 4,836 4,836 Residential mortgage backed - non-agency 632 2 263,184 18,810 18,812 Commercial mortgage backed - agency — — 34,080 1,294 1,294 Commercial mortgage backed - non-agency 23,437 254 153,625 6,139 6,393 Asset-backed 3,721 9 56,106 1,393 1,402 Other — — 8,014 1,486 1,486 Total $ 28,327 $ 279 $ 1,194,396 $ 123,946 $ 124,225 The Company is required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance requires the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost, an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis under the current expected credit loss (“CECL”) standard, and declines due to non-credit factors are recorded in accumulated other comprehensive income (“AOCI”), net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in accumulated other comprehensive income, net of taxes, in the consolidated statements of financial condition. Prior to implementation of the CECL standard, unrealized losses caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach. The Company did no t record an ACL on the AFS securities as of September 30, 2024, or December 31, 2023. The Company considers the unrealized losses on the AFS securities to be related to fluctuations in market conditions, primarily interest rates, and not reflective of deterioration in credit. The Company had 383 securities in an unrealized loss position as of September 30, 2024. The Company has evaluated AFS securities in an unrealized loss position for credit-related impairment at September 30, 2024, and concluded no impairment existed based on a combination of factors, which included: (1) the securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) the contractual terms of the investments do not permit the issuer(s) to settle the securities at a price less than the par value of each investment, (4) issuers continue to make timely principal and interest payments, and (5) the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis. As such, there was no ACL on AFS securities at September 30, 2024. Securities of U.S. Treasury and Federal Agencies and Federal Agency Mortgage (Residential and Commercial) Backed Securities At September 30, 2024, the unrealized losses associated with 11 U.S. Treasuries and Government Agency securities, 14 Residential Mortgage Backed – Agency securities, and 14 Commercial Mortgage Backed – Agency securities were generally driven by changes in interest rates and not due to credit losses given the explicit or implicit guarantees provided 14 Table of Contents Note 2— Securities (continued) by the U.S. government. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2024. Securities of U.S. States and Municipalities At September 30, 2024, the unrealized losses associated with 212 State and Municipal securities were primarily caused by changes in interest rates and not the credit quality of the securities. These securities are investment grade and were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of our ongoing impairment analysis but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. As a result, we expect to recover the entire amortized cost basis of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2024. Residential & Commercial Mortgage Backed – Non-Agency Securities At September 30, 2024, the unrealized losses associated with 69 Residential Mortgage Backed – Non-Agency securities and 30 Commercial Mortgage Backed – Non-Agency securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses. We assess for credit impairment by estimating the present value of expected cash flows. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2024. Asset-Backed Securities At September 30, 2024, the unrealized losses associated with 21 Asset-Backed securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses. We assess for credit impairment by estimating the present value of expected cash flows. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2024. Other Securities At September 30, 2024, the unrealized losses associated with 12 securities were primarily driven by interest rates and not the credit quality of the securities. These investments were underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. Based on our assessment of the expected credit losses, we expect to recover the entire amortized cost basis of the securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2024. Restricted stock, at cost The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $ 16.8 million and $ 5.9 million at September 30, 2024, and December 31, 2023, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be impaired at September 30, 2024, and no impairment has been recognized. FHLB stock is included in a separate line item, Restricted stock, at cost on the Consolidated Balance Sheets and is not part of the Company’s AFS securities portfolio. The Company’s Restricted stock line item on the Consolidated Balance Sheets also includes an investment in Community Bankers’ Bank, totaling $ 111 thousand at September 30, 2024, and $ 50 thousand at December 31, 2023, which is carried at cost and is not impaired at September 30, 2024. Note 3— Loans The Company’s loan portfolio segments, as reported in the tables below, include (i) commercial real estate, (ii) owner-occupied commercial real estate, (iii) acquisition, construction & development, (iv) commercial & industrial, (v) single family residential (1-4 units), and (vi) consumer non-real estate and other. The risks associated with lending activities differ 15 Table of Contents Note 3— Loans (continued) among the various loan segments and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. • Commercial real estate loans carry risk associated with either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral. Other risk factors include the credit-worthiness of the sponsor and the value of the collateral. • Owner-occupied commercial real estate loans carry risk associated with the operations of the business that occupies the property and the value of the collateral. • Acquisition, construction & development loans carry risk associated with the credit-worthiness of the borrower, project completion within budget, sale after completion, and the value of the collateral. • Commercial & industrial loans carry the risk associated with the operations of the business and the value of the collateral, if any. • Single family residential (1-4 units) loans for consumer purposes carry risk associated with the continued credit-worthiness of the borrower and the value of the collateral. Single family residential (1-4 units) loans for investment purpose carry risk associated with the continued credit-worthiness of the borrower, the value of the collateral, and either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral. • Consumer non-real estate and other loans, which includes overdrafts, carry risk associated with the credit-worthiness of the borrower and the value of the collateral, if any. Loan balances as of September 30, 2024, and December 31, 2023, by portfolio segment were as follows (in thousands): September 30, 2024 December 31, 2023 Commercial real estate $ 2,526,945 $ 1,309,084 Owner-occupied commercial real estate 637,175 131,381 Acquisition, construction & development 447,449 49,091 Commercial & industrial 562,653 67,847 Single family residential (1-4 units) 1,197,245 527,980 Consumer non-real estate and other 202,570 2,373 Loans, gross 5,574,037 2,087,756 Allowance for credit losses ( 67,817 ) ( 25,301 ) Loans, net $ 5,506,220 $ 2,062,455 Net deferred loan fees included in the above loan categories totaled $ 3.4 million and $ 3.5 million at September 30, 2024, and December 31, 2023, respectively. Note 4— Allowance for Credit Losses On January 1, 2023, the Company adopted the CECL methodology as required under Accounting Standards Codification (“ASC”) 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. All information presented as of September 30, 2024, is in accordance with ASC 326. The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the Consolidated Statement of Income. Management calculates the quantitative portion of collectively evaluated loans for all loan categories using the weighted average remaining maturity (“WARM”) method. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics. Loans that do not share similar risk characteristics are evaluated on an individual loan basis and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on non-accrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans that are 16 Table of Contents Note 4— Allowance for Credit Losses (continued) collectively evaluated on a loan pool basis. A specific reserve analysis may be applied to the individually evaluated loans, which considers collateral value, an observable market price, or the present value of the expected future cash flows. A specific reserve is assigned if the measured value of the loan using one of the before mentioned methods is less than the carrying value of the loan. Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the information that is used to calculate a reasonable and supportable forecast and a reversion period forecast on collectively evaluated loans. Management may consider an additional or reduced reserve as warranted through qualitative risk factors based on the current and expected conditions as measured in supplemental information relative to the macroeconomic variable loss drivers used to calculate a reasonable and supportable forecast and a reversion period forecast. These qualitative risk factors considered by management are largely comparable to legacy factors prior to the adoption of CECL. The following tables present the activity in the ACL for the three months and nine months ended September 30, 2024, and for the three months and nine months ended September 30, 2023, including the impact of the adoption of CECL for the nine months ended September 30, 2023, and the impact of the allowance established for PCD loans for the three months and nine months ended September 30, 2024, (in thousands). Commercial real estate Owner-occupied commercial real estate Acquisition, construction & development Commercial & industrial Single family residential (1-4 units) Consumer non-real estate and other Unallocated Total Three months ended September 30, 2024 Balance, beginning of period $ 27,304 $ 5,040 $ 18,639 $ 4,768 $ 11,648 $ 618 $ — $ 68,017 Provision for (recapture of) credit losses ( 1,516 ) ( 1,073 ) 3,084 425 ( 1,006 ) 171 — 85 Charge-offs — — — ( 32 ) ( 67 ) ( 206 ) — ( 305 ) Recoveries 3 — — 9 1 7 — 20 Balance, end of period $ 25,791 $ 3,967 $ 21,723 $ 5,170 $ 10,576 $ 590 $ — $ 67,817 September 30, 2023 Balance, beginning of period $ 18,639 $ 719 $ 1,319 $ 612 $ 4,520 $ 110 $ — $ 25,919 Provision for (recapture of) credit losses 969 66 446 ( 95 ) ( 1,135 ) ( 51 ) — 200 Charge-offs — — — — — ( 13 ) — ( 13 ) Recoveries 4 — — — 1 — — 5 Balance, end of period $ 19,612 $ 785 $ 1,765 $ 517 $ 3,386 $ 46 $ — $ 26,111 Commercial real estate Owner-occupied commercial real estate Acquisition, construction & development Commercial & industrial Single family residential (1-4 units) Consumer non-real estate and other Unallocated Total Nine months ended September 30, 2024 Balance, beginning of period $ 20,633 $ 783 $ 368 $ 645 $ 2,797 $ 75 $ — $ 25,301 Allowance established for acquired PCD loans 7,503 1,931 5,968 5,684 2,608 216 — 23,910 Provision for (recapture of) credit losses ( 2,145 ) 1,253 15,387 ( 990 ) 5,273 737 — 19,515 Charge-offs ( 210 ) — — ( 178 ) ( 104 ) ( 455 ) — ( 947 ) Recoveries 10 — — 9 2 17 — 38 Balance, end of period $ 25,791 $ 3,967 $ 21,723 $ 5,170 $ 10,576 $ 590 $ — $ 67,817 September 30, 2023 Balance, beginning of period $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039 Impact of adoption CECL 2,686 ( 6 ) ( 640 ) 237 1,661 187 — 4,125 Provision for (recapture of) credit losses 1,414 156 323 ( 129 ) ( 661 ) ( 70 ) — 1,033 Charge-offs — — — ( 29 ) — ( 105 ) — ( 134 ) Recoveries 35 — — — 7 6 — 48 Balance, end of period $ 19,612 $ 785 $ 1,765 $ 517 $ 3,386 $ 46 $ — $ 26,111 17 Table of Contents Note 4— Allowance for Credit Losses (continued) The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. The following table presents the aging of the recorded investment in past due loans as of September 30, 2024, and December 31, 2023, by portfolio segment (in thousands): September 30, 2024 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Loans Total Loans 90 Days Past Due & Still Accruing Non-accrual loans Commercial real estate $ 8,797 $ 86 $ 8,674 $ 17,557 $ 2,509,388 $ 2,526,945 $ — $ 19,967 Owner-occupied commercial real estate 617 3,864 2,349 6,830 630,345 637,175 — 6,233 Acquisition, construction & development 2,812 672 95 3,579 443,870 447,449 — 434 Commercial & industrial 1,352 910 600 2,862 559,791 562,653 — 1,090 Single family residential (1-4 units) 4,633 3,021 1,307 8,961 1,188,284 1,197,245 — 7,392 Consumer non-real estate and other 516 188 659 1,363 201,207 202,570 — 756 Total $ 18,727 $ 8,741 $ 13,684 $ 41,152 $ 5,532,885 $ 5,574,037 $ — $ 35,872 December 31, 2023 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Loans Total Loans 90 Days Past Due & Still Accruing Non-accrual loans Commercial real estate $ 10,496 $ — $ — $ 10,496 $ 1,298,588 $ 1,309,084 $ — $ — Owner-occupied commercial real estate — — 790 790 130,591 131,381 — 1,000 Acquisition, construction & development — — — — 49,091 49,091 — — Commercial & industrial 195 364 — 559 67,288 67,847 — — Single family residential (1-4 units) 1,657 289 1,532 3,478 524,502 527,980 — 2,744 Consumer non-real estate and other 3 — — 3 2,370 2,373 — — Total $ 12,351 $ 653 $ 2,322 $ 15,326 $ 2,072,430 $ 2,087,756 $ — $ 3,744 Credit Quality Indicators The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current economic information, and other factors. The Company analyzes loans individually by classifying the loans by credit risk. The Company internally grades all commercial loans at the time of origination. In addition, the Company performs an annual review on the top twenty-five non-homogenous commercial loan relationships as measured by total Company exposure to each borrower. The Company uses the following definitions for credit risk classifications: Pass : These include satisfactory loans that have acceptable levels of risk. Special Mention : Loans classified as special mention have a potential credit weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard : Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of debt. Loans classified as substandard are inadequately protected by sound net worth, payment capacity of the borrower, or of the collateral pledged. If weaknesses go uncorrected, there is potential for partial loss of principal and/or interest. Doubtful : Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and unlikely. Loss : Loans classified as a loss are considered to be uncollectible and cannot be justified to continue as viable assets. While there may be the possibility of some recovery in the future, it is not practical or desirable to defer writing off these loans at the present time. 18 Table of Contents Note 4— Allowance for Credit Losses (continued) The Company has a portfolio of smaller homogenous loans that are not individually risk rated that are included within the single family residential and consumer non-real estate and other loan classes. Generally, these loan classes are rated as “Pass” unless these loans are on non-accrual and are then classified as substandard. The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of September 30, 2024, and December 31, 2023 (in thousands): September 30, 2024 Term Loans 2024 2023 2022 2021 2020 Prior Revolving Loans Total Commercial real estate Pass $ 91,379 $ 354,858 $ 518,552 $ 344,738 $ 156,431 $ 674,628 $ 57,653 $ 2,198,239 Special Mention — 28,998 37,579 43,964 17,127 41,560 7,369 176,597 Substandard — 2,224 29,827 38,493 9,854 71,530 181 152,109 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 91,379 $ 386,080 $ 585,958 $ 427,195 $ 183,412 $ 787,718 $ 65,203 $ 2,526,945 Year to date gross charge-offs $ — $ — $ — $ — $ — $ 210 $ — $ 210 Owner-occupied commercial real estate Pass $ 47,364 $ 74,592 $ 93,346 $ 141,148 $ 38,464 $ 192,686 $ 17,155 $ 604,755 Special Mention — — — 11,245 2,754 1,288 — 15,287 Substandard — — 5,268 1,496 6,123 3,925 — 16,812 Doubtful — — — — — 321 — 321 Loss — — — — — — — — Total $ 47,364 $ 74,592 $ 98,614 $ 153,889 $ 47,341 $ 198,220 $ 17,155 $ 637,175 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Acquisition, construction & development Pass $ 23,785 $ 95,048 $ 92,504 $ 149,581 $ 4,137 $ 17,807 $ 11,445 $ 394,307 Special Mention — 13,014 — — 144 — — 13,158 Substandard — 79 15,893 3,148 20,458 67 — 39,645 Doubtful — — — — — 339 — 339 Loss — — — — — — — — Total $ 23,785 $ 108,141 $ 108,397 $ 152,729 $ 24,739 $ 18,213 $ 11,445 $ 447,449 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial & industrial Pass $ 88,084 $ 60,177 $ 58,895 $ 31,648 $ 11,848 $ 13,975 $ 245,869 $ 510,496 Special Mention 388 — 18,601 12,603 — — 868 32,460 Substandard 40 296 4,673 1,748 543 1,801 10,596 19,697 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 88,512 $ 60,473 $ 82,169 $ 45,999 $ 12,391 $ 15,776 $ 257,333 $ 562,653 Year to date gross charge-offs $ — $ 10 $ 72 $ 87 $ — $ 9 $ — $ 178 Single family residential (1-4 units) Pass $ 75,618 $ 161,352 $ 218,954 $ 154,757 $ 80,328 $ 360,343 $ 138,285 $ 1,189,637 Special Mention — — — — — 216 — 216 Substandard — 603 899 612 614 4,601 63 7,392 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 75,618 $ 161,955 $ 219,853 $ 155,369 $ 80,942 $ 365,160 $ 138,348 $ 1,197,245 19 Table of Contents Note 4— Allowance for Credit Losses (continued) Year to date gross charge-offs $ — $ 39 $ 28 $ — $ — $ 37 $ — $ 104 Consumer non-real estate and other Pass $ 23,496 $ 15,588 $ 15,710 $ 8,832 $ 8,294 $ 19,369 $ 107,598 $ 198,887 Special Mention — — 1,149 — — — — 1,149 Substandard 275 157 1,410 11 — 647 24 2,524 Doubtful — — — 6 4 — — 10 Loss — — — — — — — — Total $ 23,771 $ 15,745 $ 18,269 $ 8,849 $ 8,298 $ 20,016 $ 107,622 $ 202,570 Year to date gross charge-offs $ 378 $ 39 $ 17 $ 1 $ — $ 20 $ — $ 455 Totals $ 350,429 $ 806,986 $ 1,113,260 $ 944,030 $ 357,123 $ 1,405,103 $ 597,106 $ 5,574,037 December 31, 2023 Term Loans 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial real estate Pass $ 195,857 $ 261,817 $ 166,253 $ 22,791 $ 75,170 $ 416,774 $ 36,761 $ 1,175,423 Special Mention — 12,235 35,449 — 4,876 — — 52,560 Substandard — 15,420 12,847 — 2,209 50,625 — 81,101 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 195,857 $ 289,472 $ 214,549 $ 22,791 $ 82,255 $ 467,399 $ 36,761 $ 1,309,084 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Owner-occupied commercial real estate Pass $ 9,309 $ 31,725 $ 11,229 $ 14,103 $ 10,279 $ 43,616 $ 6,184 $ 126,445 Special Mention — — — — — — — — Substandard — 532 — — — 4,404 — 4,936 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 9,309 $ 32,257 $ 11,229 $ 14,103 $ 10,279 $ 48,020 $ 6,184 $ 131,381 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Acquisition, construction & development Pass $ 8,535 $ 24,286 $ 13,698 $ — $ 728 $ 241 $ 1,603 $ 49,091 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total $ 8,535 $ 24,286 $ 13,698 $ — $ 728 $ 241 $ 1,603 $ 49,091 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial & industrial Pass $ 29,111 $ 15,204 $ 4,344 $ 162 $ 15 $ 1,335 $ 16,854 $ 67,025 Special Mention — — — — — — — — Substandard — — 822 — — — — 822 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 29,111 $ 15,204 $ 5,166 $ 162 $ 15 $ 1,335 $ 16,854 $ 67,847 Year to date gross charge-offs $ — $ — $ — $ 29 $ — $ — $ — $ 29 Single family residential (1-4 units) 20 Table of Contents Note 4— Allowance for Credit Losses (continued) Pass $ 78,222 $ 122,067 $ 60,202 $ 32,158 $ 40,938 $ 137,376 $ 54,273 $ 525,236 Special Mention — — — — — — — — Substandard — — 291 243 — 2,171 39 2,744 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 78,222 $ 122,067 $ 60,493 $ 32,401 $ 40,938 $ 139,547 $ 54,312 $ 527,980 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer non-real estate and other Pass $ 334 $ 150 $ 43 $ 151 $ 386 $ 325 $ 984 $ 2,373 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total $ 334 $ 150 $ 43 $ 151 $ 386 $ 325 $ 984 $ 2,373 Year to date gross charge-offs $ — $ 165 $ — $ — $ — $ — $ — $ 165 Totals $ 321,368 $ 483,436 $ 305,178 $ 69,608 $ 134,601 $ 656,867 $ 116,698 $ 2,087,756 21 Table of Contents Note 4— Allowance for Credit Losses (continued) The following tables present information about collateral-dependent loans that were individually evaluated for purposes of determining the ACL as of September 30, 2024, and December 31, 2023 (in thousands): September 30, 2024 With Allowance With No Related Allowance Total Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance September 30, 2024 Commercial real estate $ 7,994 $ 5,326 $ 12,745 $ 20,739 $ 5,326 Owner-occupied commercial real estate 321 244 2,142 2,463 244 Acquisition, construction & development 576 343 — 576 343 Commercial & industrial — — 356 356 — Single family residential (1-4 units) 907 36 3,453 4,360 36 Consumer non-real estate and other — — — — — Total $ 9,798 $ 5,949 $ 18,696 $ 28,494 $ 5,949 December 31, 2023 With Allowance With No Related Allowance Total Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance December 31, 2023 Commercial real estate $ — $ — $ — $ — $ — Owner-occupied commercial real estate — — 1,000 1,000 — Acquisition, construction & development — — — — — Commercial & industrial — — — — — Single family residential (1-4 units) — — 2,744 2,744 — Consumer non-real estate and other — — — — — Total $ — $ — $ 3,744 $ 3,744 $ — Purchased Credit Deteriorated Loans The Company has purchased loans for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans, at acquisition, is as follows (in thousands): Amounts Purchase price of loans at acquisition $ 380,795 Allowance for credit losses at acquisition 23,910 Non-credit discount/(premium) at acquisition 37,640 Par value of acquired loans at acquisition $ 442,344 Loan Modifications On January 1, 2023, the Company adopted ASU 2022-02 on a modified retrospective basis. ASU 2022-02 eliminates the troubled debt restructuring (“TDR”) accounting model and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty, and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan. This change required all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables — Nonrefundable Fees and Other Costs, and subjects entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction, or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on 22 Table of Contents Note 4— Allowance for Credit Losses (continued) an individual loan. For the three and nine months ended September 30, 2024, and for the year ended, December 31, 2023, the Company did not extend any modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan. Other Real Estate Owned Real estate owned activity was as follows for the nine months ended September 30, 2024, and for the year ended, December 31, 2023 (in thousands): September 30, 2024 December 31, 2023 Beginning balance $ — $ — Loans acquired/transferred to real estate owned 3,334 — Capital expenditures — — Direct write-downs — — Sales of real estate owned ( 758 ) — End of period balance $ 2,576 $ — Note 5— Deposits The aggregate amount of time deposits that meet or exceed the FDIC Insurance Limit of $250,000, was approximately $ 265.1 million and $ 92.3 million on September 30, 2024, and December 31, 2023, respectively. Brokered time deposits, which are fully insured, totaled $ 345.3 million and $ 389.0 million as of September 30, 2024, and December 31, 2023, respectively. Time deposits through the Certificate of Deposit Account Registry Service (“CDARS”) program totaled $ 36.5 million at September 30, 2024, compared to $ 24.2 million at December 31, 2023. At September 30, 2024, the scheduled maturities of time deposits for the remaining three months ending December 31, 2024, the following five years, and for the years thereafter, were as follows (in thousands): As of September 30, 2024 Remaining three months ending, December 31, 2024 $ 450,696 2025 598,419 2026 112,524 2027 60,348 2028 85,382 2029 4,923 Thereafter 4,307 Total $ 1,316,599 At September 30, 2024, and December 31, 2023, amounts included in time deposits for individual retirement accounts totaled $ 121.0 million and $ 28.5 million, respectively. Overdrafts of $ 1.3 million and $ 110 thousand were reclassified to loans as of September 30, 2024, and the year ended December 31, 2023, respectively. Note 6— Borrowed Funds Short-term borrowings The Company had borrowings of $ 320.2 million and $ 272.0 million at September 30, 2024, and December 31, 2023, respectively. At September 30, 2024, the interest rate on this debt ranged from 4.87 % to 4.90 %. At December 31, 2023, the interest rate on this debt ranged from 4.38 % to 5.57 %. The average balance outstanding during the nine months ending September 30, 2024, and the year ending December 31, 2023, was $ 323.5 million and $ 293.9 million, respectively. The Company has a finance lease liability that is not included in these balances - see Note 7 - Leased Property for a discussion of this liability that is included in the accrued interest and other liabilities line in the Consolidated Balance Sheets. 23 Table of Contents Note 6— Borrowed Funds (continued) The Company has available secured lines of credit with the Federal Reserve Bank of Richmond, such as the Borrower-In-Custody program, the FHLB of Atlanta, and unsecured federal funds lines of credit from correspondent banking relationships. Through these sources, the Company has unused capacity of $ 2.4 billion in remaining borrowing capacity as of September 30, 2024. The advances on credit lines are secured by both securities and loans. The lendable collateral value of securities and loans pledged against available lines of credit as of September 30, 2024, and December 31, 2023, was $ 1.1 billion and $ 797.8 million, respectively. As of September 30, 2024, all of the Company’s borrowings will mature within one calendar year. The contractual maturities of these borrowings, which all occur within one year of the reporting date, are as follows as of September 30, 2024, (in thousands): Due in 2024 $ 300,163 Due in 2025 20,000 Total $ 320,163 Long-term borrowings Subordinated Debentures As part of the Merger, Burke & Herbert assumed $ 75 million of subordinated debentures, that were fair valued at $ 61.5 million with a $ 13.5 million discount being amortized into interest expense over the stated maturity. As of September 30, 2024, the net balance was $ 63.7 million. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter, the amount qualifying as Tier 2 capital is reduced 20 % each year until maturity. The subordinated debentures were issued in the fourth quarter of 2021. This subordinated debt bears interest at a fixed rate of 3.25 % per year, from acquisition date to, but excluding, December 1, 2026, payable semi-annually in arrears. From and including, December 1, 2026 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”), as published by the Federal Reserve Bank of New York, plus 230 basis points, payable quarterly in arrears. This debt has a 10 -year term, and generally, is not prepayable by us within the first 5 years from issuance, which was fourth quarter 2021. Through the Merger, Burke & Herbert also assumed $ 30 million of subordinated debentures that were fair valued at $ 29.8 million with a $ 0.2 million discount being amortized into interest expense over the stated maturity. As of September 30, 2024, the net balance was $ 29.8 million. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter, the amount qualifying as Tier 2 capital is reduced by 20 % each year until its maturity. The subordinated debentures were issued in the third quarter of 2020. This subordinated debt bears interest at a fixed rate of 5.00 % per year from the date of assumption to, but excluding, September 30, 2025, payable quarterly in arrears. From and including September 30, 2025, to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 487 basis points, payable quarterly in arrears. This debt has a 10 -year term, and generally, is not prepayable by us within the first 5 years from issuance, which was third quarter 2020. Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts As part of the Merger, Burke & Herbert became the sponsor for SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III. For each of these trusts, 100 % of the common equity is owned by us. SFG Capital Trust I issued $ 3.5 million in capital securities and $ 109 thousand in common securities and invested the proceeds in $ 3.61 million of debentures, which were assumed by Burke & Herbert in the Merger. SFG Capital Trust II issued $ 7.5 million in capital securities and $ 232 thousand in common securities and invested the proceeds in $ 7.73 million of debentures, which were assumed by Burke & Herbert in the Merger. SFG Capital Trust III issued $ 8.0 million in capital securities and $ 248 thousand in common securities and invested the proceeds in $ 8.25 million of debentures, which were assumed by Burke & Herbert in the Merger. Distributions on the capital securities issued by the trusts are payable quarterly at a variable rate equal to 3 month LIBOR plus 345 basis points for SFG Capital Trust I, 3 months of LIBOR plus 280 basis points for SFG Capital Trust II, and 3 month LIBOR plus 145 basis points for SFG Capital Trust III, and equals the interest rate earned on the debentures held by the trusts and is recorded as interest expense by us. The capital securities are subject to mandatory redemption in whole, or in part, upon repayment of the debentures. We have entered into agreements which, taken 24 Table of Contents Note 6— Borrowed Funds (continued) collectively, fully and unconditionally guarantee the capital securities subject to the terms of the guarantee. The debentures of each Capital Trust are redeemable by us quarterly. The capital securities issued by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under the Federal Reserve guidelines. In accordance with these Guidelines, trust preferred securities are limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital. The remaining maturities of subordinated debentures as of September 30, 2024, are as follows (in thousands): Subordinated debentures Subordinated debentures owed to unconsolidated subsidiary trusts Remaining three months ending, December 31, 2024 $ — $ — 2025 — — 2026 — — 2027 — — 2028 — — Thereafter 105,000 19,589 Total $ 105,000 $ 19,589 Note 7— Leased Property Lessor Arrangements The Company enters into operating leases with customers to lease vacant space in certain owned premises that is not being used by the Company. These operating leases are typically payable in monthly installments with terms ranging from around two years to around sixteen years and may contain renewal options. The components of lease income, which was included in non-interest expense on the Consolidated Statements of Income, were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Operating lease income $ 565 $ 576 $ 1,696 $ 1,726 Total lease income $ 565 $ 576 $ 1,696 $ 1,726 The remaining maturities of operating lease receivables as of September 30, 2024, are as follows (in thousands): Operating Leases Remaining three months ending, December 31, 2024 $ 543 2025 2,182 2026 1,936 2027 1,836 2028 1,862 Thereafter 4,732 Total lease receivables $ 13,091 Lessee Arrangements The Company has entered into leases for branches and office space. The leases are evaluated for whether the lease will be classified as either a finance or operating lease. Certain leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. Including renewal options, the terms of the Company’s leases range from less than one year to around thirteen years . The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. 25 Table of Contents Note 7— Leased Property (continued) Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. These cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets. Right-of-use assets and liabilities by lease type, and the associated balance sheet classifications are as follows (in thousands): Balance Sheet Classification September 30, 2024 December 31, 2023 Right-of-use assets: Operating leases Other assets $ 13,826 $ 5,110 Finance leases Other assets 3,383 3,590 Total right-of-use assets $ 17,209 $ 8,700 Lease liabilities: Operating leases Other liabilities $ 14,291 $ 5,327 Finance leases Other liabilities 3,675 3,840 Total lease liabilities $ 17,966 $ 9,167 The components of total lease cost were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Finance lease cost Right-of-use asset amortization $ 71 $ 71 $ 214 $ 173 Interest expense 27 28 83 58 Operating lease cost 781 770 2,068 2,437 Total lease cost $ 879 $ 869 $ 2,365 $ 2,668 The Company’s future undiscounted lease payments for finance and operating leases with initial terms of one year or more as of September 30, 2024, are as follows (in thousands): Operating Leases Finance Leases Remaining three months ending, December 31, 2024 $ 855 $ 83 2025 2,766 333 2026 2,407 340 2027 2,226 347 2028 1,917 354 Thereafter 7,458 2,990 Total undiscounted lease payments 17,629 4,447 Less: discount ( 3,338 ) ( 772 ) Net lease liabilities $ 14,291 $ 3,675 26 Table of Contents Note 7— Leased Property (continued) The following table presents additional information about the Company’s leases as of September 30, 2024, and December 31, 2023. Supplemental lease information (dollars in thousands) September 30, 2024 December 31, 2023 Finance lease weighted average remaining lease term (years) 12.00 12.66 Finance lease weighted average discount rate 3.06 % 2.96 % Operating lease weighted average remaining lease term (years) 7.57 3.71 Operating lease weighted average discount rate 4.62 % 3.33 % Nine Months Ended September 30, Cash paid for amounts included in the measurement of lease liabilities 2024 2023 Operating cash flows from operating leases $ 2,230 $ 2,545 Operating cash flows from finance leases 83 58 Financing cash flows from finance leases 161 130 Right-of-use assets obtained in exchange for new finance lease liabilities — 1,214 Right-of-use assets obtained in exchange for new operating lease liabilities 11,130 — Note 8— Regulatory Capital Matters Banks and financial holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, “prompt corrective action” regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on AFS securities is not included in computing regulatory capital. Management believes as of September 30, 2024, the Company and the Bank meet all capital adequacy requirements to which they are subject. “Prompt corrective action” regulations provide five classifications: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”, although these terms are not used to represent overall financial condition. If “adequately capitalized”, regulatory approval is required to accept brokered deposits. If “undercapitalized”, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of September 30, 2024, and December 31, 2023, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for “prompt corrective action”. 27 Table of Contents Note 8— Regulatory Capital Matters (continued) The following table presents the actual and required capital amounts and ratios for the Company and the Bank at September 30, 2024, and December 31, 2023 (in thousands except for ratios): Actual Minimum Required Capital - Basel III Minimum Required to be Well Capitalized Amount Ratio Amount Ratio Amount Ratio As of September 30, 2024 Total Capital to risk weighted assets Consolidated $ 913,775 14.45 % $ 663,933 ≥ 10.5 % $ 632,318 N/A Burke & Herbert Bank & Trust 898,158 14.21 663,431 ≥ 10.5 631,840 ≥ 10.0 Tier 1 (Core) Capital to risk weighted assets Consolidated 748,299 11.83 537,470 ≥ 8.5 505,854 N/A Burke & Herbert Bank & Trust 826,214 13.08 537,064 ≥ 8.5 505,472 ≥ 8.0 Common Tier 1 (CET 1) to risk-weighted assets Consolidated 720,936 11.40 442,622 ≥ 7.0 411,006 N/A Burke & Herbert Bank & Trust 826,214 13.08 442,288 ≥ 7.0 410,696 ≥ 6.5 Tier 1 (Core) Capital to average assets (leverage ratio) Consolidated 748,299 9.66 309,940 ≥ 4.0 387,425 N/A Burke & Herbert Bank & Trust 826,214 10.67 309,602 ≥ 4.0 387,003 ≥ 5.0 As of December 31, 2023 Total Capital to risk weighted assets Consolidated $ 443,799 17.88 % $ 260,694 ≥ 10.5 % $ 248,280 N/A Burke & Herbert Bank & Trust 442,414 17.82 260,626 ≥ 10.5 248,215 ≥ 10.0 Tier 1 (Core) Capital to risk weighted assets Consolidated 418,244 16.85 211,038 ≥ 8.5 198,624 N/A Burke & Herbert Bank & Trust 416,859 16.79 210,983 ≥ 8.5 198,572 ≥ 8.0 Common Tier 1 (CET 1) to risk-weighted assets Consolidated 418,244 16.85 173,796 ≥ 7.0 161,382 N/A Burke & Herbert Bank & Trust 416,859 16.79 173,751 ≥ 7.0 161,340 ≥ 6.5 Tier 1 (Core) Capital to average assets (leverage ratio) Consolidated 418,244 11.31 147,965 ≥ 4.0 184,957 N/A Burke & Herbert Bank & Trust 416,859 11.27 147,986 ≥ 4.0 184,982 ≥ 5.0 The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of September 30, 2024, approximately $ 234.7 million of retained earnings was available for dividend declaration consistent with the Company’s capital plan. Note 9— Derivatives The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Cash flow hedges of interest rate risk The Company’s objective in using interest rate derivatives is to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps, caps, and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Other interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments 28 Table of Contents Note 9— Derivatives (continued) over the life of the agreements without exchange of the underlying notional amount. During 2024, such derivatives were used to hedge the variable cash flows associated with variable-rate assets. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense or interest income in the same period(s) during which the hedged transaction affects earnings. During the next twelve months, the Company estimates that an additional $ 76.4 thousand will be reclassified as an increase to interest expense. Derivatives not designated as hedges The Company enters into interest rate swaps with its loan customers to facilitate their financing requests. Upon entering into swaps with our loan customers, the Company will enter into corresponding offsetting derivatives with third parties. These derivatives represent economic hedges and do not qualify as hedges for accounting. These back-to-back interest rate swaps are reported at fair value in “other assets” and “other liabilities” in the Company’s Consolidated Balance Sheets. Changes in the fair value of interest rate swaps are recorded in other non-interest expense and sum to zero because of offsetting terms of swaps with borrowers and swaps with dealer counterparties. The table below presents the fair value of the Company’s derivative financial instruments, which includes accrued interest, as well as their classification on the Consolidated Balance Sheets as of September 30, 2024, and December 31, 2023 (in thousands): September 30, 2024 Balance Sheet Location Notional Amount Fair Value Derivatives designated as hedges: Interest rate swaps related to fair value hedges Other liabilities $ 300,000 $ 1,502 Derivatives not designated as hedges: Interest rate swaps related to customer loans Other assets $ 100,096 $ 2,558 Interest rate swaps related to customer loans Other liabilities 100,096 2,558 December 31, 2023 Balance Sheet Location Notional Amount Fair Value Derivatives designated as hedges: Interest rate swaps related to cash flow hedges Other assets $ 100,000 $ 65 Interest rate swaps related to cash flow hedges Other liabilities 150,000 1,047 Derivatives not designated as hedges: Interest rate swaps related to customer loans Other assets $ 72,572 $ 998 Interest rate swaps related to customer loans Other liabilities 72,572 998 The table below presents the effect of cash flow hedge accounting on AOCI for the three months ended September 30, 2024, and September 30, 2023 (in thousands): Derivatives in Cash Flow Hedging Relationships September 30, 2024 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2024 Amount of Gain or (Loss) Recognized in OCI on Derivative Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest Rate Products $ — $ — $ — Interest Income $ — $ — $ — Interest Rate Products ( 3,887 ) ( 3,887 ) — Interest Expense 1,080 1,080 — Total $ ( 3,887 ) $ ( 3,887 ) $ — $ 1,080 $ 1,080 $ — 29 Table of Contents Note 9— Derivatives (continued) Derivatives in Cash Flow Hedging Relationships September 30, 2023 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2023 Amount of Gain or (Loss) Recognized in OCI on Derivative Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest Rate Products $ ( 48 ) $ ( 48 ) $ — Interest Income $ ( 473 ) $ ( 473 ) $ — Total $ ( 48 ) $ ( 48 ) $ — $ ( 473 ) $ ( 473 ) $ — The table below presents the effect of cash flow hedge accounting on AOCI for the nine months ended September 30, 2024, and September 30, 2023 (in thousands): Derivatives in Cash Flow Hedging Relationships September 30, 2024 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2024 Amount of Gain or (Loss) Recognized in OCI on Derivative Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest Rate Products $ ( 19 ) $ ( 19 ) $ — Interest Income $ ( 611 ) $ ( 611 ) $ — Interest Rate Products 631 631 — Interest Expense 2,113 2,113 — Total $ 612 $ 612 $ — $ 1,502 $ 1,502 $ — Derivatives in Cash Flow Hedging Relationships September 30, 2023 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2023 Amount of Gain or (Loss) Recognized in OCI on Derivative Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest Rate Products $ ( 337 ) $ ( 337 ) $ — Interest Income $ ( 1,259 ) $ ( 1,259 ) $ — Total $ ( 337 ) $ ( 337 ) $ — $ ( 1,259 ) $ ( 1,259 ) $ — The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2024, and September 30, 2023 (in thousands). 30 Table of Contents Note 9— Derivatives (continued) Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Three months ended September 30, 2024 September 30, 2023 Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded. $ 40 $ 1,080 $ ( 433 ) $ — The effects of fair value and cash flow hedging: Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts Hedged items (1) 40 — 40 — Derivatives designated as hedging instruments — — — — Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 Interest contracts Amount of gain or (loss) reclassified from AOCI into income — 1,080 ( 473 ) — Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring — — — — Amount of gain or (loss) reclassified from AOCI into income - included component — 1,080 ( 473 ) — Amount of gain or (loss) reclassified from AOCI into income - excluded component — — — — Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships Nine months ended September 30, 2024 September 30, 2023 Interest Income Interest Expense Interest Income Interest Expense Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded. $ ( 491 ) $ 2,113 $ ( 1,549 ) $ — The effects of fair value and cash flow hedging: Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts Hedged items (1) 120 — ( 1,066 ) — Derivatives designated as hedging instruments — — 776 — Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 Interest contracts Amount of gain or (loss) reclassified from AOCI into income ( 611 ) 2,113 ( 1,259 ) — Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring — — — — Amount of gain or (loss) reclassified from AOCI into income - included component ( 611 ) 2,113 ( 1,259 ) — Amount of gain or (loss) reclassified from AOCI into income - excluded component — — — — (1) The Company voluntarily discontinued a fair value hedging relationship and these amounts include the gain or (loss) and the hedging adjustment on a voluntary discontinued hedging relationship. The Company has allocated the basis adjustment to the remaining individual assets in the closed portfolio and will amortize the basis adjustment over a period consistent with amortization of other discounts or premiums on the assets. 31 Table of Contents Note 9— Derivatives (continued) Credit-risk-related Contingent Features As of September 30, 2024, the Company has no derivatives in a net liability position that would require the posting of collateral. Note 10— Commitments and Contingencies Credit extension commitments The Company’s financial statements do not reflect various financial instruments which arise in the normal course of business and which involve elements of credit risk, interest rate risk, and liquidity risk. These financial instruments include commitments to extend credit (e.g., revolving lines of credit) and commercial letters of credit. Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of our commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. A summary of the contractual amounts of the Company’s financial instruments outstanding at September 30, 2024, and December 31, 2023, is as follows (in thousands): September 30, 2024 December 31, 2023 Commitments to extend credit $ 995,782 $ 278,923 Commercial letters of credit 62,474 10,718 Commitments to extend credit and commercial letters of credit both include exposure to some credit loss in the event of non-performance of the customer. The Company’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Consolidated Balance Sheets. Many of these instruments have fixed maturity dates, and many of them will expire without being drawn upon; accordingly, they do not generally present any significant liquidity risk to the Company. Allowance for credit losses - off-balance-sheet credit exposures The Company recorded a provision for credit losses on unfunded commitments of $ 62.0 thousand and $ 3.9 million for the three and nine months ended September 30, 2024. The Company recorded a provision for credit losses on unfunded commitments of $ 35.0 thousand and a recapture of $ 69.8 thousand for the three and nine months ended September 30, 2023. The ACL on off-balance-sheet credit totaled $ 4.1 million and $ 254.2 thousand as of September 30, 2024 and December 31, 2023, and is included in accrued interest and other liabilities on the accompanying Consolidated Balance Sheets. Litigation The Company is a party to litigation, claims, and proceedings arising in the normal course of business that are ordinary and routine to the nature of the Company’s business and operations. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from any currently pending or threatened litigation, claims, or proceedings will not be material to the Company’s financial position. Note 11— Fair Value Measurements Determination of Fair Value Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. 32 Table of Contents Note 11— Fair Value Measurements (continued) Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 – Significant unobservable inputs that reflect our own assumptions that market participants would use in pricing an asset or liability. In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company used the following methods and significant assumptions to estimate fair value: Investment securities The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Equity Investments Equity investments are recorded at fair value on a recurring basis, with changes in fair value reported in net income. Through the Merger, at September 30, 2024, we acquired an investment in an S&P 500 index mutual fund that is actively traded on an exchange, and we classify it as Level 1. Through the Merger, we acquired perpetual preferred stock of a bank holding company issued in October 2022 in a private offering. The perpetual preferred stock does not trade on an exchange or in an active over-the-counter market; therefore, we estimate its fair value using the present value of its future cash flows using observed discount rates of similar publicly-traded securities, adjusted for a liquidity premium. We classify the perpetual preferred stock as Level 2. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment. Such equity securities are included in Equity Investments on the accompanying consolidated balance sheets. Derivatives The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Company has contracted with a third-party vendor to provide valuations for interest rate swaps using standard swap valuation techniques. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities. The Company recognizes interest rate lock commitments at fair value. Fair value of interest rate lock commitments is based on the price of underlying loans obtained from an investor for loans that will be delivered on a best effort basis (Level 2). Loans held-for-sale, at fair value The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. 33 Table of Contents Note 11— Fair Value Measurements (continued) Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): Fair Value Measurements at September 30, 2024, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial assets Investment Securities U.S. Treasuries and government agencies $ 152,617 $ — $ — $ 152,617 Obligations of states and municipalities — 655,646 — 655,646 Residential mortgage backed - agency — 54,766 — 54,766 Residential mortgage backed - non-agency — 277,476 — 277,476 Commercial mortgage backed - agency — 34,050 — 34,050 Commercial mortgage backed - non-agency — 153,694 — 153,694 Asset-backed — 70,635 — 70,635 Other — 37,547 — 37,547 Total investment securities available-for-sale $ 152,617 $ 1,283,814 $ — $ 1,436,431 Loans held-for-sale, at fair value $ — $ 4,216 $ — $ 4,216 Equity investments $ 7,827 $ 6,902 $ — $ 14,729 Derivatives $ — $ 2,558 $ — $ 2,558 Financial liabilities Derivatives $ — $ 4,060 $ — $ 4,060 Fair Value Measurements at December 31, 2023, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial assets Investment Securities U.S. Treasuries and government agencies $ 179,071 $ — $ — $ 179,071 Obligations of states and municipalities — 463,203 — 463,203 Residential mortgage backed - agency — 42,238 — 42,238 Residential mortgage backed - non-agency — 266,031 — 266,031 Commercial mortgage backed - agency — 34,885 — 34,885 Commercial mortgage backed - non-agency — 177,061 — 177,061 Asset-backed — 77,936 — 77,936 Other — 8,014 — 8,014 Total investment securities available-for-sale $ 179,071 $ 1,069,368 $ — $ 1,248,439 Loans held-for-sale, at fair value $ — $ 1,497 $ — $ 1,497 Derivatives $ — $ 1,063 $ — $ 1,063 Financial liabilities Derivatives $ — $ 2,045 $ — $ 2,045 The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a non-recurring basis in the financial statements: Collateral dependent loans Loans for which the borrower is experiencing financial difficulty and repayment is dependent upon the operation or sale of collateral, are considered collateral-dependent. For collateral-dependent loans, the fair value is measured based on the value 34 Table of Contents Note 11— Fair Value Measurements (continued) of the collateral securing the loans, less estimated costs of disposal. Collateral may be in the form of real estate or business assets, including equipment, inventory, and accounts receivable. The vast majority of the collateral underlying collateral-dependent loans is real estate, the fair value of which is measured through an appraisal. The appraisals of the collateral supporting collateral-dependent loans may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. Other real estate owned Assets acquired through foreclosure or other proceedings are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The fair value of foreclosed properties is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data. Updated appraisals of foreclosed properties are generally obtained if the existing appraisal is more than 18 months old or more frequently if there is a known deterioration in value. However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends. Upon foreclosure, any fair value adjustment is charged against the allowance for credit losses on loans. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense in the consolidated statements of income. Assets that were measured at fair value on a non-recurring basis during the period are summarized below (in thousands): Fair Value Measurements at September 30, 2024, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Collateral dependent loans Commercial real estate $ — $ — $ 2,668 $ 2,668 Owner-occupied commercial real estate — — 77 77 Acquisition, construction & development — — 233 233 Commercial & industrial — — — — Single family residential — — 871 871 Consumer non-real estate and other — — — — Other real estate owned — — 2,576 2,576 Fair Value Measurements at December 31, 2023, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Collateral dependent loans Commercial real estate $ — $ — $ — $ — Owner-occupied commercial real estate — — — — Acquisition, construction & development — — — — Commercial & industrial — — — — Single family residential — — — — Consumer non-real estate and other — — — — Other real estate owned — — — — 35 Table of Contents Note 11— Fair Value Measurements (continued) The following table presents quantitative information about Level 3 Fair Value Measurements for assets measured at fair value on a non-recurring basis at September 30, 2024, and December 31, 2023 (in thousands except for percentages): Description Fair Value Valuation Techniques Unobservable Inputs Range September 30, 2024 Collateral dependent loans $ 3,850 Appraisal of collateral Management adjustments (e.g., liquidity, selling costs, etc.) 5.0 % to 20.0 % for liquidity, 6.0 % to 8.0 % for selling costs Other real estate owned 2,576 Appraisal of collateral Management adjustments (e.g., liquidity, selling costs, etc.) 5.0 % to 20.0 % for liquidity, 6.0 % to 8.0 % for selling costs December 31, 2023 Collateral dependent loans $ — Appraisal of collateral Management adjustments (e.g., liquidity, selling costs, etc.) 5.0 % to 20.0 % for liquidity, 6.0 % to 8.0 % for selling costs Fair value of financial instruments The carrying amounts and estimated fair values of financial instruments not carried at fair value, at September 30, 2024, and December 31, 2023, were as follows (in thousands): Fair Value Measurements at September 30, 2024, Using: Carrying Amount Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial Assets Cash and due from banks $ 44,902 $ 44,902 $ — $ — $ 44,902 Interest-earning deposits with banks 246,863 246,863 — — 246,863 Loans, net 5,506,220 — 5,412,064 — 5,412,064 Accrued interest 32,791 — 32,791 — 32,791 Financial Liabilities Non-interest-bearing deposits $ 1,392,123 $ — $ 1,392,123 $ — $ 1,392,123 Interest-bearing deposits 5,208,702 — 5,196,728 — 5,196,728 Short-term borrowings 320,163 — 320,203 — 320,203 Subordinated debentures, net 93,532 — 93,532 — 93,532 Subordinated debentures owed to unconsolidated subsidiary trusts 16,950 — 16,950 — 16,950 Accrued interest 6,719 — 6,719 — 6,719 Fair Value Measurements at December 31, 2023, Using: Carrying Amount Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial Assets Cash and due from banks $ 8,896 $ 8,896 $ — $ — $ 8,896 Interest-bearing deposits with banks 35,602 35,602 — — 35,602 Loans, net 2,062,455 — — 1,897,459 1,897,459 Accrued interest 15,895 — 15,895 — 15,895 Financial Liabilities Non-interest-bearing deposits $ 830,320 $ — $ 830,320 $ — $ 830,320 Interest-bearing deposits 2,171,561 — 2,167,218 — 2,167,218 Short-term borrowings 272,000 — 271,716 — 271,716 Accrued interest 8,954 — 8,954 — 8,954 36 Table of Contents Note 12— Accumulated Other Comprehensive Income (Loss) The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2024, and September 30, 2023 (in thousands): Three months ended September 30, 2024 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income Beginning Balance $ 2,730 $ ( 97,415 ) $ ( 5,745 ) $ ( 100,430 ) Net unrealized gains (losses) ( 3,071 ) 28,628 — 25,557 Less: net realized (gains) losses reclassified to earnings ( 853 ) ( 32 ) — ( 885 ) Net change in pension plan benefits — — — — Ending Balance $ ( 1,194 ) $ ( 68,819 ) $ ( 5,745 ) $ ( 75,758 ) Three months ended September 30, 2023 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income Beginning Balance $ ( 1,196 ) $ ( 117,950 ) $ ( 7,031 ) $ ( 126,177 ) Net unrealized gains (losses) ( 38 ) ( 20,285 ) — ( 20,323 ) Less: net realized (gains) losses reclassified to earnings 373 ( 32 ) — 341 Net change in pension plan benefits — — — — Ending Balance $ ( 861 ) $ ( 138,267 ) $ ( 7,031 ) $ ( 146,159 ) Nine months ended September 30, 2024 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income Beginning Balance $ ( 490 ) $ ( 97,259 ) $ ( 5,745 ) $ ( 103,494 ) Net unrealized gains (losses) 483 29,019 — 29,502 Less: net realized (gains) losses reclassified to earnings ( 1,187 ) ( 579 ) — ( 1,766 ) Net change in pension plan benefits — — — — Ending Balance $ ( 1,194 ) $ ( 68,819 ) $ ( 5,745 ) $ ( 75,758 ) Nine months ended September 30, 2023 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income Beginning Balance $ ( 1,589 ) $ ( 130,875 ) $ ( 7,031 ) $ ( 139,495 ) Net unrealized gains (losses) ( 267 ) ( 8,322 ) — ( 8,589 ) Less: net realized (gains) losses reclassified to earnings 995 930 — 1,925 Net change in pension plan benefits — — — — Ending Balance $ ( 861 ) $ ( 138,267 ) $ ( 7,031 ) $ ( 146,159 ) 37 Table of Contents Note 12— Accumulated Other Comprehensive Income (Loss) (continued) The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2024, and September 30, 2023 (in thousands). Details about Accumulated Other Comprehensive Income Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statements of Income Three months ended Nine months ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Cash flow hedges: Interest rate contracts $ — $ ( 472 ) $ ( 611 ) $ ( 1,259 ) Interest income Interest rate contracts 1,080 — 2,113 — Interest expense Tax effect ( 227 ) 99 ( 315 ) 264 Income tax expense (benefit) Net of tax $ 853 $ ( 373 ) $ 1,187 $ ( 995 ) Available-for-sale securities: Realized gains (losses) on securities $ — $ — $ 613 $ ( 111 ) Net gains/(losses) on securities Realized gains (losses) on basis adjustment for fair value hedges 41 41 120 ( 1,066 ) Interest income Tax effect ( 9 ) ( 9 ) ( 154 ) 247 Income tax expense (benefit) Net of tax $ 32 $ 32 $ 579 $ ( 930 ) Total reclassifications, net of tax $ 885 $ ( 341 ) $ 1,766 $ ( 1,925 ) Net income Note 13— Other Operating Expense Other operating expense from the Consolidated Statements of Income for the three and nine months ended September 30, 2024, and September 30, 2023, is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 FDIC assessment $ 1,037 $ 463 $ 2,500 $ 1,496 Historic tax credit amortization 632 632 1,895 1,895 IT related 1,003 532 2,257 1,489 Consultant fees 1,585 1,322 5,865 2,300 ATM, card, & network expense 1,640 474 3,299 1,386 Directors' fees 124 556 1,578 1,400 Audit expense 541 167 1,145 687 Legal expense 445 920 1,660 1,553 Virginia franchise tax 675 671 2,025 1,931 Marketing expense 427 116 1,134 454 Donation expense 26 — 5,145 — Core deposit intangible amortization 4,297 — 7,162 — Other 4,747 1,564 10,551 4,451 Total $ 17,179 $ 7,417 $ 46,216 $ 19,042 The Company incurred Merger-related expenses of $ 11.3 million for the nine months ended September 30, 2024, including $ 1.8 million of which were incurred during the three months ended September 30, 2024. These expenses are included in the consultant fees, audit fees, legal expense, donation, and other line items detailed in other operating expenses. 38 Table of Contents Note 14— Share-Based Compensation The Company has a share-based incentive plan described below that allows it to offer a variety of equity compensation awards subject to approval. Total compensation cost that has been charged against income for the share-based awards granted was $ 566.9 thousand and $ 610.1 thousand for the three months ended September 30, 2024, and September 30, 2023, respectively. The total income tax benefit was $ 119.0 thousand and $ 128.1 thousand for the three months ended September 30, 2024, and September 30, 2023, respectively. Total compensation cost that has been charged against income for the share-based awards granted was $ 2.0 million and $ 1.8 million for the nine months ended September 30, 2024, and September 30, 2023, respectively. The total income tax benefit was $ 410.5 thousand and $ 377.6 thousand for the nine months ended September 30, 2024, and September 30, 2023, respectively. 2019 Stock Incentive Plan In 2019, the Company’s Stock Incentive Plan (“2019 SIP”) was approved by the Bank’s Board of Directors. The 2019 SIP provides for the issuance of share-based awards to directors and employees of the Company. The 2019 SIP authorized 240,000 units to be issued, and the Company’s practice is using authorized unissued shares to satisfy these share-based awards. Each unit represents a contingent right to receive one common share or an equivalent amount of cash, or a combination of the two, at the discretion of the Company. Currently, we have a sufficient number of authorized unissued shares to satisfy all outstanding equity awards. Under the 2019 SIP, the Company has issued restricted stock unit (“RSU”) awards that are both time-based and performance-based. Each RSU award will indicate the number of shares, the conditions (e.g., service, performance, and/or a combination), and the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the award at grant date. 2023 Stock Incentive Plan In 2023, a new stock incentive plan (“2023 SIP”) was approved by the Company’s Board of Directors and shareholders. Upon the 2023 SIP’s shareholder approval date of March 30, 2023, no further share-based awards will be issued under the 2019 SIP. The 2023 SIP provides for the issuance of share-based awards to directors and employees of the Company. The 2023 SIP authorized the issuance of 250,000 shares, subject to an annual increase in available shares. A total of 64,365 and 24,705 shares were issued during the nine months ended September 30, 2024, and September 30, 2023, respectively. For time-based RSUs, the fair value was determined by using the closing stock price on the date prior to the grant date. These RSUs vest over three to five years . The Board, from time to time, approves performance-based RSU awards that may be earned between a three to five year performance period. Whether or not units are earned at the end of the performance period will be determined based on the achievement of performance and/or market targets (e.g., market capitalization target) over the performance period. If the conditions are achieved, the grant recipient will receive 100 % of the units granted as these awards do not provide for a multiplier effect. The performance/market targets are determined by the Board of Directors. The fair value for performance-based RSU awards was determined by using a Monte Carlo simulation analysis to estimate the achievement of the market capitalization target determined by the Board of Directors. The Monte Carlo simulation analysis required the following inputs: (1) expected term, (2) expected volatility, (3) risk-free rate, and (4) dividend yield. The expected term was based on the stated performance period. Management used the expected volatility from a peer group. The risk-free interest rate is based on the U.S. Treasury yield curve over the performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. 39 Table of Contents Note 14— Share-Based Compensation (continued) The following is a summary of all the Company’s RSU awards issued under both the 2019 SIP and 2023 SIP: Non-vested Shares Shares Weighted-Average Grant-Date Fair Value Non-vested at December 31, 2023 143,585 $ 51.21 Granted 64,365 51.41 Vested ( 107,520 ) 47.09 Forfeited ( 600 ) 73 Non-vested at September 30, 2024 99,830 $ 55.65 As of September 30, 2024, there was $ 3.6 million of total unrecognized compensation costs related to non-vested shares granted under both the 2019 SIP and 2023 SIP. The cost is expected to be recognized over a weighted average period of 1.31 years. 2023 Employee Stock Purchase Plan In 2023, a new employee stock purchase plan (“2023 ESPP”) was approved by the Company’s Board of Directors and shareholders. Upon the 2023 ESPP’s shareholder approval date of March 30, 2023, the 2023 ESPP reserved 250,000 shares of common stock for issuance to employees. At September 30, 2024, 237,943 shares were available to be issued. Whole shares are sold to participants in the 2023 ESPP at 85 % of the lower of the stock price at the beginning or end of each semi-annual offering period. The first semi-annual offering period began on September 1, 2023, and the current semi-annual offering period began on September 1, 2024. Eligible employees may purchase shares in an amount that does not exceed the lesser of the IRS limit of $25,000 or 15 % of their annual salary. The following table presents information for the 2023 ESPP at the end of September 30, 2024: September 30, 2024 Shares purchased 12,057 Weighted average price of shares purchased $ 44.93 Compensation expense recognized (in 000's) 127.2 Stock Appreciation Rights (“SAR”) Upon completion of the Merger and as a part of the Merger Agreement, Burke & Herbert assumed SAR awards that had been issued to existing employees that would continue with the same terms and conditions adjusted for the exchange ratio of 0.5043 . As part of the Merger, a significant portion of SAR awards accelerated their vesting and thus did not require any future service component. Management used the Black-Scholes option-pricing model to fair value these accelerated SAR awards and included this value as part of the purchase price consideration discussed in Note 16 - Business Combination . The Company also used the Black-Scholes option-pricing model to fair value the non-accelerated SAR awards that were not fully vested. The SAR awards that have been assumed by the Company, were issued in 2019, 2021, and 2023, and these SAR awards become exercisable ratably over seven years ( 14.3 % per year) and contractually expire ten years after the grant date. Upon completion of the Merger, the Company determined the fair value per SAR using the following assumptions: 2019 SAR 2021 SAR 2023 SAR # of years to full vesting 7 years 7 years 7 years Fair value $ 14.89 $ 16.92 $ 14.56 Risk-free interest rate 4.51 % 4.32 % 4.14 % Expected dividend yield 3.95 % 3.95 % 3.95 % Expected common stock volatility 32.56 % 32.56 % 32.56 % Expected contractual life (in years) 4.77 7.20 8.77 A summary of SAR and option activity during the nine months ended September 30, 2024, is as follows: 40 Table of Contents Note 14— Share-Based Compensation (continued) Weighted Average Dollars in thousands, expect per share information SARs Aggregate Fair Value Remaining Contractual Term (Yrs.) Exercise Price Outstanding, December 31, 2023 — $ — — $ — Granted (or acquired) 299,556 4,996 5.67 45.24 Exercised 60,894 1,147 — 40.72 Forfeited 5,642 86 — 47.96 Expired — — — — Outstanding, September 30, 2024 233,020 $ 3,763 5.61 $ 46.34 Exercisable SARs: At September 30, 2024 193,613 $ 3,159 5.21 $ 45.79 The total fair value of SARs exercised was $ 1.1 million during the nine months ended September 30, 2024. The total fair value of SARs vested was $ 47.1 thousand during the nine months ended September 30, 2024. As of September 30, 2024, there was $ 583.2 thousand of total unrecognized compensation costs related to non-vested SARs acquired through the Merger. The cost is expected to be recognized over a weighted average period of 2.53 years. Note 15— Earnings Per Share Basic earnings per share excludes dilution and is computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential impact of contingently issuable shares. The Company uses the treasury stock method as described by ASC 260 - Earnings Per Share for each dilutive instrument when computing diluted earnings per share. The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares dilutive potential common stock. Dilutive potential common stock has no effect on income available to common shareholders. Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net income applicable to common shares (in thousands) $ 27,397 $ 4,056 $ 15,465 $ 17,614 Weighted average number of shares 14,944,962 7,428,710 11,529,953 7,427,817 Options effect of dilutive shares 95,183 70,568 61,830 78,692 Weighted average dilutive shares 15,040,145 7,499,278 11,591,783 7,506,509 Basic earnings per common share $ 1.83 $ 0.55 $ 1.34 $ 2.37 Diluted earnings per common share 1.82 0.55 1.33 2.35 For the three months ended September 30, 2024, and the nine months ended September 30, 2024, the options effect of dilutive shares is anti-dilutive and not considered in calculating diluted EPS. Stock awards equivalent to 27,418 and 1,368 shares of common stock were not considered in computing diluted earnings per common share for the three months ended September 30, 2024, and September 30, 2023, respectively, because they are antidilutive. Stock awards equivalent to 51,094 and zero shares of common stock are not considered in computing diluted earnings per share for the nine months ended September 30, 2024, and September 30, 2023, respectively, because they are antidilutive. Note 16— Business Combination Effective on May 3, 2024, Burke & Herbert completed the Merger with Summit, pursuant to the Merger Agreement. 41 Table of Contents Note 16— Business Combination (continued) In the Merger, holders of Summit common stock outstanding at the effective time of the Merger received 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they owned, subject to the payment of cash in lieu of fractional shares. The total aggregate consideration payable in the Merger was approximately 7,405,772 shares of Burke & Herbert common stock. Additionally, each share of Summit’s 6.0 % Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series 2021 issued and outstanding was converted into the right to receive a share of Burke & Herbert Series 2021 Preferred Stock. Summit’s results of operations from May 3, 2024, were included in the Company’s results beginning with reporting as of June 30, 2024. Net interest income and pre-tax net income for Summit were estimated to be $ 63.0 million and $ 68.5 million, respectively, since the date of the acquisition through September 30, 2024, and are included in the Company’s Consolidated Statement of Income. Pre-tax net income for Summit only includes income and expense that are still being recorded on Summit’s core operating system. As the Company is merging data and processes, certain legacy Summit expenses, including occupancy and salaries, are now merged within the Company’s core system. Merger-related costs of $ 27.5 million are included in non-interest expense in the Company’s income statement for the nine months ended, September 30, 2024. A portion of these Merger-related costs is captured in Other Operating Non-Interest Expense as further description in Note 13 - Other Operating Expense and an additional $ 16.3 million of such Merger-related costs is captured in Salaries and Wages, Pensions and Other Employee Benefits, Occupancy, and Equipment rentals, depreciation and maintenance. These costs captured in those line items represent change-in-control payments, acceleration of benefit due to the change-in-control, software breakage, and other lease breakage fees. The fair value of the common shares issued as part of the consideration paid for Summit was determined in the basis of the closing price of the Company’s common shares on the date of completion of the Merger. We accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations, and accordingly, the assets and liabilities of Summit were recorded at their respective fair values on the date of completion of the Merger. The fair values of assets and liabilities are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $ 32.8 million in connection with the acquisition, which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The goodwill arising from the transaction is no t deductible for tax purposes and consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 7 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The fair value of intangible assets related to core deposits was $ 68.8 million on the date of acquisition. The fair value of purchased financial assets with credit deterioration was $ 380.8 million on the date of the acquisition. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $ 442.3 million. The Company estimates, on the date of the acquisition, that $ 23.9 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected. The following table details the total consideration paid for Summit on May 3, 2024, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill at the acquisition date. 42 Table of Contents Note 16— Business Combination (continued) ($ in thousands, except share information) Consideration May 3, 2024 Common stock of Summit Financial Group, Inc. 14,686,738 Exchange ratio 0.5043 Expected Burke & Herbert common stock to be issued 7,406,522 Actual Burke & Herbert common stock issued 7,405,772 Fractional common stock to be paid in cash 750 Actual Burke & Herbert common stock issued 7,405,772 Price per share of Burke & Herbert common stock issued $ 51.67 Purchase price consideration for common stock issued 382,656 Fractional common stock to be paid in cash 750 Average 10 day closing price used to pay fractional common stock $ 53.66 Cash paid for fractional shares 40 Implied value of stock appreciation rights ("SARs") and restricted stock units 4,336 Fair value of preferred stock issued by Burke & Herbert 10,413 Fully diluted transaction value $ 397,445 Preliminary Goodwill $ 32,783 43 Table of Contents Note 16— Business Combination (continued) As Recorded Estimated Estimated by Summit Fair Value Fair Value ($ in thousands) May 3, 2024 Adjustments May 3, 2024 Total purchase price consideration $ 397,445 Recognized amounts of identifiable assets acquired and liabilities assumed Cash and equivalents $ 53,357 $ — $ 53,357 Securities, available-for-sale, at fair value 491,608 — 491,608 Securities, held-to-maturity, at amortized cost 93,573 ( 7,430 ) 86,143 Equity and other investments 36,085 — 36,085 Loans, gross 3,707,940 ( 153,306 ) 3,554,634 Allowance for credit losses ( 49,471 ) 25,991 ( 23,480 ) Loans, net of allowance 3,658,469 ( 127,315 ) 3,531,154 Premises and equipment, net 62,255 13,276 75,531 Accrued interest receivable 19,610 — 19,610 Company-owned life insurance 86,363 — 86,363 Goodwill and intangibles 73,144 ( 4,384 ) 68,760 Other assets 83,381 11,322 94,703 Total identifiable assets acquired 4,657,845 ( 114,531 ) 4,543,314 Deposits 3,704,072 ( 7,136 ) 3,696,936 Borrowings 323,610 — 323,610 Subordinated debentures and trust preferred securities 123,533 ( 16,466 ) 107,067 Unfunded reserve liability 6,692 ( 3,190 ) 3,502 Accrued interest and other liabilities 47,537 — 47,537 Total liabilities 4,205,444 ( 26,792 ) 4,178,652 Total identifiable net assets $ 452,401 $ ( 87,739 ) 364,662 Preliminary Goodwill $ 32,783 Post Merger, all of the securities, held-to-maturity were reclassified as available-for-sale. The following table presents supplemental pro forma information as if the Merger had occurred on January 1, 2023. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed dates. Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2024 2023 2024 2023 Net Interest Income $ 69,405 $ 74,905 $ 210,377 $ 219,460 Net Income 25,001 24,960 76,669 29,205 44 Table of Contents Note 17— Goodwill and Other Intangible Assets The following table presents the change in goodwill for the three and nine months ended September 30, 2024, and September 30, 2023, (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Beginning of period $ 32,783 $ — $ — $ — Acquired goodwill — — 32,783 — Impairment — — — — End of period $ 32,783 $ — $ 32,783 $ — During the nine months ended, September 30, 2024, the Company recorded $ 32.8 million of preliminary goodwill associated with the acquisition of Summit. See Note 16 - Business Combination to the consolidated financial statements for additional detail regarding this transaction. The Company performs the annual goodwill impairment test on September 30 every year. Other intangible assets consist of the core deposit intangible which is being amortized on an accelerated basis over its estimated useful life of 7 years. During the nine months ended, September 30, 2024, the Company recorded $ 68.8 million of core deposit intangibles associated with the acquisition of Summit. The gross carrying amounts and accumulated amortization of other intangible assets for the nine months ended September 30, 2024, were as follows (in thousands): Nine Months Ended September 30, 2024 Beginning of period $ — Core deposit intangible acquired 68,760 Accumulated amortization ( 7,162 ) Impairment — Total core deposit intangible $ 61,598 The Company reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Total amortization expense associated with intangible assets was $ 7.2 million for the nine months ended September 30, 2024. Estimated amortization expense for future years is as follows (in thousands): Estimated Amortization Remaining three months ending, December 31, 2024 $ 4,298 2025 15,553 2026 13,097 2027 10,641 2028 8,186 Thereafter 9,823 Total $ 61,598 45 Table of Contents