BHRB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2026, for Burke & Herbert Financial Services Corp. (BHRB), a Virginia-based financial holding company. The reporting period is significantly impacted by the completion of the merger with LINKBANCORP, Inc. (LNKB) on May 1, 2026. Following the merger, the Company's total consolidated assets grew to $11.0 billion, crossing the $10 billion threshold which subjects the Bank to additional regulatory scrutiny, including direct examination by the Consumer Financial Protection Bureau (CFPB) and interchange fee limitations under the Durbin Amendment effective July 1, 2027.

Key Financial Metrics

Material Changes vs. Prior Period

• Merger Impact: The LNKB Merger drove a $3.1 billion increase in total assets and a $2.6 billion increase in loans and deposits. The merger contributed approximately $18.1 million in net interest income and $5.0 million in pre-tax income for the period following the May 1 closing date.
• Earnings Decline: Net income applicable to common shares decreased by $20.3 million (36%) compared to the prior year period. This decline was primarily due to $33.7 million in merger-related expenses (legal, consulting, audit, change-in-control payments) included in non-interest expense.
• Expense Growth: Non-interest expenses increased by 46.4% year-over-year, driven by the merger integration costs and a larger employee base. Salaries and wages increased by $20.5 million.
• Asset Quality: Non-performing assets increased to $98.2 million (0.89% of total assets) from $76.9 million, primarily due to the acquisition of LNKB's loan portfolio. The allowance for credit losses (ACL) coverage ratio remained stable at 1.18%.
• Capital Ratios: The Company remains "well capitalized." Common Equity Tier 1 (CET1) ratio was 11.78%, and Total Risk-Based Capital ratio was 14.43% as of June 30, 2026.

Guidance, Outlook, and Risks

• Regulatory Changes: Crossing the $10 billion asset threshold introduces new compliance costs and operational constraints. The Company anticipates a meaningful reduction in debit card interchange revenue starting July 1, 2027, due to the Durbin Amendment.
• Commercial Real Estate (CRE) Exposure: CRE loans represent 48.7% of the gross loan portfolio (excluding owner-occupied and construction). Management monitors this concentration closely, noting that office collateral types represent 16.6% of total CRE loans. The portfolio is geographically diversified, with the largest concentration in Virginia (39.2%).
• Integration Risks: Management faces risks related to the successful integration of LNKB operations, including the realization of expected synergies and cost savings. Failure to integrate efficiently could impact future earnings.
• Interest Rate Risk: The Company utilizes interest rate swaps to manage exposure. Economic Value of Equity (EVE) analysis indicates a 15.6% decrease in EVE under a 200 basis point rate increase scenario.

Investor Verification Checklist

• Merger Synergies: Verify the timeline and magnitude of cost savings and revenue synergies expected from the LNKB integration against the $33.7 million in one-time merger costs incurred in Q2.
• Durbin Amendment Impact: Assess the specific strategies the Company is implementing to mitigate the anticipated reduction in debit card interchange revenue effective July 2027.
• CRE Portfolio Quality: Review the specific risk ratings and collateral values of the $3.9 billion Commercial Real Estate portfolio, particularly the office sector, given current market headwinds.
• Expense Run-Rate: Determine the normalized non-interest expense run-rate post-merger to evaluate future profitability once one-time integration costs are removed.
• Capital Adequacy: Confirm that the Company's capital plan accounts for the increased regulatory requirements and potential stress testing associated with the $10 billion+ asset size.