Burke & Herbert Financial Services Corp.BHRB
Burke & Herbert Financial Services Corp. Fair Value Disclosure
Fair Value Measurements
Determination of Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
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 Summit merger, we acquired an investment in an S&P 500 index mutual fund that is traded on an exchange, and we classify it as Level 2 as of December 31, 2025.
Through the Summit 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.
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.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
| Fair Value Measurements at December 31, 2025 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 | $ | 150,124 | $ | — | $ | — | $ | 150,124 | |||||||||||||||
| Obligations of state and municipalities | — | 922,574 | — | 922,574 | |||||||||||||||||||
| Residential mortgage backed - agency | — | 55,385 | — | 55,385 | |||||||||||||||||||
| Residential mortgage backed - non-agency | — | 218,092 | — | 218,092 | |||||||||||||||||||
| Commercial mortgage backed - agency | — | 73,896 | — | 73,896 | |||||||||||||||||||
| Commercial mortgage backed - non-agency | — | 111,109 | — | 111,109 | |||||||||||||||||||
| Asset backed | — | 53,466 | — | 53,466 | |||||||||||||||||||
| Other | — | 31,308 | — | 31,308 | |||||||||||||||||||
| Total investment securities available-for-sale | $ | 150,124 | $ | 1,465,830 | $ | — | $ | 1,615,954 | |||||||||||||||
| Loans held-for-sale, at fair value | $ | — | $ | 365 | $ | — | $ | 365 | |||||||||||||||
Equity investments | $ | — | $ | 14,201 | $ | — | $ | 14,201 | |||||||||||||||
| $ | — | $ | 2,604 | $ | — | $ | 2,604 | ||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||
| $ | — | $ | 2,671 | $ | — | $ | 2,671 | ||||||||||||||||
| Fair Value Measurements at December 31, 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 | $ | 149,127 | $ | — | $ | — | $ | 149,127 | |||||||||||||||
| Obligations of state and municipalities | — | 698,724 | — | 698,724 | |||||||||||||||||||
| Residential mortgage backed - agency | — | 53,186 | — | 53,186 | |||||||||||||||||||
| Residential mortgage backed - non-agency | — | 247,876 | — | 247,876 | |||||||||||||||||||
| Commercial mortgage backed - agency | — | 33,071 | — | 33,071 | |||||||||||||||||||
| Commercial mortgage backed - non-agency | — | 154,511 | — | 154,511 | |||||||||||||||||||
| Asset backed | — | 64,056 | — | 64,056 | |||||||||||||||||||
| Other | — | 31,820 | — | 31,820 | |||||||||||||||||||
| Total investment securities available-for-sale | $ | 149,127 | $ | 1,283,244 | $ | — | $ | 1,432,371 | |||||||||||||||
| Loans held-for-sale, at fair value | $ | — | $ | 2,331 | $ | — | $ | 2,331 | |||||||||||||||
| Equity investments | $ | — | $ | 12,407 | $ | — | $ | 12,407 | |||||||||||||||
| $ | — | $ | 3,191 | $ | — | $ | 3,191 | ||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||
| $ | — | $ | 1,988 | $ | — | $ | 1,988 | ||||||||||||||||
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 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 December 31, 2025 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 | $ | — | $ | — | $ | 10,377 | $ | 10,377 | |||||||||||||||
| Owner-occupied commercial real estate | — | — | — | — | |||||||||||||||||||
| Acquisition, construction & development | — | — | 2,640 | 2,640 | |||||||||||||||||||
| Commercial & industrial | — | — | 213 | 213 | |||||||||||||||||||
| Single family residential | — | — | 223 | 223 | |||||||||||||||||||
| Consumer non-real estate and other | — | — | — | — | |||||||||||||||||||
| Other real estate owned | — | — | 2,689 | 2,689 | |||||||||||||||||||
| Fair Value Measurements at December 31, 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 | — | — | — | — | |||||||||||||||||||
| Acquisition, construction & development | — | — | 232 | 232 | |||||||||||||||||||
| Commercial & industrial | — | — | 249 | 249 | |||||||||||||||||||
| Single family residential | — | — | 872 | 872 | |||||||||||||||||||
| Consumer non-real estate and other | — | — | — | — | |||||||||||||||||||
| Other real estate owned | — | — | 2,783 | 2,783 | |||||||||||||||||||
The following table presents quantitative information about Level 3 Fair Value Measurements for assets measured at fair value on a non-recurring basis at December 31, 2025, and December 31, 2024 (in thousands except for percentages):
| Description | Fair Value | Valuation Techniques | Unobservable Inputs | Range | ||||||||||||||||||||||
| December 31, 2025 | ||||||||||||||||||||||||||
| Collateral dependent loans | $ | 13,453 | 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 | 2,689 | 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, 2024 | ||||||||||||||||||||||||||
| Collateral dependent loans | $ | 4,021 | 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 | 2,783 | 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 December 31, 2025, and December 31, 2024, were as follows (in thousands):
| Fair Value Measurements at December 31, 2025 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 | $ | 53,497 | $ | 53,497 | $ | — | $ | — | $ | 53,497 | |||||||||||||||||||
| Interest-bearing deposits with banks | 235,630 | 235,630 | — | — | 235,630 | ||||||||||||||||||||||||
| Loans, net | 5,319,853 | — | — | 5,284,210 | 5,284,210 | ||||||||||||||||||||||||
| Accrued interest | 35,442 | — | 35,442 | — | 35,442 | ||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Non-interest-bearing | $ | 1,336,380 | $ | — | $ | 1,336,380 | $ | — | $ | 1,336,380 | |||||||||||||||||||
| Interest-bearing | 5,067,561 | — | 5,062,925 | — | 5,062,925 | ||||||||||||||||||||||||
Short-term borrowings | 450,000 | — | 450,005 | — | 450,005 | ||||||||||||||||||||||||
Subordinated debentures, net | 70,222 | — | 70,800 | — | 70,800 | ||||||||||||||||||||||||
Subordinated debentures owed to unconsolidated subsidiary trusts | 17,268 | — | 16,494 | — | 16,494 | ||||||||||||||||||||||||
| Accrued interest | 4,447 | — | 4,447 | — | 4,447 | ||||||||||||||||||||||||
| Fair Value Measurements at December 31, 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 | $ | 35,554 | $ | 35,554 | $ | — | $ | — | $ | 35,554 | |||||||||||||||||||
| Interest-bearing deposits with banks | 99,760 | 99,760 | — | — | 99,760 | ||||||||||||||||||||||||
| Loans, net | 5,604,196 | — | — | 5,465,772 | 5,465,772 | ||||||||||||||||||||||||
| Accrued interest | 34,454 | — | 34,454 | — | 34,454 | ||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Non-interest-bearing | $ | 1,379,940 | $ | — | $ | 1,379,940 | $ | — | $ | 1,379,940 | |||||||||||||||||||
| Interest-bearing | 5,135,299 | — | 5,126,423 | — | 5,126,423 | ||||||||||||||||||||||||
Short-term borrowings | 365,000 | — | 364,985 | — | 364,985 | ||||||||||||||||||||||||
| Subordinated debentures, net | 94,872 | — | 91,760 | — | 91,760 | ||||||||||||||||||||||||
| Subordinated debentures owed to unconsolidated subsidiary trusts | 17,013 | — | 14,587 | — | 14,587 | ||||||||||||||||||||||||
| Accrued interest | 6,157 | — | 6,157 | — | 6,157 | ||||||||||||||||||||||||
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About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.