Burke & Herbert Financial Corp., once famous for its resistance to change, has announced the first deal in its storied history, agreeing to pay $371.5 million in stock for the Summit Financial Group in Moorefield, West Virginia.
Both parties described the transaction as a merger of equals. Summit investors will own about half the pro forma company and receive 0.504 shares of Burke & Herbert for each Summit share. Burke & Herbert will be the surviving corporate brand identity and the headquarters will be in Alexandria, Virginia, Burke & Herbert's base since 1852.
Burke & Herbert Chairman and CEO David Boyle will lead the combined company as chairman and CEO. Charlie Maddy, Summit's president and CEO, will serve as president. The 16-member board will include eight directors from both Burke & Herbert and Summit.
The $3.6 billion-asset Burke & Herbert has been expanding aggressively in recent years, moving south, first to Fredericksburg in 2021, and Richmond, where it expects to open its first branch later this year. Still, Burke & Herbert had never acquired another bank and remained associated to a degree with the dyed-in-the-wool conservatism that once distinguished its operations. Burke & Herbert resisted introducing account numbers and supplied its teller stations with old-fashioned quill pens until the mid-1970s.
Co-founder John Woolfolk Burke's family have remained active in Burke & Herbert's management. Two descendants, including former Chairman and CEO E. Hunt Burke, currently serve as directors.
The decision to merge with Summit seems to break decisively with that past. The transaction would create an $8.1 billion-asset regional bank spread across five states with a wider product set and more capital, not to mention projected earnings of $115 million in 2025, the first full year of combined operations, Boyle said in the press release. The two companies reported combined earnings of $97 million in 2022 and $35.4 million for the first six months of 2023.
"This alliance doesn't just extend our influence; it strategically positions us for future growth," Maddy said in a press release late on Thursday. "I am unwavering in my belief that this partnership will elevate us to heights neither of our organizations could have reached on their own."
The $3.9 billion-asset Summit dates back to 1883 when its bank subsidiary, now Summit Community Bank, was founded as the South Branch Valley National Bank of Moorefield. It operates 54 branches in West Virginia, Virginia, Maryland, Delaware and Kentucky. Burke & Herbert, Virginia's oldest bank, has 23 branches located primarily in suburban Washington, D.C., including Alexandria, which sits across the Potomac River from the Capitol.
With virtually no overlap between the two franchises, the deal's projected cost saves are relatively modest, 11% of the combined noninterest expense base, which totaled $150.8 million in 2022. Tangible book valuation dilution for Burke & Herbert, the legal acquirer, will total about 12.7% with an estimated earn-back of 1.2 years. One-time merger expenses are expected to total $45.5 million after taxes.
Burke & Herbert and Summit cited scale as among their primary reasons for deciding to merge. In that respect, the deal may be a harbinger. While 2023 has been slow from a merger-and-acquisition standpoint, with just 50 deals announced through July 26, many observers
"The rich and storied history of our franchises and our combined financial strength creates a promising future … due to favorable profitability metrics and a larger foundation for future growth," Boyle said in the press release.
Veteran bank consultant Bert Ely, principal of Ely & Co. in Alexandria and a longtime Burke & Herbert customer, expressed some doubt, noting that geographic expansion can be "fraught with risk" for banks.
"I remember a banker in western Virginia telling me, back in the 1970s, when branching restrictions were being eased in Virginia, that he and fellow bankers in the area anticipated 'the boys from Richmond' were going to be making loans in market areas local bankers were smart enough not to make," Ely said. "I hope that fate does not befall Burke & Herbert."
Chris Marinac, director of research at Janney Montgomery Scott in Atlanta, said the deal's ultimate outcome would be determined by how well Burke & Herbert and Summit execute. "There's no guarantee of success or failure," he said.
Marinac credited Burke & Herbert for being "proactive." The $371.5 million sale price works out to approximately $25.20 for each Summit share, which amounts to a modest 6% premium over Thursday's closing price of $23.76. In that respect, Burke & Herbert likely benefited by striking a deal now, before the marketplace heats up, Marinac said. "There's a lot of pricing changes because of the way securities have acted ... just given how interest rates have shifted. I think sellers have to be willing to accept that," Marinac said.
"There's also a long-term bet a seller is making when joining up with another bank," Marinac added.
