Burke & Herbert Financial Services Corp. 10-Q

Item 1A. Risk Factors Except as described below, there have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in our Form 10 for the year ended December 31, 2022. Risks Relating to the Consummation of the Merger and Burke & Herbert Following the Merger The market price of Burke & Herbert common stock after the merger may be affected by factors different from those currently affecting the shares of Burke & Herbert common stock or Summit common stock. In the merger, Summit shareholders will become Burke & Herbert shareholders. Burke & Herbert’s business differs from that of Summit and certain adjustments may be made to the Burke & Herbert’s business as a result of the merger. Accordingly, the results of operations of the continuing corporation and the market price of Burke & Herbert’s common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of Burke & Herbert and Summit. We expect to incur substantial costs related to the merger and integration. Burke & Herbert has incurred and expects to incur a number of non-recurring costs associated with the merger. These costs include legal, financial advisory, accounting, consulting and other advisory fees, severance/employee benefit-related costs, public company filing fees and other regulatory fees, financial printing and other printing costs and other related costs. Some of these costs are payable by us regardless of whether the merger is completed. We have also incurred and expect to incur significant costs in connection with negotiating the merger agreement and closing the merger. In addition, the continuing corporation will incur integration costs following the completion of the merger as Burke & Herbert and Summit integrate their businesses, including facilities and systems consolidation costs and employment-related costs. Burke & Herbert may also incur additional costs to maintain employee morale and to retain key employees. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including purchasing, accounting and finance, payroll, compliance, treasury management, branch operations, vendor management, risk management, lines of business, pricing and benefits. While we have assumed that a certain level of costs will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration costs. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. These integration costs may result in the continuing corporation taking charges against earnings following the completion of the merger, and the amount and timing of such charges are uncertain at present. There can be no assurances that the expected benefits and efficiencies related to the integration of the businesses will be realized to offset these transaction and integration costs over time. Anticipated future merger and integration-related pre-tax costs are currently estimated to be approximately $57 million. Combining Burke & Herbert and Summit may be more difficult, costly or time-consuming than expected, and we may fail to realize the anticipated benefits of the merger. The merger is a transaction combining two financial institutions of relatively similar asset size. The success of the merger will depend, in part, on the ability to realize the anticipated cost savings from combining the businesses of Burke & Herbert and Summit. To realize the anticipated benefits and cost savings from the merger, we must successfully integrate and combine Summit’s businesses in a manner that permits those cost savings to be realized, without adversely affecting current revenues and future growth. If we are not able to successfully achieve these objectives, the anticipated benefits of 71 Table of Contents the merger may not be realized fully, or at all, or may take longer to realize than expected. In addition, the actual cost savings of the merger could be less than anticipated, and integration may result in additional and unforeseen expenses. An inability to realize the full extent of the anticipated benefits of the merger and the other transactions contemplated by the merger agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results of the continuing corporation following the completion of the merger, which may adversely affect the value of the common stock of the continuing corporation following the completion of the merger. We have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on us during this transition period and for an undetermined period after completion of the merger on the continuing corporation. Furthermore, the board of directors of the continuing corporation will consist of former directors from each of Burke & Herbert and Summit. Combining the boards of directors of each company into a single board could require the reconciliation of differing priorities and philosophies. The future results of the continuing corporation following the merger may suffer if the continuing corporation does not effectively manage its expanded operations, including complying with any enhanced regulatory requirements. Following the merger, the size of the business of the continuing corporation will increase beyond the current size of our business. The continuing corporation’s future success will depend, in part, upon our ability to manage this expanded business, which may pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that the continuing corporation will be successful or that it will realize the expected operating efficiencies, revenue enhancement or other benefits currently anticipated from the merger. The continuing corporation may also face increased scrutiny from governmental authorities as a result of the increased size of its business, including if the total assets of the continuing corporation grow to exceed $10 billion as of December 31 of any calendar year. Banks with $10 billion or more in total assets are, among other things: examined directly by the CFPB with respect to various federal consumer financial laws; subject to reduced dividends on any holdings of Federal Reserve Bank of Richmond common stock; subject to limits on interchange fees pursuant to the Durbin amendment to the Dodd-Frank Act; subject to certain enhanced prudential standards; no longer treated as a “small institution” for FDIC deposit insurance assessment purposes; and no longer eligible to elect to be subject to the “community bank leverage ratio.” Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, and the incurrence of significant expenses which could have a significant adverse effect on the Company’s financial condition or results of operations. The continuing corporation may be unable to retain Company personnel successfully after the merger is completed. The success of the merger will depend in part on the ability of us and the continuing corporation to retain the talents and dedication of key employees currently employed. It is possible that these employees may decide not to remain with Burke & Herbert or Summit, as applicable, while the merger is pending or with the continuing corporation after the merger is consummated. If we are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, we could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, following the merger, if key employees terminate their employment, the continuing corporation’s business activities may be adversely affected, and management’s attention may be diverted from successfully hiring suitable replacements, all of which may cause the continuing corporation’s business to suffer and we may not be able to locate or retain suitable replacements for any key employees who leave. Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the continuing corporation following the merger. Before the merger and the bank merger may be completed, various approvals and consents must be obtained from the Federal Reserve Board (unless a waiver is granted), the FDIC, the Virginia BFI, the West Virginia Division of Financial Institutions (“WVDFI”), and other regulatory authorities in the United States. In determining whether to grant these 72 Table of Contents approvals, such regulatory authorities consider a variety of factors, including the regulatory standing of each party and various other factors. These approvals could be delayed or not obtained at all, including due to an adverse development in either party’s regulatory standing or in any other factors considered by regulators when granting such approvals; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment generally. The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the continuing corporation’s business or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the continuing corporation following the merger or otherwise reduce the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger. The completion of the merger is conditioned on the receipt of the requisite regulatory approvals and the expiration of all statutory waiting periods without the imposition of any material burdensome regulatory condition. Additionally, the completion of the merger is conditioned on the absence of certain orders, injunctions or decrees by any court or governmental entity of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the merger agreement. In addition, despite the parties’ commitments to using their reasonable best efforts to comply with conditions imposed by regulators, under the terms of the merger agreement, neither Burke & Herbert nor Summit, nor any of their respective subsidiaries, is permitted (without the written consent of the other party), to take any action, or commit to take any action, or agree to any condition or restriction, in connection with obtaining the required permits, consents, approvals and authorizations of governmental entities or regulatory agencies that would reasonably be expected to have a material adverse effect on the continuing corporation and its subsidiaries, taken as a whole, after giving effect to the merger and the bank merger. Certain of Burke & Herbert’s and Summit’s directors and executive officers may have interests in the merger that may differ from, or are in addition to, the interests of Burke & Herbert’s shareholders. Burke & Herbert’s shareholders should be aware that some of Burke & Herbert’s and Summit’s directors and executive officers may have interests in the merger that are different from, or in addition to, those of Burke & Herbert shareholders and Summit shareholders. These interests may create potential conflicts of interest. The Burke & Herbert and Summit boards of directors were aware of these respective interests and considered these interests, among other matters, when making their decisions to approve the merger agreement, and in recommending that, in the case of the Burke & Herbert board of directors, Burke & Herbert shareholders vote to approve the merger agreement and, in the case of the Summit board of directors, Summit shareholders vote to approve the merger agreement. The merger agreement may be terminated in accordance with its terms and the merger may not be completed. The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: (i) approval of the merger by Burke & Herbert shareholders and approval by Summit shareholders; (ii) authorization for listing on Nasdaq of the shares of Burke & Herbert common stock to be issued in the merger, subject to official notice of issuance; (iii) the receipt of the requisite regulatory approvals, including the approval of the Federal Reserve Board (unless a waiver is granted), the FDIC, the VBFI and the WVDFI; (iv) effectiveness of the registration statement on Form S-4 for the Burke & Herbert shares to be issued as consideration in the merger; and (v) the absence of any order, injunction, decree or other legal restraint preventing the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement or making the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement illegal. Each party’s obligation to complete the merger is also subject to certain additional customary conditions, including (a) subject to applicable materiality standards, the accuracy of the representations and warranties of the other party, (b) the performance in all material respects by the other party of its obligations under the merger agreement, and (c) the receipt by each party of an opinion from its counsel to the effect that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the merger may not be completed. In addition, the parties can mutually decide to terminate the merger agreement at any time, before or after the requisite shareholder approvals, or Burke & Herbert or Summit may elect to terminate the merger agreement in certain other circumstances. 73 Table of Contents Failure to complete the merger could negatively impact Burke & Herbert. If the merger is not completed for any reason, including as a result of the either one of Burke & Herbert’s or Summit’s shareholders failing to approve their respective merger proposal, there may be various adverse consequences us and we may experience negative reactions from the financial markets and from their respective customers and employees. For example, our business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of our common stock could decline to the extent that current market prices reflect a market assumption that the merger will be beneficial and will be completed. We also could be subject to litigation related to any failure to complete the merger or to proceedings commenced against Burke & Herbert or Summit to perform their respective obligations under the merger agreement. If the merger agreement is terminated under certain circumstances, we may be required to pay a termination fee of $14.86 million to Summit. Additionally, we have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement and all filing and other fees paid in connection with the merger. If the merger is not completed, we would have to pay these expenses without realizing the expected benefits of the merger. In connection with the merger, we will assume Summit’s outstanding debt obligations, and the continuing corporation’s level of indebtedness following the completion of the merger could adversely affect the continuing corporation’s ability to raise additional capital and to meet its obligations under its existing indebtedness. In connection with the merger, we will assume Summit’s outstanding indebtedness. Our existing debt, together with any future incurrence of additional indebtedness, and the assumption of Summit’s outstanding indebtedness, could have important consequences for the continuing corporation’s creditors and the continuing corporation’s shareholders. For example, it could: • limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; • restrict us from making strategic acquisitions or cause the continuing corporation to make non-strategic divestitures; • restrict our ability to pay dividends; • increase our vulnerability to general economic and industry conditions; and • require a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on the continuing corporation’s indebtedness, thereby reducing our ability to use cash flows to fund operations, capital expenditures and future business opportunities. We are subject to business uncertainties and contractual restrictions while the merger is pending. Uncertainty about the effect of the merger on employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to seek to change existing business relationships with us. In addition, subject to certain exceptions, we have agreed to operate our business in the ordinary course in all material respects and to refrain from taking certain actions that may adversely affect our ability to consummate the transactions contemplated by the merger agreement on a timely basis without the consent of the other party. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger. Uncertainty related to the proposed merger could disrupt our relationships with customers, suppliers, business partners and others, as well as our operating results and businesses generally. Whether or not the merger is ultimately consummated, as a result of uncertainty related to the proposed transactions, risks relating to Burke & Herbert’s business include the following: • our employees may experience uncertainty about their future roles, which might adversely affect our ability to retain and hire key personnel and other employees; • customers, suppliers, business partners and other parties with which we maintain business relationships may experience uncertainty about their respective futures and seek alternative relationships with third parties, seek to alter their business relationships with us or fail to extend an existing relationship; and 74 Table of Contents • We have expended and will continue to expend significant costs, fees and expenses for professional services and transaction costs in connection with the proposed merger. If any of the aforementioned risks were to materialize, they could lead to significant costs which may impact our results of operations and financial condition. The current higher for longer interest rate environment may adversely impact the fair value adjustments of investments and loans acquired in the merger. Upon the closing of the merger, we will need to adjust the fair value of Summit’s investment and loan portfolios. The rising interest rate environment could have the effect of increasing the magnitude of the purchase accounting marks relating to such fair value adjustments, thereby increasing initial tangible book value dilution, extending the tangible book value earn-back period, and negatively impacting our capital ratios, which may necessitate taking steps to strengthen our capital position. The merger agreement limits our ability to pursue alternatives to the merger and may discourage other companies from trying to acquire us. The merger agreement contains “no shop” covenants that restricts our ability to, directly or indirectly, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, subject to certain exceptions generally related to the exercise of fiduciary duties by our board of directors, engage in any negotiations concerning, or provide any confidential or non-public information or data relating to, any alternative acquisition proposals. These provisions, which include a $14.86 million termination fee payable under certain circumstances, may discourage a potential third-party acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing that acquisition. Burke & Herbert shareholders will have reduced ownership and voting interest in the continuing corporation after the consummation of the merger and will exercise less influence over management. Burke & Herbert shareholders currently have the right to vote in the election of the board of directors and on other matters affecting us. When the merger is completed, each Burke & Herbert shareholder and each Summit shareholder will become a holder of common stock of the continuing corporation, with a percentage ownership of the continuing corporation that is smaller than the holder’s percentage ownership of either Burke & Herbert or Summit individually, as applicable, prior to the consummation of the merger. Based on the number of shares of Burke & Herbert common stock and Summit common stock outstanding as of the close of business on the respective record dates, and based on the number of shares of Burke & Herbert common stock expected to be issued in the merger, the former Summit shareholders, as a group, are estimated to own approximately 50% of the outstanding shares of the continuing corporation immediately after the merger and current Burke & Herbert shareholders as a group are estimated to own approximately 50% of the outstanding shares of the continuing corporation immediately after the merger. Because of this, our shareholders may have less influence on the management and policies of the continuing corporation than they now have on the management and policies of us. Issuance of shares of our common stock in connection with the merger may adversely affect the market price of our common stock. In connection with the payment of the merger consideration, we expect to issue approximately 7,400,527 shares of Burke & Herbert’s common stock to Summit shareholders. The issuance of these new shares of our common stock may result in fluctuations in the market price of our common stock, including a stock price decrease. Company shareholders will not have appraisal rights or dissenters’ rights in the merger. Appraisal rights (also known as dissenters’ rights) are statutory rights that, if applicable under law, enable shareholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to shareholders in connection with the extraordinary transaction. Burke & Herbert shareholders are not entitled under applicable law to appraisal rights in connection with the merger. Shareholder litigation could prevent or delay the completion of the merger or otherwise negatively impact our business. Shareholders of Burke & Herbert and/or of Summit may file lawsuits against Burke & Herbert, Summit and/or the directors and officers of either company in connection with the merger. One of the conditions to the closing is that no order, injunction or decree issued by any court or governmental entity of competent jurisdiction or other legal restraint preventing 75 Table of Contents the consummation of the merger, the bank merger or any of the other transactions contemplated by the merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting Burke & Herbert or Summit defendants from completing the merger, the bank merger or any of the other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in significant costs to us, including any cost associated with the indemnification of directors and officers of each company. We may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger. Such litigation could have an adverse effect on the financial condition and results of operations of Burke & Herbert and Summit and could prevent or delay the completion of the merger. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not Applicable.