Berkshire Hills Bancorp (NYSE: BHLB) is one of the few banks not to come out of the shock of the pandemic in better shape than before. Not only does Berkshire Hills shares remain below pre-pandemic levels, but the bank has faced many changes in management and is now in rebuilding mode. With stocks trading at the lower end of the industry, especially for a bank its size ($ 12.4 billion in assets), investors considering Berkshire Hills are now looking to see if the depressed valuation points to a value stock – or a value trap. We will take a look.
Lots of work to do
Berkshire Hills struggled in 2020, with its stock falling below $ 10 per share at some point in August. The bank took a significant goodwill impairment which significantly reduced its tangible book value (TBV). TBV is a bank’s capital less goodwill and intangible assets, and shows what a bank would be worth if it were to be immediately liquidated. Banks are trading against their TBVs, so it’s not good to see TBV take a big hit. Last year, the Berkshire Hills board also suffered heat from one of its shareholders, HoldCo Asset Management, after the bank failed to repurchase shares when it traded below of TBV, or considered a bank sale before essentially hiring a new management team.
But since then the bank has entered into a cooperation agreement with HoldCo and added one of its co-founders to its board of directors; started to buy back shares; and launched a new strategic plan to turn the bank around. Dubbed Berkshire’s Exciting Strategic Transformation (BEST), the plan aims for the bank to achieve a 10% to 12% return on tangible equity (ROTCE) within three years. ROTCE is the bank’s technical return on equity less intangibles and goodwill, and it’s a good representation of what the bank earns on shareholder investments.
BEST also expects to achieve a return on assets (ROA) of 1%, a measure of how the company uses its assets to generate a profit. Berkshire Hills plans to achieve these goals by doing things like growing corporate banking, US Small Business Administration (SBA) loans, asset lending, wealth management and the bank’s MyBanker program, in which mobile personal bankers meet customers where they need to make banking more convenient and personal. Part of BEST also means transforming the balance sheet to change the composition of assets and deposits, something the bank has already started doing by eliminating non-core loan portfolios such as its indirect auto loan business and with the recent sale of its insurance business. at Brown & Brown.
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The second quarter showed some early progress for new CEO Nitin J. Mhatre. During the quarter, the bank generated an ROTCE of almost 8% and an ROA of 0.70%. But there was nothing particularly exciting about the top line, as net interest income (essentially the profits banks make on loans and securities) showed no improvement. We also know that the upcoming sale of the insurance business will also hurt short-term non-interest income.
The positive points for the quarter were largely attributable to the improvement in the deposit base and credit outlook. Berkshire Hills has not historically had a good deposit base, but like much of the industry, it took the last year to dramatically improve this all-important feature that banking investors are watching. Unpaid deposits, that is to say those on which the bank pays no interest, are up 19% compared to the second quarter of 2020 and 10% compared to the first quarter of 2021. They now represent nearly 30% of total bank deposits. Berkshire Hills has also done a good job cutting back on high cost sources of finance such as traded certificates of deposit (CDs) and other higher cost borrowing. Additionally, the bank said 84% of customers’ CDs will be revalued over the next 18 months, further reducing deposit costs.
Credit also improved during the quarter. COVID-related deferrals fell 54%, and defaults and net write-offs (debts unlikely to be collected, a good representation of losses) declined. Berkshire Hills has not necessarily had a credit problem in the past, but credit quality has been volatile in recent quarters, unlike most other parts of the banking industry. This is also the first quarter of the pandemic that Berkshire Hills failed to make an allowance for potential credit losses, as most banks released previously built reserves for loan losses in recent quarters. .
Is there any value?
Mhatre got off to a good start in his first real quarter at the helm of Berkshire Hills, but I don’t think I’m ready to call Berkshire Hills valuable action yet. While there have been good improvements on the deposit and credit fronts, I am looking for more consistency on credit and will also be interested to see how well these non-interest-bearing deposits remain after the system has liquidity. standardized banking. There also needs to be more evidence of improvement on the lending side, and I’m looking to better understand the overall strategic plan. Mhatre says he wants to partner with fintechs to boost banking on the consumer side, but I’m still not sure exactly what that will look like, or if that will give the bank any differentiation or advantage in a certain niche. banking. The markets in which Berkshire Hills operates are not particularly exciting economies.
Finally, while a 10% ROTCE and 1% ROA are strong, stronger peers the size of Berkshire Hills are already doing much better than that, so three years is a long way to wait to essentially get back to the middle. of the peloton. Berkshire Hills might be more attractive if it traded below TBV, as it has more scale than most small banks trading below TBV, but the bank is already trading above TBV. Having said that, I don’t consider Berkshire Hills to be a value stock at this time.
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