Life at the $12.8-billion-asset Berkshire Hills Bancorp (BHLB 2.77%) has been anything but dull over the past few years, whether you look at the bank's volatile stock price or its many leadership changes. Now, one of the bank's major shareholders, HoldCo Asset Management, appears to have had enough and has called the bank out for its inability to create shareholder value. Let's take a look at Berkshire Hills' struggles over the past few years, some of HoldCo's claims, and then what this means for the stock moving forward.
A tough few years
The trouble for Berkshire Hills started in 2018 when Michael Daly abruptly resigned as CEO. Following his departure, some employees claimed Daly had created a toxic workplace culture. The Boston-based bank's board of directors elevated then-president Richard Marotta to replace Daly as chief executive. Marotta vowed to improve profitability and went to work on cleaning up the bank's reputation. But two years later, Marotta followed in his predecessor's footsteps and abruptly resigned to "pursue new opportunities."
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The bank's stock price has cratered since Daly left, falling from more than $40 per share in late 2018 to to less than $9 per share in late September of 2020, trading at less than 40% of tangible book value. After Berkshire Hills COO Sean Gray stepped in to serve as acting CEO for Marotta, the bank hired Nitin Mhatre, a former executive at Webster Bank. Mhatre is the bank's third CEO since late 2018, but the first one hired from outside the bank.
HoldCo gets involved
In August 2020, HoldCo Asset Management began acquiring shares in Berkshire Hills and eventually amassed a position equal to roughly 3.3% of outstanding shares at the bank. HoldCo said in a recent public letter sent to Berkshire Hills' board of directors that it believed the market had overreacted toward the bank's credit outlook and management changes. HoldCo also said it found the bank's CFO, Jamie Moses, to be a "shareholder advocate."
HoldCo appears to be doing well on its investment. Around the time the company said it bought shares, Berkshire Hills likely traded around $10 or below. Since then, the bank -- along with the overall sector -- has bounced back. Berkshire Hills recently traded around $20.24, or roughly 90% of tangible book value.
Failing shareholders?
But despite its gains, HoldCo believes Berkshire Hills failed shareholders in two major ways. First, the bank has yet to repurchase shares while trading below tangible book value. When a company repurchases shares, it is essentially removing shares from the total outstanding amount. This rewards shareholders because their slice of the company now makes up a greater piece of the overall pie, technically giving their shares a larger allocation of earnings. And when a bank is trading below tangible book value, it's a rare opportunity to repurchase shares, because it will not only grow earnings but will also grow tangible book value, which in turn can drive the stock price higher.
The odd thing about the situation at Berkshire Hills, according to HoldCo's letter, is that the board and its CFO, Moses, appear to be on completely different pages. At a recent investor conference, Moses reportedly said the bank has plenty of excess capital and should be repurchasing shares below book value, reportedly calling it a "no-brainer."
HoldCo and Moses also seem to be at odds with the board's decision to hire Mhatre. I think many investors (including me) believed that given Berkshire Hills' multiple leadership changes, struggles to turn the bank around, and low valuation, the bank might consider a sale, which could result in a nice bump from the company's current stock price. But if the bank truly wanted to explore a sale, it likely wouldn't hire a new CEO from outside the company. That suggests a new direction, not an exit.
Moses also appeared to be in the dark on this move. According to HoldCo's notes, Moses said at the conference, "I do not believe the board considered a sale or a partnership as part of the CEO search, I say that because nobody asked me to do an analysis." Moses further said, according to HoldCo's notes, that the new CEO and the board do not view share repurchases below tangible book value as a "no-brainer," despite the company's strong capital levels. At this point, I have to assume Moses is beyond frustrated with the board if he's willing to share all this information with investors at an industry conference.
HoldCo in its letter said it expects Berkshire Hills' board, which owns only 0.6% of outstanding shares, to explain the process in hiring the new CEO, whether the bank actively explored a sale, and its current plan.
Will HoldCo's involvement prove beneficial?
HoldCo has likely already doubled its investment with shares at today's levels, but I do find its frustration and questions completely warranted. If either the board or Mhatre does not support share repurchases (I think it's hard to really know Mhatre's position, given that he is so new), that likely means they want to grow the bank.
And I think Berkshire Hills' growth story has been played out. Prior to Daly's departure in 2018, the bank had been on a huge acquisition spree, building a somewhat wonky regional presence in parts of New England, upstate New York, New Jersey, and Pennsylvania. It called itself "America's Most Exciting Bank" and moved its headquarters from Western Massachusetts to Boston with aspirations to be the first regional bank in Boston since Bank of America acquired FleetBoston prior to the Great Recession.
That story has largely been a failure. Berkshire Hills clearly has underperformed and has been exiting business lines and shrinking its footprint to cut costs. Kudos to the bank for acknowledging when certain things aren't working and trying to cut costs. But in a time when the low-interest rate environment is eating into loan profits and banks need to invest heavily in digital, it seems like a tough time to start over.
While HoldCo may not own enough shares to be an activist investor right now, the public letter it wrote could force more answers from the bank regarding the events of the last few years. Now in the public spotlight, the board will at the very least need to have a good explanation for continuing to not have a share repurchase plan in place. I'd also expect any future growth strategies to be watched closely. Since HoldCo's letter on the afternoon of Feb. 8, shares of Berkshire Hills did jump as much as 5% at one point, so the accountability campaign seems to be off to a good start.
