The $13.1 billion asset Berkshire Hills Bancorp (NYSE:BHLB) began to struggle in late 2018, after its CEO Michael Daly abruptly left the company due to what some analysts believed were workplace culture issues. The stock price had already come down to just shy of $33 per share at the end of 2019. But when the coronavirus pandemic really hit the economy hard in late February, the company's stock tumbled from a little more than $27 per share to about $11 per share now, and it's trading way below book value. In fact, it's so far below book value, at this point I'm wondering if the bank may consider taking goodwill impairment in the second quarter. Here's why.
Loan values could deteriorate
Goodwill is an intangible asset on the balance sheet, and it represents the premium a company pays over the fair value of an asset it is acquiring. Most banks accumulate goodwill when they acquire another bank for more than book value, which has been very common in recent years. Goodwill impairment occurs when the value of an asset declines below the book value of that asset.
Berkshire has a number of loans in its portfolio that are in industries that have been heavily affected by the pandemic. Roughly 29% of the bank's loans are in the hospitality, leisure, restaurant, retail, healthcare, and construction industries, so there is a good chance that some of those assets could lose value permanently. .
Trading far below book value
If you look at the six banks that took goodwill impairment after the first quarter of the year, a common theme is that they were all trading significantly below book value.
The average book value of the five American banks in that group at the time was just above 51% of book value, a steep discount. Berkshire Hills, on the other hand, is currently trading at 32% of book value, and the company has a lot of goodwill. Berkshire Hills was a very active acquirer leading up to the end of 2018, and as a result accumulated more than $553 million in goodwill.
While the bank's book value as of March 31 was $33.90 per share, its tangible book value was only $22, meaning there is a lot of goodwill baked into the company's book value .
Can the company rebound?
The way that banks evaluate goodwill is tricky, but in general one thing to look at is whether the bank can return to 100% book value. In Berkshire's case, the question might be whether or not the bank can return its stock price to $33.90 per share. This seems like it would be a significant challenge when you compare it to other similar banks and the industry as a whole.
For instance, the KRE, an index of regional bank stocks, has seen its market price decline about 34% since Feb. 20, when the market really started to dip as a result of the virus. Berkshire Hills' stock in the same time period is down about 60%.
The stock prices of some of the bank's direct competitors, Independent Bank Corp (NASDAQ:INDB), Meridian Bancorp (NASDAQ:EBSB), and Brookline Bancorp (NASDAQ:BRKL), have declined 17%, 38%, and 37%, respectively, in the same time period.
The market has obviously been volatile, but even during a strong rebound Berkshire has failed to get close to full book value. Between March 23 and April 29, Berkshire Hills' share price rose from $11.92 to $18.48, but even at that level the bank was only trading at about 55% of book value, and Berkshire Hills hasn't gotten close to that level since.
Goodwill impairment affects earnings
Goodwill impairment does not affect liquidity or regulatory ratios, but it does get recorded as a non-interest expense, meaning it cuts directly into profits. Berkshire Hills did declare its regular $0.24 quarterly dividend on June 18 , so maybe that's a sign that it is in better shape, but it's still hard to picture Berkshire rebounding to 100% book value anytime soon.