Berkshire Hills Bancorp (BHLB 1.62%) is a regional bank based in Pittsfield, Massachusetts, that you probably haven't heard much about unless you're from New England. Like many small banks, Berkshire Hills (which has about $13 billion in assets) has really struggled this year, devastated by the coronavirus pandemic and its effects. But the bank beat earnings estimates in the third quarter and established some positive momentum after net losses in the first two quarters of the year. At its current low value, is Berkshire Hills a buy?
After two straight quarters of net losses, Berkshire Hills posted net income of $21.4 million, or $0.42 per share, in the third quarter, down slightly from $22.6 million in the same period last year. Revenue was down 27% to $96.7 million year over year, but up about 2% over the second quarter. Fee income was down 8% year over year, but up 9% over the previous quarter, primarily due to higher deposit fees as transaction volumes increased. Also, provision for credit losses was just $1.2 million, down from $29.8 million the previous quarter.
The major cause for the bounce is related to the $554 million goodwill impairment the bank took in the second quarter. A company's goodwill balance is made up of intangible assets that accumulate through acquisitions, like its brand value, intellectual property, and customer and employee relationships. When the value of those assets drops below what the company paid for them, that's when goodwill impairments occur. Impairments count as non-interest expenses, so they cut into profits. In the second quarter, Berkshire Hills' $554 million goodwill impairment resulted in an $11.02 per share hit to earnings.
While it is not uncommon for a company to pay more than the value of its tangible assets, the pandemic has changed that, especially for banks. As Berkshire Hills said in its second-quarter earnings release: "Due to the pandemic, industrywide stock prices and earnings expectations have declined significantly, and the company concluded that the goodwill balance was no longer supported by its estimate of the company's fair value. The entire goodwill balance was therefore written off as a non-cash expense that was deemed non-core by the company."
By taking a goodwill impairment, the company is charging off these underperforming assets.
As good as it gets?
Where does this leave Berkshire Hills? The market really reacted well to Berkshire's solid earnings report on Oct. 26, and the stock jumped 11% the next day. It's since pulled back a bit and is now down about 61% on the year.
Berkshire Hills' stock is extremely undervalued, with a price-to-book ratio (P/B) around 0.45, which means the stock price is trading well below the value of its assets. And the thing is, the P/B was even lower last quarter, at around 0.32, so the market is starting to move a bit in a positive direction. But the company has a long way to go and faces a tough road ahead as the recession continues and interest rates remain at 0%.
Plus, the company is undergoing a leadership change to replace Richard Marotta, who resigned as CEO in August. Sean Gray, the bank's current president and COO, was tapped to serve as acting president and chief executive while the bank undergoes a search process. Gray is considered a candidate, but the bank is looking outside the organization as well.