As it did to many, many companies this year, the coronavirus pandemic sent Berkshire Hills Bancorp (BHLB 3.48%) into an absolute tailspin.
The Boston-based regional bank, which was trading above $40 per share just a little more than two years ago and opened 2020 above $32, cratered to below $10 per share this spring, and sank to $8.71 per share in late September. At that record low, the $12.6 billion asset bank was trading at just below 40% of its tangible book value. At that point, I think many investors (myself included) were speculating that it could eventually become an acquisition target.
But as bank stocks rebounded in recent months, Berkshire Hills did too. On Tuesday, it closed at $16.75, a little more than 75% of tangible book value. So at current levels, is Berkshire Hills still a takeout candidate?
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Still a good opportunity
With a market cap of around 75% of tangible book value, Berkshire Hills is still cheap. Most banks have by now rebounded to tangible book value or above, so I think there is a good chance it could still be an acquisition target. However, banks are sold, not bought -- in other words, an institution generally has to actively put itself out there if it wants suitors to come calling. Considering where it had been trading not long ago, there was little chance Berkshire Hills would have decided to sell when it was valued at its previous steep discount. That would have been too large a loss for investors and insiders of a bank that had been performing well recently. Now, with its valuation closer to tangible book value, the bank is in a much stronger position to negotiate a better premium.
Share price weakness isn't the only sign that Berkshire Hills may wind up on the hunt for a buyer. Two CEOs have departed the company in the past two years, suggesting either that there's a lack of strategic direction or that the board of directors has not been happy with where the bank is heading. The bank also wrote down its entire goodwill value in the second quarter. Goodwill is an intangible asset that essentially values aspects of the bank that are hard to put firm dollar values on -- things like good customer relationships and brand awareness. One reason a bank might write off some of the value of those intangibles is if management believes that it won't be able to lift its market cap back to book value. Notably, the two largest banks to get acquired this year, CIT Group and BBVA USA, both took goodwill impairments in 2020.
Another thing to consider is what kind of position the bank will be in after the U.S. economy more or less stabilizes. After a difficult first half of 2020, Berkshire Hills turned in a much better third quarter. But it's hard to gauge whether the regional bank will be able to regain its pre-pandemic earnings power. On the third-quarter earnings call, bank executives said they think they can keep bringing deposit costs down and will look to trim $10 million to $15 million in annual expenses.
That would help, but Berkshire Hills' total loan volume dropped to about $9 billion in the quarter from about $9.7 billion a year prior. A smaller loan book means less net interest income -- and interest income was already going to be challenged in this ultra-low-rate environment. Meanwhile, total revenue in the third quarter was down more than 50% year over year. So, if the bank's leadership anticipates that growing earnings will be a real challenge, they may want to sell while they think its stock price is near the high end of its range for the foreseeable future.
Finally, every seller needs a buyer, and I believe Berkshire Hills could have a few potential suitors. The $14 billion asset Eastern Bankshares, which recently completed its IPO, is one option. Eastern CEO Bob Rivers has said he wants to grow his bank to $40 billion in total assets over the next decade, and Berkshire Hills presents a rare opportunity to acquire a solid brand that actually makes meaningful headway in that direction. One potential question for Eastern is whether it would want the parts of Berkshire Hills in Upstate New York, New Jersey, and Pennsylvania, which are outside its current footprint. A larger bank that is interested in the Boston market and also has a presence in western Massachusetts, where Berkshire Hills used to be headquartered, might be interested as well -- People's United Financial.
Keep watching
Due to the changes in leadership, the goodwill impairment, and the tough outlook, I don't see Berkshire Hills' recent stock price uptick as an impediment to an acquisition. In fact, it probably puts the bank on better footing to get the kind of sale price it is looking for. A big question is whether it would be able to come to terms with a potential suitor. There could be wide discrepancies between the price it's willing to accept and the one a buyer is willing to pay, given how much higher Berkshire Hills' market cap was relatively recently. But keep an eye out -- this bank could still go up for sale soon.
