Let’s talk about Berkshire Hills Bancorp (ticker: BHLB)
To me, this seems like an attractive stock. If you look at the stock price over the last five years, it’s sort of been rocky. From 2017 to the middle of 2018, it has done excellent, and shareholders were getting decent returns on the stock. At that point, I’m sure it seemed like a somewhat stable investment until the sudden drop in its share price.
What caused this downward spiral? Well, in November of 2018, the then CEO Michael Daly resigned due to speculation of toxic workplace culture.
Then recently, as we all know, the coronavirus pandemic struck, and most if not, every stock declined in price. This was especially the case with Berkshire, but it still hasn’t recovered since late 2018.
Is this stock a possible diamond in the rough? Let me analyze below.
I stumbled upon this stock when looking at the financial sector, and it stuck out to me initially due to the dividend. The dividend is $0.24 quarterly, meaning it’s $0.96 annually at the time of this post.
This dividend may not seem much, especially when you can invest in a Canadian bank that pays a higher dividend, but this would technically pay out more if you consider the same price.
Allow me to explain. Let us look at RBC (ticker: RY). Its current price at the time I am writing this is $68.27. Berkshire Hills Bancorp’s stock price is $10.18. If we purchase six shares of Berkshire Hills Bancorp (bringing us to a total of $61.08), the total dividend you could be eligible to receive would be $5.76. The dividend for RBC is $3.13. Obviously, in this case, you would receive a higher dividend for Berkshire.
However, at the same time, you are subjecting yourself to much more risk than RBC, so there are other factors you might consider before investing in one over the other.
Nonetheless, the dividend is attractive to me.
The company prides itself on building strong relationships with customers and businesses within Massachusetts and the other states where branches are located. They are invested as well into their communities, by offering several different grants, sponsorships, and community development loans. You can tell that the company wants to be a significant contributor to a city or town’s development and buildup of its economy.
Berkshire also has its Be FIRST vision, where it aims to develop a significant and robust culture where any and every one can build their career and be accepted. This initiative is built on accepting different perspectives, helping employees build on positive mindsets to learn and strive for success, encouraging diversity in the workforce, ensure that everyone is respectful of one another and much more.
This is intriguing to me, as the company can build a very inclusive and accepting workforce where employees want to be and enjoy doing to work daily. These kinds of work environments will allow companies to thrive and succeed, which only benefits everyone involved.
Berkshire Hills Bancorporation is slowly attempting to expand into the market, just having recently acquired SI Financial Group, which allowed the corporation to gain more customers and their deposits. Through this acquisition as well, Berkshire will look to improve efficiency, repurchase stocks, and liquidate assets to pay expensive wholesale funds.
Building upon digital platforms and meeting the needs of communities and consumers is also an essential vision the company has to long-term growth.
The company also is looking to reduce its balance sheet leverage, release lower returning assets, and return more capital to shareholders through repurchasing their stock. This signifies they are not only looking to increase their efficiency and profitability but also to improve shareholder returns.
The management of Berkshire Hills Bancorp seems to be very good; most of the executive management and directors have been around for a significant amount of time CEO Richard Marotta would have been a significant player in their strategic approach to gaining more market share within the industry.
Most of the management has had much experience within their fields, some having worked with TD, SI Financial Group before the merger, and the Citizens Bank. It leads me to believe that this management is stable, especially since their business has been profitable over the last few years.
One thing that the management has done particularly well is that 69% of the workforce is female. This goes hand in hand with their Be FIRST culture and the initiatives they are taking. In addition to this, 53% of the management itself is female. This company is undoubtedly setting the foundation for a more diverse and gender equality-based society.
I also wanted to look at the proxy to see how much management was getting paid annually. Richard Marotta was paid $2.1 million last year, a significant increase from 2018 leading management in terms of the highest salary. Next is Sean Gray, the COO at $1.3 million and James Moses Senior Executive Vice President and CFO at $793,769. These salaries are based on a fixed rate, incentives, and as share-compensation.
Berkshire Hills Bancorp prioritizes in community banking. As we all know, there is an extensive list of other banks that would compete against Berkshire. So, I debated whether or not to include any but figured I would include a couple. One being TD and the other being the First Financial Bank.
I decided to select the TD Bank as they have roughly 139 branches in Massachusetts, according to US Bank Locations’ website. For a competitive advantage, I decided to look at what they offer and compare it to Berkshire Hills Bancorp.
When you open a TD Bank checking account, there are no ATM fees, you can easily waive their monthly maintenance fee, zero liability protection, 24/7 fraud monitoring, and other benefits. The monthly maintenance fee varies, but for their Beyond Checking account, the monthly fee is $25.
A f1rst Simple Checking account at First Financial Bank offers no monthly service charge and no minimum balance to maintain it. Clients also enjoy security on their accounts, a non-interest-bearing account, and text banking. This account seems ideal to consumers based on its probable ease of use.
A checking account at Berkshire Hills Bancorporation has very low to no fees, free ATM access, overdraft protection (also offered by the other two banks), and a fee-free account that provides more benefits to veterans and active military personnel. Although the benefits may be similar across the board, the exclusive bonuses for veterans and military personnel seem to be a nice touch to thank those for their service and gain more customers.
For savings accounts, well, the TD Simple Savings Account offers no fees on the account for the first year and a $300 minimum daily balance to waive their monthly maintenance fee, which is $5. First Financial offers their F1rst Everyday Savings Account where there is a $5 monthly service charge if the minimum daily balance goes below $250 ad their monthly service charge is waived for the first 90 days. While Berkshire’s saving accounts will offer low or no monthly fees, competitive interest rates, exclusive savings account for servicemen and women, and the same monthly service charge policy as First Financial.
By far, TD is the largest of these three banks, and it makes Berkshire look puny. This just signifies that Berkshire still has a long way to go before becoming a national bank, rather than a community bank. To me, it just seems hard to compare Berkshire to larger banks or financial institutions. I think they offer some excellent services, which will be useful in luring consumers to use their services, but in the end, if Berkshire were even to become a national bank, it will take more than several years to accomplish this.
Berkshire Hills’ financials aren’t terrible.
If you look at their total net revenue across the past four years, you will notice that it has gone up 14.9% annually, while earnings have increased at 25.9%. From 2016-2017, earnings lowered 5.8%, as well in 2018-2019, by 7.9% despite the increase in revenue. The massive jump in profits of 91.4% in 2017-2018 offsets these decreases.
Despite the losses reported within the first quarter of this year, I still would not necessarily hold that against them. It’s their loss on securities, a significant drop on total non-interest income, and a decrease in revenues from prior years that make up this loss. It’s only a roughly $20 million net loss and at this point things will be negative until this pandemic is over for the most part.
The net cash provided by operating activities was still positive, even with adverse losses. If you take a closer look, this is only because their provision for credit losses is significantly high, which can be expected with COVID-19, and their losses on marketable securities, which can also be attributed to the pandemic.
With their investing activities, it is positive due to acquisitions of loans, as you will see a net change in loan of roughly $217.4 million. I believe this would have been acquired to offset the loss of deposits, as they reported a decrease in their deposits of $262.2 million, which is significant. This led the company to have roughly $170 million used in cash for their financing activities, which was not as bad as last year’s $917.5 use of money. Of course, that was offset by gaining more financing, sales, maturities, and securities prepayment.
If we look at the balance sheet, you’ll notice Berkshire has a small number of current assets and a large number of current liabilities. Why the high amount of current liabilities? Well, it is due to all of the consumers’ deposits. It is doubtful that consumers will take out all of their cash from their accounts immediately. In a world where that happens, the company would try to liquidate loans and mortgages, which could only be acquired by other financial institutions. It would possibly need to be at a discount for any institutions to purchase this. When you look at its short-term debt, it has increased around $100,000 from year-end in 2019 to the first quarter of 2020.
The company’s long-term assets are high, and long-term liabilities are low. This is due to the mortgages and loans they are collecting over time from their consumers. Their loans have decreased $200,000 from the end of 2019 to the first quarter of 2020.
Berkshire Hills Bancorp has a beta of 1.33, stating the company is highly volatile. Even with a generally positive day yesterday, at the time of this writing, you notice it started strong and ended up negative, while the DOW and S&P 500 having positive days.
According to Yahoo Finance, the PEG ratio is even negative at -1.27, which would be attributed to the negative EPS the company would have in the first quarter of 2020. Although this does not look enticing, I still generally believe the stock will recover, as it has a decent EPS over the last several years, and will have a good jump in price over the next year or whenever the virus is mostly maintained.
The price/sales ratio is 1.37, and the price/book ratio is 0.29. The price/book ratio is very undervalued considering this company does have a solid balance sheet and book value; for that reason, I believe it offsets the higher price/sales ratio.
Even the forward P/E is 11.28, which isn’t terrible. It signifies that investors expect the earnings to go up over time, which I also do expect.
Another impressive ratio to note is the book value per share for Berkshire Hills Bancorp is 34.24. Looking at what people are paying for the company’s book value would suggest this is a massive steal for value investors, and it is bound to go up over time. I just solidify my case of this company having good financials, fundamentally, a great balance sheet rather than jump on the bus and instantly invest after having seen this number.
Lastly, if you do look at the payout ratio, it is roughly above 70%, which may be unsustainable to some extent. However, the company continues to increase their retained earnings annually by 18.67% over the past four years. Take that into consideration, with roughly 50 million outstanding shares; the company can afford to pay out their dividends.
To me, this stock is an excellent short-term hold in the sense that its value is bound to go back up hopefully within a year or a little more, maybe even less than a year. Berkshire Hills’ financial statements are stable, I like the price/book ratio, and other banks are affected by COVID-19, meaning over time, their values will go up, and share prices will increase.
The only thing that I might consider a red flag with the company is whether or not they continue to suffer significant negative losses. Their operating cash flow looks good for the period that we are in and certainly can withstand operations for a period of time. If the company needs to continuously acquire loans to fund their business, well, then it may be more worrisome.
Will Berkshire Hills Bancorp be the next big national bank? I don’t think so, at least not within the next couple of years. However, this is and will continue to be a well-established bank within Massachusetts for the periods to come, especially if management continues to instill their Be First visions in the company.
I give this stock a grade of A-.
It seems like a possible diamond in the rough. The strategy here seems like to buy low and sell high.
Most of the information I gathered for my analysis was from the company’s 10-K filing in 2019, their financial statements through their website, statistics on Yahoo Finance, and information about the company’s goals and visions were found here.
I appreciate you taking the time to read this article. Let me know your thoughts on this stock below.
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Disclaimer: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only.