With its pending purchase of Commerce Bank in Worcester, Mass., and a Boston address staked out for its new headquarters, Berkshire Hills Bancorp is moving closer toward its goal of becoming New England’s next regional bank.
Though Berkshire, based in the western Massachusetts city of Pittsfield, has been bulking up in New England for the past decade, its deal for the $2.2 billion-asset Commerce is especially significant because it would thrust Berkshire over the $10 billion-asset threshold and raise its profile in Boston.
And for a bank with ambitions to become the go-to local player for middle-market companies, increased size and increased visibility in New England’s largest and most dynamic market matter, said CEO Michael Daly.
Of course, Berkshire will face plenty of competition as it moves more aggressively into the Boston market. Boston is highly fragmented, with scores of community banks competing for market share with heavyweights like Bank of America, TD Bank, Santander and Citizens Financial Group.
Smaller regionals, including the $26 billion-asset Webster Financial in Waterbury, Conn., and the $40 billion-asset People’s United Bank in Bridgeport, Conn., have also expanded into Boston in recent years, largely to help offset slower growth in their home markets.
But Daly said he believes that, despite the competition, there is still room in the marketplace for a local institution capable of serving middle-market clients. The bulk of that business is now being handled by larger banks that moved into New England through acquisitions.
“Most of the business that we believe is available to us is probably with the big guys: Santander, TD Bank, Bank of America,” Daly said.
David Bishop, an analyst with FIG Partners in Atlanta, agreed. “It’s a wide-open market for a company that has the scale and capital to serve that middle-market business segment,” Bishop said. Once the Commerce deal closes later this year, “you’ll see [Berkshire’s] growth profile start to step up,” he added.
Berkshire has bought eight banks in the Northeast over the past dozen years and, in doing so, has more than quadrupled its assets, to $9.3 billion at March 31. It most recently expanded into New Jersey and Pennsylvania when it purchased the Pennsylvania-based Small Business Administration lending unit of Parke Bank in New Jersey in 2015 and the $1.1 billion-asset First Choice Bank a year later.
In 2012, it acquired Greenpark Mortgage in Needham, Mass., gaining a foothold in eastern Massachusetts. It began making commercial loans in the Boston market around the same time, and its presence there is a big reason its commercial and industrial loan portfolio has more than tripled, to $1.1 billion, over the past five years.
In building Berkshire from a small local bank into a budding regional player, Daly said he has been trying to emulate one of the industry’s most successful acquirers: M&T Bank Chairman and CEO Robert Wilmers. Like Berkshire, M&T, of Buffalo, N.Y., started small, acquiring local banks in markets close to home before expanding, methodically, into newer, often faster-growing, markets and moving into new business lines.
“I try to spend as much time with [Wilmers] as I can because I always learn something,” Daly said. “That’s a great example of a bank that’s grown, grown profitably and they’ve rewarded their shareholders.”
Daly has also benefited from the guidance of Berkshire’s board chairman William Ryan. Formerly the chief executive of Banknorth and its predecessor banks, Ryan was one of the most prolific dealmakers of his generation. Between 2000 and 2004, Banknorth, of Portland, Maine, acquired over a dozen community banks across the Northeast. In 2004, Toronto-Dominion Bank became the majority owner of Banknorth and renamed it to TD Banknorth. The institution went to acquire several more banks and ultimately had a little over $41 billion in assets in 2007, when Toronto-Dominion acquired all the remaining shares and renamed it TD Bank.
Ryan joined Berkshire’s board in 2014, and has been instrumental in articulating the bank’s strategy to the rest of the board and getting their support.
The Commerce Bank acquisition will also boost Berkshire’s assets to $12 billion, at which point the company will have to submit to stress tests and, like all banks with more than $10 billion of assets, face caps on interchange.
The additional regulatory scrutiny aside, Collyn Gilbert, managing director at Keefe, Bruyette & Woods, said that the deal could go a long way toward helping Berkshire achieve its middle-market ambitions. Commerce, she said, “has a very low loan-to-deposit ratio … and is sitting on a lot of cash, as well. The ability for Berkshire to take that cash and redeploy that into loans will [add to] to the profitability profile of the bank.”
Importantly, the deal also would give Berkshire a stronger retail presence in central and eastern Massachusetts, where it has relatively few branches now. Berkshire is also scouting for office space in downtown Boston and by the end of the year is expected to move its headquarters to the city.
While Berkshire isn’t putting a number on its asset targets, FIG Partners’ Bishop wrote in a research note that he believes Berkshire has the infrastructure to support an asset base as high as $30 billion.
The bank has been building that infrastructure for years, too, beginning with a core system that also supports banks closer to $100 billion in assets, said COO Sean Gray. It then built a new risk management system to ensure the bank’s controls and corporate governance will be up to snuff with regulators and recently, added a new asset-liability management system. On top of all that, the bank has also layered in the talent needed to make it all work, Gray said.
With the infrastructure in place, Bishop said that Berkshire can now turn its attention to hiring talented relationship managers with established books of business away from larger rivals. It’s a strategy that comes with a cost, but it’s one that could pay off in the long run as it aims to compete for larger loans.
“I think Berkshire is going to be going after the A-type players, and they don’t come cheap,” Bishop said. “The near-term challenge is overcoming that expense burden, [but] longer term it should have a benefit.”