Beacon deal expands Berkshire’s reach into CNY banking market

Berkshire Hills Bancorp, Inc.’s recently announced acquisition of Beacon Federal Bancorp, Inc. moves the Massachusetts–based banking company firmly into the Central New York market at a time when some larger competitors are focusing elsewhere.

Berkshire Hills Bancorp (NASDAQ: BHLB), parent company of Berkshire Bank, announced May 31 that it will acquire Beacon Federal (NASDAQ: BFED) in a $132 million stock and cash deal expected to close in the fourth quarter.

The acquisition will give Berkshire seven Beacon Federal branches, including one each in East Syracuse, DeWitt, Rome, and Marcy. Beacon, which has deposits of $677 million and is headquartered in the village of East Syracuse, concentrates most of its business in the Syracuse metropolitan area as well as the Utica–Rome market, which Berkshire entered last year when it acquired Rome Bancorp. Beacon Federal will be merged into Berkshire Bank.

The Syracuse and Utica–Rome areas are largely overlooked by larger banks such as Bank of America or Citizens Bank as hot growth spots, says Damon DelMonte, an analyst covering Berkshire in the Hartford, Conn. office of New York City–based equity-research firm Keefe, Bruyette & Woods, Inc.

Many of those larger banks have focused their attention these days on larger markets where they can see a faster turnaround and more robust revenue growth, DelMonte contends.

But the Syracuse and Utica–Rome markets are right up Berkshire’s alley, he adds. “They typically open in what are perceived to be slow-growth markets,” DelMonte says of Pittsfield, Mass.–based Berkshire. The company successfully accomplished this last year when it acquired five Rome Savings Bank branches through the acquisition of Rome Bancorp, Inc. “I think it’s a logical acquisition for them,” he adds.

The deal is a good one for Beacon and its customers as well, DelMonte says. “It’s a difficult environment for smaller banks to continue to grow,” he says. The acquisition by Berkshire should provide growth for Beacon’s shareholders and expand the product and service offerings to its customers, he says.

Beacon President and CEO Ross Prossner echoed that by saying his customers will benefit from Berkshire’s resources in banking, wealth management, and insurance. “Our combined operations will position us well to further increase market share in the Central New York market,” Prossner said in the joint news release the banking companies issued May 31.

Berkshire President and CEO Michael P. Daly said in a June 1 conference call with investors and the media that it was natural for Berkshire to respond when Beacon reached out to the company to talk about an acquisition.

“Their business is concentrated in the Central New York or upstate New York [market],” he said. “It’s a market that we targeted with our acquisition of Rome last year.”

The markets also boast a solid population of about 1 million people and weathered the recession reasonably well, he noted. After taking on Beacon’s two Syracuse–area branches and two Utica–Rome area offices, Berkshire Bank will have 10 branches serving the Syracuse and Utica–Rome markets upon completion of this deal. Berkshire says it will have $700 million in deposits and the third position in the market share among regional banks.

That will bump Berkshire’s total number of branches to 73 — up from 42 offices just 18 months ago. Last year, Berkshire acquired Legacy Bancorp and just completed the acquisition of The Connecticut Bank and Trust Company on April 20 of this year.

Daly expects the Beacon deal will provide Berkshire with a 22-cent boost in core earnings per share (EPS) starting in 2013, making the deal attractive for its shareholders.

Acquisition terms

Under the terms of the agreement, 50 percent of outstanding Beacon shares will be swapped for Berkshire shares at a fixed ratio of 0.92 shares for each Beacon share. The remaining 50 percent of the Beacon shares will exchange for $20.50 per share in cash. The transaction was valued at $20.35 per Beacon share based on the $21.96 Berkshire closing price on May 30.

The acquisition will cost Berkshire $14 million pre-tax, and the company is using more cash for this deal than some of its previous ones in an effort to right-size its capital, Daly noted. Berkshire will fund the balance of the deal through subordinated debt, and the banking company has already seen positive response to its debt placement, he added.

Beacon’s share price jumped nearly 45 percent to close at $19.23 on June 1, the first trading day after Berkshire announced the acquisition the evening before. The stock barely fluctuated the next three trading days. Meanwhile, Berkshire’s stock price fell nearly 5 percent to $20.75 on June 1, and then was flat the next three trading days.

Each Beacon shareholder will have the right to elect the form of consideration, subject to proration procedures to maintain the 50-50 mix of stock and cash. The transaction is intended to qualify as a reorganization for federal-income tax purposes and the shares of Beacon stock exchanged from Berkshire should transfer on a tax-free basis, the banking companies said in their news release.

The boards of both businesses have approved the acquisition, which is now subject to the approval of Beacon’s shareholders as well as state and federal regulatory agencies.

Berkshire expects to appoint one Beacon board member to its board. 

In addition to the Central New York branches, Berkshire will also add Beacon’s Chelmsford, Mass. office to its roster, making it Berkshire’s first eastern Massachusetts full-service branch. Berkshire currently operates 10 residential and commercial-lending offices in central and eastern Massachusetts. Berkshire plans to divest Beacon’s modest-sized Tennessee operations — it has two branches there.

New York City–based Sandler O’Neill & Partners, L.P. served as the financial advisor to Berkshire, while Keefe, Bruyette & Woods, Inc., also based in New York City, was the financial advisor for Beacon. Washington, D.C.–based Luse Gorman Pomerenk & Schick, P.C. served as outside legal counsel to Berkshire, while Atlanta–based Kilpatrick Townsend & Stockton LLP was outside legal counsel to Beacon.

Headquartered in Pittsfield, Mass., Berkshire Hills Bancorp has $4.3 billion in assets and 68 branches in Massachusetts, New York, Connecticut, and Vermont.

Beacon Federal earned $5.7 million, or 93 cents a share, in 2011, up almost 7 percent from 2010. In the first quarter of 2012, Beacon Federal reported profit of $1.3 million, down more than 13 percent.