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Tickers in this Article: BAC, BHLB, C, GE, WMT
Once the thrift next door, Berkshire Hills Bancorp has grown into an aggressive and highly successful regional lender, writes MoneyShow.com senior editor Igor Greenwald.

Imagine learning that a perfectly boring neighbor is in fact a world-renowned chainsaw juggler. Or that the corner grocer is taking market share from Walmart (WMT) and plans an IPO.

You wouldn’t be any more dumbfounded that I was recently to discover that I’m living on the home turf of America’s Most Exciting Bank. Because I’m not based in New York, San Francisco, or even Charlotte.

This is Pittsfield, Mass., a onetime General Electric (GE) company town nestled among the Berkshire hills in the extreme western part of the state. Pittsfield was orphaned by GE decades ago, long enough for anger to fade into nostalgic regret, and for the municipal economy to finally emerge from an extended coma.

The GE legacy lives on in a plastics business now owned by Saudi Arabia’s SABIC, and the associated cottage industry. GE also did defense work in town, and that mantle has been taken up by some 100 General Dynamics (GD) engineers developing electronics for the Navy.

But mostly the Berkshires’ slowly shrinking populace depends these days on tourists, New Yorkers with summer homes, and arts and crafts. And a pretty good living it’s been of late for some, judging by the torrent of deposits pouring into America’s Most Exciting Bank.

Now, I don’t know if Berkshire Hills Bancorp (BHLB) is really all that, unless you get excited about branch redesign and business lending. But it’s a dynamic stock likely headed for greater glory after working off the current excess of momentum.

CEO Michael P. Daly is experienced, still young, and hungry to transform BHLB into a regional player. His timing on acquisitions has been lucky, and his team’s execution after them demonstrably lucrative.

The bank outgrew its hometown some years ago. It has expanded north along the Housatonic River valley into Vermont and south toward the Connecticut border. It’s crossed the ridge to the west into the Albany, NY metro area and east into the Springfield, MA market. Berkshire also took advantage of the recent economic struggles to acquire a local competitor with a fee-based asset management business and a Hartford, Conn. bank that will extend the franchise into that city’s northern suburbs.

It must be doing something right, because deposits increased 10% last year excluding the effect of acquisitions, leaving the bank with the happy problem of finding ways to put its excess capital to use. Commercial business loans grew 29% during the year, while the recent deals boosted earnings per share 53% year over year.

Perhaps most impressively of all, net interest margin expanded from 3.3% to 3.6%, at a time when it’s been shrinking for many lenders. Berkshire credited rapid growth in its checking accounts.

Net charge-offs amounted to 0.27% of outstanding loans in the most recent quarter, less than a fifth of the industry average. Bank of America (BAC) charged off 1.74% in its most recent quarter.

A hedge-fund manager who specializes in small-cap banks and has BHLB among his top five holdings was effusive in his praise for Daly and Berkshire. “Talk about a well-run bank that’s in a completely different business than Bank of America or Citigroup (C),” he says.

The investor thinks analyst estimates for Berkshire’s forward earnings are too low given the amount of cheap capital at its disposal and the aggression with which Daly’s crew is expanding into adjacent markets overlooked by the biggest banks.

“He’s probably the most optimistic bank executive in the country right now,” the investor says of Daly. He has reason to be, with the unemployment rate in many of Berkshire’s markets down to the 7% range, and the bank well-placed to meet the improving demand for business loans.

“We have seen some firming of conditions in our markets…and expect that to continue,” Daly said on last month’s conference call, after handily beating estimates.

In the meantime, the stock yields 2.9%, and is priced at 12 times the current year’s earnings estimates, which are likely conservative.

“It’s the best little bank no one has ever heard of,” says my hedge-fund source. Now that’s exciting.

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