Loan write-off in fraud case dings Berkshire Bank's earnings per share

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PITTSFIELD — Earnings per share of Berkshire Bank stock dropped 23 cents during the third quarter, as the bank wrote off a $16 million loan that is tied up in a bank fraud case in Albany, N.Y.

Under normal circumstances, earnings would have increased 4 cents during that period, according to Berkshire Hills Bancorp's third-quarter earnings statement. But because the bank decided to use a loan-loss provision to charge off the entire sum, net income dropped by $12 million during that three-month period, slicing core earnings per share during the quarter to 46 cents. Berkshire Hills Bancorp is the bank's holding company.

Without the loan charge, the bank's core earnings per share would have increased from 65 cents to 69 cents from the second quarter, due to improved revenue and efficiency, according to the bank. The company's board of directors has approved a quarterly cash dividend of 23 cents per common share for shareholders of record Nov. 14. That dividend is payable Nov. 27.

The $16 million loan is part of a bank fraud case in Albany involving MyPayrollHr of Colonie, N.Y. Michael T. Mann, who owns ValueWise Corp., MyPayrollHr's parent company, allegedly used fake companies to obtain $70 million in loans and lines of credit, according to a criminal complaint. Mann has pleaded not guilty to federal bank fraud charges.

Berkshire Hills reported in September that it owned a $16 million participating interest in a commercial lending arrangement that recently had defaulted due to "potentially fraudulent activity," and that the situation could "adversely affect" the bank's bottom line during the third quarter, according to documents filed with the Securities and Exchange Commission. In a second filing with the SEC on Oct. 21, the bank indicated that it planned to use a loan-loss provision to take the entire loan off the books during the third quarter, which ended Sept. 30.

"We spent a month looking at this, and determined that we needed to charge off the whole loan balance and that it would be equivalent to 23 cents per share," said David Gonci, Berkshire Bank's capital markets director.

"These are unusual situations," he said. "But from our point of view, it was a pretty good quarter in all other aspects."

Net income dropped from $25 million to $23 million from the second to third quarters, according to the earnings statement, but the bank also reported a quarter-to-quarter increase of 8 percent in net revenue, and increases in net interest margin, fee income from continuing operations, efficiency ratio and in nonperforming assets during that three-month period.

Total assets during the third quarter were $13.5 billion, while total loan activity dropped 2 percent.

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"We believe that our stockholders, like our analysts, understand that these thing happen in a rare event," Gonci said. "You can't wholly prevent against a fraud situation. Our stock price actually did a little better than our peers when we compared everybody's stock prices. There was no apparent negative reaction in stock price or trading volume."

In a statement, Berkshire Bank CEO Richard Marotta acknowledged that the bank's income declined during the third quarter because of the decision to charge off the defaulted loan, but that other operations remained on track.

"Credit performance has otherwise remained solid," he said. "Liquidity and capital measures continue to strengthen and our per-share measures of book value, and tangible book value improved over the prior quarter."

Loan-loss provisions are expenses that financial institutions set aside in advance to deal with uncollected loans or loan payments. The allowance can cover a series of factors that are associated with potential loan losses, including bad loans and customer defaults.

"When you charge off a loan, you charge it off against the allowance," Gonci said. "In essence, the provision for losses is charged for that current period of income. When banks have loan charge-offs, most of the time they increase their loan-loss provision in order to cover that charge-off."

In September, Pioneer Bank of Albany revealed that it was the lead bank in a syndicate that includes Berkshire Bank and Chemung Canal Trust of Elmira, N.Y., that provided a $36 million loan to MyPayrollHr. Pioneer Bank and Berkshire Bank each provided $16 million to that $36 million loan, according to the Albany Times Union.

Mann, who lives in Edinburg, N.Y., told law enforcement personnel that he began borrowing large sums of money from banks and financing companies under false pretenses and hadn't paid back any of the $70 million that he accumulated, according to the criminal complaint. Pioneer Bank is the largest creditor.

MyPayrollHr, which processed payroll and tax payments for 1,000 small-business clients across the country, went out of business suddenly Sept. 5. One of MyPayrollHr's clients was Springfield-based United Personnel, which has an office in Pittsfield.

Tony Dobrowolski can be reached at tdobrowolski@berkshireeagle.com or 413-496-6224.

Total Berkshire Bank assets during the third quarter were $13.5 billion. The original version of this story was incorrect.


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