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Berkshire Hills Bancorp expects Q3 hit on loan default tied to possible fraud

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Berkshire Hills Bancorp expects Q3 hit on loan default tied to possible fraud

Boston-based Berkshire Hills Bancorp Inc. expects its third quarter net income to be "adversely affected" by unit Berkshire Bank's participating interest in an approximately $16 million loan that went sour due to potentially fraudulent activity by the borrower.

Berkshire Hills said it is working with the lead lender, which informed it of the default, to pursue remedies. It noted that the default is an isolated incident, as it does not have any other accounts or business arrangements with the borrower or related entities.

In a Sept. 23 note, Sandler O'Neill analysts Mark Fitzgibbon and John LaViola said based on the size of the loan and the timing of the event, they suspect the borrower is MyPayrollHR, which suddenly shut down Sept. 4. News blog KrebsonSecurity.com reported payroll processor MyPayrollHR took about $35 million of payroll and tax payments with it upon its closure.

The analysts noted that Pioneer Bancorp Inc. (MHC) previously disclosed it was the lead lender and had $16 million of exposure on the loan. Chemung Financial Corp. said its unit had a $4.2 million participating interest in a loan flagged for potential fraud.

The analysts estimated Berkshire Hills' third quarter EPS could decline by 27 cents to 38 cents, assuming the bank fully writes off the loan. The analysts added that they would not be surprised if the company used the opportunity to clean up additional challenging credits and noted that the company informed them last week they had no exposure to MyPayrollHR's loans.

"Therefore, we were surprised to learn that they did have exposure," the analysts wrote.