SecProbe.io

CORRESP
1
filename1.htm

Correspondence

LUSE GORMAN POMERENK & SCHICK

A PROFESSIONAL CORPORATION

ATTORNEYS AT LAW

5335 WISCONSIN AVENUE, N.W., SUITE 400

WASHINGTON, D.C. 20015

TELEPHONE (202) 274-2000

FACSIMILE (202) 362-2902

www.luselaw.com

    WRITER’S DIRECT DIAL NUMBER

(202) 274-2009

    WRITER’S EMAIL

mlevy@luselaw.com

VIA EDGAR AND HAND DELIVERY

July 31, 2009

Mr. John P. Nolan

Senior Assistant Chief Accountant

U.S. Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, DC 20549

    Re:

    Berkshire Hills Bancorp, Inc.

Form 10-K for the fiscal year ended December 31, 2008

Form 10-Q for the quarterly period ended March 31, 2009

Definitive Proxy Statement filed April 13, 2009

File No. 000-51584

Dear Mr. Nolan:

We are in receipt of your letter dated June 29, 2009 providing comments on the referenced
filing for Berkshire Hills Bancorp, Inc. (the “Company”). The Company’s responses are set forth
below and are keyed to the staff’s comment letter.

Form 10-Q for the quarterly period ended March 31, 2009

Financial Statements

Notes to Consolidated Financial Statements

Note 3. Securities, page 12

    1.

    We note your disclosure on page 28 that the Company owns one pooled trust preferred security
with a cost basis of $2.6 million and a fair market value of $0.5 million and your conclusion
that this security was not other than temporarily impaired at March 31, 2009 despite the
credit rating downgrade from Aa to Caa. Please provide us with a detailed explanation of how
you came to this conclusion indentifying all available evidence, explaining the relative
significance of each piece of evidence and identifying the primary evidence on which you
relied in making your assessments. In preparing
your response, please be sure to address your consideration of the credit rating downgrade,
which appears to be a critical and compelling piece of evidence considering both Moody’s and
S&P’s definition of this below investment grade credit rating states that these securities
are typically of poor standing, may be in default, may have elements of danger with respect
to principal or interest, are vulnerable to nonpayment, and are dependent upon favorable
economic conditions for the issuer to meet its financial commitment.

Mr. John P. Nolan

July 31, 2009

Page 2 of 12

RESPONSE

The Company’s conclusion that the private placement pooled trust preferred security (the
“Security”) was not other than temporarily impaired at March 31, 2009 was based on both the
Company’s ability and intent to hold the Security for a period of time sufficient to allow
for an anticipated recovery of its remaining amortized cost and the protection from credit
loss afforded by $120 million in excess subordination above current and projected losses.

Background

The Company owns $2.6 million of the Mezzanine Class B tranche [CUSIP 74042CAE8] of the $360
million Preferred Term Securities XXVIII, Ltd. pool (the “Pool”) of notes. The notes are
collateralized by obligations from 45 geographically diverse banks and 11 insurance
companies constituting 71% and 29% of the Pool, respectively. At March 31, 2009, the
Security’s fair value was $0.5 million and was based on S&P pricing derived from SFAS 157
Level 3 inputs.

Interests in the Pool are dividend across one equity and six debt tranches as follows:

Pool
at Inception — November 8, 2007

Preferred Term Securities XXVIII, LTD

    Senior

    Senior

    Mezzanine

    Mezzanine

    Mezzanine

    Mezzanine

    Income

Class A-1

    Class A-2

    Class B

    Class C-1

    Class C-2

    Class D

    Notes

    Par

    $191.0 MM

    $45.7 MM

    $44.4 MM

    $36.0MM

    $8.0 MM

    $27.0 MM

    $19.5 MM

    Price/FV

    100

    95.532

    95.214

    94.927

    94.927

    92.132

    N/A

    Paid-in

    $191.0 MM

    $43.7 MM

    $42.3 MM

    $34.2 MM

    $7.6 MM

    $24.9 MM

    16.3 MM

    Coupon

    3m Libor + 0.90

    3m Libor + 0.40

    3m Libor + 0.60

    3m Libor + 0.90

    Variable

    3m Libor + 1.75

    N/A

    Maturity (Bullet)

    3/22/2038

    3/22/2038

    3/22/2038

    3/22/2038

    3/22/2038

    3/22/2038

    3/22/2038

    Moody’s Rating

    Aaa

    Aaa

    Aa2

    A3

    A3

    Not Rated

    Not Rated

    Fitch Rating

    AAA

    AAA

    AA

    A

    A

    BBB

    Not Rated

Mr. John P. Nolan

July 31, 2009

Page 3 of 12

As of March 31, 2009, one bank in the Pool was in default and four were in interest deferral
status. These banks represented 1.39% and 6.25% of the total pool, respectively. No
insurance companies were in default or deferral status. These developments combined with
broad adverse macroeconomic events and circumstances triggered the following credit
downgrades of the Pool’s tranches by Moody’s and Fitch at March 31, 2009:

Pool
— March 31, 2009

    Senior

    Senior

    Mezzanine

    Mezzanine

    Mezzanine

    Mezzanine

    Income

    Class A-1

    Class A-2

    Class B

    Class C-1

    Class C-2

    Class D

    Notes

    Price/FV

    29.92

    17.85

    17.85

    8.45

    8.45

    5.85

    N/A

    Moody’s
Rating

    A3

    Ba1

    Caa1

    Ca

    Ca

    Not Rated

    Not Rated

    Fitch
Rating

    A

    BBB

    BB

    CC

    CC

    CC

    Not Rated

Discussion

At March 31, 2009, the Company had both the ability and intent to hold the Security until
recovery of its amortized cost basis. This assertion is supported by the Company’s strong
capital and liquidity positions and its historical low portfolio turnover.

General deterioration in the liquidity and asset quality of banks in the Pool during the
second half of 2008 led to closer monitoring by the Company. At December 31, 2008 and again
on March 31, 2009, the Company assessed its Security’s exposure to credit loss by performing
a third-party valuation-specialist assisted, break-even analysis, to calculate the excess
subordination of the Mezzanine Class B tranche.

The Company modeled actual cash flows from the Pool’s banks and insurance companies as
provided by Intex Solutions, Inc. and adjusted these for actual and assumed defaults to
determine the amount of future credit losses that could be absorbed by the Pool’s Junior
tranches before a single dollar of credit loss would be attributed to the Mezzanine B
tranche. Assumed defaults were identified through a review of the liquidity, asset quality,
and capital ratios of the banks and insurance companies in the Pool and included the four
banks in deferral plus two additional performing banks with weak liquidity and asset
quality. In total, $37.5 million or 10.42% of the total Pool was deemed to have defaulted
for the purposes of the analysis compared to $5 million or 1.39% actually in default.

The potential for future bank and insurance company defaults was also considered in the
break-even analysis. For the two years following March 31, 2009, an annual bank default rate
of 2% was assumed. This rate approximates the historical one-year high-default rate for
small banks and thrifts observed in 1989 and is considered conservative after factoring the
six
excess defaults discussed above. A more normalized business environment was assumed after
mid-2011 and a historical average bank default rate for small banks and thrifts of 36 basis
points was applied every year thereafter, with 10% recoveries lagged 2 years.

Mr. John P. Nolan

July 31, 2009

Page 4 of 12

Potential insurance company defaults were conservatively estimated based on double the
idealized default probabilities indicated by AM Best’s ratings at March 31, 2009. Insurance
companies on negative credit watch were downgraded two additional notches by the Company and
unrated insurance companies were assigned a CCC-rating. Zero recoveries were assumed on all
insurance company defaults.

The Company’s March 31, 2009 break-even results indicated that there was excess
subordination of approximately $120 million above current and projected losses in the
Mezzanine Class B tranche. Under this scenario, the Pool would have to experience $120
million of future losses before a single dollar of credit losses is allocable to the
Security. The discounted, Security-specific cash flows, over its term to maturity using a 30
year libor rate + 60 bps [3.815% at March 31, 2009], an approximation of the average return
expected over the life of the Security, indicated that the Security’s principal and interest
was preserved.

Conclusion

The preservation of the Company’s principal and interest resulting from the excess
subordination above current and projected losses combined with the Company’s ability and
intent to hold the Security until the recovery of its amortized cost basis supported the
Company’s decision not to impair the Security at March 31, 2009. As new information becomes
available in future periods, changes to the Company’s assumptions may be warranted and could
lead to a different conclusion regarding the other than temporary impairment of the
Security.

    2.

    As a related matter, please provide us with the following information related to your pooled
trust preferred securities and revise future filing disclosures to include this additional
information:

    •

    deal name;

    •

    class/tranche;

    •

    credit rating for each class/tranche;

    •

    number of banks issuance;

    •

    deferrals and defaults — dollar amount and as a percentage of collateral; and

    •

    excess subordination — dollar amount as a percentage of collateral.

Please see Item 1, Comment 1 for disclosure of all requested information pertaining to the
Company’s pooled trust preferred security as of March 31, 2009.

We intend to expand the disclosure of the Company’s evaluation of the Company’s pooled trust
preferred security for potential other than temporary impairment in the Company’s upcoming
Form 10-Q for the quarter ended June 30, 2009. The following is a draft of the proposed
disclosure which may be revised as circumstances warrant.

Mr. John P. Nolan

July 31, 2009

Page 5 of 12

The Company owns a $2.6 million investment (the “Security”) in the Mezzanine Class B tranche
[CUSIP 74042CAE8] of the $360 million Preferred Term Securities XXVIII, Ltd. pool (the
“Pool”) of notes. The Pool is structured with one equity and six debt tranches
collateralized by obligations from 45 geographically diverse banks and 11 insurance
companies constituting 71% and 29% of the Pool, respectively. The Mezzanine Class B tranche
is subordinate to two Senior tranches and senior to all remaining tranches. The Senior,
Class B, and Junior tranches make up 65%, 12% and 23% of the Pool, respectively.

During Q1 2009, this security was significantly downgraded by Moody’s from Aa2 to Caa1. The
Company evaluated the Security, with a fair value of 0.7 million, for potential other than
temporary impairment at June 30, 2009 and determined that an other than temporary impairment
was not evident based on both the Company’s ability and intent to hold the Security until
the recovery of its remaining amortized cost and the protection from credit loss afforded
by$77 million in excess subordination above current and projected losses.

The Company’s ability and intent to hold the Security until recovery is supported by the
Company’s strong capital and liquidity positions as well as its historical low portfolio
turnover.

At June 30, 2009, the Company assessed the Security’s exposure to credit loss by performing
an independent third-party valuation-specialist assisted, break-even analysis, to calculate
the excess subordination of the Mezzanine Class B Tranche. The Company modeled actual cash
flows from the Pool’s banks and insurance companies as provided by Intex Solutions, Inc. and
adjusted these for actual defaults and assumed defaults to determine the amount of future
credit losses that could be absorbed by the Pool’s Junior tranches before a single dollar of
credit loss would be attributed to the Mezzanine B tranche.

As of June 30, 2009, two banks totaling 2.8% of the Pool were in default while an additional
five banks totaling 7.6% of the Pool were in deferred interest status. No insurance
companies were in default or deferral status. Assumed defaults were identified through a
review of the liquidity, asset quality and capital ratios of all banks and insurance
companies in the Pool and included the five banks in deferral. In total, $70.0 million or
19.4% of the total Pool was deemed to have defaulted for the purposes of the analysis
compared to $10 million or 2.78% actually in default.

The potential for future bank and insurance company defaults was also considered in the
break-even analysis. For the two years following June 30, 2009 an annual default rate of 2%
was assumed. This rate approximates the historical one-year high-default rate for small
banks and thrifts observed in 1989 and is considered conservative after factoring the five
excess defaults discussed above. A more normalized business environment was assumed after
mid-2011 and the historical average bank default rate for small banks and thrifts of 36
basis points was applied every year thereafter, with 10% recoveries lagged 2 years.

Mr. John P. Nolan

July 31, 2009

Page 6 of 12

Potential insurance company defaults were conservatively estimated based on double the
idealized default probabilities indicated by AM Best’s ratings at June 30, 2009. Insurance
companies on negative credit watch were downgraded two additional notches by the Company and
unrated insurance companies were assigned a CCC-rating. Zero recoveries were assumed on all
insurance company defaults.

The Company’s June 30, 2009 break-even results indicated that there was excess subordination
of approximately $77 million above current and projected losses in the Mezzanine Class B
tranche. Under this scenario, the Pool would have to experience an additional $77 million of
future losses before a single dollar of credit losses is allocable to the Security. The
discounted, Security-specific cash flows, over its term to maturity using a 30 year libor
rate + 60 bps [4.761% at June 30, 2009], an approximation of the average return expected
over the life of the Security, indicated that the Security’s principal and interest was
preserved.

The preservation of the Company’s principal and interest resulting from the excess
subordination above current and projected losses combined with the Company’s ability and
intent to hold the Security until the recovery of its amortized cost basis supports the
Company’s decision not to impair the Security at June 30, 2009. As new information becomes
available in future periods, changes to the Company’s assumptions may be warranted and could
lead to a different conclusion regarding the other than temporary impairment of the
Security.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations

Application of Critical Accounting Policies and Accounting Estimates, page 24

    3.

    We note your disclosure on page 25 that as of March 31, 2009 there were no events that
required the Company to perform an interim impairment test of goodwill. Given the reduction
in first quarter 2009 net income due to higher provisions for loan losses and the recent
deterioration in your market capitalization to a level below book value at March 31, 2009,
please tell us and in future filings disclose the following additional information regarding
your interim testing performed:

    •

    the specific date upon which you assessed the indicators of impairment;

    •

    the indicators of impairment you assessed and explain, in detail, how you determined
there were no significant changes since the year-end evaluation; and

    •

    whether you believe quantitative testing for each reporting unit (using the two-step
impairment test discussed in paragraphs 19-22 of SFAS 142) would have produced similar