Sterling Financial Corp., a bank holding company in Lancaster, Pa., that has been hobbled by a loan fraud scheme, agreed yesterday to be acquired by PNC Financial Services Group Inc. for $565 million in stock and cash.
Sterling has affiliates in Carroll, Cecil and Harford counties. The Pittsburgh financial services giant recently acquired Mercantile Bankshares of Baltimore to gain a presence in Maryland.
PNC will acquire $3.3 billion in Sterling assets and 67 affiliate branches and banks in Pennsylvania, Delaware and Maryland.
The deal comes a little less than two months after Sterling said it uncovered fraud at an equipment leasing unit that cost the corporation about $165 million - close to what the bank earned in the past five years. As a result, the company was considering selling itself as a way to resolve the crisis.
"These things come up for sale, and if the fit is good and the financials are good, then you have to consider them," PNC Chief Executive Officer James E. Rohr said in a conference call yesterday.
Sterling employs 1,100 people in the three states in which it operates. The Maryland operations include Carroll County's Bank of Hanover and Trust Co. and Bay First Bank branches in Bel Air, Perryville, North East and Elkton. PNC officials said Sterling employees would be retained.
The sale values Sterling stock at $19 a share, an 80 percent premium over the company's closing price Wednesday of $10.55. The stock was trading at about $22 before the bank fraud began to come to light. PNC shares fell $1.84 to close at $71.37 yesterday, while Sterling's shares rose $7.11, or 67 percent, to $17.66.
The deal is expected to close in the first quarter of 2008 and add to PNC's earnings by 2009.
PNC announced last week that it is acquiring yet another bank, Yardville National Bancorp of Mercer County, N.J. " ... Quite frankly, we didn't think either one of these things would be for sale six months prior to the discussions," Rohr said in the conference call.
In late April, Sterling postponed its first-quarter financial report after receiving information of possible "irregularities."
During the course of an internal investigation, five employees of Sterling's equipment leasing unit were fired, including the subsidiary's chief operating officer and executive vice president.
PNC President Joseph C. Guyaux said he had forged a relationship with Sterling CEO J. Roger Moyer Jr. two years before news of the fraud broke. But Moyer made it clear then that Sterling controlled its own destiny - a thanks, but no thanks.
"The case of fraud then led to a conversation to take new look," Guyaux said. "They had more options than the potential to sell, but now that was a more viable option for them."
Mike Lambert, director of communications at Sterling, said the company had four options: trying to climb out on its own, selling off assets, selling off business lines or selling the company as a whole.
"It was a proactive contact to PNC and others," Lambert said. "We're in the process of restating three years worth of earnings statements. It will be 3 1/2 years when we are done."
Rohr said the acquisition reflects PNC's strategy of "disciplined, effective capital deployment" and that the integration shouldn't distract the group from its work on Mercantile.
Richard J. Johnson, PNC's chief financial officer, said the Pittsburgh company's analysis of Sterling's financial situation assumed it would take a $125 million capital infusion to bring the company back to health.
To some analysts, the premium offered for Sterling shares was an indication of PNC's seriousness as a suitor.
"They apparently wanted this franchise and were willing to pay up for it," said Gary Townsend, a senior vice president and an analyst who covers PNC Bank for Friedman, Billings, Ramsey Group Inc. in Arlington, Va. "We've heard that the closest other bidders came in the $17 range."
Townsend is concerned the sale will limit the upside of PNC stock: "We think it was expensive. It seems somewhat unnecessary. Combined with the Yardville transaction, we hope that they don't do a lot more of them."
Guyaux defended the price.
"With cases of fraud, you don't know how far it runs and if it spreads into other parts of the business," he said. "We satisfied ourselves because the market price was sort of irrelevant. There were no printed financial statements for almost six months."
stephanie.newton@baltsun.com