Reeling from the impact of a "sophisticated loan scheme" that will deplete much of its capital, Sterling Financial Corp. in Lancaster, Pa., may have no choice but to sell itself, analysts said.
The $3.3 billion-asset company announced late Thursday that it would take an after-tax charge of $145 million to $165 million for the fourth quarter, as a result of a scheme that it said involved five employees at its Equipment Finance LLC.
The charge amounts to roughly half of Sterling's equity and would erase more than three years of earnings.
Its shares plunged 38.3% Friday, to $9.97.
"Complete meltdown," Matthew C. Schultheis, an analyst at Ferris, Baker Watts Inc., said in an interview after a Sterling conference call Thursday evening. "I'm flabbergasted by the size of that charge. Utterly shocking that it's that large."
The company has hired KBW Inc.'s Keefe, Bruyette & Woods Inc. to explore its strategic options, which include raising capital, selling assets and business units, or selling itself outright.
Tito Lima, Sterling's chief financial officer, said in an interview Friday that he could not estimate how long it might take to evaluate those options. "We're moving as fast as we can."
Mr. Schultheis and other analysts said Sterling is unlikely to survive such a financial blow on its own.
"This company is for sale," Mr. Schultheis said. "It has to be."
Sterling's 67 branches in Pennsylvania, Maryland, and Delaware make it attractive, despite its troubles, he said.
"As soon as the loss is quantified, I think you're going to get some people in there who are really interested in acquiring this franchise," Mr. Schultheis said. "Good branch network, good markets — why not?"
Several analysts put the $5.5 billion-asset National Penn Bancshares Inc. of Boyertown at the top of their list of potential buyers. National Penn's president, Glenn E. Moyer, is the brother of Sterling's president and chief executive officer, J. Roger Moyer Jr.
Catharine Bower, a spokeswoman for National Penn, said it would not discuss whether it would be interested in buying Sterling. "That said, we continue to respect Sterling as a quality organization that has established an excellent franchise presence. We feel they are taking proactive steps to deal with their situation."
Analysts said Pennsylvania banking companies, including the $14.9 billion-asset Fulton Financial Corp. in Lancaster, the $6 billion-asset F.N.B. Corp. in Hermitage, and the $2.3 billion-asset KNBT Bancorp Inc. in Bethlehem, would be the most interested potential buyers because they could extract some cost savings. One analyst said the $6.3 billion-asset Provident Bankshares Corp. in Baltimore also might show interest.
Those companies either would not discuss the speculation or did not return a call for comment.
Determining Sterling's value is difficult, given the uncertainties about the potential loss, analysts said. Their estimates ranged from $7 to $14 a share.
The stock has lost more than half its value since April 19, when Sterling said it had discovered potential contract irregularities at Equipment Finance, which provides financing for the soft-pulp logging and land-clearing industries, mostly in the Southeast.
Sterling, which acquired the specialty lender in 2002, said a group of five officers and employees at Equipment Finance orchestrated the loan scheme over an extended period. The preliminary results of an investigation show the group concealed credit delinquencies, falsified financing contracts and related documents, and subverted internal controls and reporting systems, the company said.
"The scheme was able to avoid detection until recently due to the depth and breadth of the collusion," Mr. Moyer said in the conference call. The five employees have been fired, he said.
Mr. Lima said the deception was limited to Equipment Finance and does not reflect practices at Sterling or its other units.
"This is just not the kind of company that Sterling is. This is not the ethics we promote, and that's probably what hurts the company the most," he said. "This had no impact whatsoever on any of the accounts at our banks or any of our other affiliates."
Sterling said that its capital restoration plan includes consolidating four of its banks and halting dividend payments.
The analysts said raising capital would be tough.
"I don't think they're going to find a warm reception in the market," Mr. Schultheis said.
Mac Hodgson, an analyst at SunTrust Robinson Humphrey, said selling off assets and units likely would not be enough. "I don't think it will result in enough capital relief to get them out of the woods."
The estimated loss does not include any potential recovery from collateral or insurance, but some analysts did not express much hope for either.
Mr. Hodgson said even though Sterling deployed a collections team, he questions how effective that might be. "I'm under the assumption there isn't any legitimate collateral backing some of these loans."
Sterling likely would have to fight for any insurance recovery, he said.
Alper M. Sungur, an analyst at Sidoti & Co. LLC, called the charge a "disaster" and said Sterling's best option is to sell itself.
"They might as well close their doors right now," he said. "I cannot understand how this has gone undetected for such a long time."
Cassandra Toroian, the chief investment officer at Blue Rockefeller LLC, which owns stock in other community banks in Pennsylvania, said Sterling might attract interest from private-equity buyers.
"They'd have to raise some serious capital to remain viable," she said. "Maybe we'll see private equity step in."
Richard D. Weiss, an analyst at Janney Montgomery Scott LLC, said he could not guess whether Sterling might have to sell until it provides a financial report. "Does anybody really know if someone would want it at this point? Right now it's kind of dead in the water."
Sterling has not reported first-quarter results, pending the outcome of the investigation into Equipment Finance.
The company said it has hired Promontory Financial Group, the Washington firm headed by former Comptroller of the Currency Eugene Ludwig, to evaluate its controls. Mr. Schultheis speculated that Sterling brought in Mr. Ludwig to help keep the regulators at bay until it can find a buyer.
