Sterling Financial Corp. of Lancaster, Pa., said its deal to be sold to PNC Financial Services Group Inc. of Pittsburgh remains on track despite its disclosure this week of $35 million in new charges related to issues in its equipment leasing unit.
Sterling announced the $565 million deal with PNC in July, after it uncovered what it called a "sophisticated loan scheme" that included concealment of delinquencies and falsification of financing contracts at its equipment finance subsidiary.
It will have to restate earnings back to 2004, including this year's first-quarter results. It has not reported second- or third-quarter earnings but had already announced it would take charges of up to $165 million related to its ongoing investigation of the scheme.
Sterling disclosed the latest charges, $35 million after tax, in a filing Wednesday with the Securities and Exchange Commission. A spokesman for Sterling said Thursday that the charge is not expected to affect the PNC deal.
In the filing the $3.3 billion-asset Sterling said that PNC "has been advised of the matters discussed … and the corporation continues to expect the transaction to close in the first quarter of 2008."
Two investment bankers who asked not to be named said Thursday that the latest charge is considerable for a company of Sterling's size. However, at just over 6% of the PNC deal's value, it is unlikely to present a material change to the deal, they said.
A spokesman for PNC said, "We had anticipated the additional charges related to this business, and this was in the range we had expected."
He also said that the new charges "will not affect our pricing" of the deal.
James E. Rohr, the chairman and chief executive of the $126 billion-asset PNC, told investors when the deal was announced in July that "there's two kinds of risk" involved in buying Sterling: shareholder suits and the leasing portfolio.
"We've got a good idea and a good handle on how you manage" the legal risk, Mr. Rohr said. He cited PNC's experience in buying the troubled Riggs National Corp. in 2005, after regulators found Riggs major deficiencies in Riggs' anti-money-laundering compliance.
Discussing the investigation, Mr. Rohr said, "After the big charge, there just isn't much left of that leasing company portfolio." His company is "comfortable" that the risk "relative to the overall size of PNC" is small, he said.
The Sterling spokesman said Thursday that it is "moving along well" with the investigation, expects to wrap it up "within a few weeks," and "wouldn't expect additional charges."
Sterling disclosed in April that a group of five loan officers and other employees at Equipment Finance LLC, which it bought in 2002, had orchestrated the loan scheme over an extended period.
PNC is also buying the $3 billion-asset Yardville National Bancorp in Hamilton, N.J., for $408 million. That deal was announced in June.
