PNC to buy besieged bank

PNC Financial Services Group Inc. is snatching up a Lancaster bank crippled by widespread fraud at an equipment-financing subsidiary.

The Pittsburgh bank said yesterday that it would pay $565 million for Sterling Financial Corp., the fifth PNC acquisition announced or completed since March.

In a conference call, analysts peppered PNC chairman and chief executive officer James E. Rohr with questions about whether the bank would continue its rapid pace of acquisitions.

Rohr said PNC was not out looking for banks to buy, but "these things come up for sale, and if the fit is good and the financials are good, then you have to consider them." PNC's largest market is the greater Philadelphia region.

Separately yesterday, PNC reported second-quarter net income of $423 million, up 11 percent from $381 million in the 2006 period. Net income per share fell to $1.22 from $1.28 because acquisitions increased shares outstanding.

Analysts' estimates for PNC's net income ranged from $1.29 a share to $1.41 a share. The stock was punished for that shortfall, dropping $1.84, or 2.5 percent, to close at $71.37 yesterday on the New York Stock Exchange.

Rohr attributed the shortfall to the write-off of a private-equity investment, a couple of proprietary investment-trading moves that went against the company, and a $13 million charge for tax exposure on complicated leasing transactions.

"We're on course to have another good year," he said.

Sterling Financial came on the market in May after it said it would take a charge of $145 million to $165 million against 2006 earnings to make up for concealed losses at Equipment Finance L.L.C.

PNC agreed to pay $19 a share in cash and stock for Sterling, whose stock traded for as much as $24.20 late last year and as little as $9.48 at the end of May.

The agreement valued Sterling at $565 million. The final price will depend on the price of PNC's shares before the closing. At the end of 2006, Sterling's stock market value was more than $700 million.

After an extensive examination of Sterling's books, PNC said, it concluded that the fraud was confined to the financing subsidiary. PNC said that it expected to take a one-time after-tax charge of $28 million related to the acquisition and that it was confident it could handle the legal risk of the many shareholder lawsuits filed against Sterling.

The Lancaster bank has $3.3 billion in assets, including $2.63 billion in deposits at 66 bank branches in central Pennsylvania, northern Maryland and northern Delaware. By comparison, PNC has 1,084 branches and $126 billion in assets.

PNC said the Sterling purchase would fill a gap in its operations between Philadelphia, Harrisburg and Baltimore. PNC's June deal to buy Yardville National Bancorp of Hamilton, N.J., for $403 million would solidify its operations in central New Jersey.

Headquarters: Lancaster.

Founded: 1987, as the holding company for the First National Bank of Lancaster County.

Businesses: Banking at 66 branches in Pennsylvania, Maryland and Delaware; insurance; fleet and equipment leasing; commercial financing; investment/ brokerage services.

Employees: 1,100,

as of Dec. 31.

2006 revenue:

$186.0 million.

2006 profit:

$36.5 million.

SOURCES: Sterling Financial, Bloomberg News

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