Pa. bank fires 5 over `loan scheme'

Officials of Sterling Financial unit are alleged to have falsified pacts, leading to huge loss

May 25, 2007|By Bloomberg News

Sterling Financial Corp. announced yesterday that officers and employees of its equipment leasing unit ran a "sophisticated loan scheme" that cost the Pennsylvania bank as much as $165 million and may force the sale of the company.

Employees of the subsidiary, Equipment Finance LLC, colluded to conceal loan losses, falsify contracts, and "subvert" internal controls over an extended period, Sterling said in a federal regulatory filing yesterday.

Five employees were fired, including the subsidiary's chief operating officer and executive vice president, the bank said. Customer accounts weren't affected.

Sterling, which owns Bay First Bank branches in Maryland, hasn't determined what years were involved or the damage, which may range to $165 million after taxes, or about as much as the bank earned in the past five years.

The bank hired a firm run by Eugene A. Ludwig, former comptroller of the currency, to help tighten its controls, and New York investment bank KBW Inc. to explore options including a sale.

Sterling said the loss will be charged against 2006 earnings. The bank's market value is $480 million, according to Bloomberg data. Sterling operates in Pennsylvania, Maryland and Delaware and employs 1,100 people.

EFI is a wholly owned subsidiary of Sterlings affiliate bank, Bank of Lancaster County, N.A. As part of a capital restoration plan, Sterling plans to consolidate four of its affiliate banks Bank of Hanover and Trust Company, Pennsylvania State Bank, Bay First Bank, N.A., and Bank of Lancaster County, N.A. under BLC Bank, N.A.Shares of the bank have fallen 32 percent this year. Sterling postponed its first-quarter report April 19 after receiving information of possible "irregularities." Its shares gained 80 cents to $16.16 yesterday.

Sun reporter Allison Connolly contributed to this article.

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