Bank Ratings of Five Sterling Financial Units Downgraded

Earnings charge at parent company could leave the banks undercapitalized.
Publish date: Ratings has downgraded the financial strength rating of five subsidiaries of Sterling Financial (SLFI) to D (Weak) due to concerns that they may not be adequately capitalized.

Four of the subsidiaries, Bank of Hanover & Trust of Hanover, Pa.; Pennsylvania State Bank of Camp Hill, Pa.; Bank of Lancaster County of Strasburg, Pa.; and Bay First Bank of North East, Md., were previously rated B (Good). The other operating unit, Delaware Sterling Bank & Trust of Christiana, Del., was previously rated C (Fair).

A 'D' rating indicates that a financial institution currently demonstrates what Ratings considers to be significant weaknesses that could negatively affect depositors or creditors. In an unfavorable economic environment, these weaknesses could be magnified.

The downgrades follow the parent company's announcement last week that it expects to take an after-tax charge of between $145 million and $165 million to its earnings for the year ended Dec. 31, 2006.

This charge, along with the expected restatement of several years' financial statements, is the result of an ongoing investigation into the action of several employees involved with the company's leasing subsidiary. Ratings believes a $165 million charge against capital would put the holding company in danger of being classified as "undercapitalized" by regulators.

Sterling Financial plans to consolidate four of its subsidiaries, Bank of Hanover & Trust, Pennsylvania State Bank, Bank of Lancaster County and Bay First Bank.