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Sterling’s superstar subsidiary collapses

There was a time when J. Roger Moyer Jr. called Sterling Financial Corp.’s acquisition of EFI the best business decision of his life.


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There was a time when J. Roger Moyer Jr. called Sterling Financial Corp.’s acquisition of EFI the best business decision of his life.

The deal looked like a coup.

Sterling, of Lancaster County, paid $30.5 million for EFI in February 2002. EFI finances logging and land-clearing equipment.

EFI reported profit of about $4.2 million for Sterling in 2002, or about 17 percent of the corporation’s total earnings. By 2006, EFI’s reported profits had grown to about $17 million, more than 46 percent of Sterling’s total.

But EFI’s success was based on fraud, Moyer now says. He is Sterling’s president and chief executive officer.

On May 24, Sterling said it had evidence that EFI employees at various levels had falsified deals and hidden loan delinquencies in a scheme dating back to at least 2004.

Bankers and analysts were taken aback by the scope of the damage, using words such as “shock” and “disaster.” EFI’s longtime leader, George W. Graner, has stepped down in what Sterling described in an April 30 news release as a voluntary departure. Reached by phone at the time, Graner declined to comment beyond confirming his resignation. Sterling also announced May 24 that five EFI employees had been fired.

EFI makes loans to help small logging companies in the southeastern U.S. buy equipment — machines with names such as feller-bunchers and log-skidders. Those machines can cost as much as $350,000, according to accounts EFI provided the Business Journal in 2005.

EFI officials described logging finance as a niche industry in which few lenders have lasted for long. They said their biggest strength was their legwork — their willingness to get into the woods and their knowledge of loggers’ culture.

EFI previously was called Equipment Finance Inc. It’s now a limited liability company but still goes by the old acronym.

As its earnings figures swelled, EFI became a staple of the overall company.

Sterling has been steadily working to expand its line of non-banking businesses, often through acquisitions. Moyer has said that EFI’s profits took earnings pressure off Sterling. The unit’s success enabled Sterling to invest in other acquisitions, he told American Banker newspaper in 2004.

It is too early to say how EFI went so wrong — and how the alleged fraud went undetected for so long. But several analysts and local bankers said they see the EFI drama as a warning about managing businesses outside the straightforward borrowing-and-lending of a typical bank.

“I think it’s going to force bankers to look at other investments and what they are doing, and whether it’s the right thing or not,” said Kenneth Shoemaker, president and chief executive officer of Orrstown Financial Services Inc., based in Shippensburg, Cumberland County.

EFI stands out as an example of what can go wrong with non-core businesses, said Mac Hodgson, a stock analyst who follows Sterling for SunTrust Robinson Humphrey in Atlanta.

Most banks are trying to build other lines of business such as insurance brokerage, leasing or investments. Banks want to diversify and become less dependent on interest-rate conditions, which are especially trying now. Many also see a natural business opportunity in related financial services.

Such income represents a smaller proportion of total earnings at many other banks than it did at Sterling.

It was surprising that Sterling allowed EFI to become such a big part of the overall business, said Patricia A. Husic, president and chief executive officer of Dauphin County-based Centric Bank.

“It’s amazing, it is, and especially for a company as conservative as Sterling is,” she said

The incident underscores the importance of auditing ancillary businesses with the same intensity as the traditional banking side, said Jim Gibson, chairman and chief executive officer of Camp Hill-based Integrity Bank.

“You manage every business subsidiary with the same type of controls that you have in running a bank,” he said. Not to do so, he said, is to gamble with a corporation’s future.

Several bankers said they hold Sterling’s management in high regard.

“Bad things aren’t supposed to happen to good people, and they are absolutely terrific bankers,” Shoemaker said. “I have the utmost respect for them.” Husic expressed similar sentiments.

“I know if anybody can get out of this and turn this around … I know that they can,” she said.

Moyer, who was 58 as of April, has been with Sterling since 1978. He became the company’s chief operating officer in January 2001, president in January 2002 and chief executive officer in May 2002, shortly after the EFI deal.

Moyer has a calm style, and he has previously taken reporters’ calls at home.

“I have great faith and pride in our employees, customers and services,” he said in a May 24 conference call on EFI, “so an event like this has been especially difficult for me.”

The fallout

Sterling Financial Corp. estimated the losses from the alleged fraud at EFI at $145 million to $165 million — more than the entire corporation earned in the last four years. The EFI investigation has not been completed, and Sterling management said it’s unclear how much could be recovered from insurance or reclaimed collateral.

But the loss may well mean the end of Sterling, as stock analysts predict the company will be sold.

As of May 29, Sterling’s stock price had plunged more than 50 percent since April 19, the day the EFI probe was announced. And the company’s book value also will be cut by about 50 percent, said Mac Hodgson, a stock analyst who follows Sterling for SunTrust Robinson Humphrey in Atlanta.

The Bank of Lancaster County, facing a sudden reduction in capital as a result of the EFI losses, was merged with three other Sterling-owned banks. Branding, branches and personnel will remain the same, according to Sterling.

—David Dagan

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