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The economic downturn continues to take its toll on the U.S. banking industry with the count of banks that have failed this year topping 120 and rising rapidly.
The stresses that have caused those failures are also being felt at locally based banks, which have seen share prices plummet in the past year as profits diminished and nonperforming loans mounted.
Yet local banking officials say the picture here is far from bleak, with some recent signs of a brightening outlook. Banks here, they say, are well capitalized and have plenty of money to lend.
It's not just that the stresses from the housing crisis and unemployment that have toppled banks in other parts of the country are far from reaching the breaking point here. It's also that deposit and loan levels at local banks are still rising, and income for the latest quarter, which ended Sept. 30, has rebounded compared with earlier in the year.
Just back last week from a two-day banking conference in Florida, William J. Reuter, chairman and CEO of Lititz-based Susquehanna Bancshares, said he felt fortunate.
"When you sit there with people from Florida, California, Nevada, Michigan," he said, "you thank the good Lord you're operating where you do."
Yet Susquehanna and other local banks are having to help carry the burden of bank failures in other parts of the country through higher fees to the Federal Deposit Insurance Corp.
In the first nine months of 2009, those fees added up to more than $20 million for Susquehanna compared with less than $1 million for the same period last year. And on top of that, Reuter said, the bank is preparing to write a check for about $65 million as prepayment for its FDIC fees for the next three years.
The parent companies of the three other banks based in Lancaster County saw similar high FDIC fees during the first nine months of this year — $21.7 million at Fulton Bank, $898,000 at Union National Community Bank and $881,000 at Ephrata National Bank.
"It's important for people to understand that it's the banking industry that is paying for this, not the taxpayer," said R. Scott Smith Jr., chairman and CEO of Fulton Financial Corp., the Lancaster-based parent of Fulton Bank.
A rough patchThose higher fees, combined with set-asides for loan losses and other factors at those four banks, resulted in sharply reduced income so far this year compared with last.
Susquehanna and Union National actually posted losses in net income for the first nine months of the year, although returns were back in the black during the third quarter.
In its quarterly report to the Securities and Exchange Commission, Susquehanna Bancshares attributed its $7.4 million loss during the first nine months to higher FDIC premiums as well as increases in provisions for loan and lease losses, and the cost of consolidating some branch offices in Central Pennsylvania.
During the final three of those months, conditions had swung back in the black to the tune of $2.7 million in net income. That was still a 57.8 percent drop from the third quarter of 2008.
Union National attributed its loss of $257,000 for the first nine months to higher FDIC charges, penalties for prepayment of higher interest debt and impairment charges for mortgage-backed and other securities.
During the third quarter that had swung back to a net income of $147,000, a 22.5 percent drop from the third quarter of 2008.
Fulton posted a net income of $34.4 million for the first nine months of the year, a 64.2 percent drop from 2008, and $18.3 million in net income for the third quarter, a drop of 37.1 percent from 2008.
Ephrata has also shown some signs of stress this year. It reported $2.98 million in net income for the first nine months of this year, a 3.4 percent drop from the same period in 2008.
Ephrata's $642,000 in net income for the third quarter was a 142.3 percent increase over 2008. However, factoring out the loss from a sale of Fannie Mae stock last year, which provided Ephrata with a significant tax benefit, the increase for the quarter would have been a more modest 2.2 percent.
The bank was also in the middle of a consultant's project last year, which added to expenses and skews the comparison, said Aaron Groff, chairman, president and CEO of ENB Financial Corp., the parent company of Ephrata National Bank.
Each of the banks points to construction loans as a continuing concern from last year, with less troublesome problems now cropping up across the board in other portfolios.
"Small businesses and agriculture have stresses in our current economy," Groff said. "Our reserve for loan losses, we continue to put more in."
Still, bank officials say, the local economy is faring better than most places, including some of the other areas in the Northeast where Susquehanna and Fulton do business.
"We are fortunate in Lancaster County to have diversity. It takes a longer time for a weakening economy to penetrate," Groff said.
Mark Gainer, chairman, president and CEO of Union National Financial Corp., the Mount Joy-based parent company of Union National Community Bank, agrees.
"We're fortunate here in Lancaster County that people still have a pretty strong ethic to repay their debts," he said.
Deposits and loansDespite the stresses they're under, local banks point to growing deposits and loan portfolios as a couple of positive indicators.
Third quarter deposits were up 21.3 percent at Fulton, 12 percent at Union National and 8 percent at Ephrata.
Deposits were down 3 percent at Susquehanna, but Reuter attributed that to a sharp drop in certificates of deposit. "Our core deposits, they're up 11.4 percent," he said.
"People are putting money into the bank rather than the [stock] market. People are sitting on their cash," Fulton's Smith said.
"Funding is not an issue now as far as lending goes," he said. "There's plenty of money to make loans. ... The issue in lending now is that quality loan demand is just not there."
Still, unlike some of the country's largest banks where lending has been declining, local banks have increased their loan portfolios.
Third quarter loans were up 1.2 percent at Fulton, 4 percent at Susquehanna and 8 percent at Ephrata, but down 7.6 percent at Union National.
At Susquehanna, for instance, although real estate construction loans were down 7 percent compared with the third quarter last year, consumer loans were up 8 percent, commercial loans up 6 percent and real-estate-secured residential loans up 5 percent.
"I think the core consumer has come back to banks for mortgage shopping," Susquehanna's Reuter said.
That's not to say that banks haven't become more rigorous during the recession in screening customers for loans, particularly for startup companies.
"The cry out there is for these new businesses to get seed capital," Ephrata's Groff said. "In the banking business, we are paying attention to existing customer relationships. But if we don't grow new relationships, we won't grow."
Stocks and dividendsLike other banks across the country — and most publicly traded companies in general — local banks have seen a significant erosion in stock prices during the recession and are just beginning to see some rebound from lows in the summer.
Susquehanna's stock was trading below $6 a share last week, according to marketwatch.com, well below its high for the year of over $16 but up from its low in July, when it dipped to $3.78.
Similarly, Fulton was trading below $9 last week, down from $11.35 last December but up from $4.72 in July; and Union National was trading below $4, down from a high a year ago of $6.50 but up from a low of $2.82 in August.
Ephrata's stock, on the other hand, was trading below $21 last week, a low for the year and down from a spike to $27 in July.
Ephrata's Groff said he believes his bank's stock price is a direct reflection of a decision last month to cut the dividend payable next month from 30 cents a share to 24 cents.
That's still significantly more than other locally based banks are paying. Union National suspended its dividend altogether last year to bolster its capital position. Fulton cut its dividend to 3 cents a share in April, and Susquehanna announced last month that it was dropping its dividend to 1 cent a share.
"The decision to reduce dividends was a painful decision," Susquehanna's Reuter said. But "it was the prudent thing to do. ... None of us are smart enough to understand how deep this recession is going to be."
Road to recoveryAlthough banking officials are seeing signs that make them hopeful the worst of the recession is over, they still believe the overall economy will be slow to recover.
"I think people are just a bit more optimistic," Ephrata's Groff said, pointing to refinancing activity and reports that people have started coming in again to pre-qualify for home mortgages.
The main drag, bank officials say, is the continuing loss of jobs.
"The big driver is unemployment," Union National's Gainer said. "We need consumers to start spending."
Mike Gumpper, professor of economics at Millersville University and director of its Center for Economic Education, agrees.
"There are a lot of positive signs that we have come to the bottom, [that] the declines have slowed," Gumpper said. "[But] the unemployment issue is still the big elephant in the room when it comes to recovery. ... The path leading out of it is going to be very slow, very drawn out compared to past recoveries."
There is also concern about how the government backs away from its stimulus efforts as the economy stabilizes.
"The issue now is the transition in stimulus from the public to the private sector," Fulton's Smith said. "It could be a tricky transition."
Still, bank officials are hopeful.
"We're confident," Susquehanna's Reuter said. "We believe we'll be positioned nicely as the economy does turn around."
Dennis Larison is editor of the business section and can be reached by telephone at 291-8753 or by e-mail at dlarison@lnpnews.com.
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