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Encouraging resultsMidstate banks make headway in third quarter

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Most midstate banks did pretty well in the third quarter this year.

"It was one of the best quarters in the history of the company," said William Reuter, chairman and CEO of Lititz-based Susquehanna Bancshares Inc., parent company of Susquehanna Bank.

Overall, 2012 is shaping up to be Susquehanna's best year ever, he said. Commercial and retail loans both grew, as did core deposits, while asset quality improved for the sixth consecutive quarter.

Other midstate bank CEOs had the same story to tell.

"The bank is … on target for its best year in 2012," following record years in 2010 and 2011, said Michael Kochenour, chairman, president and CEO of York Traditions Bank, which completed its first decade this year.

Camp Hill-based Integrity Bank said it achieved a 16.6 percent return on equity in the third quarter, compared with 15.8 percent in the third quarter of 2011.

"We've had good growth in multiple areas," President and CEO Jim Gibson said.

Nationwide, the third quarter of 2012 saw banks record their best earnings in six years, the Federal Deposit Insurance Corp. said earlier this month.

Banks and thrifts reported net income of $37.6 billion, up 6.6 percent from a year earlier, the FDIC said. Total assets rose 1.4 percent, and loans rose by 0.9 percent, the FDIC said.

"It is particularly encouraging to see small banks improving their earnings," FDIC Chairman Mark Gruenberg said in a statement.

"The impact of the financial crisis and recession affected their performance later than that of larger banks, and their recovery began later as well."

Among midstate banks, third-quarter income dropped 7.3 percent from 2011 to 2012, according to calculations based on FDIC data. However, that is due primarily to Orrstown Bank, which posted a third-quarter loss of $21 million.

The Shippensburg-based bank has been working since last year to prune a number of bad loans from its portfolio and is under federal and state consent orders. The bank has said it expects to recover most of its third-quarter loss by setting it against future tax liabilities.

Excluding Orrstown, midstate bank income rose 27 percent in the quarter compared with 2011.

For the first nine months of the year, midstate bank income rose 19.7 percent, a figure that includes Orrstown.

The FDIC compiles quarterly data on every bank in the country and makes it available on its website. Most banks are subsidiaries of holding companies; various accounting choices made within those companies can change net income and other financial results at the holding- company level. Also, some companies hold multiple banks: Lancaster-based Fulton Financial Corp. holds six, for example.

Asked what is driving net income growth, midstate bankers pointed to residential mortgages, followed by business loans.

November was an all-time high for residential mortgages at Integrity Bank, Gibson said.

"My guys tell me December will be in the same area," he said.

Meanwhile, Integrity's board approved $35 million in new business loans in November, Gibson said. Loans in the third quarter were up about 7 percent over the same quarter in 2011, he said.

York Traditions is picking up considerable non-interest income through its residential mortgage business, which it brought in-house in early 2010, Kochenour said. As for commercial loans, "the pipeline is as good as it's looked in the last two, three years," he said.

At Orrstown Bank, on the other hand, net loans and leases shrank 20.2 percent since September 2011, the FDIC said. Orrstown's dropoff in loans is one of the biggest in the country, according to research firm SNL Financial.

Orrstown is still in the process of dealing with its bad loans and can't be aggressive in securing new ones until it satisfies regulators' concerns, said Matt Schultheis, an analyst with Boenning & Scattergood.

"They have their hands around the problem," he said, referring to the bank's leadership. "The question is, how quickly can they get this stuff off the books?"

Orrstown did not respond to requests for comment.

Susquehanna Bank's acquisition of Tower Bancorp Inc. in February helped it achieve top-three market share in 12 counties this year. That dominance has led to increased brand awareness and corresponding growth, Reuter said, adding that the bank's increased size allows it to take on larger loans.

The lackluster economy makes for sharp competition among banks, he acknowledged.

"You have to be prepared to take somebody else's customer and expand more relationships with your customer at the same time," he said.

Schultheis said he is seeing a lot of market share steals — stronger banks poaching weaker ones' business — in place of overall market growth.

In some cases, banks' earnings upticks are due to reduced loan loss provisions, Schultheis said. Many banks had to set aside large sums to cover loans that went bad in the recession, money that they can release now that loan portfolios are healthier.

That does not appear to be the case locally. Susquehanna has not yet reduced its loan loss provision but plans to do so, Reuter said.

York Traditions posted a sharp year-over-year increase in non-accruing loans. However, that's because the bank had so few such loans in 2011 that the figure "had nowhere to go but up," Kochenour said.

The bank had no charge-offs whatsoever in 2011, he said. York Traditions' troubled asset ratio, a measure of bank health developed by MSNBC and American University, remains well under the national median, indicating the bank's had fewer nonperforming loans than its peers.

Though bank leaders expressed some concern about the "fiscal cliff," they were optimistic about 2013.

"There's reasonable activity out there," Reuter said, and the Federal Reserve has signaled it intends to keep interest rates low.

Low interest rates have hurt lenders' margins but have helped keep the economy moving, Gibson said.

"We have a business model we believe will thrive in good and difficult times," he said of Integrity. "I'm absolutely elated about 2013."

Click here to download a chart showing midstate banks' year-on-year statistics.

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