There's a lot of scrutiny in how banks lend these days, partially a consequence of the financial crisis and resulting federal legislation to rein in the worst offenders of substandard lending practices.
Despite that scrutiny, banks can build their businesses by lending outside the geographic area that's considered their home territory. Out-of-area lending comes with risks, but bankers said the practice — when stringently controlled — can be a good way to diversify an institution's portfolio with new industries and customers. It's also a way for banks to expand into new territory, they said.
However, you're unlikely to see many Central Pennsylvania banks lending to companies in Philadelphia or Pittsburgh, much less Florida or California, executives said.
"It's not much of a leap for us to go to Lancaster, because we know the market so well," said Jeff Seibert, chief operating officer for Shippensburg-based Orrstown Bank and its parent company, Orrstown Financial Services Inc.
About 2 percent of Orrstown Bank's total loan portfolio is out-of-area lending, according to the company. The bank writes loans to existing commercial customers that have business deals outside Central Pennsylvania, which reduces the risk and exposure in the markets by lending to stable companies, Seibert said.
Generally, more banks have increased their out-of-area lending as part of broad growth strategies, he said.
"The lack of loan demand was forcing banks to go outside their area to find new business," he said.
It's not an unusual strategy but still, fewer banks are going out on the limb. More often than not, they're partnering with other banks on those loans, said Pete Ricker, senior vice president of Gettysburg-based ACNB Bank.
"Typically, what banks do is partner with other banks and do loan participation," he said.
That allows banks to spread the risk and total loan amount among the partners so that one bank doesn't over- extend itself on large loans, Ricker said.
Between 10 percent and 15 percent of loan applications to ACNB are eligible for loan participation, whereas several years ago that might have only been about 2 percent, he said. Companies feel they are ready for borrowing, but it also shows the large regulatory pressure that banks are under to manage their risk, he said.
That pressure is evident in pure out-of-area lending, too.
"If a bank is lending outside its area, then regulators are going to look very closely at what they're doing there," said Ann Grochala, vice president for lending and housing policy with the Independent Community Bankers of America, a trade group in Washington, D.C.
Regulators will have a lot of questions for banks that are taking on risk outside the geographic and industry areas they are more familiar with, she said.
A bank's relationship with customers, its growth strategy and expertise in various industries are crucial factors in how it expands its business, she said. Out-of-area and participation lending can help banks by diversifying their portfolios.
"Right now, they're looking for additional lending opportunities," Grochala said, "so they'll look at any borrower, but it depends on the borrower's ability to repay the loan."
Orrstown Bank approaches out-of-area loans with caution, Seibert said. First, it isn't going to leap-frog counties for new business. It's going to do business in counties adjacent to those it already has business in, and it's going to study the markets closely before entering, he said.
Orrstown has to be careful. The bank and Orrstown Financial Services were under heavy scrutiny from state and federal regulatory agencies in 2012 for writing $113.8 million worth of commercial real estate loans before the 2008 financial crisis. Those loans — some in Maryland — soured when the recession hit, leaving Orrstown with too large of a risk on its books.
SEPTA, the Southeastern Pennsylvania Transportation Authority, filed a class-action civil suit in 2012 alleging Orrstown misled investors in security filings about the quality of its loan portfolio. Orrstown denies the allegations. The matter is still in the courts, Orrstown spokesman Mark G. Bayer said.
Orrstown fixed its financial difficulties by selling off most of its troubled loan portfolio to private investors and since last year has been on a better financial path.
No one wants to throw caution to the wind, Seibert said. But banking is still a competitive business, and passing over opportunities is a delicate dance.
"If there's a loan out of area, and we're familiar with the company and industry, we would consider it," he said. "Other banks would entertain that as well, because if they don't, there's always a competitor out there who will."