Locally based banks have not seen the large loan losses or plummeting stock prices that have afflicted banks in other regions, but the effects of the housing downturn and federal bailout are still being felt here.

For one thing, local bank officials report spending a lot of time lately assuring customers about the banks' stability and explaining how their money is protected by the Federal Deposit Insurance Corp., things most customers took for granted until recently.

"People are constantly reading and seeing bad news," said Craig Roda, president and chief executive of Fulton Bank, Lancaster County's largest bank in term of deposits. "There's just a fear and concern by all consumers about their bank."

Aaron Groff, chairman and chief executive of Ephrata National Bank, the county's fifth largest, said tellers were getting so many questions, the bank published a "financial soundness and stability" statement, posted on its Web site, to provide answers about its capitalization, dividend payments and FDIC protection.

Still, ENB Financial Corp., the bank's parent holding company, has suffered collateral damage from the banking crisis.

Earlier this month, it reported a 61.8 percent decline in earnings for the third quarter ending Sept. 30 — $628,000 compared with $1.64 million for the same quarter a year earlier — attributing that decline in large part to a $760,000 drop in the value of its Fannie Mae stock and another $453,000 in direct losses from the sale of that stock both before and after the government took over the mortgage giant Sept. 7.

Yes, the bank has had losses in its holdings of Fannie Mae, and yes it's had loan delinquencies, Groff said, but Ephrata National is still well capitalized, and those delinquencies are less than 0.5 percent of its loan portfolio and have not been spiking.

"We've not seen anything trending that corresponds with what's been going on globally and nationally," he said. "We have not booked one subprime loan."

And Ephrata National still has money to lend.

"Our underwriting standards have not changed," Groff said. "If a person can afford a loan, they can still get a loan."

Susquehanna Bancshares, parent of Susquehanna Bank, the county's second largest bank, also reported a large drop in third-quarter earnings last week — 67.8 percent — $6.4 million compared with $19.9 in the third quarter of 2007.

During its conference call on the report, the bank blamed the drop on several events related to the adverse economic climate, including a $17.5 million impairment charge on two $10 million collaterized debt obligations that have fallen far below par value.

The bank also cited a $2.5 million charge for costs associated with the consolidation earlier this month of its three bank subsidiaries into a single charter, a move projected to save the company $20 million next year.

Despite its third-quarter troubles, Susquehanna is still showing a large increase in earnings for the year to date — $68.6 million compared with $50.4 million for the same period last year — a 26 percent improvement.

Some of that can be attributed to the acquisition of Community Banks Inc. last November, which boosted the size of the company by 17 percent.

The bank bailout
Some large banks with local branches, such as Wachovia and Bank of America, have played prominent roles in the financial crisis and government bailout in recent weeks.

Wachovia, the county's fourth largest bank, made headlines earlier this month when it was sold to Wells Fargo to prevent its collapse.

And Bank of America, 18th largest here, has figured prominently by agreeing to take over the troubled Wall Street investment firm Merrill Lynch.

"As of now, only the nine major banks have been helped directly" by the federal bailout, Mike Gumpper, professor of economics at Millersville University and director of its Center for Economic Education, said last week. "The direct funding to local banks hasn't happened yet."

The government has set aside $125 billion of the recent $750 billion bailout package to buy shares in those nine largest banks and another $125 billion to help hundreds of regional banks. Those smaller banks have until Nov. 14 to apply for the assistance.

Friday, in one of the first signs of how the program will work for smaller banks, PNC Financial Services Group Inc. announced it has been approved for $7.7 billion in federal help as part of a deal to buy troubled National City Corp., of Cleveland, for $5.58 billion.

PNC, based in Pittsburgh and 18th largest in the county, bought Bank of Lancaster County earlier this year.

In contrast, Groff said Ephrata National has no intention of asking for federal help, at least not at this time.

"We don't have the need," he said, and it would run counter to his bank's tradition of independence.

"Free enterprise brings good value if we can continue to run that way," he said.

Union National Community Bank, the county's sixth largest, on the other hand, has been looking at the proposal and participated in a recent conference call with the FDIC to learn more about it, said Mark Gainer, the bank's chairman and chief executive.

"On the surface, it sounds like something we would want to participate in," Gainer said. "We don't want to be put at a competitive disadvantage."

The problem, he added, is that the FDIC couldn't answer 75 percent of the questions that bank officials posed about the program, which leaves Union National up in the air about whether to participate.

Union National has already been through a period of restructuring to improve its financial prospects, closing its Home Team mortgage subsidiary a year ago, issuing a private stock offering in May and selling some of its low-interest assets earlier this year to pay off higher cost borrowings to boost its capital position.

Gainer said the bank was fortunate it took those steps when it did.

"We went through a de-lev\heraging and restructuring in 2007. If we tried to do some of those things now, we wouldn't be able to," he said. "The way we view it, we've gone through the heavy lifting, now we're back to the knitting."

Union National has also been in the news recently after its former vice president of lending, George Clayton Jr., was charged with taking out $700,000 in fraudulent loans.

Gainer said that has not affected the bank's finances. A portion of the money has been recovered and the loss is covered by insurance. No customer information left the bank because of Clayton's actions, he added.

"In this environment today, our capital is as strong as it's been in eight or 10 years," Gainer said, and figures for the bank's most recent quarter will be out later this week.

Also looking at the government's bailout proposal is Fulton Financial Corp., the parent holding company for Fulton Bank.

"We do continue to look at what is being offered and what the impact would be for our company," said Laura Wakeley, Fulton's vice president for communication.

In its third-quarter report, released last week, Fulton attributed a drop in earnings to the current economic turmoil and housing downturn.

The company reported earnings of $29.1 million for the three months ending Sept. 30, a 13.4 percent drop from the same period in 2007.

The report attributed that decline to pre-tax charges of $10.8 million — which reflects a fall in the value of its bank stocks and debt securities — and to a $22.1 million increase in its provision for loan losses.

Susquehanna Bancshares is also looking at the government's bailout plan, according to comments by William Reuter, its chairman and chief executive, during the earnings conference call.

"We're intriqued by certain aspects of it," he said. "Clearly, we're well capitalized, and if we could access some additional capital that would be great. ... It would be worth it for us to be able to put a few more dollars out there" in loans. "We haven't made any commitments, but we're studying it very hard right now."

Fallout from housing
Each of the three locally based banks is still lending money, including home mortgages, but in many cases those loans have shifted somewhat, especially away from construction loans.

"The secondary markets have gotten a lot more stringent," Fulton's Roda said.

In the past, he said, the secondary market was willing to stretch to provide a loan for an individual with a borderline credit score.

"Today, that individual will probably not get approved for a loan," Roda said. Still, "if you look at Fulton Mortgage Co., activity is just as good as a year ago."

Roda said that's because there is less competition in the market and a consequent "flight" to quality mortgages.

"We've always been Steady Eddie, never been outside the box," he said. "We have gotten a lot of that additional business we would not have had before."

Indeed, the bank's recent quarterly report showed significant increases in commercial and residential mortgages, as well as home equity, industrial, financial and agricultural loans, but decreases in construction and consumer loans.

Ephrata National Bank has been in a similar position.

"We're granting loans, but we're asking more questions," Groff said. "We're looking more closely at our housing industry ... particularly at the person who wants to build a house on spec."

Ephrata National has been making loans to some families for several generations, Groff said, but when it has statistics that cast doubt on a loan application's viability, it isn't doing anyone any good to put the bank's assets at risk.

Stock prices
Like most public companies, local banks' stock prices have taken a beating during the current bear market, but not to the extent of a Wachovia, which reported a $23.7 billion quarterly loss last week and has seen its stock plummet from around $47 a share a year ago to a mere 75 cents at the end of September.

Fulton, for instance, was trading around $12 a share early last week, dropping to around $8.50 a share Thursday, but bouncing back to around $9 be the end of the week.

That's down, but not significantly, from the $13 a share its stock was fetching a year ago.

Likewise, Susquehanna Bancshares began the week around $16 a share, ending it around $13.50, also down from the $20 a share it was fetching a year ago.

ENB Financial, parent of Ephrata National, which is traded over the counter and not as susceptible to market volatility, was trading for $25 a share last week, down from $30 a year ago, but up from $22 in July.

Part of the recovery in price may be attributed to a program the bank launched in August to buy back up to 140,000 shares for its own stock for dividend reinvestment and employee stock programs, primarily, Groff said, because the stock was available at a good price.

Union National, which suspended dividend payments at the beginning of the year as part of its efforts to increase capitalization, saw its stock price drop from $13.50 a share last November to $4.50 earlier this month before rebounding to $6.20 last week.

Over the horizon
Despite the difficult financial climate, local bank officials remain confident about their prospects for weathering the storm, especially given the steps the government has taken to temporarily raise the FDIC limit to $250,000 on bank deposits and to pump money into the banking system so banks can continue making loans.

"The steps that have been taken have been needed," Fulton's Roda said.

But Millersville University's Gumpper cautions not to expect the economic turmoil to end quickly.

"This is all part of what is going to be a fairly lengthy shakeout in the banking system," he said.

"We will see lots of losers, but that means there are going to be winners," Gumpper added.

"Our local banks happen to have a strong position because they're more conservative in their approach," he said. "They are going to have some pricing power when the market stabilizes."

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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.