Pennsylvania Community Banks Flourishing Despite Inflation, Rate Hikes

The continued growth of Centre 1st Bank in central PA is the latest example



With record high inflation, accompanied by rising interest rates to combat it, the economy is struggling through a period of uncertainty. One industry well-positioned in the current economic climate is the banking industry, and especially community and independent banks.

As inflation increases, interest rates rise as well. There is more incentive for banks to make additional profits when interest rates rise. Their profits can also be reduced as their cost of funds increases. Interest Rates tend to rise with inflation but the banks’ costs of funds (what they pay depositors) lag, providing the necessary cushion.

Generally, rate hikes are advantageous for community and independent banks. Research by the Independent Community Bankers of America (ICBA) suggests that community banks focus their asset base on higher-yielding loans that reprice faster than deposit rates when interest rates rise. Meanwhile, large banks are more likely to focus on tradeable assets, including securities and other debt instruments, that make them less sensitive to interest rate changes.

The ICBA research shows that the net interest margins of community banks under $1 billion in assets are often higher than those of larger banks during the course of a tightening cycle, averaging between 10 to 20 basis points. Similarly, net loans and leases constitute 60 percent of total assets at the average bank under $1 billion in assets, but just 50 percent at the average bank over $50 billion in assets. So based on the composition of their total assets, community banks have more to gain from a tightening cycle.

Despite the combined impact of the pandemic, inflation and rate hikes, the banking industry, and in particular community and independent banks, are growing. The current tightening cycle likely to inhibit deposit growth while improved economic conditions engender increased lending. This normalization should provide an opportunity for community banks to improve efficiency, reduce operating costs, and ultimately advance the recovery in their local communities.

Helping to illustrate this trend is the growth and success of Centre 1st Bank in Centre County. Centre 1st Bank is a community owned division of Old Dominion National Bank and is operated independently with 150 shareholders located in Central PA. The growth of ODNB now led by Mark Merrill as CEO and Jack Infield as President is among the fastest growing banks in the country, with Centre 1st Bank headquartered in State College.

When Merrill and Infield took over the bank’s charter in 2016, it had 47 million in assets and was under a OCC supervisory oversight with restrictions. During the initial two years, they raised 30 million in new capital from 175 new shareholders and opened a Loan Production Office in PA, the beginning of Centre 1st Bank. In 2018, released from the OCC restrictions while raising an additional 38.7 million dollars in capital, the total capital of 68.7 million was supported with 350 new shareholders of which 150 were representing the Centre 1st Bank Division.

In 2019, the bank officially opened its first Pennsylvania branch office on North Atherton Street. A Pennsylvania Advisory Board was established, comprised of 22 PA executives and local business leaders headed by Brent Pasquinelli as Chair and Sam Malizia as Vice Chair. Despite the challenges that COVID pandemic and economic crisis, the bank achieved record financial performance while providing credit and capital to business and individual customers through the PPP loan program. The bank has been successful in turning over 55% of those new PPP customers in to permanent customers of the bank. During the pandemic, the bank’s loan portfolio grew by a record 88%.

In the last two years, growth has continued unabated. At the end of June of 2022, Centre 1st had 338 million in loans and deposits of 152 million dollars. Since opening full time for business in the Centre Region, the bank has grown loans 166% and deposits 253%.

The capstone for this growth and success came recently, when approval for the bank’s new Pennsylvania Headquarters Building at Patton Crossing was approved. In planning for the last two years, the fifteen thousand square foot building will be the central hub for the development of the future growth of the Pennsylvania market as it looks to expand within and outside of the central part of the state. The building will house the new state of the art branch in the lower level with the corporate and commercial offices on the second floor. Initially, 15 to 20 people will be employed and the current locations for the bank on North Atherton and in Williamsburg Square will be consolidated into the new building. Anticipated occupancy will be fall of 2023.

The continued growth and success of Centre 1st Bank is indicative of the upward trend of banking in central Pennsylvania. Despite the economic uncertainty, the banking industry remains strong in serving the region.

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