As the Federal Reserve holds out for signs that inflation is moving steadily down toward its 2% goal, the target Fed Funds rate remains between 5.25% and 5.50%.

The downside to that is that banks will have to pay more for deposits and maintain those higher rates for longer. That shouldn’t be a problem for most banks. The industry’s average net interest margin at year-end was 3.28%.

However, there are 50 banks that are rated less than 4-Stars with at least 45% of their loan portfolio tied up in commercial loans (CRE/C&I) and have at least one other strike against them (one being a narrow interest margin). These bank can be found on page 5 of this week's Jumbo Rate News.

Fed Waived its Magic Wand and Rates Stayed the Same

The Fed’s Open Market Committee voted unanimously to keep the Fed Funds target rate steady once again at its meeting this week. As the committee holds out for signs that inflation is moving steadily down toward its 2% goal, the target rate remains between 5.25% and 5.50%. The last change was July 26, 2023.

The predictions that came out of the committee meeting last December (JRN 40:48) called for the Fed Funds target to end 2024 somewhere in the 4.25% to 5.00% range. That could still happen, but we’re likely looking at the top end of that range rather than the bottom. We don’t expect any change in June (or probably July), but new projections in June will give a better indication.

In the meantime, as rates remain higher for longer than previously expected, you can continue to take advantage of  attractive CD rates. That’s the upside.

The downside is that banks will have to pay more for deposits and maintain those higher rates for longer. That shouldn’t be a problem for most banks. The industry’s average net interest margin at year-end was 3.28% (according to the  FDIC’s Quarterly Banking Profile QBP). That’s three basis points above its pre-pandemic average of 3.25%, but pressures are mounting.

Credit card balances and charge-offs are up, delinquencies are up across all loan types, and risks remain elevated in offices and office loans.

These mounting pressures did play a role in the demise of Republic First Bank, Philadelphia, PA last week, but there was much more to the story than that.

Republic First Bank was established in 1988 and had more than its fair share of ups and downs over the years. A shake-up began in 2021 when a group of activists-investors tried to over-ride CEO cand force a sale of the bank.

By the middle of 2022, Hill had resigned (not by choice) and those investors were trying to beef up capital to make the then 3-Star rated bank more attractive to would-be buyers. That plan never really got off the ground.

In March 2023 SVB and Signature Bank failed and panic ensued. Republic First may have been able to slide under the radar but then First Republic Bank of San Francisco was also taken over. First Republic, Republic First, confusion followed.

When the dust settled, Republic First Bank (PA) was still standing, but was now firmly planted on Bauer’s Troubled and Problematic Report). Another attempt was made to raise capital. This attempt also failed.

Republic First Bank’s assets, which had peaked at $6.31 billion, were $5.87 billion at year-end 2023. Its net worth had gradually depleted from its peak in 2021 and by year-end 2023 its leverage capital ratio was just 4.43%. And that’s not all...

Between Commercial Real Estate (CRE), which accounted for about half of its total loans, and other commercial loans, 60% of Republic First Bank’s loans were dependent on commerce. Its net interest margin was just 1.17%, well below that 3.28% average. The bank posted losses in each quarter of 2023. Could it get worse? Yes, it turns out, it could.

Based in Philadelphia, Republic First had over 30 branches, mostly spread throughout Pennsylvania and New Jersey, with a couple  offices also in NYC. Respondents in those two regions (NY & Philadelphia) in the Fed’s latest Beige Book all reported declines in demand for CRE. That did not bode well for a bank dependent on business loans.

Republic First Bank’s ultimate failure cannot be blamed on one major blow, rather on a culmination of several smaller wounds. 5-Star Fulton Bank, Lancaster, PA, which had been looking to expand in the area, likely got a bargain basement price to do just that.

There are no other banks that are currently facing the same blend of circumstances that brought Republic First down. There are many, however, that have some of those issues. For example: 1,240 banks (including Republic First) have over 49% of their loan portfolios in CRE and/or C&I (Commercial & Industrial) loans; of those, 423 have an interest margin of less than 3.28%; only two are below 1.17%.

What we also found was that, based on year-end 2023 data, there are several banks (Republic First included) that are rated less than 4-Stars with at least 45% of their loan portfolio tied up in commercial loans (CRE/C&I).  The 50 listed on page 5 also have at least one of the following:

• A leverage capital ratio less than 5% (1);
• A GAAP Capital ratio less than 5% (28);
• A net interest margin < 2% (8); and/or
• A fourth quarter 2023 loss (30).

This is about as close as we can get in similarity to Republic First Bank’s numbers. There is only one bank that is remotely similar to Republic First, Zero-Star Vast Bank, N.A., Tulsa, OK, and it has the star-rating to show it. Without the internal drama, though, it’s still not the same.