USA BANK COLLAPSES - FDIC Closes Republic First as USA Interest Rates Claims First Financial Victim

hi welcome back to Joe blogs in today's episode I want to talk to you about the failure of Republic First Bank which is a Philadelphia based bank that was seized by us Regulators on Friday the 26th of April placed into Administration and has now been sold to Fulton Financial core and you might be sitting there thinking Republic First Bank that rings a bell didn't this Bank get into difficulty this time last year and you'd be forgiven for thinking that because in April 2023 following the failure of Silicon Valley Bank and Signature Bank First Republic Bank actually failed so if you're thinking about naming a bank I'd probably advise against using First Republic in any order in the name of that bank because these Banks seem to be doomed but Republic First Bank has now become the first US Bank in 2024 to fail and it's the sixth largest bank in the USA to fail since 2010 so in today's video we'll go through the details as to the problems that have caused Republic First Bank to fall into Administration and be seized by the regulator we'll have a look at the failed bailout attempts that took place in 2023 we'll talk about the changes of strategy that have taken place at the bank over the last couple of years and how that's caused them to be in such financial difficulty we'll then talk about what's gone on with their Auditors because the Auditors actually raised the red flag with regards to this business and were subsequently sacked and then finally today I'll wrap up with my summary as to whether or not I think the failure of Republic First Bank is the start of systemic failure in the US banking system or whether this is an isolated case that won't have any impact on other Banks but before we get started on all of that I'd like to say thank you so much to everyone that's supporting the channel if you bought me a coffee or sent me a YouTube super thanks recently thank you so much for the time and effort you've taken to do that I really really appreciate it and if you've signed up as a long-term supporter of the channel either through Patron or buy me a coffee membership or YouTube membership thank you for that long-term support it really does help me and it keeps me motivated and makes me think up more ideas videos so thank you so much for that support on Friday the 26th of April the FDIC in the USA announced that it had seized the Philadelphia based Republic Bank and placed it into Administration the fdic's press release stated Philadelphia based Republic first Bank doing business as republic bank was closed today by the Pennsylvania Department of banking and securities which appointed the Federal Deposit Insurance Corp or FDIC as receiver to protect depositors the FDIC entered into an agreement with Fon Bank Pennsylvania to assume substantially all of the deposits and purchase substantially all of the assets of Republic Bank Republic bank's 32 branches in New Jersey Pennsylvania and New York will reopen as branches of Fon Bank on Saturday for branches with normal Saturday hours or on Monday during normal business hours this evening and over the weekend depositors of Republic Bank can access their money by writing checks or using ATMs or debit cards checks drawn on Republic Bank will continue to be processed and Loan customers should continue to make payments as usual depositors of Republic Bank will become depositors of Fon bank so customers do not need to change their banking relationship in order to retain their deposit insurance coverage customers of Republic Bank should continue to use their existing branches until they receive notice from Fulton Bank that it has completed systems changes that will allow its Branch offices to process their accounts as well as of 31st of January 20124 Republic Bank had approximately $6 billion in total assets and $4 billion in total deposits the FDIC estimates that the cost of the deposit Insurance Fund related to the failure of republic bank will be $667 million the FDIC determined that compared to other Alternatives Fulton bank's acquisition of Republic Bank is the least costly solution for the D an insurance fund created by Congress in 1933 and managed by the FDIC to protect the deposits at the nation's Banks Republic Bank is the first US bank failure this year the last failure was Citizens Bank sax City Iowa in November 202 23 so the FDIC has provided an explanation as to what happened at the end of the Republic Bank Saga but what I want to do is find out exactly what caused it to get into such financial difficulty that the FDIC had to take it over and in order to get closer to that detail let's have a look at a presentation that was given by the management team in July 23 to investors now if we start off by looking at this slide which gives an overview of Republic First Bank you can see that the bank was founded in 1988 and it stated that for the first 20 years grew with a focus on Commercial clients and opportunities in the metropolitan Philadelphia and Southern New Jersey markets and I think what's interesting about this presentation is that there's a strong flavor from the management team blaming the management teams from the past and this is highlighted in the next bullet point which says under prior management the bank expanded into New York City and new business lines at the time the board was divided with several directors loyal to the previous CEO despite these strategic missteps so basically what they're saying here was that the board changed its strategy it changed its direction and that some people didn't agree with that and I assume that those people were still involved in the management of the business at the time of its failure and were trying to detach themselves from having any responsibility with that change of strategy and the infighting and the change change of management is highlighted in the next bullet point which says in 2022 our directors oversaw an effort to refresh the board and leadership team bringing in three new directors and a new CEO and CFO we also brought in a new general Council in 2023 our new leadership team has prioritized stabilizing the business while executing a new strategic plan our mission is to deliver an unmatched commercial and consumer banking experience and with are focused on providing fanatic customer service I don't know whether that's a typo whether they meant to put fantastic but they did put fanatic doesn't really make a lot of sense and by the fact that the bank has now failed I don't think they managed to achieve providing fanatic customer service if we now have a look at this slide it starts to give us an insight as to why the bank failed and before we move on to those details which is shown at the bottom you can see that between 2021 and the first half of 2023 the bank had three different Chief executives Vernon Hill was the chief executive in 21 and the first half of 2022 he was then replaced on an interim basis by Harry Madonna who was then replaced in December 2022 by Tom geel and if we have a look at the detailed note to the bottom of this slide you can see that there is some finger pointing in terms of why the bank is in such difficulty and it says that in the fourth quarter of 2021 the previous leadership invested heavily in Long durations Securities with low fixed interest rates as rates increased those Securities declined in value and this is something that we've talked about on previous bank failures basically when interest rates were very very low it was difficult for banks to be able to find a return on that money and so a lot of banks invested heavily into government bonds but unfortunately as interest rates started Rising those bonds moved out of the money and that's exactly what's happened to Republic first the slide goes on to attach further blame to the previous management team stating in the first half of 2022 that the previous leadership team continued its aggressive expansion opening a new branch in Philadelphia and increasing its presence in the New York market and they also decided to grow their jumbo Residential Mortgage portfolio at below Market interest rates so once again here we've got a major problem because if you're providing large mortgages at below Market rates that's going to be a major issue particularly if interest rates rise rapidly which as we know they have done because what that means is that you've got these huge portfolio of loans on your books that you're not making any profit on and so that's very difficult to be able to come back from and this slide really gives us a detailed explanation as to why Republic first failed and once again here we've got the existing management team placing all of the blame onto the previous management team and they've broken down the bank's problems into four different categories Branch footprint lending activity balance sheet and asset portfolio in terms of the branch footprint the previous management team strategy was focused on aggressive expansion of the company's Branch footprint including the challenging New York City Market which required significant capital and led to a lack of focus in terms of lending activity the previous management team developed an active mortgage lending business specializing in jumbo mortgage products with aggressive Ates which had higher risk and lower risk adjusted rates of returns than other asset classes in terms of the balance sheet the previous management team grew the balance sheet significantly to support expansion which put pressure on Capital ratios and finally for the asset portfolio the previous management team invested heavily in long-dated fixed rate mortgage bonds and expanded the jumbo mortgage loan portfolio at below Market rates and when interest rates were at long-term lows the value of which have declined substantially in a rising rate environment so basically what we're hearing here is that in the period following the global financial crisis Republic First Bank changed its strategy from commercial lending into targeting the jumbo mortgage market and that market was obviously very aggressive particularly as interest rates started to fall and we had historic lows in interest rates for a long period of time as we went through the covid-19 period and Republic first lent lots of really big mortgages at very low rates now in order to offset those low rates they were taking in customer deposits and the only way of getting any sort of return was to place that money into long-dated government securities into treasury bonds and that's what Republic First Bank did but the problem with that is that it locks up a lot of your capital for a long period of time and as interest rates started to rise over the last 18 months or so those B started to move out of the money on a mark to Market basis when you're looking at the value of those bonds there is an inverse relationship between the price and the coupon on the bond so that's what was happening for a public First Bank and the problem they had is that when you're lending all of your money into jumbo mortgages that's generally over a 30-year period so you can't get any of your Capital back from that nobody's going to repay those loans particularly because they were lent at very aggressive rates and when you've got a loan portfolio that's tied up in longdd mortgages with very low yields on them and all of your assets are also tied up in very low yielding bonds you've got no liquidity and that's exactly what's happened to Republic First Bank and this is exactly the same situation that we saw with the failure of other banks in 2023 they didn't have any liquidity and what that means is that they become IL liquid and therefore they get put into receivership and the big question is why didn't the management team do something about this to sort it out before they got to the point of no return interestingly in September 2023 the management team actually announced a bailout deal which was designed to raise $75 million of new capital on the 27th of September 2023 Republic First Bank announced that it had signed a non-binding letter of intent with George Norcross a legendary deal doer and prolific Democratic fundraiser and his brother Philip Norcross a lawyer and lobbyist with deep ties to local and state governments as well as the Norcross bracka group to make an investment of at least $35 million into the company as a condition to the investment the company needed to raise at least $40 million of additional capital from thirdparty investors now unfortunately despite receiving substantial financial support from the Norcross brothers who put their name on this transaction the deal fell apart as they were enabled to raise the additional $40 million that they needed from third party investors and whilst no official reason has been given for the failure of that deal one of the questions that's been raised has been the ability of the company to be able to deliver reliable financial information and in February 2024 the company's Auditors actually posted a statement saying that they were unable to sign off on the accounts Republic first Auditors are Crow LLP and in a public statement filed on the 21st of February 2024 by Republic Bank it was disclosed that Crow had advised the company and the company's management concurred that the following material weaknesses in internal control over financial reporting existed at the 31st of December 2022 number one a failure to maintain an effective control environment which resulted in deficiencies in the communication of certain relevant information to the board of directors of the company to two a failure to maintain effective controls over the implementation of the financial accounting standard board's accounting standard three a failure to maintain effective controls over the measurement of allowance for credit losses four a failure in design of system development life cycle controls related to the conversion of the core banking system and general ledger that occurred in June 2022 five certain instances due to the core system and general ledger conversion during 2022 where there was a failure and general ledger reconcilements being prepared and reviewed timely six a failure in operating effectiveness of review and approval controls over manual journal entries that flow through the core system to the general ledger and seven a failure in operating Effectiveness within deposit operations over the review and authorization of deposit account status changes such as new account openings so what did the management team of Republic first do about all of these recommendations that their Auditors Crow had put forward they dismissed Crow as the Auditors on the 21st of February 2024 so how important and relevant is the failure of Republic First Bank this table shows all of the bank failures in the USA dating back to 2017 and as you can see right at the top here we've got Republic First Bank on the 26th of April and I think the key issue to have a look at here is the total assets because that tells us how big these banks are and as you can see first republ public bank had total assets of $5.9 billion so just under $6 billion and when you look down this list you can see that it's actually the fourth largest bank that's failed since 2017 if we compare the size of Republic First Bank to the last bank failure which was Citizens Bank in November 23 which had assets of 66 million Republic First Bank is almost 90 times larger so this is significant and there have only been three banks that have been larger than Republic First Bank that have failed in the last 7 years being Signature Bank with total assets of 110 billion Silicon Valley Bank with total assets of 209 billion and First Republic Bank with total assets of 233 billion and if we have a look at this chart which shows the total asset value of all of the banks that have failed in each year between 208 and 2024 you can see that since 2014 there have only been two years 2015 and 2023 when the total volume of assets for failed Banks was more than the 6 billion dollar for Republic First Bank so what's the summary and conclusion today well I wanted to post this video because I think the failure of a USA bank is big news in any circumstances and as always the devil is in the detail you need to dive into the details to find out exactly what has driven the failure of this bank because what we're concerned about is whether this is a systemic risk or whether this is just isolated to this particular bank and I think what we've identified from today's video is that the reason why Republic First Bank got itself into financial difficulty was because of its changing lending strategy post the financial crisis in 2008 when it decided to move away from commercial lending and move into Residential Mortgages and at that time you can understand why the management team wanted to do that because the global financial crisis was an absolute disaster and lots of companies went down lots of Banks and financial institutions actually went busted and the management team at that point decided that Residential Mortgages were going to be a safer option than lending to companies that was what they decided to do but where I think they started to go wrong was that they decided to Target the jumbo mortgage market so people who wanted to take on huge mortgages and and that's a very competitive end of the market and in order to win some business they had to start undercutting the competition so they went in very aggressively and were offering very low rates now at the same time as they decided to do that interest rates started to come down rapidly so in order to keep winning business Republic First Bank had to keep cutting its mortgage rates and that meant that it was making virtually nothing on these huge loans and at the same time that that was happening they were also finding it was very difficult to make a return on customer deposits so all of the money that they were taking in from customers they were putting it on long-dated government securities so they locked up all of their Capital into long-term mortgages and long-term bonds and then what happened was interest rates started to rise rapidly and the problem that the bank faced was that they' locked everything up at very low rates so they'd locked in virtually no profit and also they had no liquidity and as they started to need more capital they struggled to be able to sell those bonds because they were all trading below par so in order to sell the bonds they would have had to take a massive hit and the bank obviously didn't want to do that and so they started running out of capital they got themselves into financial difficulty they tried to do a bailout with the Norcross brothers that failed because external investors decided that it was too risky they didn't like the look of the risk profile and ultimately the bank got itself to the position where the FDIC had to step in and appoint a receiver and basically it was completely El liquid and as the FDIC stated they've lost around $670 million as part of that bailout so the big question here is will there be any other financial institutions that have got themselves into the same situation and I think the answer is yes because over the last few years when we had that prolonged period of low interest trates it was very difficult to make any profit if you were a financial institution and many of the decided that it was a safer bet to put their Capital into long-dated government bonds because they were paying a reasonable amount at that point however because we've had this rapid increase in interest rates all of those bonds are now underwater they're trading below par so to cash them in you're going to have to take a hit and make a loss so it's safe to say that there are lots of financial institutions who've put their money into these long-dated government bonds that are now underwater and if those financial institutions finds in a liquidity crisis if they need to cash things in to realize some money they're going to have exactly the same problems as Republic first did that they'll start making losses and then you go into this horrible spiral where you're making losses and your Capital starts Contracting and you haven't got any cash and therefore you potentially face the risk of becoming illiquid and going into receivership so I think the overall summary of today's video is that the situation at Republic First Bank is partly down to the change in management stratey stry that was decided post financial crisis the problems with that change in strategy were accelerated as we saw interest rates coming down and the bank struggled to be able to find places to actually make a return that was then made much much worse when interest rates started to rise again because it left the bank in a very vulnerable situation and as they ran out of cash and options the only real option for the company was to go into receivership and to be sold but in terms of whether or not this is going to spread across the whole of the financial sector I think time will tell we'll have to see how many other the banks in 2024 suddenly advise that they also have liquidity problems and that they've locked away all of their Capital into very low yielding assets and therefore are a liquid and potentially are facing receivership so hopefully you've enjoyed today's video you found it useful informative and thought-provoking if you've liked what have said then please give me a thumbs up thank you for watching this video all the way through to the end and here's something to put a smile on your face e

Channel: Joe Blogs

Views: 110,926

Keywords: evergrande, evergrande crisis, recession, crash, china property, evergrande china, evergrand, turkey, turkey financial crisis, global financial crisis, depression, recesssion, financial crash, recession 2022, interest rates, default, debt crisis, share crash, economy, us crash, market crash, ukraine, russia, ww3, world war 3, nato, ukraine news, ukraine russia, russia ukraine news, russia v ukraine war, russia news, usa vs russia, us china, world affairs, imf, peru, bailout, pakistan, khan

Id: NUjyAtygl_U

Length: 22min 29sec (1349 seconds)

Published: Mon Apr 29 2024