Worries growing at Phila. area's small banks

Could Republic First Bancorp Inc.'s $2.8 million quarterly loss be a harbinger of trouble for small banks across Philadelphia?

The Philadelphia company was alone among many small, publicly traded local banks reporting earnings so far to post a first-quarter loss. Like many banks, Republic First is battling the consequences of real estate loans that went bad.

Most other small Philadelphia-area banks escaped the first quarter in decent shape, despite the weak economy and interest-rate dynamics that squeezed profits for some.

"The quarter came out to be OK. It was definitely a lot better than you would have expected if you had been watching Hillary Clinton and Obama campaigning" in Pennsylvania, said Rick Weiss, who covers banks for Janney Montgomery Scott L.L.C. in Center City.

Eleven of 18 publicly traded banks in the region with at least $500 million in assets reported higher profits in the first quarter than in the same period a year ago. Republic First was the only one - of those releasing earnings through Thursday - to report a loss.

Republic First set aside $5.81 million for losses on loans this year, compared with $80,000 last year.

Its problems "were exacerbated by the problems in the general economy and the deterioration of real estate values," chairman and chief executive Harry D. Madonna said.

At banks nationwide, according to analysts at Friedman, Billings, Ramsay & Co. Inc., the median ratio of troubled loans to total loans deteriorated to its worst level since the first quarter of 1995. They expect the negative trend to continue through the end of the year.

It is even more troubling to the analysts that the increase in bad loans outpaced the growth in reserves to cover them.

At banks in the Philadelphia region, nonperforming loans and other assets increased 130 percent, to $450.12 million at the end of March from $195.9 million a year earlier. Over the same period, reserves increased just 19 percent, to $546.68 million from $458.8 million.

That discrepancy means banks likely will have to add to reserves in the future, cutting into earnings and depressing already weak stock prices.

The figures do not include Sovereign Bancorp Inc., which had $484.39 million in nonperforming assets and $775.44 million in reserves on March 31. Sovereign is technically headquartered in Philadelphia, but it is managed from Boston.

In lending, the Philadelphia region's relatively steady economy has helped banks. "We have not seen any change in loan demand," said Ted Peters, chairman and chief executive of Bryn Mawr Trust Co.

However, earnings at Bryn Mawr and other banks were under pressure because the Federal Reserve's interest-rate cuts caused the rates that banks charge on loans to decline more quickly than the rates they pay on deposits.

A key measure of bank profitability - net interest margin - is based on the difference between the two rates, and for many banks that margin went down in the first quarter.

At Parke Bancorp Inc. in Sewell, for example, net interest margin fell to 3.33 percent in the first quarter from 3.52 percent in the fourth quarter and 3.91 percent a year ago.

Harleysville Savings Financial Corp., by contrast, said its net interest margin was 1.64 percent in the first quarter, up from 1.55 percent in the fourth quarter and the same as in the first quarter of last year.

"We've benefited greatly by the number of CDs we have that are repricing" at lower interest rates, said Harleysville's chief financial officer, Brendan J. McGill.

Harleysville also relies more heavily than Parke on borrowed money to fund its loans. Those loans are more expensive - hence Harleysville's lower margin - but they allow the bank to more quickly reduce its cost of funds than it could if were more dependent on deposits.