While big banks falter, Philly’s family-owned Firstrust says it was ‘ready for this day’
Firstrust, which calls itself "Philadelphia's hometown bank," is using what it learned in past economic downturns to protect its customers and business.
The four-story headquarters of Firstrust Bank squats above Ridge Pike, two miles up the hill from Silicon Valley Bank’s West Conshohocken outpost in a high-rise tower over the Schuylkill.
They’re both banks, but they operated at different edges of the business — as this year’s banking crisis shows.
“Silicon Valley Bank got in trouble because they violated a fundamental rule of banking: Don’t borrow short and lend long,” said Richard Green, Firstrust’s chairman and principal owner, citing the California-based bank’s unusual mix of short-term deposits and long-term loans.
By contrast, he added, “we are fortunate to have operated in challenging times before.”
Silicon Valley tripled deposits and doubled loans during the biotech bubble of 2020-22 but funded that growth with venture capitalists’ uninsured deposits. It also bought a large portfolio of long-term bonds that promised attractive yields but lost value as interest rates rose.
Rumors spread, venture depositors fled, and the bank was seized last month by the Federal Deposit Insurance Corp. as its value dropping toward zero.
Firstrust (formerly First Federal Savings & Loan of Philadelphia) survived a similar scare at the end of the 1970s around the time Green went to work at the family bank. It happened just as a string of Fed rate hikes was destroying the cozy 3% deposit yields and devaluing the steady 6%, fixed-rate, 30-year mortgages that used to give it and other neighborhood savings and loans a comfortable profit margin.
Being small, flexible, and determined, “we stopped doing that business and began making short-term adjustable-rate loans,” which are much more forgiving of rapid interest-rate changes from the lender’s point of view, Green said.
Last year, as the Fed began boosting rates, Firstrust sold its short-term bonds, pledged property loans as security for new, low-cost Federal Home Loan Bank funding, and used the proceeds to boost what president Tim Abell calls “high-quality” consumer and home mortgage loans. The bank’s total loans jumped to $4.1 billion at the end of 2022, from $3.3 billion at the start of the year. Profits rose, according to the FDIC.
Can banks still grow with a Fed-induced slowdown looming? One hopeful sign: “There are still cranes in the air in the city” — apartment towers and new offices for law firm Morgan Lewis and insurer Chubb.
But those long-awaited projects don’t guarantee more like them, Abell noted. Speculative office buildings, retail centers, even warehouses are not as common as they were. “There’s a lot of unused [office and retail] space.” Maybe “adaptive reuse” projects will turn them into apartments, in time.
For now, “the construction companies are still busy with projects that were backed up [during the pandemic] — for another year or two,” Green added. “But private developers are slowing down now. With higher rates, some projects that might have made sense last year don’t pencil out — they won’t have the same level of returns — so they may not get done.”
It’s like on the roads: “When it gets foggy, and there’s a lack of clarity, people slow down.”
Lenders are requiring more equity and more up-front money. Along with higher rates, that means some projects that would have been funded last year will be put off for now.
Even with housing, “there is not an indefinite pipeline,” Abell said. “Apartment occupancies are pretty good, rents keep increasing — there has been an undersupply of apartments. But the Wall Street Journal has reported the volume of apartment sales is down significantly, meaning that investors are balking, or having trouble financing, the prices that owners still think their units deserve.”
Still, “we are still seeing demand from residential buyers,” he added.
Firstrust also reports strong interest from small-business borrowers, from medical practices, veterinary clinics, and other health professional offices.
“Life sciences are still pretty strong,” Abell said. “But the hospitals are struggling.”
Green, a past member of the Penn Health board that oversees the big university hospital system, said independent hospitals and suburban chains face “very, very difficult” finances. As the Inquirer has reported, most area hospital systems lost money last year.
“The ones that are making it have translational research,” such as messenger RNA, having raised money to turn their university-based doctors’ medical technology discoveries into therapies that attract outside funding and eventually profitable products, Green said.
“But a straight-up hospital business in the USA has a small margin even when it’s healthy,” he said. “It’s now upside down. They have a lot of physical plant. The cost of labor is very large. They can end up with a lot of deferred maintenance.”
How do today’s banking troubles compare to the last crisis, the mortgage meltdown of the late 2000s? This time, “the banks are better capitalized,” with more money to cover potential losses, thanks in part to stricter government rules, Green said. “In 2008, credit standards were too loose.”
Green said past crisis experience made it easier to cope with the fast changes in deposit, loan, and investment policy during the recent rise in interest rates.
Silicon Valley Bank, founded in 1983, also survived the 2008-2009 crisis — but had grown its assets 20 times since then, requiring a lot more risk management than was apparent when it went belly-up.
By contrast, since that time, Firstrust slightly more than doubled in size. Silicon Valley build a local office network; Firstrust has just 15 branches in Philadelphia and its Montgomery and Bucks County suburbs, plus one each in Camden, Allentown, and Baltimore County, Md. (18 in all).
Bankers talk a lot about culture. At Firstrust that includes lists of pithy sayings that Green says originated with his grandfather, who started the bank, and his father, whom he succeeded: “We deal with the world as it is, not as we think it should be,” and “We adapt to the forces at work in our environment. The world does not owe us a living!” Several others focus on service as a way to keep customers.
With rates higher, Firstrust has boosted loan rates and deposit yields, like its competitors. “I’m happy that some people living on a fixed income can now make more return on their savings,” Green said.
Customers called as rates went up — more for assurance, he said, than in panic. “One lady said, ‘I’ve been with you for 60 years. I have a lot of money with you.’ She wanted to make sure it was safe. She said, ‘At this age, I can’t go back to belly dancing.’ ”
He laughed, just a little. “Young bankers may have grown up with rates that didn’t move for many years,” Green said. “But we were ready for this day.”