Regulators closed Philadelphia-based Republic First Bank on April 26, 2024. Fulton Bank, NA assumed most of Republic First’s deposits and assets in an FDIC-assisted transaction. The FDIC’s Inspector General will likely conduct a Failed Bank Review that will try to identify the causes of Republic First’s failure. In the meantime, here are some takeaways based on what’s already available from publicly available sources.
The bank wasn’t that small. Republic [1] was no one’s idea of a systematically important bank. But it wasn’t all that small either. With roughly $6 billion in total assets and $4 billion deposits, spread across 34 branches, it was the eleventh largest bank headquartered in Pennsylvania. It’s the 15th largest bank to fail since 2000. The FDIC projects a resolution cost of $667 million, making Republic the twentieth costliest bank failure this century.
Contrast Republic with Superior Bank, FSB, a Chicago based thrift that failed in 2001. Superior had only $1.765 billion in total assets ($3.1 billion in 2024 dollars). But its failure was a big deal at the time. The Office of Thrift Supervision was the primary regulator. OTS’s Regional Director for the Central Region was pushed out and the region itself was merged out of existence a year later as part of a broader restructuring.
It was a slow bleed. Republic had been losing money since Q4 2022. Its net interest margin was only 1.10%, nearly 200 basis points below the peer group median. Since 2019, net income was never above the 2nd percentile for its peer group.
Capital ratios were also low and sharply declining. The bank’s leverage ratio peaked at 7.43% in 2021, which was still lower than 96% of its peer group. Capital ratios declined every year after that and fell to only 4.43% by December 2023. Depleted capital can lead to a death spiral where there are simply too few interest earning assets to be profitable.
Growth comes before a fall. Despite its poor financials, Republic grew by $2.64 billion or 79% between 2019 and 2022. This pattern of rapid growth and then collapse follows the examples of SVB, First Republic, and countless other failed banks over the years. Residential mortgages increased by $758 million over this period, following ‘s acquisition of Oak Mortgage Company in 2016. The bulking up was not entirely loan driven. Investment securities more than doubled between 2019 and 2023, to $2.5 billion.
Interest rate risk strikes again. Republic First had an outsized IRR position. Longer-term (15 year or more) mortgage loans and MBS represented 39.28% of total assets. This compares to a peer group median of 7.21% and placed Republic in the 98th percentile of its peer group. The value of the bank’s investment portfolio fell from 99% of amortized cost as of year-end 2021 to just 84% a year later. This steep decline in value is roughly comparable to that of SVB’s investment portfolio, which fell from 99% to 85% over the same period.
Republic First’s 10-K reported IRR in terms of maturity gap, net interest income, and net portfolio value (akin to economic value of equity) for rate shocks as high as +400 basis points. This was more extensive public reporting of IRR than seen at most banks. Unfortunately, the risk reporting wasn’t very realistic. Republic First’s lowest reported NPV ratio (at +400 bps) at 13.24%, was more than twice its Tier 1 leverage ratio of 5.85%. Amazingly, the company’s Q3 2022 10-Q stated that “There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on October 26, 2022.”
Reporting was a mess. The SEC requires companies to file the quarterly 10-Q report within 45 days of quarter end and the annual 10-K within 90 days of fiscal year-end. It took Republic ten months to file its 2022 10-K. It never filed a 2023 10-K. Republic filed its Q3 2022 10-Q in March 2023 and hasn’t filed one since. NASDAQ delisted the company in 2023. Republic replaced its auditor in February 2024. The previous auditor had noted the bank’s failure to maintain an effective control environment. These reporting weaknesses would be a huge red flag even for a firm indicating strong financials. Republic’s poor performance makes these deficiencies even more concerning.
An internal power struggle made things worse. Vernon Hill II led Commerce Bank from one branch in 1973 to 47 branches in 2008. Regulators forced Hill out in 2007, apparently due to his disregard for conflict-of-interest considerations. That included awarding lucrative contracts to an architectural design firm owned by his wife, Shirley. Hill co-founded Metro Bank UK in 2010, which also grew rapidly. He became Chairman in 2013 but resigned in 2019, following similar conflict of interest concerns. Hill became Chairman of Republic in 2016 and CEO in 2021. Apparently learning nothing from Hill’s prior experiences, Republic paid more than $2 million to Shirley Hill’s firm between 2019 and 2021. Republic’s board removed Vernon Hill in August 2022. It’s not clear whether the self-dealing played any role in his ouster. The bank’s inability to file timely financial reports, manage its interest rate risk, or operate profitably was reason enough.
Republic appointed a new CEO and CFO in December 2022. The bank was embroiled in lawsuits, from Hill and from an activist investor group headed by George Norcross. Management eventually threw in the towel and agreed to be acquired by the Norcross group in October 2023, with a capital infusion of $35 million. Norcross was a power player in New Jersey politics and is reported to have accumulated a $250 million fortune, which suggests that George Washington Plunkitt might have been a role model. After stringing things along for four months, Norcross backed out of the deal, citing the bank’s failure to file timely financial reports. The toxic mix of hubris, greed, and incompetence among the warring parties makes it hard to identify the good guys here.
The market gave up on Republic First before the regulators did. Republic First was never a highflyer. The stock price has been declining since 2017, outside an occasional dead cat bounce. We don’t know yet when regulators figured out that Republic was a goner. Bloomberg News reported that the proposed Norcross deal in 2023 caused FDIC to put off the planned auction process for Republic First.
Borrowings delayed the inevitable. Republic’s deposits fell by $900 million (17%) between December 2021 and December 2023. At the same time, the bank became increasingly reliant on borrowings. FHLB advances increased from zero as of September 2021 to $970 million as of March 2023. Advances started to decline after that, but “other borrowings” rose from zero to $663 million in Q2 2023. It is likely that these borrowings were part of the Fed’s Bank Term Funding Program (BTFP). The Call Report does provide further details on “other borrowings,” and the Fed won’t announce BTFP recipients until 2025. However, the growth of “other borrowings” coincides with the introduction of the BTFP and that is the likely source of funds.
One rationale for these borrowing facilities, especially the BTFP, was that they avoided fire sales of assets. Perhaps. But these facilities also allowed a bank that was losing money to remain open and to continue to dissipate its assets.
The Dual Banking System gets another black eye. Republic First was a state-chartered bank. As was SVB, Signature, and First Republic. Although most banks are also state-chartered, national banks account for 21 of the 30 largest commercial banks. As I noted in an earlier post, banks in the United States gets to choose their own regulators. Banks can operate under a national or state charter under what is known as the Dual Banking System. Larger banks often find national charters attractive because they can largely avoid individual state consumer laws under the doctrine of federal preemption. Some also see a national charter as more prestigious.
State charters offer both tangible and intangible attractions. State banking agencies typically charge lower assessments than the OCC. They are also seen as offering lighter touch supervision. Since the costs of a bank failure are borne by the Federal government (in the form of the FDIC), the primary supervisor lacks any real skin in the game. The Fed (for state member banks) and the FDIC (for state nonmember banks) serve as backup regulators. However, it’s not a very efficient way to supervise a bank. The poor track record of state-chartered institutions should lead to a rethinking of the Dual Banking System, but there is little evidence thus far to suggest that it will.
[1] Republic First did business as Republic Bank.
Leave a Reply