5 Key Takeaways from the Demise of Republic First Bancorp
Femi John Elegbe, CFA
Finance | Strategy | CFO | Treasury | Risk and Capital Management | Dancer | Coffee lover
Over the next few days/months/years, there are several reasons that Historians will blame for the demise of Republic First Bank. In the annals of banks that have failed or been seized by the Regulators, Republic First is a drop in the bucket.
As the end of January 2024: the bank has approx. $6billion in total assets, $4billion in total deposits, 32 branches (in NJ, PA, and NY). At an estimated cost of $667million to the Deposit Insurance Fund (DIF), the FDIC determined that this is the least costly resolution for the DIF (compared to other failures). Sigh.
In November 2023, Republic First Bancorp struck a deal with a group of investors (Norcross Braca Group), which would have infused the lender with about $35million of capital, some change in Board composition, etc. Unfortunately, and predictably, the deal was terminated in February 2024.
Over the last few years, there has been so much handwriting on the wall: job cuts (to reduce costs), exit from the mortgage operations, delisting from NASDAQ, change of Auditors. The list goes on and on.
But for now, here are my thoughts:
1. Weak ALM and Risk Management: One of the common threads of recent bank failure is Asset-Liability management, Rising cost of funds, and overreliance on uninsured deposits. We are currently unsure how these factors eventually drove Republic First to the brink. When interest rates began to rise, the bank should have paid more attention to maturity/duration gaps. Inadequate risk management practices can expose banks to significant financial losses. Failure to assess and manage risks effectively can lead to loan defaults, market losses, and liquidity problems.
We presume that the straw that broke the camel's back was the portfolio of Investment securities. From 2019 to 3Q2022, the amortized cost of these securities grew from $1.2billion to a whopping $2.8billion. Almost 90% of these growth were Agency MBS (+$1billion HTM, and $411million Available for sale). As rates began to rise, I postulate that the Bank probably had to deal with unrealized loss of almost half a billion dollar in 3Q2022. At a time when the 10yr UST was in the 3.75% range, the average yield on the Bank's Investment securities was ~2.00% !!!
Instead of betting that rates will stay low, for longer, a more proactive bank leadership would have / should have repositioned their balance sheet, take smaller losses earlier on - as soon as rates started to rise, and deploy the capital to originate assets that hopefully will yield a little bit more than their funding costs.
2. Liquidity is Queen and Capital is King: A poorly capitalized bank is a disaster just waiting to happen. Bank management, the Board, and the Regulators need to do a better job on this front. Their inability to consummate the $35million capital injection from the Norcross Barca Group was a missed opportunity. From 2017 till the end of 3Q2022, all the regulatory capital ratios declined YoY.
Republic’s capital conservation buffer fell below the required buffer amount of 2.5% as of September 30, 2022, hence, Republic was subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.
3. Growth at All Cost: I once heard that not all growth is good. For example, cancer IS a growth, but no one in their ideal mind will say Cancer is good. In their July 2023 Letter to shareholders, the new CEO, Thomas Geisel and the new Chairman, Andrew Cohen noted that the challenging times they were going through is partly due to “ill-advised” expansion of the bank’s physical/retail footprint. While the bank’s loan mix was relatively diversified from 2017 to 3Q2022, Total loans (net of deferred loan fees) grew by ~$2billion i.e., a 21% CAGR. However, 41% of this growth came from Residential mortgages, 26% from CRE loans, and another 13% from Owner Occupied Real estate loans. At the end of 2017, Total deposits was $2.1bn, and this ballooned to $5.2bn by the end of calendar year 2021. FDIC disclosure at the time when the bank was seized on April 26 noted that total deposits is $4billion.
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4. Poor Corporate Governance and Proxy Battle: From 2021 till 2023, the Bank was saddled with too much internal strife between the management and the Board. It is very unfortunate when this type of disagreement spills outside the boardroom. Weak corporate governance practices can lead to ineffective decision-making, lack of oversight, and conflicts of interest. Governance failures did undermine the stability and credibility of Republic First Bancorp.
5. Technology Risks, Compliance Issues, and Ineffective Internal Controls: In June 2022, the bank underwent some systems conversion. The bank blamed this for their failure to maintain adequate internal control, which consequently led to the delay in Republic’s audit and financial filings in 2022. Yes, increasing reliance on technology exposes banks to cybersecurity threats and operational risks – but banks’ executive needs to do a better job to minimize the risk of technology failures, data breaches, cyber-attacks (which can disrupt operations, compromise customer data, and lead to financial losses). Once the Auditor quits, gets fired, and/or starts giving qualified opinions, etc. we should take these as a tell-tale sign of a bank that is likely to be in trouble – eventually.?
Closing Thoughts:
To have resilient and fortress financial institutions, bank managers need to implement robust risk management practices, which are both proactive and dynamic. If the Management and the Board cannot stay on top of their bank’s liquidity, asset diversification, capital, solvency, and daily operational needs – then, they are in the wrong business.
Part 1, Item 4 of the 3Q2022 Quarterly Report makes for a fun read. It was all out there – in plain sight.
Selah………