Republic First Bancorp Inc. is once again dealing with fallout, and the financial health of its bank unit, Republic First Bank, keeps deteriorating.
On Feb. 28, the Norcross-Braca investor group said it will be terminating its capital commitment with Republic First, citing the bank's failure to take actions and satisfy closing conditions. The commitment, announced Oct. 27, 2023, was the company's third recapitalization attempt since March 2023 and the only one that came without contingencies that the bank must raise additional outside capital.
The announcement of the termination put further pressure on Republic First's stock as the share price closed down 58.33% on Feb. 29 to 1.25 cents and has lost 99.4% of its value since the start of 2023.
The Norcross-Braca group — which since 2022 has been building a stake and agitating for change in the Philadelphia-headquartered company — was slated to invest $35 million. Once that was completed, the company planned to seek the remainder of the previously announced goal to raise $75 million to $100 million in capital.
In a Feb. 29 statement, Republic First said it could execute its strategic plan even without the Norcross-Braca investment and the bank has an adequately capitalized position with a strong deposit base and ample liquidity. However, Republic First's banking subsidiary has been an industry laggard in many of its reported operating metrics.
In the fourth quarter of 2023, it logged an adjusted tangible common equity ratio of -1.75% and recorded a loss of $187.4 million in its accumulated other comprehensive income. Its net income and return on average assets have been negative for five consecutive quarters.
Some of its key financial metrics are significant outliers when comparing the $5.87 billion-asset Republic First Bank to publicly traded banks with less than $10 billion in assets that had reported earnings through Jan. 26. In the fourth quarter of 2023, Republic First Bank's net interest margin was 0.85%, down from 2.74% in the year-ago period, while the median net interest margin of the community bank group was 3.25%. Republic First Bank's efficiency ratio, which measures a bank's ability to deploy resources, was up 71 percentage points quarter over quarter to 211.1%, compared to the community bank group's median of 65.31% in the quarter.
The deteriorating financial situation raises the question of how long the Federal Deposit Insurance Corp. would let the bank find a solution on its own while continuously logging losses, said David Larson, managing director at Artisan Advisors.
"I think you really have to wonder how much time will the FDIC allow them to continue to pursue the raise," Larson said.
Further capital raise uncertain
Private equity firms have been making investments in banks, but they tend to prefer opportunities to fuel growth at banks with more promising strategies instead of rescuing banks under financial pressure, industry experts said.
Another challenge to raising additional capital is that the holding company has yet to file year-end financials for 2022 and 2023. In its statement, Republic First noted that it has been working with Wolf & Co. in an effort to get current with its financial reporting obligations. "This is key for us and investors in considering opportunities for growth capital in the future," the statement said.
Bank investors agreed that raising capital without current financial statements is difficult, and the lack of filings helps fuel speculation. Bradley Rinschler, managing partner at Stroudsburg, Pa.-based Down Range Capital Management, said the outdated financials are a red flag that could lead to bigger issues and noted how First NBC Bank delayed several filings in 2016 before failing in April 2017.
Rinschler added that Norcross-Braca exiting the recap agreement also sends a troubling signal to the market since it had been actively involved in the bank. "It looks like they are kind of cutting their losses," Rinschler said.
M&A complicated by potential role of FDIC
When the Norcross-Braca group announced the latest capital commitment, it came around the same time the FDIC was reportedly accepting bids on the bank in late October.
The FDIC's reported participation also complicates matters for Republic First, especially if it were considering a sale process. The risk of failure — true or not — gives potential suitors little incentive to pay up if they believe that they could eventually take part in a government-assisted deal. In a deal for a bank that has not failed, buyers would need to mark the target's securities book to the market as is a typical M&A accounting approach. Republic First's unrealized losses and thin capital base would drag down the capital ratio at the combined entity.
Given the mounting losses and the latest termination of the recap deal, the industry is once again speculating about Republic First's fate.
"You can't do this deal without assistance," one depository investment banker said. "This news is really going to cause the industry to kind of perk up and see what happens."