Republic First Bank became “critically undercapitalized” in April – which a dysfunctional board and management team exacerbated, ultimately leading to the bank’s failure, according to the material loss review published Wednesday by the federal insurer of bank deposits.
The report, issued by the Federal Deposit Insurance Corp.’s (FDIC) Office of Inspector General (OIG), was prepared by the accounting firm of Sikich CPA LLC. The report was aimed at finding the direct cause of Republic First Bank’s failure. When the bank failed in April, it became the first bank failure for 2024.
At the time, the FDIC said the demise of the $6 billion-in-assets, Philadelphia-based bank could cost the Deposit Insurance Fund (DIF) an estimated $667 million.
According to the Sikich report, the direct cause of the bank’s failure was its determination that it could no longer hold its “held-to-maturity” debt securities to maturity. That required the bank to reclassify those securities as “available-for-sale.”
“Because of insufficient liquidity, the Bank then further determined it was ‘more-likely-than-not’ that it would have to sell these securities before the recovery of the amortized cost, thereby requiring the Bank to recognize significant fair value losses in its net income,” the report states. “Once this occurred, the Bank became critically undercapitalized for prompt corrective action (PCA) purposes and was closed by the Pennsylvania Department of Banking and Securities on April 26, 2024.”
The accounting firm’s report also stated that the firm “determined that the dysfunctional Board and management team was a significant contributing factor to the Bank’s troubled condition, its inability to adjust strategies and address increasing risk, and its eventual failure.”
Regarding the FDIC’s supervision of the bank, the report found it to be “generally timely, adequate, and well-coordinated with other regulators.”
However, the report also said that the agency’s November 2023 visit to the bank “lacked documented support for its conclusions related to changes to the Management rating and a proposed FDIC enforcement action.”
The report also noted that the agency’s approval of the bank’s use of brokered deposits inflated the insured deposits at the bank to $300 million. “Since brokered deposits directly result in an increase in insured deposits, they have the potential to increase the loss to the Deposit Insurance Fund (DIF) in the event of an insured depository institution’s failure and liquidation. However, such risks are not assessed as part of the brokered deposit waiver process,” the report states.
FDIC Office of Inspector General: Material Loss Review of Republic First Bank