On Friday evening the FDIC announced that the Pennsylvania Department of Banking and Securities had closed Republic First Bank1 and appointed the FDIC as receiver. The FDIC then entered into an agreement with Fulton Bank, National Association under which Fulton Bank has assumed substantially all of the deposits and purchased substantially all of the assets of Republic Bank. The estimated cost to the Deposit Insurance Fund is $667 million.
This morning Fulton Bank’s parent company, Fulton Financial Corporation, filed a prospectus with additional information about the transaction, supplementing the initial press release from the company on Friday night. This post looks at a few of the new details provided in this morning’s announcement.
The Transaction
Friday’s Announcements
According to Republic Bank’s call report for the quarter ending December 31, 2023, the bank had approximately $5.87 billion in total assets and approximately $4.37 billion in deposits, around half of which were insured.2
Things have of course shifted since the end of last year, and based on Friday’s announcements it was difficult to tell exactly where Republic Bank’s balance sheet stood at the time of its failure, and difficult to tell what had been purchased and assumed by Fulton Bank and what had been left behind.
According to the FDIC’s Friday evening press release, “as of January 31, 2024” Republic Bank had “approximately $6 billion in total assets and $4 billion in total deposits.”
According to Fulton Financial’s Friday evening press release, Fulton Bank purchased assets of “approximately $6 billion, including an investment portfolio of approximately $2.0 billion and loans of approximately $2.9 billion” and assumed liabilities of “approximately $5.3 billion, including deposits of approximately $4 billion and other borrowings and liabilities of approximately $1.3 billion.”
Monday’s Announcement
The prospectus filed by Fulton Financial this morning provides more details, and clarifies some of the statements in the Friday releases.
Acquired Assets. The prospectus states that Fulton and the FDIC are engaged in an ongoing process to ascertain the fair value of the acquired assets, but that Fulton “anticipates that it will acquire approximately $5.2 billion of assets of Republic First, consisting of approximately $0.2 billion of cash, approximately $2 billion of investment securities (purchased at fair value), approximately $2.9 billion of loans and approximately $0.1 billion of other assets.” According to the prospectus, these assets were acquired at a $374 million discount.
Branch Purchase Option. “Fulton Bank also has the option to purchase all bank branches and corporate locations in the future.”
Assumed Liabilities. Fulton “anticipates assuming $5.6 billion of total liabilities of Republic First, including approximately $4.2 billion of deposits, approximately $1.3 billion of borrowings and approximately $0.1 billion of other liabilities.” The $1.3 billion of borrowings includes FHLB advances and bank term funding program advances.
No Loss Share Agreement or Equity Appreciation Instrument. Fulton “did not enter into a loss sharing arrangement or equity appreciation instrument with the FDIC in connection with the Republic First Transaction.”
Cash From the FDIC. Fulton “also expects to receive approximately $0.8 billion of cash from the FDIC.” This amount includes “an estimated $0.4 billion of settlement amount due to negative asset value of balance sheet and approximately $0.4 billion asset discount.”
Anticipated Sale of Securities Portfolio. Fulton “currently expects to sell Republic First’s securities portfolio of approximately $2.0 billion.” Proceeds received from that transaction, as well as the cash received from the FDIC, are expected to be used to “repay assumed borrowings and approximately $1.0 billion of [Fulton’s] wholesale funding sources.”
Dividend Restrictions. In connection with the OCC’s approval of the transaction, “Fulton Bank committed that, for a period of two years from the date of the Republic First Transaction, it will not declare or pay any dividend without receiving a prior written determination of no supervisory objection from the OCC.”
Common Stock Offering. As mentioned above, all this information comes from a prospectus filed by Fulton this morning. The prospectus contemplates an issuance of common stock, and assumes Fulton will raise $200 million in gross proceeds from the offering.3
Note that all of the above reflects what has been released at the time of this post — Fulton has a conference call scheduled for later this morning at which more details may be provided,4 and further SEC filings may also provide additional information.
Why Did Republic Bank Fail?
The press releases by the FDIC and Pennsylvania DoBS on Friday did not go into the reasons for Republic Bank’s failure. This is pretty typical for receivership announcements and in any case the story is at least in part probably what you would guess — as a brief Bloomberg article on Friday noted, Republic Bank “had struggled with similar issues as other regional lenders: high interest rates that translated into unrealized losses on loans and securities.”
If the bank’s history is anything to go by, however, there may be more to the story. For example, check out this 2023 article by Emily McCormick at Bank Director. A search for coverage of Vernon Hill in the archives of the Financial Times also turns up several colorful results.
Or to take a slightly more recent example, as a reader pointed out over the weekend, in February 2024 Republic Bank’s parent company filed an 8-K in which it announced the appointment of a new auditor. The 8-K also included a list of seven material weaknesses in internal control over financial reporting that had been identified by the previous auditor.5
As the company noted, some of these material weaknesses had been previously disclosed in the company’s 10-Q for the quarter ended September 30, 2022. (This 10-Q was not filed by the company until March 2023, and as of today is still the most recent quarterly report on file with the SEC.)
Other issues, however, were newly identified. Among the newly identified material weaknesses were:
a failure in the operating effectiveness of review and approval controls over manual journal entries that flow from the core system to the general ledger, which resulted in unauthorized entries being manually posted without proper review or approval of those entries; and
a failure in the operating effectiveness within deposit operations over the review and authorization of deposit account status changes, such as a new account opening, dormant account identification, or a deposit account in an overdraft position.
To be clear, this post makes no claim that these material weaknesses, or any of the others listed in the 8-K, necessarily led to the bank’s failure. The point is just that there was an awful lot going at Republic Bank, and we hope at some point to get a post-mortem that does it justice.6
The bank did business under the name Republic Bank.
The bank estimated that approximately $2.25 billion of its deposits were uninsured.
See page S-8:
Following the completion of the Republic First Transaction, the Corporation expects its tangible common equity ratio (“TCE/TA”), Tier 1 leverage ratio, common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio to be 6.3%, 8.1%, 8.9%, 9.7% and 12.4%, respectively. Following the completion of the Republic First Transaction and after giving effect to the proposed offering of the Corporation’s common stock described in this prospectus supplement (assuming for such purposes $200 million gross proceeds from such offering), the Corporation expects its tangible common equity ratio, Tier 1 leverage ratio, common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio to be 6.9%, 8.6%, 9.7%, 10.4% and 13.2%, respectively.
According to the company’s Friday press release, “Fulton will host a conference call and audio webcast at 11 a.m. on April 29, 2024.”
The 8-K stated that there were no disagreements between the company and its previous auditor “on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to [the previous auditor’s] satisfaction, would have caused [the previous auditor] to make reference to the subject matter of the disagreement in connection with its reports.”
At a minimum, given the loss incurred by the Deposit Insurance Fund the FDIC’s Inspector General will conduct a material loss review, but it will be several months before that review is released.