Republic First Bank Resolution: Minimal Disruption Expected

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On Friday afternoon, the FDIC took the failed Republic First Bank into receivership and the majority of the bank’s assets and liabilities were sold to Fulton Bank on the same day. We do not expect this bank failure to create systemwide turmoil similar to what we experienced in March of 2023 due to Republic First Bank’s small size. For comparison, Signature Bank, the smallest of last year’s three failed banks, had $110.4B in assets at the end of 2022, making it ~19x the size of Republic First’s $5.9B in assets as of the end of 2023. Moreover, last week’s failure was driven by a years-long decrease in profitability rather than runs on uninsured deposits, a common denominator in the failure of Signature Bank, Silicon Valley Bank, and First Republic Bank.

Republic First Bank’s failure was linked to higher costs of deposits and wholesale funding that pressured its net interest income. Following the start of Federal Reserve’s rate hikes in 2022, the bank relied heavily on Federal Home Loan Bank (FHLB) Advances and senior debt to fund its operations. From year-end 2021 to first-quarter 2023, the bank increased its FHLB Advances from $0 to $645M, and its senior debt ballooned from $81M to $1.0B during the same period. These borrowings led to higher interest costs and lower profitability. The bank reported net interest income of $69.9M in 4Q 2023 compared to $148.1M in the same quarter of 2022. Consequently, Republic First booked a $42.7M operating loss in 4Q 2023.

Republic First Bank branches will carry on as Fulton Bank branches with no disruption to depositors. Fulton Bank’s much larger size ($27.4B of assets and $309.0M of net income in 4Q 2023) should allow it to assume Republic First Bank’s assets and liabilities with minimal disruption to the banking system. Although ‘higher for longer rates’ will likely continue to pressure bank profitability through 2024, we believe that larger banks subject to stringent capital and liquidity requirements are more diversified in their sources of revenue, well capitalized, and liquid through this rough patch. If you have any questions, please reach out to Capital Advisors Group.

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