The Office of Inspector General (OIG) of the Federal Deposit Insurance Corporation (FDIC) has issued a Material Loss Review of Republic First Bank.
On April 26, 2024, the Pennsylvania Department of Banking and Securities (PA DoBS) closed Republic First Bank and appointed the FDIC as receiver. On May 21, 2024 the FDIC estimated the loss to the Deposit Insurance Fund (DIF) to be approximately $667 million.
Under a contract overseen by the OIG, Sikich CPA LLC (Sikich) performed the Material Loss Review. The objectives of the engagement were to (1) determine why the bank’s problems resulted in a material loss to the DIF, and (2) evaluate the FDIC’s supervision of the bank, including the FDIC’s implementation of the Prompt Corrective Action (PCA) requirements of section 38 of the Federal Deposit Insurance Act, and make recommendations for preventing any such loss in the future.
Sikich found that the direct cause of Republic First Bank’s failure was its determination that it could no longer hold its “held-to-maturity” debt securities to maturity, requiring the Bank to reclassify them as “available-for-sale” securities. 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. Once this occurred, the Bank became critically undercapitalized for PCA purposes and was closed by the PAoDBS. Sikich also found 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.
In assessing the FDIC’s supervision of the bank, Sikich determined that:
- The FDIC’s November 2023 visitation for Republic First Bank lacked documented support for its conclusions related to changes to the Management rating and a proposed FDIC enforcement action; and
- The FDIC’s approval of the Bank’s use of brokered deposits contributed to an increase in insured deposits of approximately $300 million and that improvements to the FDIC’s brokered deposit waiver process are needed to adequately assess risks to the DIF.
Sikich made four recommendations intended to improve the FDIC’s supervision processes and help prevent future losses to the DIF. The FDIC concurred with three of the recommendations and partially concurred with the remaining recommendation. The FDIC plans to complete corrective actions by June 30, 2025.