Republic First Bank’s “dysfunctional” board and management ultimately led to its April failure, even though the Federal Deposit Insurance Corp. upgraded its management rating just five months earlier, according to a report issued Wednesday by the FDIC's Office of the Inspector General.
The basis of the dysfunction, according to the report composed by certified public accounting firm Sikich, originated with onetime chair and CEO Vernon Hill, though it did not identify him by name. Specifically, related-party transactions conducted by Hill during his time with the bank – including hiring a firm owned by his wife for bank marketing – and related board member concerns ultimately led to a shareholder lawsuit, a proxy battle and mass management turnover.
“With the Board and management distracted by the proxy battle, lawsuits, and significant leadership turnover, FDIC and [Pennsylvania Department of Banking and Securities] examiners struggled to obtain information related to the Bank’s strategic and capital planning efforts.”
Republic First “ultimately provided capital planning responses and a Strategic Plan that examiners found to be insufficient,” Sikich wrote. In June 2023, examiners noted that Republic First’s condition “left the new management team with few options to make material changes to the balance sheet.”
The FDIC was keeping close watch on the bank’s condition and appeared likely to downgrade the bank’s CAMELS rating – a regulatory rating which reflects an institution’s capital adequacy, asset quality, management capabilities, earnings sufficiency, liquidity position and sensitivity to market risk – to 5, its lowest possible score in November 2023.
But instead, the FDIC upgraded the management component rating from 4 to 3 and maintained all other CAMELS component ratings and the composite rating from the June 2023.
Sikich wrote that the FDIC failed to document evidence in support of the November 2023 rating decision.
“According to FDIC officials, all support justifying the conclusions of the visitation was included in the visitation memorandum itself, with additional supporting information found in meeting notes retained in [the FDIC’s system of record] RADD. The limited information documented did not provide a clear trail of decisions and supporting logic,” Sikich wrote.
“In contrast, other documented evidence demonstrated that the Bank faced critical challenges at that time, most notably with regards to its financial reporting,” Sikich wrote. “The available evidence we reviewed suggested that downgrades of other component ratings and sustainment of the Management rating may have been warranted at the time the FDIC upgraded Republic Bank’s Management component rating.”
The FDIC also replaced a recommended consent order with an informal enforcement action.
Five months after the November 2023 visit, the FDIC seized Republic First and sold its assets to Lancaster, Pennsylvania-based Fulton Bank.
Though Sikich said much of the dysfunction within the bank’s leadership occurred during Hill’s tenure, the firm noted that the management team in place in 2023 failed to respond to rapidly changing market situations.
“[F]ollowing the March 2023 bank failures of Silicon Valley Bank and Signature Bank, the new Board and management team was required to cancel its large capital raise campaign. The lack of additional capital further stressed the Bank’s liquidity position, but new management did not initiate the Bank’s Contingency Funding Plan in its Liquidity Policy, contributing to an interim ratings downgrade to the Liquidity component in April 2023,” Sikich wrote.
“While examiners in 2023 noted increased responsiveness of the new Board and management team, supervisory findings related to strategic and capital planning persisted,” Sikich wrote.