27 Oct, 2023
Republic First secures contingent-free capital from activist group
By Lauren Seay and Syed Muhammad Ghaznavi
Republic First Bancorp Inc. is hoping that the third time is the charm with its latest recapitalization plan.
For the third time this year, Republic First struck a plan with investors in an effort to infuse the company with the capital it needs to stay afloat. On Oct. 27, the Philadelphia-based bank said it secured a $35 million capital commitment from an activist investor group led by George Norcross III and Gregory Braca (Norcross-Braca group). The commitment is free of contingencies that the bank must raise additional outside capital, unlike the company's two previous agreements.
Under the latest agreement, Braca, formerly CEO of TD Bank NA, and two other independent individuals will join Republic First's board, and Philip Norcross will become chair. Directors Andrew Cohen, Harry Madonna, Lisa Jacobs and Harris Wildstein will leave the board.
Once the investment closes, subject to regulatory approval and other conditions, the company will continue its search to raise the remainder of its previously stated $75 million to $100 million goal.
The latest deal comes after the company struck an agreement with the Norcross-Braca group just last month in which the investors agreed to put $35 million into the company, contingent upon Republic First raising at least another $40 million from other sources.
That announcement came more than seven months after the company struck its first recapitalization agreement: the now-terminated deal with affiliates of Castle Creek Capital and an affiliate of Cohen Pvt. Ventures to invest $125 million, contingent upon Republic First securing $34.725 million from other investors.
For the most recent raise, Squire Patton Boggs (US) LLP and Vinson & Elkins LLP are serving as legal advisers to Republic First and Keefe Bruyette & Woods Inc. and Raymond James & Associates Inc. are serving as financial advisers. Sullivan & Cromwell LLP and Ballard Spahr are serving as legal advisers to the Norcross Braca Group.
The latest infusion will not erase all the company's woes. Now it has to put that capital to use to improve its financial performance.
Financial performance
The company has taken steps to try to improve its performance,
The company had a tangible common equity (TCE) ratio of 1.62% at June 30, making it one of just two banks with between $5 billion and $20 billion in assets headquartered in the Northeast or mid-Atlantic with a TCE ratio below 2%, according to S&P Global Market Intelligence data. Among Market Intelligence's analysis of a select group of peers in the Philadelphia metro area, it had the lowest TCE ratio.
The company's TCE ratio has taken a hit as a result of its negative $190.4 million in accumulated other comprehensive income. Republic First has a large securities portfolio, and like many banks, it has come underwater as interest rates rose rapidly.
The company's capital ratios excluding those unrealized losses are holding up better, as its common equity Tier 1 (CET1) ratio stood at 8.32% while its leverage ratio was 5.07% in the second quarter. Still, it had the lowest CET1 and leverage ratio compared to its Philadelphia peers.
Republic First also reported net losses in the last three quarters as it grappled with declining net interest income (NII) and increasing expenses. The company's NII totaled $18.94 million at June 30, down from $37.91 million in the year-ago period. Meanwhile, its total interest expense jumped to $35.1 million in the second quarter from $3.8 million in the second quarter of 2022. Republic First has yet to announce a scheduled earnings release date for its third-quarter results.
Its net interest margin has also been affected, sitting at 1.33% at June 30, the lowest among its Philadelphia peers.
Other struggles
Persistent underperformance caught the attention of several activist investors at the end of 2021. Driver Management Co. LLC launched a proxy contest in December that year, nominating three independent candidates to the board. Driver and the company struck a cooperation agreement in October 2022 after two years of back and forth.
Last month's recapitalization agreement the company struck with the Norcross-Braca group came after tensions simmered between the two for more than a year and a half. Months of public fighting and lawsuits began in January 2022 after the investor group sent a public letter to the company expressing concern about performance and leadership and requested approval to own more than 10% of the company's stock.
While battling multiple investor activism campaigns, the company has faced a number of other struggles since the end of 2021, such as in-fighting among its board, the ouster of its prior CEO and filing delinquencies that led to de-listing from the Nasdaq.
The company's struggles were further compounded by a September article from The Wall Street Journal highlighting the company's situation and likening it to First Republic Bank.
"That's definitely not a good thing to have that article published," an industry adviser with over 15 years of experience told S&P Global Market Intelligence. "That probably just amplifies the pressure."
But Republic First hopes that it has found its solution with the investment, which will boost its capital ratios, the company said in a news release.
"This is an important milestone to strengthen our balance sheet and improve our operations. We look forward to having the benefit of Phil's and Greg's expertise in the boardroom as we work together to enhance value for all stakeholders and chart Republic First's future," Republic First's Geisel said in the release.
The investors are also hopeful that this will turn the ship around.
"We believe that with proper board leadership and a focus on improving operations, the company can provide great service to its customers and depositors as well as value to its shareholders," George Norcross III said in the release. "This investment and new leadership on the board is the next step of what will be the new Republic First."