Philadelphia Bank Shifts to Backup Plan

After its long-running merger talks collapsed in March, Republic First Bancorp Inc. in Philadelphia today finds itself in a more fortunate position than many banks — it has a Plan B.

The $967.5 million-asset company last week raised $28.1 million in fresh capital, which it may use to add branches and finance loans while it rides out the industry downturn.

Republic First hasn't lost its ambition, either: It still aims to be a leader in the Philadelphia market. Yet it must shore up its balance sheet before it can focus on growth, analysts say.

"It all depends on how quickly we can see credit losses come down here over the next few years," said Jason O'Donnell, an analyst at Boenning & Scattergood Inc. "If they're able to improve in commercial real estate and construction and land loan losses, then they are going to be sitting in a situation by mid to late next year where they'll have a nice allocation of excess capital that they can then think about deploying offensively."

But Republic First is a long way from that point, O'Donnell said. It wanted to raise $40 million but could pull off only $28.1 million.

It's also a long way from its condition in November 2008 when it announced a deal with Metro Bancorp Inc. of Harrisburg, Pa., in which Metro would have absorbed Republic First's operations. After several deadline extensions, the deal fell apart in March amid regulatory uncertainty and Republic First's deteriorating credit quality.

The company widened its loss in 2009 to $11.4 million, from a loss of $472,000 in 2008. Its provision for loan losses nearly doubled, from $7.5 million in 2008 to $14.2 million in 2009. And its nonperforming assets ratio has jumped from 1.65% in September 2008 to 4.95% at March 31. Like others in the Philadelphia market, Republic First faced rising losses in its commercial real estate portfolio, which makes up 72% of total loans, according to a quarterly filing with the Securities and Exchange Commission.

On March 15, the companies announced that, with no regulatory approval in sight, they were abandoning the deal.

Yet a little more than a month later, Republic First announced it was seeking fresh capital to move forward with its strategy to become a retail-focused bank.

It managed to attract some investors, but could not raise as much as it wanted. Also, the offering was highly dilutive to shareholders, more than doubling the number of shares outstanding, said Ned Douthat, an analyst at Ockham Research.

"Clearly, the market has not given them a whole lot of benefit of the doubt," he said.

Still, the capital-raising effort represents something of a fresh start. Though Republic First did not return phone calls seeking comment, it said in the prospectus that it plans to begin operating as "Republic Bank," the name under which the bank was incorporated and did business from 1988 until 1996.

Also, over the past two years it has added executives from Commerce Bancorp Inc. of Cherry Hill, N.J., which was bought by Toronto-Dominion Bank's TD Banknorth Inc. of Portland, Maine, in March 2008. Commerce was founded by Vernon W. Hill 2nd, one of Republic First's largest shareholders and a co-founder of Metro Bancorp. The management changes are part of "the continuing process of transforming Republic First Bank into the premier retail bank in the Philadelphia metropolitan area," Republic First's chief executive, Harry Madonna, said in a statement last month.

For more than a year it has been working to lower its concentration of commercial real estate loans, reducing the portfolio by 17% in 2009, according to the prospectus. It was also well capitalized as of March 31, with a Tier 1 capital ratio of 11.9%.

Republic First also said it had applied to open a branch in Haddonfield, N.J., and plans to pursue more de novo branching opportunities in its market this year.

"We continue to believe that an attractive niche exists serving small- to medium-sized business customers not adequately served by our larger competitors, and we will continue to seek opportunities to build commercial relationships to complement our retail strategy," it said in the prospectus.

But with stress in commercial real estate expected to continue, analysts were doubtful that Republic First will be able to accomplish more this year than working through its credit problems.

"I can certainly see them doing that, I just can't imagine that they're going to be growing aggressively anytime in the next few quarters," O'Donnell said.