On November 3, 2017, we issued our Material Loss Review of the Failure of First NBC Bank (First NBC), New Orleans, Louisiana. The Louisiana Office of Financial Institutions (OFI) closed First NBC and appointed the FDIC as Receiver on April 28, 2017. First NBC’s total assets at closing were $4 billion, and the estimated loss to the Deposit Insurance Fund (DIF) was about $997 million. Our Material Loss Review analyzed the causes of First NBC’s failure and evaluated the FDIC’s supervision of First NBC.
Causes of Failure: First NBC exhibited many of the characteristics of bank failures that we have identified in prior Material Loss Reviews and other reviews of the FDIC’s supervision program:
- a dominant official with broad lending authority and limited Board of Directors (Board) oversight,
- rapid growth funded by high-cost deposits, and
- large lending relationships and concentrations without adequate risk management controls to mitigate the risks.
The bank also developed significant concentrations in trade receivables and complex tax credit investments. The losses the bank realized on its large loan relationships, trade receivables, and tax credit investments severely diminished earnings and depleted capital to a point at which the bank could not recover.
The FDIC’s Supervision of First NBC: Between 2006 and 2017, the FDIC and OFI conducted nine full-scope joint safety and soundness examinations and six visitations of First NBC consistent with requirements. However, the FDIC’s use of enforcement actions and examination ratings to address First NBC issues was counter to the agency’s forward-looking supervisory approach.That is, although examiners identified repeated risk management weaknesses, they relied too heavily on the bank’s financial condition and ability to raise capital in taking supervisory action and assigning management and asset quality ratings.
From 2009 to 2015, First NBC adopted four Board Resolutions to address examination findings and matters requiring board attention. The FDIC’s continued reliance on these Board resolutions and matters requiring board attention was largely ineffective in correcting the issues raised. A stronger enforcement action was warranted as early as 2010 based on the bank’s risk profile. Instead, the FDIC did not take more formal action at First NBC until late 2016 once the bank’s financial condition had deteriorated significantly.
Examiners rated First NBC as satisfactory overall from inception through 2015. Examiners reported repeated concerns with bank management and asset quality but assigned improved ratings to both areas in 2011 and 2014, years when First NBC received significant capital injections. As for the management rating, a more critical assessment of the Chief Executive Officer’s influence on the bank’s activities was warranted in light of the bank’s rapid growth, reliance of volatile funding, and concentrations in risky loans and complex investments.
With respect to asset quality, we could not identify any significant improvements in the bank’s adversely classified assets trends during the 2011 and 2014 examinations that would warrant an increase in the asset quality rating. he ratings did not reflect the impact of the loan administration issues identified nor the complex nature of First NBC’s assets, which required robust management practices.
We made two recommendations in this report and management concurred.