The recipe that culminated in the collapse of First NBC Bank this spring had many of the same ingredients present in other large bank failures: years of rapid growth, driven by a controlling chief executive who had grandiose dreams, nearly unfettered authority and an unusual appetite for risk.
That's according to a recently released federal report that offers the most detailed look yet into the mounting problems that plagued the New Orleans-based community bank. Its nearly $1 billion crash marked the costliest failure of an American bank since the height of the 2008-10 financial crisis.
The 41-page analysis prepared by the inspector general of the Federal Deposit Insurance Corp. supports many long-held suspicions about First NBC's business practices — in particular, that the bank frequently made or renewed loans to distressed clients after their long-term prospects were exposed as questionable at best. In many cases, loans were issued without the necessary paperwork or adequate collateral.
It also puts an official stamp on claims of mismanagement just as a federal grand jury has begun issuing subpoenas, with an eye toward potentially bringing criminal charges.
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While focusing much of its criticism on First NBC's founder and CEO, Ashton Ryan Jr., the report also deplores a lack of oversight by the bank's board as well as by federal and state regulators.
Based on years of confidential bank examination reports, which rarely become public, the FDIC report also notes an unusual transaction that smacks of a conflict: a $2 million loan to Ryan from a First NBC customer who had recently obtained a $9 million unsecured loan from the bank.
Ryan, a former partner at a Big Five accounting firm, founded First NBC in 2006. It drew a local who's who of backers and grew at a remarkable pace into a nearly $5 billion institution. But the report suggests that the bank's trajectory was lifted partly by its willingness to pay high interest rates for deposits, which were in turn used to make loans that were bigger than many larger banks in the area were willing to take on.
More problematic still, some loans were made simply to allow borrowers to make payments on earlier loans. The report says that policy "masked potential delinquencies and jeopardized the overall safety and soundness of the bank."
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Trouble at the top
As earlier reviews found, First NBC's issues started at the top. Ryan "dominated the bank's strategy, risk appetite, credit culture and daily operations," according to the report, which suggests that his influence over the bank's operations was nearly total:
- He drove First NBC's "aggressive growth and funding strategy."
- He filled roles that typically conflict with a CEO, such as chief financial officer, and at times oversaw accounting, auditing and other financial activities.
- He extended loans and made risky credit and investment decisions even after such moves were criticized by bank examiners.
After being removed from the top job in late 2016, Ryan remained president of the bank and its parent, First NBC Bank Holding Co., before resigning altogether in April, shortly before the crash.
Ryan's attorney, Eddie Castaing, declined to comment Saturday on the report, saying he had not yet read it.
"Neither Ashton Ryan nor I were consulted or questioned in connection with that report, and we were not given an opportunity to present any facts or evidence or have any input with that report," he said.
But Castaing cautioned against drawing a quick connection between allegations of bad banking and criminal intent. "Just because a loan officer makes a risky loan or an unsecured loan does not mean that he violated the law," he said, "and just because the bank failed, it doesn't mean that anyone violated the law."
In addition to Ryan, the inspector general's report blames the bank's board for showing "little willingness to exercise greater control," particularly over Ryan's broad lending powers.
As early as 2009, examiners raised concerns and called for greater oversight. They urged the board to dial back Ryan's lending authority; reduce the bank's practice of relying on costly deposits; increase staffing to oversee lending; and reduce risks involved in the bank's complex tax-credit business, an operation that many banking veterans have criticized as beyond the norm in complexity.
Many of their recommendations were "never effectively addressed," according to the new report. In hindsight, it blames federal and state regulators for not taking corrective action as early as 2010.
"Setting a strong supervisory tone by pursuing a more formal action earlier would have been consistent with lessons learned from the financial crisis," the report says.
By 2009, Ryan could personally approve loans for as much as $13 million, a figure the report called "excessive." Two years later, his limit was cut to $5 million. But by 2013, Ryan's authority was bumped back up to $7.5 million, although it's unclear what led to the board's decision.
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Too little, too late
It seems clear that Ryan's expansive authority and lending practices hurt the bank. "First NBC suffered significant losses related to large loan relationships that were extended multiple times," the report says.
The board eventually took some steps to rein in Ryan, hiring a chief financial officer and updating lending policies. But the report concludes that those measures came too late.
That First NBC collapsed at a time when bank failures are increasingly rare has drawn the scrutiny of federal authorities. A grand jury has been issuing subpoenas to top company executives, board members and large customers.
In addition to Ryan's stewardship, investigators are exploring the bank's dealings with Gregory St. Angelo, who served as First NBC's attorney, The Advocate has reported.
St. Angelo took out multiple loans from the bank. In a 2014 deposition in a civil case, he estimated his loans from the bank totaled about $20 million, though he said he was not the lone guarantor on some of that debt.
Those loans, while substantial, were not nearly large enough to be a major cause of the bank’s failure. The bank's 10 biggest loans averaged about $76 million apiece, according to its 2015 financial filings, high for a bank of its size.
In addition to the FDIC and the FBI, the Securities and Exchange Commission is also investigating the bank's meltdown.
While after-the-fact regulatory reports can provide clues for criminal investigators, it's not clear that the missteps outlined in the FDIC document will lead to an indictment, said Shaun Clarke, a former federal prosecutor.
"It's important to keep in mind that there's a giant distinction between mismanagement and criminal intent," Clarke said. "Sure, (such a report) can guide an investigation, but the things they're talking about may or may not be criminal in nature.
"There's a lot of bank failures and other events that result in substantial criticism of one or more leaders but do not lead to any criminal indictment."
Across the U.S., bank failures have slowed significantly since the height of the financial crisis in 2010, when regulators closed 157 banks, the highest tally since the savings-and-loan crisis ended in 1992. So far, just seven have failed in 2017, including First NBC.
The inspector general's report identifies dozens of potential warning signs of "possible fraud and insider abuse," including the allegation that Ryan landed a sizable loan from a customer and, more broadly, his penchant for making risky loans to rapidly grow the bank's portfolio.
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A hard fall
The report, released this month, is not the first acknowledgement of First NBC's mismanagement, but it offers perhaps the clearest view of what happened.
The bank's collapse marked a hard fall for Ryan, who played a central role in New Orleans' business community as the city recovered from Hurricane Katrina in 2005.
When he founded First NBC, Ryan chose a name that recalled First National Bank of Commerce, a prominent New Orleans institution that was acquired by Bank One in 1998. As his new bank grew, so did Ryan's celebrity, earning him status as perhaps the city's best-known banker, even though his bank was far from New Orleans' biggest.
He earned roughly $1.6 million in total compensation in 2015.
First NBC went public on May 10, 2013, with nearly 4.2 million shares of stock priced at $24 each. At the time, Ryan said the stock offering would help the company take the next step in its evolution as New Orleans' premier community bank.
At the same time, First NBC's assets grew from $374 million in 2007 to $4.7 billion at the end of 2015. Its annual growth rate between 2010 and 2012 was 40 percent.
Behind the scenes, though, questions persisted.
The bank typically offered the highest rates on deposit accounts in the metro area, which attracted large deposits — often exceeding the FDIC's standard $250,000 insurance limit.
By March 2016, First NBC had roughly $1.2 billion in uninsured deposits — about 30 percent of the bank's deposit liabilities. Such deposits are considered volatile because outside factors, like interest rates or bad publicity, can trigger customers to rapidly withdraw their money.
That's what happened. As First NBC's shaky status came into public view, many customers quickly reacted. From Oct. 24, 2016, to March 31, 2017, nearly $2.7 million was withdrawn on average each day, court records show.
"Those withdrawals diminished available funding, and the bank experienced a significant liquidity crisis," the inspector general's report says.
Between 2006 and 2017, regulators conducted nine routine examinations and six visitations that reviewed First NBC's operations. However, the inspector general's report found their actions were lacking, identifying significant issues but allowing the bank too much leeway.
"Although examiners identified repeated risk management weaknesses, they relied too heavily on the bank’s financial condition and ability to raise capital," the report says.
Benefit of hindsight?
However, criticism directed toward regulators comes with the benefit of hindsight, according to John Ducrest, commissioner of the Louisiana Office of Financial Institutions.
Ducrest, who sought the court order to close First NBC in April, said examiners expressed concern about Ryan's management and the board's lack of oversight for years.
But at the time, examiners were forced to rely heavily on financial statements that First NBC's parent later said were erroneous and should no longer be cited. That made the bank's deteriorating situation harder to detect, he said.
"After the fact, it's easier to make conclusions, but in real time, our examiners and their examiners made the best decisions they could with the information that was in front of them," Ducrest said.
Hermann "Buck" Moyse III, who served as chairman of the board of First NBC Bank, did not return a message Friday.
By November 2016, the music stopped. The bank entered into a consent order with regulators, who supervised an extensive review of the bank's management and loan portfolio.
As they dug in, the outlook on First NBC's loans grew worse, turning up hundreds of millions of dollars in loans that, upon closer inspection, needed to be downgraded in cases where payments were not being made as scheduled.
"These large loans had ongoing renewals or extensions without principal reductions. First NBC suffered significant losses related to large loan relationships that were extended multiple times," the report says.
In a response included with the report, the director of the FDIC's Division of Risk Management Supervision, Doreen Eberley, said that regulators "should have set a strong supervisory tone by pursuing stronger enforcement actions as early as 2010."
"The accounting errors and over-lending derived from weak board oversight of a dominant policy official, coupled by inadequate risk management practices," Eberley said.
Additional reviews of the FDIC's oversight are expected to be finished early next year.