The Office of Inspector General for the Federal Deposit Insurance Corporation has prepared a material loss review on First NBC Bank, a state-chartered nonmember bank headquartered in New Orleans, La. First NBC was unable to maintain sufficient capital to cover the investment and loan losses that the bank experienced, causing the Louisiana Office of Financial Institutions (OFI) to close the bank, and appoint the FDIC as receiver on April 28, 2017. First NBC’s total assets at closing were $4.0 billion, and the estimated loss to the Deposit Insurance Fund (DIF) was $996.9 million.
OIG is required to complete a review and deliver an audit report when the DIF incurs a material loss with respect to a financial institution for which the FDIC is appointed receiver. The objectives of the audit were to determine the causes of First NBC’s failure and the resulting material loss to the DIF and to evaluate the FDIC’s supervision of First NBC. The audit results showed that First NBC exhibited many of the characteristics of other bank failures of the FDIC’s supervision program. These characteristics included:
- a dominant official with broad lending authority and limited Board of Directors oversight;
- rapid growth funded by high-cost deposits;
- large lending relationships and concentrations without adequate risk management controls to mitigate the risks; and
- significant concentrations in trade receivables and complex tax credit investments.
Recommendations. The report concluded that the bank’s insolvency was due to accounting errors and over-lending, as well as inadequate risk management practices. However, the report also found that the FDIC should have set a strong supervisory tone by pursuing stronger enforcement actions as early as 2010. OIG made the following recommendations:
- Complete a post material loss assessment of the FDIC’s supervision of First NBC to ensure proper implementation of FDIC guidance, including guidance related to dominant officials and application of forward-looking supervision.
- Update training materials and conduct training to reflect the lessons learned from this failure.
FDIC supervisory actions. The report also reviewed 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. However, the report stated that 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.” The FDIC agreed with the audit report’s conclusion that First NBC’s board did not adequately control the CEO’s activities and influence until the bank’s condition had diminished to a point where the bank was unable to recover.
The Division of Risk Management Supervision responded to the recommendations with corrective actions. It first conducted a review of First NBC Bank’s supervisory history and requested two additional assessments—an independent assessment by professional staff outside of the Dallas Region; and a post-material loss review assessment being conducted by the Dallas Region. These are expected to be completed by Jan. 30, 2018. With regard to the recommendation to update training materials and conduct training, the Department will determine what additional training is needed after the assessments are completed.
Companies: First NBC Bank
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