Tax credits from reconstruction projects lead to questions about earnings, capital levels and accounting
First NBC grew rapidly under Ashton Rya a prominent New Orleans banker.
With much of New Orleans still devastated by Hurricane Katrina in 2006, well-heeled local luminaries including football stars Peyton and Eli Manning invested in a new bank meant to help with the rebuilding.
That bank, First NBC Bank Holding Co. grew rapidly over the past decade under the leadership of Ashton Ryan, a prominent local banker. Now, it is facing its own problems.
First NBC invested heavily in New Orleans construction projects that included generous tax credits established by federal and state governments. These included the New Orleans African-American Museum, local theaters and an assisted-living facility in a historic building, according to the bank’s annual report. As business boomed, First NBC became the largest bank based in the city by assets.
“I cannot go to an event in this community and not see First NBC down as the major sponsor or a key sponsor,” Ben Johnson, president and chief executive of the New Orleans Chamber of Commerce. “Every city wants an Ashton Ryan.”
The tax credits, though, have led to questions about First NBC’s earnings, capital levels and accounting. The bank is also grappling with souring loans and securities
The Federal Deposit Insurance Corp. has said First NBC is no longer “well capitalized,” restricting its ability to take on certain deposits and pay interest. The Securities and Exchange Commission is investigating its accounting.
After being late to file its 2015 accounts with regulators, First NBC has yet to file its second-quarter report with the SEC. As a result, it is fighting the possibility of being delisted by Nasdaq.
This makes First NBC something of an anomaly: a publicly traded U.S. bank running into financial problems at a time when bank failures remain low and regulatory scrutiny is tougher than ever.
Some analysts believe the bank, which has about $5 billion in assets, may need to raise as much as $150 million to shore up its balance sheet. That would be equal to almost three-quarters of First NBC’s shrunken market value. Its stock has fallen more than 70% in 2016.
First NBC said that it has a turnaround plan.
“We believe we have a model that works,” said Mr. Ryan, a native New Orleanian who rides on a Mardi Gras float each year. “Our capital problems came from unusual items that we don’t think would be expected to recur.”
The bank has said the crux of its turnaround plan will be an attempt to raise capital but that it hopes to avoid issuing more common stock. Indeed, First NBC says it might be able to use debt to bolster a capital ratio on which it has been found lacking.
Selling debt isn’t necessarily straightforward, though. First NBC was recently downgraded to junk status by Kroll Bond Rating Agency Inc., which specializes in rating smaller lenders. It is now the only bank the ratings company covers with a junk rating.
The bank’s problems this year led an investment firm that owns the bank’s debt, HoldCo Asset Management, to bet against the stock. This, the firm said, was initially a way to hedge against the prospect of default by the bank. HoldCo also released public letters questioning the bank’s accounting.
Another potential issue: Mr. Ryan.
The 68-year-old has long been a top banker in New Orleans’s close-knit business community. He has a portrait of himself in his office. A customer painted it for Mr. Ryan after First NBC helped him “recover from a significant loan issue he had experienced at another bank,” a spokesman said.
But his stature, which helped get First NBC up and running, may have turned into a liability. In its 2015 annual report, which wasn’t filed until August, management said the company didn’t have adequate internal controls over accounting because of the board’s “lack of adequate oversight” and Mr. Ryan’s “dominant influence.” The bank recently announced governance changes, including separating the CEO and chairman roles.
What’s more, nearly all of Mr. Ryan’s stock in the bank, about 475,000 shares, equal to 2.5% of shares outstanding, is pledged against outside debts, including real-estate investments, according to Mr. Ryan and securities filings.
It isn’t clear if football’s Manning brothers still own shares in the bank. An agent for the brothers didn’t respond to requests for comment.
The root of First NBC’s trouble is its reliance on the esoteric tax credits.
The benefit from the credits, as well as from fees tied to projects that generated them, made up about half the bank’s earnings in recent years, according to Catherine Mealor, an analyst with Keefe, Bruyette & Woods.
In 2014, for instance, First NBC made $43 million—$33 million of which was from tax benefits.
Largely because of the credits, the bank’s deferred tax assets—effectively an offset to future taxes—have grown unusually large. At the end of the first quarter, these stood at $247 million, up from $95.8 million a year earlier. The latest amount was equal to two-thirds of the bank’s common equity.
That is potentially worrisome because forthcoming regulatory changes mean the bank won’t get as much credit for these assets in capital ratios. In coming years, that could leave it with a too-thin capital buffer.
Another problem: When First NBC’s 2015 annual report was released in August, it restated results for the prior four years and included a $59.5 million charge to write down its tax-credit investments for 2015. The report also showed a deteriorating loan book: 4.6% of loans were considered nonperforming in 2015 versus an average of 1.1% for banks around the same size.
That was largely due to one loan to an oil-and-gas company that now has a balance of $112 million. The bank also wrote off $70 million worth of purchased receivables from an ethanol-manufacturing subsidiary of a bankrupt company.
