In the first large bank failure in years, state regulators in Louisiana closed New Orleans-based First NBC Bank, which also had five branches in Florida. The bank had $5 billion in assets at the end of 2016 but in January sold $1 billion of its assets including nine branches in Louisiana to Whitney Bank, which is based across the state line in Gulfport, Mississippi. Now Whitney Bank is taking over the branches and “transactional” deposits of the failed bank. The deposits Whitney Bank is assuming are essentially the checking and savings accounts based in the bank’s branches, but these are estimated to be $1.6 billion, less than half of the bank’s deposits.
The FDIC will send checks on Monday for certificates of deposit, retirement accounts, and other investment-style deposits, covering an estimated $2 billion in deposits belonging to a large number of investors. I imagine this will be the largest check-writing effort to date at FDIC; it is, at least, unusual for the FDIC to have to write $2 billion in checks to bank depositors after a bank failure. This is also one of the most costly bank failures in U.S. history, with the FDIC estimating the cost to the Deposit Insurance Fund to be nearly $1 billion. That figure must be taken as a rough estimate, as the values of many of the bank’s assets are not known with precision.
The bank was obviously troubled in recent years, during which its record was a series of missed deadlines and regulatory actions. The failed bank had appointed a new CEO in February. Subsequently, the president resigned and the bank reported accounting lapses going back at least two years. The bank’s write-down of previously overstated assets was apparently large enough to prompt regulators to close the bank.
First NBC Bank was founded in 2006, in the aftermath of Hurricane Katrina, and expanded rapidly. The timing would have been bad anywhere in the United States as real estate values dropped, but was especially unlucky in coastal Louisiana as it faced further tropical weather disasters. If the bank’s founder was betting on New Orleans bouncing back after the hurricane damage, that also was a bad guess. Ten years later, only the neighborhoods not affected by flooding have returned to their previous levels of population and economic activity.
Bank regulators are lenient with banks in areas affected by natural disasters but must be more strict with banks that draw most of their deposits from investors. A disaster can hurt the prospects of any business, but history shows that a well-managed business can often recover in time. Investor deposits are worrisome to regulators for two reasons. Banks usually pay higher interest rates on these types of accounts, leaving the bank with a thin profit margin. At the same time, investors can move their money out faster than other depositors. Such a turn of events can deplete what appeared to be a well-capitalized bank in a matter of weeks.
There is a theory in 20th-century management thinking that holds that the easiest time to grow a business is when competitors are cutting back. First NBC Bank is the latest in a series of hundreds of banks, retailers, and other businesses that tried to expand into tough times and ended up shutting down instead, suggesting that the management truism may not be so.