Two big banks were closed by regulators in recent days. Yesterday saw Guaranty Bank (BestBank in some states) shut down by the federal Office of the Comptroller of the Currency. Just days before that, however, an even bigger bank was shut down, First NBC Bank. Based in New Orleans, the bank had $5 billion in assets on its books.
Because our firm sues banks as well as brings whistleblower actions on behalf of the government, we have unique insights into the world of collapsed banks. Sometimes banks go under because they are mismanaged. Sometimes they go under because of fraud. And sometimes they just happen to be in the wrong market at the wrong time. The latter may be what happened to First NBC Bank.
Why First NBC Bank Was Closed by Regulators
First NBC Bank has been in trouble almost from the day it opened in 2006. After Hurricane Katrina devastated New Orleans, the community came together and formed a new bank to help homeowners and businesses. Prior to the bank’s closure, First NBC’s website explained the philosophy of the bank, “Even during the recent economic downturn, First NBC Bank has not stopped lending and has been applauded for providing financial assistance to small businesses still recovering from the Hurricanes, as well as supplying capital for new small businesses to open their doors.”
The timing of the bank’s formation couldn’t have been worse. Less than two years after opening its doors, the national economy collapsed. That meant real estate prices dropped dramatically. Many of First NBC’ Bank’s loans were underwater.
Later the local economy would be hit by the Deepwater Horizon oil spill and falling oil prices (Offshore oil production in the Gulf is a big driver of the New Orleans economy.)
First NBC Bank didn’t have deep enough roots to survive the constant blows to the local economy. On April 28th, the bank was closed by the Louisiana Office of Financial Institutions. The state didn’t provide any reasons for the closure but those in the banking industry all knew the bank was struggling with a portfolio of underwater loans. The FDIC was appointed as receiver.
Despite having several terrible years, some thought the bank could survive. In 2013, the bank raised millions of dollars in cash through a public stock offering. Investors appeared to believe in the future of the bank as evidenced by the success of their public offering. Four years later, however, the bank would be closed.
In typical fashion, the FDIC came in and closed the bank at 5:00 pm on a Friday. Regulators don’t offer advance notice when closing a bank to avoid causing panic and avoid bankers making questionable last minute loans.
The FDIC assigned all deposits of First NBC Bank to Whitney Bank, a local Mississippi bank with deep roots in New Orleans. Some assets were also transferred although not all.
What Does the Closure of First NBC Bank Mean for Consumers?
For consumer questions, the FDIC has issued a FAQ or “frequently asked questions” guide for First NBC Bank customers. Most of your questions will likely be answered there.
The good news is that no one is losing any money. Despite the FDIC insurance’s limit of $250,000 per account, the agency found another bank to take over the deposits. All deposits were transferred, even those worth more than $250,000. That action came at a steep price, however.
Whitney took on the deposits but not all the assets. In banking parlance, an asset is often a loan. You and I look at a loan as a liability, but for a bank, they are considered assets since they generate interest income.
Because Whitney isn’t taking on the bad loans, the FDIC will need to liquidate them. The agency says the bad debt will cost them approximately $997 million. At the end of 2016, the FDIC was holding $83 billion in its deposit insurance fund.
Accessing your money should be seamless. Former First NBC Bank branches in Louisiana are now operating as Whitney Bank. Florida branches were reopened under the name Hancock Bank.
First NBC Bank checks, credit and debit cards will continue to be honored. Direct deposits and automatic bill payments will also continue as usual.
One change is for those holding IRA accounts and certificates of deposit. Those accounts were not acquired by Whitney. Holders of these accounts will receive a check. No early withdrawal charges will be assessed but if the money was in an IRA, customers have just 60 days to rollover those funds into a new tax deferred account. If you don’t, expect huge IRS penalties.
Another thing that will likely change is the interest rate your receive on savings accounts. If you have a savings account, Whitney can change the rate of interest you earn on your savings. You will need to find a new bank if you don’t accept the new rate.
First NBC Bank Closure and Commercial Customers
If you are a commercial customer of First NBC Bank, your relationship with Whitney may change.
One change may to holders of short term commercial notes. Frequently commercial loans renew yearly. Customers just assume that the bank will renew each year. Whitney may not wish to renew those loans, however.
Generally, banks are only obligated to honor the terms of the loan agreement. That often means they don’t have to renew. In many states, however, courts look to the course of conduct between the parties and any promises made by the bank. Courts can also impose a common law duty of good faith and fair dealing on banks.
If you have a renewing commercial loan or have a loan commitment that hasn’t closed yet, consider hiring good lender liability lawyers in case something goes wrong. We certainly have the experience to help.
Finally, there are issues for commercial borrowers who may have potential claims or lawsuits against First NBC Bank. What happens to those?
As receiver, the FDIC will defend against those claims but is not liable for any judgments if you win. State and federal law establishes a hierarchy of how claims and judgments are paid and in what order. If you have a claim against First NBC, call us. We can help.
We can also help if the bank has a claim against you. Going forward, it will be the FDIC that brings suit if they believe you owe First NBC. Unfortunately, the law gives the FDIC considerable clout that it can exercise as receiver. If you are facing the FDIC and the weight of the federal government, give us a call. (Brian Mahany once represented the FDIC and knows how claims by failed banks work.)
Whistleblower Awards for Bank Fraud Information
The federal government offers substantial cash awards for information about fraud committed by banks. If the fraud hurts the bank (writing bad loans, for example), the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) offers awards of up to $1.6 million. (Maximum awards are frequently paid.) FIRREA cases can be brought against individual bankers or the bank itself.
If the misconduct hurts a federal program, the False Claims Act can pay even bigger awards. An example of bank misconduct that could hurt the government is fraud involving residential mortgages. (Most home loans are backed by the FHA, VA, Fannie Mae or Freddie Mac). Another example could be misconduct that costs the FDIC money. (Here the FDIC is shelling out just shy of $1 billion to protect depositors.) Finally, information about how a bank abused TARP (bailout monies) could qualify.
To date our Mahany Law banking whistleblowers have received over $100 million in awards!
If you are a commercial borrower with a substantial loss or claim against the bank, we can also help. MahanyLaw has partnered with Judge, Lang & Katers to handle cases against banks. We are two independent national boutique litigation firms that join forces on banking cases.
If you have a commercial loan dispute or lawsuit involving First NBC Bank or Whitney Bank, visit our lender liability website. Please note that our minimum amount in controversy is $5 million. Unfortunately, we are not equipped to accept or provide legal advice on consumer cases. If you are a consumer with questions, please contact the FDIC or the state or county bar association where you live. In most locales, the bar association operates a free lawyer referral service.
For more information, contact attorney Brian Mahany at or by phone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept confidential. Please feel free to also visit our FIRREA Bank Whistleblower information page for more information.
MahanyLaw – America’s Bank Whistleblower Lawyers