First NBC Bank's long-awaited annual report is raising more concerns about the New Orleans company's operations.
The $3.8 billion-asset company had been facing pressure from the Nasdaq and investors to file the document, which revealed a $25.5 million loss for 2015. First NBC also revised annual profits for the prior four years by a total of $24.6 million.
Of greater importance, the new reporting revealed a $99.2 million reduction in capital that pushed First NBC's Tier 1 and total risk-based ratios below the threshold for being considered well capitalized. The filing also disclosed that the Securities and Exchange Commission is now looking into the company's financial reporting.
These revelations are increasing the likelihood that First NBC will need to raise capital. In a letter made public earlier this month, HoldCo Asset Management, a New York firm that owns about $8 million of First NBC subordinated debt, claimed the company would need to raise up to $300 million in coming years.
HoldCo, in a follow-up letter released Friday, called First NBC "perhaps the worst capitalized bank in the country above $1 billion of assets." HoldCo, meanwhile, also has a short position in the company.
Holdco also noted that First NBC's nonperforming assets had more than quintupled from a year earlier, to $164 million at the end of last year. The firm also claimed that First NBC's Texas Ratio – a measure of nonperforming assets divided by tangible common equity and loan-loss reserves – had increased to 41.
In comparison, the average Texas Ratio for banks with more than $1 billion of assets was just under 5 through March 31, according to data from the Federal Deposit Insurance Corp. (Texas ratios greater than 100 are considered warning signs of a possible failure.)
Ashton Ryan, First NBC's chairman, president and chief executive, did not respond to an email seeking comment. HoldCo, managed by principals Vik Ghei and Misha Zaitzeff, declined to comment further.
First NBC's annual filing did not disclose any plans for adding capital other than noting that it "may be required or otherwise need to raise additional capital in the future" as part of a compendium of risk factors.
While the company remains adequately capitalized, losing the well-capitalized designation has some potentially serious negative consequences, including higher deposit-insurance premiums, increased borrowing costs and restrictions on accepting and renewing brokered deposits. First NBC had $231 million of brokered deposits on its balance sheet on June 30, according to its FDIC call report.
Several industry experts cast doubt on whether First NBC would need to raise as much capital as HoldCo claims, pointing out that the company's Tier 1 leverage capital and common equity Tier 1 risk-based capital ratios remain above well-capitalized thresholds. They also noted that the gap separating the substandard ratios and the minimum well-capitalized threshold is relatively small.
That means it is possible for First NBC, which earned about $28 million in the first half of this year, to build capital back up through retained earnings in short order, Chris Marinac, an analyst at FIG Partners, said.
Stephen Scouten, an analyst at Sandler O'Neill, reached a similar conclusion, writing in a Friday note to clients that "the bank's solid organic earnings," along with possible credit recoveries, "will help to rebuild capital."
Also, more than two-thirds of the year-over-year spike in nonperforming assets was associated with a single loan tied to an oil well that is up and running after being temporarily out of commission, First NBC said.
Resolving other issues highlighted in the annual report might be more challenging. First NBC said it had identified what it termed "material weaknesses" in its financial reporting and with how it evaluates and monitors borrowers' credit quality. As part of a remediation plan, the company has pledged to significantly strengthen the board's audit committee and to hire a chief operating officer to assist Ryan with day-to-day management.
First NBC's well-publicized difficulties have been baked into its stock price, which is down more than 60% this year, industry observers said.
Marinac said the latest filing may represent First NBC's first steps along the road to recovery, adding that executives would be in a better position to comment next month, when the company is expected to release quarterly reports for this year. "The key is for the company is to get the word out about what's really happening," he said.
First NBC's latest filing provided scant information about its strategy of investing heavily in low-income and historic properties, which generate tax credits. When all goes well, the credits can offset income tax obligations, thus adding to profits. However, they were also the root cause of First NBC's long-standing reporting woes.
In the wake of Hurricane Katrina 11 years ago, First NBC seized on an opportunity to reap significant benefits as Louisiana and the federal government made a number of lucrative tax incentives available to encourage rebuilding efforts. As late as this summer, First NBC called tax credits an "integral part" of its business model.
"It' a very unique strategy," Marinac said. "They're one of only a few banks in the country to turn [real estate tax credits] into a line of business."