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Caleb Newquist : New Orleans, Louisiana, October 2016. While most of the nation is consumed by the closing weeks of a chaotic presidential election, a completely different drama is unfolding in the Crescent City. A homegrown bank founded in the aftermath of Hurricane Katrina is in trouble. Its founder, a banking legend and a New Orleans native, had started it with the help from the city's well-heeled, including a couple of other hometown legends, Peyton [00:00:30] and Eli Manning. As recently as May, an examination of first NBC Bank had found it to be adequately capitalized. But now the Federal Reserve Bank of Atlanta had just notified first NBC that it had classified. It has been in, quote, troubled condition. Then in November 2016, founder and CEO Ashton Ryan Junior said that first NBC had, quote, plenty of capital and [00:01:00] equity. But then a month later, the bank announced that Ashton Ryan Junior was no longer CEO. The management shakeup was supposed to reassure everyone that the bank's issues were being addressed. It didn't matter. In late April 2017, first NBC collapsed. That was the end of the bank. But it was the beginning of something much worse.

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Caleb Newquist : This is Oh My Fraud, a true crime podcast for the squeamish spreadsheet type. I'm Caleb Newquist. How's it going? Uh, I hope you're doing well. Like most of you, I've been busy. Having [00:02:00] said that, I would really like to not be busy. I don't know about you, but I'm looking forward to the day when I get to tell people that I don't have anything going on. Uh, busy is very overrated. It's so annoying when you ask someone, how's it going? And they respond, oh my God, I've been so busy. As if the earth would tilt over on its axis if their schedule had nothing on it. Do yourself a favor. Take things down a notch, okay? The world doesn't need [00:02:30] your busy bodying. Take a nap. You won't miss anything. Nothing will happen. Okay, maybe China will invade Taiwan. But, you know, checking every last item off your errand list isn't going to change that. Okay, relax. Anyway, one of the things that had me busy for exactly one day recently was that I had to report for jury duty. Never had to do that before. Uh, it was kind of fun. I'd recommend it. And I know you're probably wondering. [00:03:00] No, it wasn't a fraud case. It was a domestic misdemeanor. So yeah, no fraud, sadly. Fun fact I learned that in Colorado. Uh, a misdemeanor case only needs six jurors. And so I don't know if that's, I don't know, probably vary state to state.

Caleb Newquist : But anyway, they only needed six jurors. I was in the pool of people that got to go through the selection. And the judge was the judge was very earnest, very earnest, [00:03:30] took her job very seriously. And I guess that's what you want in a judge, right? You want a judge to take them seriously or to take you want you want a judge to take their job seriously. It's kind of a serious job. Okay. Um, so she gave us a little history lesson on the Fifth Amendment, the presumption of innocence, you know, stuff like that. It was good. It was pretty good. Anyway, I'll spare you the suspense. I did not get selected. Like I said, they only needed six and I wasn't one of them. And [00:04:00] so me and the rest of the pool were discharged with the court's thanks, as they say. And since their thanks seemed sincere, let me just also offer a sincere. You are welcome. It was my pleasure to perform my civic duty. I didn't have to go to work. I got to read a little bit. I had a nice snack, Cup of coffee. It was a lovely, quiet morning. And I'm a little sad, actually, that I won't have the opportunity to do that again for 12 [00:04:30] months or so. I hope I get to do it again someday. Okay, here's a review from the earmark app. Brian writes Caleb must be so lonely with nobody to banter with or laugh at his jokes.

Caleb Newquist : He's still killing it. But do him a favor and find the guy a new co-host. Uh, Brian, I just would like to clarify I am alone. I am not lonely. Okay. There is a there's a distinction to be made there. Okay. And we are not actively looking [00:05:00] for a new co-host. It's not exactly the kind of job that you conduct interviews for. But I will say this. If the right person comes along, uh, we'll we'll give it a go. All right. But for now, you're stuck with me. Sorry. Anyway, thanks to everyone who rates the show or leaves reviews on Apple, Spotify, or wherever you listen. Uh, do that if you get a chance. It's helpful. It's helpful. Also, you can email me [00:05:30] if you got questions, comments, story ideas, whatever. Oh my. Fraud. Com. Also, this is the last time I'm going to say this. Last time I promise. Greg Kite and I will be at the new Jersey society of CPAs Convention and Expo tomorrow, June 5th, in Atlantic City at the Borgata Hotel and Casino. Technically the show started yesterday, but you can still register. There are two and three day passes that include our session tomorrow, but if you're listening [00:06:00] to this after June 5th, then you can't do any of it. So I'm sorry. There's a link in the show notes if you still want to register at this very late hour.

Caleb Newquist : All right. And if you need a live or virtual presentation on Frontier Ethics, email all my fraud at earmarks. Com to get more information on pricing and availability. All right, that's enough business time for some fried. Ashton [00:06:30] Ryan Jr had done it before he could do it again. Before founding first NBC Bank in 2006, Ryan had been president and CEO of first Bank and Trust of New Orleans from October 1998 to July 2005. He had grown that institution's assets from $78 million to $680 million. Prior to that, he was president and CEO of First National Bank of Commerce for 17 years, starting in 1981, and growing [00:07:00] it from $2 billion in assets to 6 billion in assets in 1998, when it was acquired by Bank one, which eventually became part of JPMorgan Chase. Prior to becoming a big shot banker, Ryan was a partner at Arthur Andersen for 20 years, where he specialized in. Maybe no surprise, auditing banks in the aftermath of Hurricane Katrina that struck the New Orleans and surrounding areas in August 2005. Ryan set out to start a new bank, one that could [00:07:30] help the city rebuild. He pulled together more than $60 million from investors to start first NBC. Between the bank's founding in May 2006 and 2012. First, NBC opened 31 branches across the New Orleans metropolitan area and the Mississippi Gulf Coast during this time. First NBC made acquisitions in April 2008, May 2008, and November 2011.

Caleb Newquist : They had 33 employees at the bank's founding, [00:08:00] and that grew to over 400 by December 2012. Ryan's deep ties to the community, along with the other members of his senior management team, were a key part of their early success. This team had experience growing bank franchises. They had worked together in executive management capacities at local New Orleans institutions, including 14 of the bank's top 18 senior executives working for First National Bank of Commerce when it was acquired by Bank [00:08:30] one. Over the many years, Ashton Ryan and his team were regulars within many of the city's civic groups, including the boards of Greater New Orleans, the University of New Orleans Foundation, and Junior Achievement of Greater New Orleans, among many others. Now, if you don't remember Hurricane Katrina and the devastation that it caused, uh, it was bad. It was bad. Nearly 1400 people died, and it resulted in more than $125 [00:09:00] billion in damages to New Orleans and the surrounding area. New Orleans is a city rich with history and culture, and so it's easy to imagine that people would want to do whatever they could to bring the city back from that kind of devastation. And for somebody like Ashton Ryan to come along and rally people who, like him, cared a lot about New Orleans, that was a big deal. He brought a real community presence to [00:09:30] the critical need of financing for New Orleans to rebuild.

Caleb Newquist : It would have been easy to root for him, and this bank efforts were noble, civic minded, and at the outset they seemed destined for success. Yeah. So civic minded people, uh, I'd argue that we need more of them. And I'm not just talking about me [00:10:00] and the dozens of people who showed up for jury duty the other day. Although, you know, that's that's part of it. We live in this modern, dynamic society that rewards innovation and risk taking and and entrepreneurship. And there are many, many benefits to this kind of system. And we're not going to get into all that. I think they're pretty well understood. But I think one of the challenges of it is that there's kind of this broad belief that those characteristics can be applied [00:10:30] in virtually any context to fix a problem. And the people that are willing to take the risk and innovate to solve those problems will be financially rewarded. But. It. And this is something that gets far less attention. But there's lots of failures on the way to great success. And sometimes, you know, it's a problem of execution. You know, like how how something is done is not done the right way. You know, they're solving the problem in the [00:11:00] wrong way. In other contexts, the economics don't work. So you maybe you do have the right solution, but it costs too much money, or you can't get people to invest in the idea until you aren't losing as much money.

Caleb Newquist : And then there's another variation on the economics where you're making a little bit of money, but that's just not enough money anyway. So then the question becomes, okay, there's all these problems that need to be addressed, or the economics aren't good or aren't good enough. [00:11:30] And but does that mean they're not worth doing? I mean, if there's an inherent value of fixing a problem or doing something, Is that still great enough that it should be done regardless of the economics? And this is the kind of question that causes a lot of tension between groups of people who say, yes, they're absolutely worth doing, and people who say, no, that's not worth doing at all. Low income housing, [00:12:00] for example, historic restoration projects. Uh, those are good examples of this. Many times these types of projects are financed and supported by state and local governments and even sometimes, you know, federal support. And it's easy to understand why regular real estate developers, people who are in the business, aren't really drawn to these projects because number one, like low income housing, not super sexy. You know, developers [00:12:30] want to be able to market their projects to attract buyers and businesses so they can make big returns on investment, right? Low income housing. I mean, those projects are difficult to do, that. There's rules to follow. The cost of materials is still high, even if you're cheaping out on them and you can't sell the homes for whatever you want.

Caleb Newquist : So that makes for tight margins. In other words, they just don't make a lot of money. They might even lose money. And the same kind of goes for historic restoration. These projects are expensive [00:13:00] and I'm not an expert, but I have to imagine that there's a lot of criteria that you have to meet in order to do historical renovation or preservation. You have to use certain materials, special contractors, so that the historical integrity is preserved. So the costs are high and probably going to go over budget and a developer or bank. They don't want to do that because it's too risky to to, you know, you know, it's not going to make the money. Or in the bank's case, it's not going to get paid [00:13:30] back. In general, I think most people would agree that providing housing for low income citizens is a good thing to do. It's a good priority for government, in other words. Likewise, I think most people would agree that we should preserve historical buildings and sites and locations because it enriches the communities that they're in. It educates citizens about the past. They serve as destinations for tourism, education of local students. I mean, the reasons why that's good policy are basically endless. [00:14:00] And it's fine if the free market doesn't want to solve that those problems. Right? The whole idea is if the if the free market doesn't want to do something, but people agree that it's worth doing, then the government steps in, the government can do it.

Caleb Newquist : That's a job for government, you know. So maybe it loans money to developers and maybe it offers tax credits and it tries to find banks who want to support those kind of projects. If there are businesses who want to support civic and community development, then that's a good thing. Just like we need more civic minded [00:14:30] citizens, we can always use more civic minded businesses. With the support of the New Orleans community, numerous successful projects, and rapid growth. First, NBC filed to become a public company in November 2012. In its S-1 filing, first NBC reported total assets of $2.7 billion, net loans of $1.9 billion, total deposits of 2.3 billion, and shareholders equity [00:15:00] of 248 million. Also in its S-1 first NBC listed experienced core management team with a local banking tradition of success as a competitive advantage in the business section of the filing. It goes on at some length about Ashton Ryan Junior, but also William Burnell, the chief credit officer. Marcia Crowley, the chief compliance officer. And Mary Beth Verdugo's, chief financial officer. And their collective [00:15:30] experience. And the results seem to bear this out further down in the section the section, the bank lists competitors and the only banks larger than first NBC were large regional and national banks. And remember, first NBC had only been around for six years.

Caleb Newquist : So that's pretty remarkable growth for a new bank. It's hard to imagine a bank doing that without a strong executive management team. Likewise, the bank mentions several times its [00:16:00] role as a community bank and its officers investment in civic and community organizations. We talked about this a little bit already. It also explains its participation in rebuilding New Orleans after Katrina, writing, quote, we invested approximately $99.1 million in tax credit projects that have rebuilt affordable housing, created employment, and supported redevelopment projects in our city and the surrounding areas. Now, if you've never [00:16:30] looked at an S-1 filing before or don't know what an S-1 is, let me briefly explain. When a company wants to become public, that is, they want to make their shares of their company available to the general public. It must file a form S-1 with the Securities and Exchange Commission. It's a big milestone in the process of any company that's becoming public. And it documents virtually everything about the business [00:17:00] for potential investors to know. I'll let you in on something. There are lots of rules about what goes into an S-1. So these these documents are very long and they're mostly very boring. But one of those very long, seemingly boring sections is the risk factors section. And that's important because it's the part where the company goes into great detail about everything that could go wrong. [00:17:30] And now we don't have time to go through the whole thing.

Caleb Newquist : But here's just a few things that first NBC bank listed at the time. Okay, the first one I'll mention is quote. We rely heavily on our management team and could be adversely affected by the unexpected loss of key officers. In other words, that competitive advantage we just talked about that will disappear real fast if something happens to these senior leaders. Okay. The [00:18:00] second risk it describes is that, quote, as recovery from Hurricane Katrina winds down in New Orleans. Local economic activity may be depressed, which could adversely affect our growth. And the last one I'll mention is, quote, our high concentration of large loans to certain borrowers may increase our credit risk. Our ten largest borrowing relationships range from approximately $27 million [00:18:30] to $45.7 $7 million. Plus, banks are just kind of risky enterprises. You're borrowing money from depositors, and then you're loaning that money to people who want to borrow in the hope that they will pay you back. It's just a weird juggling act. And it's, you know, highly regulated. And, yeah, it's a hard business. But overall, investors liked what they saw [00:19:00] on the first day of trading in May 2013. First, NBC's initial public offering raised $115 million and its shares rose, closing at $24.50. In a statement, Ashton Ryan said the bank will be even better positioned to serve the financial needs of the New Orleans community as it continues its recovery after Katrina.

Caleb Newquist : As far as anyone knew, the [00:19:30] years in the aftermath of first NBC's IPO were good ones. The bank was considered to be well capitalized by its regulators, and its assets continued to grow to nearly $5 billion at the end of 2015. Its stock price had reached $42 that December, but then in February 2016, the cracks in first NBC started to emerge. Like many public companies, the bank was reporting its results for the fourth quarter [00:20:00] of 2015 as well as the full year's performance. The Times-Picayune New Orleans Advocate reported that the company had increased its net profit from $54 million to more than $66 million. Its loan portfolio had grown nearly over 26% in the past year, driven by a large increase in construction loans, but also an acquisition the bank had made in the prior year. So that all sounds fine, but it's the last sentence [00:20:30] of this particular article that caught my attention and it reads, quote, loans past due by more than 90 days and repossess property or non-performing assets jumped by 17.1 million to $45.7 million for the year. Now, $45 million in non-performing loans in a portfolio of like 3.5 billion. Uh, it's probably nothing to really worry about. It's immaterial, as the accountants like to say. Or [00:21:00] the auditors whoever. Uh, but still, it's a 60% jump. That's a sharp increase. But then that tiny crack spread into a messy spider web. In April, when the bank reported that its 2011, 2012, 2013, and 2014 financial statements could no longer be relied upon.

Caleb Newquist : The bank's auditors had found errors in its accounting for its tax credits, and based on those errors, the bank's audit committee determined that their financial statements could no longer be relied [00:21:30] upon. In May 2016, an FDIC examination of the bank found that it was no longer considered to be well capitalized in the context of banking regulation. It was merely adequately capitalized, so a small demotion when a reporter asked a banking professor at Louisiana State University what it all meant. The professor replied, quote, generally nothing good, but it is hard to say until you see the restatements. The [00:22:00] stock price was down to $19.50 5% off its high of 42 from just six months earlier. Those restatements came in August, when the company finally filed its annual report. Not only did it restate its results for 2011 through 2014, it also reported a write down of its tax credit investments for 2015. It also disclosed that 4.6% of its loans were non-performing, compared to [00:22:30] an average of 1.1% for banks of a similar size. This four times greater than the average figure was mostly due to a single oil and gas company that had a loan balance of $112 million. There was also a writedown of $70 million in purchased receivables of a bankrupt ethanol manufacturing subsidiary. To make matters worse, in October 2016, the Louisiana Office of Financial [00:23:00] Institutions and the Federal Reserve Bank of Atlanta notified first NBC that it considered the bank to be in, quote, troubled condition.

Caleb Newquist : This label came with a bunch of conditions, including the bank had to get approval from the fed before adding directors, senior executives, changing the responsibility of its leaders, or making certain types of agreements that would indemnify or give severance to key employees. The fed also said that the bank could not do anything that [00:23:30] would represent a reduction in capital, except for the payment of normal and routine operating expenses without its approval. So yeah, they need a lot of permission slips. Now. As 2016 came to a close, things were not improving. First, NBC agreed to let regulators further scrutinize its management, loan portfolio, budget, strategic planning and plans to boost [00:24:00] its capital and liquidity. That was in November. Now, by this time, regulators had known for a while that Ryan had had a quote unquote, dominant influence at the bank and that its board of directors had failed to conduct adequate oversight of him. This had come up regularly in bank examinations, but nothing had been done to improve the situation. At best, their efforts had been terribly ineffective. [00:24:30] This all came to a head in December when Ashton Ryan was demoted, losing his position as CEO. Roughly three weeks later, the bank announced that it was selling nine branches and $1.3 billion in loans to Whitney Bank, a regional institution based in Mississippi.

Caleb Newquist : The stock was now in the single digits, down more than 80% from its high. And the worst was yet to come. Even [00:25:00] with the sale of its nine branches to Whitney Bank, it seems nothing could stop first NBC from imploding. Roughly a month after that sale, the bank disclosed that it expected to significantly write down its deferred tax assets. But because this is big business, they used slightly fancy language to describe the situation. [00:25:30] They called it a, quote, material valuation allowance. Now, if you are not familiar with deferred tax assets, let's talk about that briefly. Remember how we talked about how first, NBC, having invested in lots of projects that relied on tax credits, but it was also financing lots of projects that depended on tax credits. Okay. Okay. Well, one of the important ways [00:26:00] that tax credits work is that you only get to use them if your business is profitable. So simple example. Let's say a bank invests $1 million in a project that is valued at $10 million. For that investment, the bank gets a 20% tax credit. So $200,000. And he gets to take that against its tax liability. But let's say the bank doesn't [00:26:30] owe that much tax. Say it only owes $10,000 in tax. It can use 10,000 of its 200, its total 200,000 tax credits, and use the remaining 190,000 sometime in the future when it has a profit or and and therefore has tax to pay.

Caleb Newquist : In other words, the bank is deferring the use of the tax credit to some point in the future. The value of that tax credit deferred into the future is considered to [00:27:00] be an asset on the company's books. You'll see it on the balance sheet called a deferred tax asset. Okay. But in first NBC's case, when it told everyone in its disclosure, hey, we need to make a material valuation allowance of our deferred tax asset. They were basically saying, uh, yeah, the valuable thing that we thought we were going to use in the future, uh, we're probably not going to use it. The [00:27:30] bank was essentially admitting that it wasn't going to owe taxes in the future. And if you're not going to owe taxes, that probably means you're not going to be profitable in the future either. And that scares the crap out of investors. As one analyst told the New Orleans Advocate, quote, tax credits are wonderful if you're making money, but they're not so wonderful if you're not making money. If you're not making money, you're not paying taxes. And if you're not paying taxes, what good are [00:28:00] they? In April 2017, two major events unfolded. Number one, Ashton Ryan resigned from first NBC Bank, and number two, Louisiana banking regulators finally put first NBC out of its misery, ordering the bank to be closed. The FDIC was appointed as the receiver, and Whitney Bank assumed all of the bank's deposits and acquired its short term investments.

Caleb Newquist : Cash and loans. First, [00:28:30] NBC's assets at the time of its collapse were $4 billion. The loss to the Fdic's Deposit Insurance Fund that's the safety net the regulator uses to reimburse depositors when a bank fails. That was nearly $1 billion. This ensured that the depositors of first NBC were fully taken care of and experienced no disruption with their accounts. So when you consider how disruptive a bank's failure can be, the wind down a first. [00:29:00] Nbc probably went about as well as anyone could have hoped for. Still, first, NBC's failure was a significant blow to the community banking in the Gulf region. And so, naturally, people in that area. They wanted to know what happened, like what was really going on behind the scenes. The New Orleans Advocate had been tirelessly following the story of first NBC's troubles and in the aftermath of the bank's failure. [00:29:30] A key theme began to synthesize into a broader picture of mismanagement. Key among these was first NBC's aggressive growth, driven by Ashton Ryan, its dominant leader. It had become a relatively large bank 5 billion in assets by the end of 2015. In a very short period of time, its annual growth between 2010 and 2012 was 40%, and between 2013 and 2016 it was an average of 22%. [00:30:00] That was double the average of banks similar in size to first NBC. That rapid growth was fueled by paying higher interest rates on its deposits than its competitors.

Caleb Newquist : And First Bank's tax credit business. These circumstances created a situation where first NBC's growth could not be sustained. It had big ongoing liabilities to its depositors and the bank's tax credits. Projects weren't paying off, which eventually [00:30:30] resulted in losses and write downs of its deferred tax assets. And of course, because first NBC was a public company, now banking analysts had lots and lots of questions, including how are you making this work? Because it actually doesn't seem to work. Bank management was able to raise some money to keep the bank going, but ultimately it wouldn't last. Money was going out faster than it was coming in. In [00:31:00] the fall of 2017, the FDIC inspector general. Roughly speaking, the internal auditor for the agency. It issued its Material loss review of. First NBC Bank. This review is required by law any time the loss to the deposit insurance fund is greater than $50 million. Remember, this one was almost a billion. The review [00:31:30] provided greater detail on many of the bank's issues that we've already talked about, and that had already been known. The rapid growth. Ashton Ryan's leadership, the tax credits business. So here's a selection of some of those details from that review regarding Ryan's dominant style. One, he was the driver behind the bank's aggressive growth and funding strategy. Two he fulfilled roles not usually compatible with that of the CEO.

Caleb Newquist : For example, he acted [00:32:00] as the chief financial officer overseeing the bank's accounting and financial activities for the first four years of the bank's existence. And he served on the audit committee early in the bank's history and directly oversaw the audit function and its reporting, and three he operated the bank. Outside policy guidelines at times and engaged in certain lending practices that were not prudent. Okay, so none of that is great, but let's continue. Okay. What about the rapid growth? Here's some detail about the higher interest for deposits that [00:32:30] the bank was paying. The bank's cost of funds was over 100 basis points higher than the bank's national peer group. The extremely high cost of funding presented risks to earnings, capital and liquidity. The CEO believed that the rates paid to customers developed loyalty and would establish goodwill among depositors during a period of historically low interest rates. Then there was an issue of uninsured deposits, in other words, money the bank held [00:33:00] that would not be paid back by the FDIC should the bank fail. Here's what the review said. By March 31st, 2016, the bank reported approximately $1.2 billion in uninsured deposits, which represented approximately 30% of total deposit liabilities. Uninsured deposits are considered volatile because rising interest rates or negative publicity about the institution can cause these uninsured deposits to flee quickly, which happened at first. Nbc. And [00:33:30] here's the portion addressing the tax credit business. The CEO viewed the investment tax credits to be attractive because they helped to meet requirements under the Community Reinvestment Act, generated significant earnings and reduced first income tax liability.

Caleb Newquist : However, two issues existed with this premise one, impairments could occur on some of the tax credits because of the issues with the related investment project, and two, the bank had to generate enough [00:34:00] pretax earnings to use the deferred tax associated with the tax credits as the bank's investments in complicated federal and state tax credit entities continue to grow. The bank became increasingly reliant on these tax credits to boost earnings performance. That's my emphasis, FYI. As explained in its 2014 annual report, the bank's investment in tax credits was a key part of the strategy to provide shareholders with exceptional returns. [00:34:30] Examiners reported that by 2014, recognized tax benefits from tax credit investments accounted for 47% of net income. Now that's a lot of governmental bureaucratic language. So I will try to boil this down to this. A big chunk of the bank's profits were coming from riskier projects, leaving it exposed to potential disruption. Okay, now that's all very fun and scary, [00:35:00] but there were new, troubling details brought to light as well. Chief among those details was noted in the scrutiny of Ryan's actions as CEO. The report states that he continued to make loan extensions and other risky credit and investment decisions during his tenure, even when those activities were subject to examiner criticisms and involved in questionable lending decisions.

Caleb Newquist : For example, the CEO obtained a $2 million personal loan [00:35:30] from one of the bank's borrowers who had recently received a $9 million unsecured loan from the bank. Okay, so in case you did not follow that, the CEO of the bank got a $2 million personal loan from one of the bank's borrowers, a borrower who had just scored a $9 million unsecured loan from the bank. Now, I freely admit that [00:36:00] I am not a banker, but I believe the technical term for this kind of an arrangement is a financial circlejerk. I don't know, but I think that's right. Here, here's some more about those questionable lending practices. Quote from 2008 through 2016, examiners criticized the bank's lending practices to financially distressed borrowers, such as numerous renewals with little or no repayment of principal new [00:36:30] loans or renewals with additional advances and questionable collateral protection. So that's not good. But it goes on. The bank extended additional funds to borrowers with apparent cash flow shortfalls through working capital lines of credit for two borrowers. These lines of credit evolved into short term interest only working capital loans made in 2008 and 2009, and then became long term fixed borrowings with little or no requirement for repayment of principal within [00:37:00] the contractual terms. Okay, so I'm not sure. But if there's no requirement for repayment of principal, is that even alone anymore? Like, what would you call that? Is that, like, finders keepers, bankers weepers? I kind of like that.

Caleb Newquist : Maybe it's deferred thievery, I don't know. That is very strange to me. Maybe again. Maybe. Standard practice. I don't know some if you're if you're if you're in the banking world and you're going to be like, [00:37:30] no, it's pretty standard, then, you know, let me know. Anyway, it continues on. I know there's a lot here. Just bear with me. Management extended new loans that were used to make payments on existing loans and to cover current taxes and insurance. First, NBC also extended loans and allowed proceeds to be used to pay off other delinquent bank loans, again without any requirement for principal payments from the borrowers. But this is my favorite. The CEO also [00:38:00] approved credit line extensions and overdrafts to adversely classified borrowers. Needless to say, perhaps. Needless to say, this is not how banks are supposed to operate. The CEO does not typically review loans and doesn't just give money, just doesn't give more money to borrowers willy nilly, because that's kind of what it sounds like was happening. The review noted that, quote, larger institutions typically establish separate [00:38:30] loan review departments staffed by independent credit analysts and loan review personnel that report their findings directly to the board or a board committee. So. In the Inspector General's Material Loss review, which I've linked to in the show notes, there is a table that shows just how out of control this got. Okay.

Caleb Newquist : It lists three borrowers, each with a column showing their loan balances of several million dollars 5.7 million for borrower [00:39:00] A, 5.8 million for borrower B, and 7 million for borrower C in the next column, it shows the increase in the loan balance, including extensions of new loans. A nearly $17 million increase for borrower, a $13 million for borrower B, and $103 million for borrower C. In each of these cases, the new loan balance increased exponentially. In borrower C's case, it increased 1,479%, which again [00:39:30] keep me honest here, but it seems like a lot in a footnote to the table, which again is in the show notes, if you care to look at it for yourself. But it goes into detail about one of those borrowers. And I'm just going to read a little bit of this to you because I don't know. It's good. One of these credits related to oil and gas lending, this was an area for which first, NBC did not develop guidance before engaging in this type of lending. Given [00:40:00] the size of the loan, the board should have established a policy to ensure that the risk limits were defined and the bank's risk exposure could be monitored by the board. Examiners noted that the loan was not properly underwritten. Originally in 2011, and the advances were used to finance operating expenses. According to the 2015 examination, the purpose of the credit was to finance oil and gas production at various wells scattered around southern Louisiana.

Caleb Newquist : First, NBC did not follow any of the common [00:40:30] risk management practices for lending in this industry to reduce the impact of pricing and operation risks associated with energy production by extending additional advances for this loan. First, NBC exacerbated its risk exposure. Now, my reading of that is something like this. One day, first, NBC bank, who seems to have no experience with oil and gas lending, decided that they would get into oil and gas lending. They didn't follow any of the best practices of [00:41:00] risk management around oil and gas lending, which maybe goes without saying, can be a very volatile business. That's my reading. Finally, the bank's investment in what's known as trade receivables. Now, many of you probably know what trade receivables are. They're also known as account receivables. But if you have no idea what those things are real quick, it's when people buy stuff from you on credit. You know, the customer buys the thing and then promises to [00:41:30] pay the seller later. Okay. First, NBC acquired a bunch of these receivables from a third party who was selling them on behalf of other businesses. Right. The idea is that the seller gets the money now because they probably need money now, and because NBC is going to buy them at a discount, they get money now rather than waiting for the customers to pay the whole amount. Okay. When the customers do eventually pay, then first NBC will get that money.

Caleb Newquist : All right. Okay. This [00:42:00] can be risky. And there's a couple reasons why. Okay. There's liquidity risk. Right. In other words, the bank is using money that it would otherwise have on hand to buy something that it may not get money for in the future. They don't know. It's not a guarantee that they're going to get money at some later date. So they're they're getting rid of the liquidity, the cash they have in hand to do this kind of risky. It's also a credit risk, because even if the bank did some due diligence on the receivables [00:42:30] and they said, yeah, it looks good, there's still a chance that they might not get paid. Okay. They're extending credit when, you know, they don't really have to. But they're extending this credit. They're giving up cash to extend credit. That's a credit risk. Okay. First, NBC's board gave Ashton Ryan the authority to acquire. I can't believe this. $250 million in trade receivables without any oversight or approval. By 2015, trade receivables consisted of [00:43:00] 50% of the bank's total capital. By 2016, bank examiners had found that these receivables had been significantly impaired. In other words, first, NBC wasn't going to receive nearly as much money as it expected. So when you take all this together, you've got impaired tax credit investments, you've got impaired trade receivables, investments, you have high cost of deposits, a CEO with unlimited authority to give money to whoever he wants, however he wants to, [00:43:30] and then even take some for himself.

Caleb Newquist : That's not good. It's not good. So at first blush, it might just seem like some gross mismanagement did first NBC bank in, but as lawsuits began to be filed in the summer of 2017, new information was still being learned, including examples of the troubled [00:44:00] businesses that Ashton Ryan continued to loan money to even after it was clear that they weren't able to repay their loans. And while no one loan was the cause of first NBC's collapse, there was enough evidence of shoddy behavior that a federal grand jury started looking into the bank's failure in September 2017. At that time, it was looking at deals the bank had done with its general counsel, Gregory Saint Angelo, who had $20 million in loans with [00:44:30] the bank over the following weeks and months and years. Frankly, additional information trickled out. And so here's a. Brief rundown of what happened. Maybe not so brief. March 2018 A lawsuit revealed that Ashton Ryan had allegedly stiffed a Slidell construction firm for nearly $5.5 million that he had owed them. This was for one of the real estate projects that he had going on outside the bank. So that was [00:45:00] another thing that came out, was that he had all these real estate projects, and in this case, he stiffed a contractor instead of paying them. He set up a loan and credit line for them at first NBC, and he kept it active for seven years.

Caleb Newquist : Each time this company's loan from the bank became due, he referenced his own debt in the bank paperwork to justify the loans credit worthiness, and then he would just extend it. It was at this time that one of Ryan's business partners, a man [00:45:30] by the name of Warren Treme, was implicated in the case. The handling or mishandling, as it were, of this arrangement resulted in lots of questions about Ryan and if he had run afoul of banking rules. A couple months later, May 2018, the owner of that Slidell, Louisiana construction company. Jeffrey Dunlap was charged with conspiracy to defraud first NBC Bank. The DOJ press release said that, quote, Bank President A [00:46:00] acted as the loan officer who reviewed and approved the loans. Dunlap pleaded guilty to that conspiracy charge in October 2018. In July 2019, Gregory Santangelo, remember general counsel? Yep. He pleaded guilty to conspiracy to defraud the bank. Saint Angelo's businesses were some of those that Ashton Ryan had loaned money to in order to pay off overdue existing loans held by first NBC loans, I might add, that were secured with materially false [00:46:30] and fraudulent documents and personal financial statements. So that's not good. Later that same month, July 2019, Kenneth Charity, a business owner with $18 million in loans held by first NBC, pleaded guilty to conspiracy to defraud the bank.

Caleb Newquist : His loan officer was, of course, Ashton Ryan and similar to Saint Angelo Charity, was extended new loans to pay off existing loans and overdrafts to conceal the fact that he wasn't making any payments. In May 2020, the [00:47:00] FDIC sued Ernst and Young for negligence in performing its audit of the bank. And finally, in July 2020, just over three years after he resigned, Ashton Ryan was indicted on 35 charges of bank fraud, eight charges of filing false bank records and one count of conspiracy to commit bank fraud. After the indictments came down, one by one, it became clear that Ryan's employees [00:47:30] and customers had turned on him. Gregory Saint Angelo William Burnell, Robert Calloway that was another loan officer involved. They had all admitted to conspiring with Ryan to defraud the bank and testified against him. Borrowers. Frank Adolf, Jeffrey. Dunlap, Gary. Gibbs, Kenneth Charity, Warren. Treem, Arvind. Mike. Vera. They all testified against Ryan as well. But the old banker and auditor. He didn't go down easy. He went through the [00:48:00] whole trial in early 2023, testifying in his own defense, where he admitted to making mistakes but denied any wrongdoing and tried to explain that circumstances and panic is what brought down the bank, not a conspiracy that he had orchestrated. His defense was sympathetic enough. His claim was that he did everything he did to help the bank succeed, because that meant New Orleans would succeed. The prosecution, meanwhile, [00:48:30] was presenting documents that were misunderstood and misrepresented.

Caleb Newquist : It wasn't enough. On Friday, February 10th, 2023, a jury found Ashton Ryan Jr guilty on all 46 counts he faced. The following September, the 75 year old Ryan was sentenced to 14 years in prison. Okay. Did we learn anything? Sure. [00:49:00] Sure we did. Ashton Ryan Jr began his career as a CPA, as an auditor, as an auditor of banks. He knew how this business worked on both sides. He'd undoubtedly been part of countless audits, external and internal governmental. It's not hard to imagine how someone with that kind of experience would become a dominant individual who basically did what he wanted. He was an expert, right? Okay. And people thought he was great. He was already a legend, [00:49:30] you know. And so no number of controls, controls or no controls. And I'm sure because it was a public company, you know, first NBC had to have controls. We're talking about the post Sox era post Sarbanes-Oxley. Sorry, I didn't mean to use the, you know, familiar language lingo there. They had controls, but you also had this dominating management figure who was doing just whatever they want. The [00:50:00] board just let him do whatever he wanted. He, you know, they they they had an oversight role and they failed to do it. Okay. Speaking of that board and of the regulators, too, um, they aren't blameless in this. Like I said, the board had a job to do.

Caleb Newquist : They didn't do it. The FDIC inspector general's Material Loss review spends plenty of time criticizing the board for exercising no oversight at all. And it faults the FDIC examiners for not making a bigger deal out of all the risks that they saw early on. Because [00:50:30] you go back and read that. And I mean, they're talking about stuff that was coming up in 2008, 2009. And, you know, they they just didn't push that hard on him. The the fast growth, the the dominant executive. The overall risk profile, all that stuff. Um, the signs were there and the FDIC just didn't push that hard. And also something that they talked about was that, uh, he had a relatively easy job raising money. And so when he showed [00:51:00] that he could raise money relatively easily, that kind of put him on better footing with the idea. It was almost like it was almost kind of like a diversion. It's like, oh, you're worried about that stuff over here? Let me tell you about these investors I got over here with millions of dollars just waiting to give me more money. Okay. In a way, it's not a perfect comparison, but it kind of reminds me of the other recent bank case we did. I don't know how many bank stories we've done. Probably [00:51:30] not that many. But episode 64 called We're Not a Bank in Kansas Anymore. In that case, we had another bank executive who was beloved in his community.

Caleb Newquist : Who took down his own bank. You know, and people are gobsmacked when they learn that their guy, their banking guy, is capable of making some pretty epic mistakes. I mean, you know, it's enough to make you want to stuff your money under your mattress. [00:52:00] Finally, it would be wrong of me not to mention the importance of local journalism in yet another one of our stories. The Times-Picayune New Orleans Advocate covered this story relentlessly. Richard Thompson at The Advocate and Anthony McCauley at the Times-Picayune. Those two guys, their names came up over and over and over again in reporting of this story. Every development, every detail, every character involved. Support [00:52:30] your local journalism. Do it. They stay on top of this stuff. They hold people accountable. It's it's important stuff. So, yeah. There you have it. Okay, that's it for this episode. And remember, laughing all the way to the bank only works if you don't break the bank. If you have questions, comments, or suggestions for stories, drop me a line at omnifrog at com or hit me up on LinkedIn. Oh my fraud is [00:53:00] created, written, produced and hosted by me. Caleb Newquist Zach Frank is my co-producer, audio engineer, music supervisor. Laura Hobbs designed our logo. Rate review and subscribe to the show wherever you listen to podcasts. If you listen on earmark, you get the CPE there. Some is free. If you want unlimited, you got to pay. That's the deal. All right. Okay. Join us next time for more swindles and scams from stories that won't make you say, oh, my fraud.