How NBRS failed

Re­port: Bank’s pres­i­dent, loan strat­egy doomed it

Cecil Whig - - FRONT PAGE - jowens@ce­cil­ By JA­COB OWENS & JANE BELLMYER

RIS­ING SUN — A re­cently pub­lished blis­ter­ing federal eval­u­a­tion of the col­lapse of the for­mer NBRS Fi­nan­cial bank lays the ma­jor­ity of the blame on the lead­er­ship of for­mer bank pres­i­dent Jack Goldstein and a risky strat­egy of bet­ting heav­ily on com­mer­cial devel­op­ment con­nected to the U.S. De­part­ment of De­fense’s Base Realign­ment and Clo­sure (BRAC) process.

Af­ter years of fall­ing un­der ex­am­i­na­tions and com­pli­ance or­ders by the Federal Re­serve Bank of Rich­mond (FRB), NBRS Fi­nan­cial was fi­nally seized in Oc­to­ber 2014 by Mary­land reg­u­la­tors and the Federal De­posit In­sur­ance Cor­po­ra­tion, and its as­sets were as­sumed by the El­li­cott City-based Howard Bank.

While the bank’s fail­ure cost the De­posit In­sur­ance Fund only $24.3 mil­lion dol­lars — a to­tal be­low the thresh­old of a “ma­te­rial loss” as de­fined by the Dodd-Frank Wall Street Re­form and Con­sumer Pro­tec­tion Act — a post-col­lapse in­vesti- gation by the Of­fice of the In­spec­tor Gen­eral (OIG) found more trou­bling rea­sons for the col­lapse.

“As a re­sult of our ini­tial re­view, we de­ter­mined that NBRS Fi­nan­cial’s fail­ure pre­sented un­usual cir­cum­stances that war­ranted an in-depth re­view for sev­eral rea­sons, in­clud­ing ques­tion­able busi­ness trans­ac­tions and prac­tices in­volv­ing se­nior man­age­ment, the bank be­ing in trou­bled con­di­tion dur­ing the five years prior to fail­ure, and its re­ceipt of Trou­bled Asset Re­lief Pro­gram (TARP) funds,” the OIG re­ported.

For a year, the OIG in­ter­viewed per­ti­nent play­ers, ex­am­ined doc­u­men­ta­tion at sev­eral lev­els, read cor­re­spon­dence and re­viewed mar­ket data. What in­ves­ti­ga­tors found paints an un­set­tling pic­ture of the bank’s up­per man­age­ment lev­els be­fore the 134-year-old in­sti­tu­tion ul­ti­mately folded.

‘Dom­i­nant in­flu­ence’ While OIG omits names in its eval­u­a­tion re­port, it is abun­dantly clear that the per­son it con­sid­ers was largely re­spon­si­ble for NBRS’ fail­ure was for­mer pres­i­dent Jack Goldstein.

It rou­tinely names the prime player as “the in­di­vid­ual who served as the pres­i­dent, the chief ex­ec­u­tive

of­fi­cer, and the chair­man of the board of di­rec­tors.” Goldstein was the only per­son to hold those po­si­tions si­mul­ta­ne­ously dur­ing the 2006 to 2014 time pe­riod that the OIG in­ves­ti­gated.

The re­port im­pli­cates Goldstein as ex­ert­ing a “dom­i­nant in­flu­ence on the bank’s oper­a­tions” that “lim­ited the in­sti­tu­tion’s abil­ity to over­come its de­te­ri­o­rat­ing fi­nan­cial con­di­tion.”

Calls to Goldstein seek­ing com­ment on the find­ings and al­le­ga­tions levied against him by the OIG were not re­turned prior to press time.

In one 2009 ex­am­i­na­tion, the FRB found that Goldstein was the only per­son able to pro­vide an­swers to ques­tions re­gard­ing nu­mer­ous func­tions, and even the bank’s chief fi­nan­cial of­fi­cer de­clined to an­swer reg­u­la­tors’ ques­tions, de­fer­ring to Goldstein. Fre­quent turnover of the CFO po­si­tion — two of them re­signed be­tween 2004 and 2009 — ex­ac­er­bated the prob­lem, in­ves­ti­ga­tors re­ported.

“In our opin­ion, the Pres­i­dent’s ap­par­ent di­rect in­volve­ment with gen­eral ledger en­tries cou­pled with his di­rect in­volve­ment in man­ag­ing loans il­lus­trates mul­ti­ple vi­o­la­tions of seg­re­ga­tion of du­ties prin­ci­ples,” the OIG re­ported.

A state ex­am­i­na­tion in 2011 also found that the bank moved its au­dits in-house, to an in­ex­pe­ri­enced em­ployee, upon the in­sis­tence of Goldstein, ac­cord­ing to the re­port.

It was this com­bi­na­tion of in­ex­pe­ri­enced up­per-level staff and Goldstein’s in­volve­ment in nearly all busi­ness that lead to Goldstein al­legedly en­gag­ing in im­proper busi­ness prac­tices for his own ben­e­fit, ac­cord­ing to the re­port.

“As early as 2009, ex­am­in­ers found that the Pres­i­dent’s to­tal out­stand­ing debt of $1.2 mil­lion to NBRS vi­o­lated a pro­vi­sion in (federal reg­u­la­tions) lim­it­ing loans to bank in­sid­ers,” the OIG re­ported. “In a Septem­ber 2010 ex­am­i­na­tion re­port, FRB Rich­mond and State ex­am­in­ers also iden­ti­fied ques­tion­able, en­ter­tain­ment-re­lated credit card trans­ac­tions on the Pres­i­dent’s cor­po­rate credit card and re­quested that NBRS Fi­nan­cial’s board re­view the ex­penses. De­spite ex­am­in­ers’ con­cerns, the board of di­rec­tors con­cluded that these ex­penses were not im­proper and re­im­bursed the Pres­i­dent for them.”

Ul­ti­mately it was Goldstein’s bor­row­ing that led to his un­do­ing, ac­cord­ing to the re­port.

In Fe­bru­ary 2012, the bank’s board of trus­tees asked Goldstein and a board mem­ber to re­sign af­ter it was dis­cov­ered that they bor­rowed $3 mil­lion through rel­a­tives with­out dis­clos­ing their ap­par­ent in­ter­est in the loan pro­ceeds, in­ves­ti­ga­tors found.

“Both the Pres­i­dent and the board mem­ber al­legedly mis­rep­re­sented the sources of re­pay­ment and the pur­pose of the loans, which may have been for per­sonal gain. Ac­cord­ingly, NBRS Fi­nan­cial’s man­age­ment filed the ap­pro­pri­ate no­ti­fi­ca­tion forms re­lated to these ac­tiv­i­ties,” the OIG re­ported.

On Feb. 13, 2012, Goldstein an­nounced his res­ig­na­tion, telling the Whig that it was “to pur­sue other op­por­tu­ni­ties.” On Feb. 22, 2012, Teresa Grei­der, who had then served as chief op­er­at­ing of­fi­cer and chief fi­nan­cial of­fi­cer for five years, re­placed Goldstein as bank pres­i­dent, af­ter 10 years of his lead­er­ship.

‘In­ef­fec­tive over­sight’ While the OIG re­port lays much of the blame for the bank’s col­lapse at Goldstein’s feet, it also notes that an in­ef­fec­tive board of di­rec­tors al­lowed the fail­ure to hap­pen.

The board em­barked on a strat­egy to ex­ploit the po­ten­tial im­pact of BRAC on the western county fol­low­ing a pre­lim­i­nary 2007 re­port from the Mary­land De­part­ment of Busi­ness and Eco­nomic Devel­op­ment — a strat­egy that ul­ti­mately doomed the bank when such an im­pact failed to ma­te­ri­al­ize.

That 2007 re­port es­ti­mated that Mary­land would re­ceive more than 45,000 federal and pri­vate-sec­tor jobs through BRAC over time and more than 15,000 of the 45,000 jobs would be lo­cated in Ce­cil and Har­ford coun­ties.

While risky, the strat­egy had some ini­tial merit. From 2005 to 2008, the bank ex­pe­ri­enced a 53 per­cent growth in com­mer­cial real es­tate lend­ing, in­clud­ing a sig­nif­i­cant con­cen­tra­tion in con­struc­tion, land and land devel­op­ment. Such lend­ing comes with height­ened risk be­cause a de­vel­oper’s ca­pac­ity to re­pay loans is con­tin­gent on whether long-term fi­nanc­ing can be ob­tained or a buyer can be found for the com­pleted project. From 2006 to 2012, how­ever, NBRS’ com­mer­cial real es­tate con­cen­tra­tions rep­re­sented over 400 per­cent of to­tal risk-based cap­i­tal, ex­ceed­ing federal guide­lines and peer av­er­ages, the re­port found.

“NBRS Fi­nan­cial’s board of di­rec­tors ap­proved a strate­gic di­rec­tion fo­cused on com­mer­cial lend­ing that con­trib­uted to the bank’s de­te­ri­o­rat­ing con­di­tion,” the OIG re­ported. “The suc­cess of the in­sti­tu­tion’s strate­gic fo­cus on com­mer­cial real es­tate hinged on the an­tic­i­pated strong lo­cal real es­tate mar­ket con­di­tions re­sult­ing from BRAC. When the an­tic­i­pated ben­e­fits from BRAC did not ma­te­ri­al­ize, the board of di­rec­tors was slow to re­act.”

Along with its risky gam­ble, the board per­son­ally signed off on the ac­cu­mu­la­tion of huge loans to sin­gle bor­row­ers, some in ex­cess of $1.5 mil­lion, which height­ened the bank’s con­cen­tra­tion risk and re­sulted in vi­o­la­tions of Mary­land’s le­gal lend­ing lim­its, ac­cord­ing to the re­port. Federal and state reg­u­la­tors found that NBRS had vi­o­lated ap­pli­ca­ble lim­its for sin­gle bor­row­ers six times from 2008 to 2012. Fol­low­ing a Septem­ber 2010 ex­am­i­na­tion, state in­spec­tors im­posed two $10,000 civil money penal­ties for loans that ex­ceeded the lim­its. Mean­while, ex­am­in­ers noted that the “NBRS Fi­nan­cial board’s con­tin­ued dis­re­gard for com­pli­ance with the ap­pli­ca­ble lend­ing lim­its was ‘egre­gious’ and in­dica­tive of ‘im­pru­dent bank prac­tices.’”

Even more star­tling is the rev­e­la­tion that the board of di­rec­tors ap­proved a $20,000 an­nual bonus to Goldstein in 2010, in di­rect vi­o­la­tion of federal reg­u­la­tions that pro­hib­ited banks that re­ceived less than $25 mil­lion in TARP funds from do­ing so. Ris­ing Sun Ban­corp, NBRS’ Vir­ginia-based hold­ing com­pany, re­ceived $6 mil­lion through TARP and trans­ferred those funds to NBRS Fi­nan­cial.

Af­ter FRB ex­am­in­ers noted this vi­o­la­tion, the board dis­con­tin­ued is­su­ing any fur­ther bonuses. But a 2012 ex­am­i­na­tion found that the board of di­rec­tors ap­proved an un­se­cured loan to Goldstein, which the bank even­tu­ally charged off, ac­cord­ing to the re­port. Fur­ther­more, ex­am­in­ers down­graded loans ex­tended to re­lated in­ter­ests of the pres­i­dent and a board mem­ber be­cause the loans were “al­legedly made un­der fraud­u­lent terms and re­pay­ment re­mains ques­tion­able.”

Fol­low­ing Goldstein’s exit and Grei­der’s ap­point­ment, FRB ex­am­in­ers were still not happy with the di­rec­tion of the bank, as Grei­der con­tin­ued to serve mul­ti­ple roles as pres­i­dent, CFO and COO.

“In the May 2013 ex­am­i­na­tion re­port, ex­am­in­ers noted this con­cen­tra­tion of au­thor­ity and stated that this was ‘ not ac­cept­able from a seg­re­ga­tion of du­ties or con­trol stand­point,’” the OIG re­ported.

In March 2014, federal reg­u­la­tors ap­proved the ap­point­ment of a new pres­i­dent for NBRS — an in­di­vid­ual who had served as a man­age­ment con­sul­tant for the bank since 2013 — but the bank’s “de­te­ri­o­rat­ing fi­nan­cial con­di­tion proved too dif­fi­cult to over­come,” ac­cord­ing to the re­port. In fact, its ad­versely clas­si­fied as­sets had grown from $3.1 mil­lion in Septem­ber 2006 to nearly $35 mil­lion in June 2014.

“Over­all, NBRS Fi­nan­cial’s board did not pro­vide ef­fec­tive over­sight of the bank’s strate­gic di­rec­tion or en­sure that the bank had the man­age­ment team or the risk man­age­ment prac­tices and con­trols nec­es­sary to mit­i­gate the de­te­ri­o­ra­tion in asset qual­ity,” the OIG re­ported.

Plenty of chances Also at the top of in­ves­ti­ga­tors’ minds was the ques­tion of whether the Federal Re­serve Bank and state reg­u­la­tors had sup­plied am­ple su­per­vi­sion of NBRS prior to its fail­ure. Pre­vi­ous analy­ses of failed banks had found a need for stronger su­per­vi­sion, in­ves­ti­ga­tors noted, but at NBRS it found the op­po­site.

“Our re­view of FRB Rich­mond’s su­per­vi­sion of NBRS Fi­nan­cial from 2006 to 2014 re­vealed that FRB Rich­mond fre­quently took de­ci­sive ac­tions at its ear­li­est op­por­tu­nity to do so,” the OIG re­ported.

In­ves­ti­ga­tors note that the FRB made its first down­grade of NBRS’ CAMELS rat­ing, or a clas­si­fied com­pos­ite score that in­di­cates a bank’s over­all health, in De­cem­ber 2009. That ac­tion was ac­tu­ally a dou­ble down­grade from a CAMELS score of 2 to 4, which was ad­dressed in a Jan­uary 2010 writ­ten agree­ment be­tween the FRB and NBRS that sought to in­stall bet­ter credit risk man­age­ment prac­tices and lay out a plan to in­crease cap­i­tal.

While the bank’s board of di­rec­tors was tasked with im­prov­ing its fi­nan­cial po­si­tion in 2010, it formed no plan to ad­dress the FRB’s con­cerns. So, in a Septem­ber 2010 ex­am­i­na­tion, reg­u­la­tors once again down­graded the bank’s health score to 5.

On May 8, 2012, the FRB again took ac­tion by rec­om­mend­ing that NBRS’ board ini­ti­ate a pro­hi­bi­tion or­der against Goldstein and the ac­cused board mem­ber, and is­sue a tem­po­rary cease­and-de­sist or­der to pre­vent them from cer­tain ac­tions re­lated to the bank’s up­com­ing share­holder meet­ing.

“Due to an open federal law en­force­ment in­ves­ti­ga­tion and the res­ig­na­tion of (Goldstein) and rel­e­vant board mem­ber in Fe­bru­ary 2012, the Board did not pro­ceed with the ac­tions re­quested by FRB Rich­mond,” the re­port found.

In all, the FRB and state reg­u­la­tors con­ducted seven full-scope ex­am­i­na­tions and six tar­get ex­am­i­na­tions be­tween 2006 and 2014, and is­sued a mem­o­ran­dum of un­der­stand­ing, a writ­ten agree­ment and a prompt cor­rec­tive ac­tion di­rec­tive to NBRS. De­spite its over­sight, the man­age­ment of the bank was un­able to cor­rect course and re­cap­i­tal­ize the bank be­fore its even­tual col­lapse in Oc­to­ber 2014.

What’s next The OIG re­port rec­om­mends that the FRB es­tab­lish new train­ing guide­lines that will help in­ves­ti­ga­tors iden­tify when se­nior ex­ec­u­tives, like Goldstein, are ex­ert­ing ex­ces­sive in­flu­ence on bank oper­a­tions, open­ing the po­ten­tial for fraud.

“In our opin­ion, (Goldstein’s) dom­i­nance over many as­pects of the bank’s daily oper­a­tions cre­ated the op­por­tu­nity for the al­leged in­sider abuse,” OIG in­ves­ti­ga­tors wrote.

While the re­port fre­quently al­leges il­le­gal ac­tiv­ity on be­half of Goldstein and pos­si­bly NBRS’ for­mer board of di­rec­tors, it does not say that any­one con­nected to the bank has been or will be charged with a crime. When asked by the Whig about that po­ten­tial, an OIG me­dia li­ai­son said the of­fice would not com­ment on the re­port nor any po­ten­tial fall­out. Any po­ten­tial crim­i­nal pros­e­cu­tions would be un­der­taken by ei­ther the U.S. De­part­ment of Jus­tice or the Mary­land At­tor­ney Gen­eral’s Of­fice.

It it note­wor­thy, how­ever, that the OIG chose to in­clude in its re­port on NBRS syn­opses of three other re­cently failed banks in which “dom­i­nant man­age­ment of­fi­cials” were iden­ti­fied. In each of those cases — one each in Vir­ginia, Cal­i­for­nia and Ge­or­gia — at least one se­nior ex­ec­u­tive was charged with fi­nan­cial crimes and sen­tenced to prison, rang­ing from six to 23 years.

“Given the sim­i­lar­i­ties be­tween these prior ma­te­rial loss and in-depth re­views and the cir­cum­stances of NBRS Fi­nan­cial’s fail­ure, the Board’s Di­vi­sion of Banking Su­per­vi­sion and Reg­u­la­tion has the op­por­tu­nity to high­light po­ten­tial in­di­ca­tors of in­ter­nal abuse or height­ened fraud risk in sit­u­a­tions in­volv­ing dom­i­nant of­fi­cials,” the re­port con­cludes. “This guid­ance or train­ing may help to mit­i­gate fraud risk by alert­ing ex­am­in­ers to po­ten­tial red flags that could help them fo­cus on ad­dress­ing the weak­nesses and con­di­tions that cre­ate the op­por­tu­nity for in­sider abuse or fraud.”

The Di­vi­sion of Banking Su­per­vi­sion and Reg­u­la­tion has al­ready in­formed the OIG that it plans to in­sti­tute the rec­om­mended train­ing.


NBRS Fi­nan­cial’s head­quar­ters, seen here in down­town Ris­ing Sun, was taken over by the FDIC fol­low­ing its col­lapse in Oc­to­ber 2014. A new re­port de­tails the is­sues that led to the in­sti­tu­tion’s demise.



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