How NBRS failed
Report: Bank’s president, loan strategy doomed it
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.