NBRS Financial directive

NRBS Financial Bank, which operates this branch in Aberdeen, has been ordered by the Federal Reserve to shore up its capital reserves or consider merging or being taken over by another bank. (TED HENDRICKS | RECORD STAFF, The Aegis / April 16, 2014)

Operations at NBRS Financial Bank have been fairly normal since April 7 when the Federal Reserve Board of Governors issued an Prompt Corrective Action Directive to the community bank serving Harford and Cecil counties, NBRS President Hugh J. Garchinsky said Tuesday.

"We remain an FDIC insured institution and comply with all regulations; our day-to-day operations are largely the same as before," Garchinsky said. "We have had a lot of questions from our customers, but that's understandable."

"We are working to keep the bank running," he said.

NBRS Financial has been ordered by federal regulators to shore up its capital position or face the possibility of being forced to merge or sell itself to another bank.

Garchinsky said the bank can continue to take new deposits, but under the Federal Reserve directive it must offer rates and maturities at prevailing market rates in the area.

A Federal Reserve spokesperson said the agency does not comment on such orders and referred all questions to NBRS.

Garchinsky said the bank has taken in some new deposits since the directive was issued. He also said there have been some withdrawals, "but nothing other than what we would have experienced in the normal course of business."

NBRS has branches in Dublin, Aberdeen and Havre de Grace in Harford County and in Rising Sun and Elkton in Cecil County and a sixth branch in Lancaster County, Pa. The bank's headquarters is in Rising Sun. NBRS has 55 employees, Garchinsky said.

Garchinsky, who became the bank's president in March after previously working with the institution as a consultant, said NBRS has customers in the three counties where it has branches, as well as in Chester County, Pa. and New Castle County, Del.

He estimates NBRS has between 10,000 and 15,000 depositors. The bank reported having $197 million in deposits at the end of 2013.

The Federal Reserve directive says NBRS was "undercapitalized" as of Oct. 28, 2013 and hasn't filed a capital restoration plan that meets the agency's requirements. As a result, the directive continues, the bank must take certain actions to address its "weakened and deteriorating capital position."

The Federal Reserve had given NBRS 60 days to increase equity through the sales of shares or cash contributions to surplus; to "enter into and close a contract to be acquired by a depository institution holding company or combine with another insured depository institution" or "take other necessary measures to make the bank adequately capitalized."

Garchinsky noted NBRS can ask for extensions on the directive and said the requirements do not necessarily mean the bank must merge or be taken over by another bank.

"Sale or merger is one of two possibilities to improve capital position," he explained. "We have 60 days and that can be extended and often is. Sale or merger isn't a hard and fast rule."

Garchinsky said the bank could also improve its capital position by selling stock or by reducing the level of its assets by selling loans, particularly those in the non-performing category.

He said the bank had worked to reduce its percentage of problem loans, which have been the crux of NBRS' problem with federal regulators.

According to its balance sheet for the quarter that ended on Dec. 31, 2013, as published on the website http://www.ibanknet.com NBRS had $139 million in outstanding loans out of total assets of $206 million.

Garchinsky said between $5 million and $6 million of those loans are non-performing, meaning they aren't being repaid. He said that percentage is "a little bit above" the level federal regulators want for a bank the size of NBRS.

He also said the volume and percentage of nonperforming loans had been at a "much higher level" before and the bank has made strides in reducing its loss to capital ratio.

The bank's commercial loan customers include farmers, developers, real estate investors and businesses, Garchinsky said.

NBRS and a related company, Rising Sun Bancorp, had previously entered into an agreement with the Federal Reserve Bank of Richmond and the Maryland Division of Financial Regulation in November 2010 under which the NBRS was required to submit a plan to strengthen board of directors' oversight of the management and operations of the bank.

The 2010 agreement also required NBRS to submit a plan of risk management acceptable to regulators and a plan to reduce the bank's risk from concentration of commercial real estate loans. Sanctions were also placed on the bank's ability to restructure any loans without prior regulatory approval, and NBRS was required to submit a plan to improve its position on any loan in excess of $250,000.

The agreement also required NBRS to submit an acceptable plan for maintaining and approving the bank's capital position and a business plan to improve the bank's earnings and overall position. Payment of dividends to shareholders were also suspended and placed under the direction of regulators.

Both Garchinsky and the Federal Reserve spokesperson said the requirements and sanctions in the 2010 agreement remain in effect.

NBRS's Rising Sun Bancorp subsidiary owes the U.S. Treasury Department's Troubled Asset Relief Program, or TARP, $5,983,000, according to the program's latest report to Congress, dated March 2014. TARP was created in the wake of the 2008 banking and financial crisis to help shore up banks whose finances were being stressed by the ensuing recession.