SCRANTON – Blinded by the desire to help their friends attain wealth, board members of First National Community Bancorp granted millions of dollars in questionable loans to fellow bank directors and other insiders who later defaulted, said two attorneys who filed a lawsuit on behalf of shareholders March 28.
The unsound lending practices, which included loans to former Luzerne County Judge Michael Conahan, helped fuel significant losses at the bank and cost shareholders more than $50 million, said attorneys Joseph Solfanelli and Todd O'Malley of the O'Malley and Langan law firm.
The lawsuit seeks to force the bank to turn over all records related to loans made to board members and persons or businesses related to them, known as "insider" loans by federal regulators.
The suit, filed on behalf of shareholder Lori Gray of Pottstown, seeks to recover losses the attorneys contend were the result of "egregious" conduct by board members, whom they allege breached their fiduciary duty to protect the interests of shareholders by making unsound loans that led the bank to lose $44.3 million in 2009.
The bank's stock fell from $18.95 in December 2007 to just $3.85 per share as of Monday.
Some of those losses are attributed to a large volume of insider loans made to directors and/or their family members, Solfanelli said.
"The most plausible explanation is, in their desire to help friends, their vision became blurred and they approved loans they otherwise would not have approved," Solfanelli said. The bad loans include $4.5 million in debt guaranteed by Conahan, who served on the bank board until he was indicted on corruption charges in 2009, and real estate developer Michael G. Cestone, who also served on FNCB's board until 2009.
That money was used by W-Cat, a corporation owned by Conahan, former Judge Mark Ciavarella, attorney Robert Powell and others, to fund the failed Sanctuary townhouse project in Wright Township. Cestone's construction company was the builder for the project.
Steve Tokach, president and CEO of FNCB, did not return a phone message March 29 seeking comment on the lawsuit.
In a letter to Solfanelli, attorneys for the bank said a committee has been formed to investigate questions raised by the attorneys. That committee has not yet completed its report.
The suit, filed in Lackawanna County Court, is based partly on the annual report FNCB, which is publicly traded, filed with the Securities and Exchange Commission in Dec. 2011. The report showed the bank had made $105.7 million worth of loans to insiders as of the end of 2009, a figure that equaled 128 percent of its net assets.
More troubling, Solfanelli said, is that $8.9 million worth of the loans FNCB made to insiders are in default and are uncollectible. Another $7.5 million in insider loans have been deemed to be at high risk for default.
Solfanelli said the amount of insider loans FNCB made is way out of line with other banks. He pointed to First Fidelity Bancorp of Scranton as an example. That bank has just $2.5 million in loans to insiders, which equates to about 5 percent of its net worth, he said.
A banking consultant contacted by The Times Leader concurred with Solfanelli's assessment.
Stuart Greenberg, a banking consultant based in Baltimore, Md., said insider loans typically should not exceed 20 to 30 percent of a bank's net worth.
The lawsuit targets directors who were on the board during the time frames in which the insider loans were made and the losses were sustained.
In a letter to the bank, Solfanelli identified those directors as Conahan, Michael G. Cestone, Michael J. Cestone Jr., Joseph Coccia, Dominick DeNaples, Louis DeNaples, Joseph Gentile, and J. David Lombardi.
Solfanelli and O'Malley said they don't know yet what role each director played in causing the problems at the bank. That information will come out as they obtain documentation, they said.
The attorneys say their investigation into FNCB's banking practices was spurred by the bank's refusal to provide documents. The lawsuit asks a judge to order the bank to turn over the information.