SCRANTON — A banking firm whose leaders once included businessman Louis A. DeNaples and former Luzerne County Judge Michael T. Conahan has agreed to a settlement with shareholders who sued over millions of dollars in questionable loans to insiders, including $4.5 million in debt to a firm co-owned by the ex-judge.
Under the settlement announced Wednesday, board members named in the litigation agree to pay $5 million to First National Community Bancorp, and the organization agrees to implement new risk-management practices and oversight procedures.
In exchange, shareholders Lori Gray and Frank Lombardo agree to drop a 2012 lawsuit in which they accuse FNCB of negligence and breach of fiduciary duty after the institution hemorrhaged money and stock value.
FNCB stock, which traded as high as $23 per share in early 2007, had dropped to $2.15 by early 2012. It closed Wednesday at $4.40 per share.
“It will be a new era, I believe that,” said Scranton attorney Joseph R. Solfanelli, lead counsel for Gray and Lombardo.
First National Community Bancorp is the parent company of First National Community Bank of Dunmore, which maintains branches in Lackawanna, Luzerne, Monroe and Wayne counties.
A statement released by FNCB pointed out the agreement does not mean either side acknowledges claims made by the other — essentially that FNCB does not admit any wrongdoing, but the shareholders aren’t saying their allegations lack merit, either.
As FNCB put it: “By entering into the stipulation of settlement, the settling parties have resolved the derivative claims to their mutual satisfaction. The settling defendants have not admitted the validity of any claims or allegations and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation.”
A derivative lawsuit is one in which shareholders sue corporate officers over claims that leaders’ actions harmed the company.
Solfanelli said in a press release that the “settlement addresses every issue raised by FNCB shareholders in a fair and equitable manner.”
“This bank will do well,” an optimistic Solfanelli added in a telephone interview later Wednesday.
But the suit filed by his clients makes clear their belief that FNCB leadership was doing neither well nor good in the years which culminated in financial woes.
An annual report filed by FNCB with the U.S. Securities and Exchange Commission in 2011 showed the bank had made $105.7 million worth of loans to insiders as of the end of 2009, representing 128 percent of its net assets.
The suit alleged board members made unsound loans that led to $44.3 million in losses for 2009. At the time the suit was filed, Solfanelli told The Times Leader that $8.9 million worth of the loans FNCB made to insiders were in default and uncollectible. Another $7.5 million in insider loans were then deemed to be at high risk for default, he said.
“Nobody robbed a bank. Nobody stuck their hand in a drawer. They wanted to help their friends do well, but they didn’t make good loans,” Solfanelli said Wednesday. “They were loans that prudent bankers wouldn’t make.”
Asked about previous loan practices, FNCB Executive Vice President and Chief Financial Officer James M. Bone Jr. said the organization would have no comment on the settlement beyond what was contained in the statement.
Among the problem loans was $4.5 million in debt guaranteed by Conahan, who served on FNCB’s board prior to his 2009 indictment, and real estate developer Michael G. Cestone, who also served on FNCB’s board until 2009.
The loan was funneled into W-Cat Inc., a corporation owned by Conahan, fellow disgraced former Judge Mark Ciavarella, attorney Robert Powell and others, to fund the failed Sanctuary townhouse project in Wright Township.
Ciavarella, Conahan and Powell were convicted and sentenced to prison for their roles in $2.8 million kickback scheme related to the construction of two juvenile detention centers and the placement of youths in the facilities in Pittston Township and Butler County. Powell completed his 18-month sentence earlier this year. Conahan and Ciavarella, sentenced to much longer terms, remain behind bars.
The W-Cat debacle is the subject of an unrelated 2012 lawsuit in which the The Powell Law Group, owned by attorneys Powell and Jill Moran, alleges that loans taken out by Powell and others were “marred by conflicts of interest and other improper acts by the bank.”
In a complaint regarding that case filed on Wednesday in Luzerne County Court, FNCB argues that Powell and Moran should be added as defendants, since as officers of Powell Law they were responsible for advising the legal firm “on all matters” related to its participation in W-Cat-related projects.
Regarding the shareholder settlement, among its key provisions are:
• The board members named in the litigation agreed to pay a lump sum of $5 million to FNCB.
According to the suit, those members are Louis A. DeNaples, Michael J. Cestone Jr., Joseph Coccia, Dominick L. DeNaples, Joseph J. Gentile, William P. Conaboy, John P. Moses and J. David Lombardi. Conahan, although named in the group, is not expected to contribute to the payment, Solfanelli said.
• Two new, independent directors will be appointed to the board, subject to regulatory approval.
• One of the new directors will serve on the board’s audit committee for a three-year term, during which time the committee will be restructured to become the audit and risk management committee.
• FNCB will adopt a new risk management charter.
• FNCB and First National Community Bank will enhance compliance with a consent order entered into with the Office of the Comptroller of the Currency, improve risk management, and establish and reinforce standards for certain loans contemplated by the bank.
• The bank will appoint one of its officers to oversee risk management.
The settlement is still subject to approval by Lackawanna County Court, after notice to the company’s shareholders and a settlement hearing, according to FNCB’s statement.
The full document and a formal notice of hearing has been filed with the SEC, and will be available on the company’s website at www.fncb.com/investorrelations, according to the statement.
Potter County Senior Judge John B. Leete has been brought in to handle the case, Solfanelli said.
Assuming approval from Leete and barring any objections from shareholders, Solfanelli said it’s likely the settlement could be officially complete in the early months of next year.
Perhaps one of the bigger questions is whether Louis A. DeNaples may someday return to the board, as news reports have speculated in recent months.
DeNaples stepped down as chairman in 2008 after being charged with perjury for allegedly lying to state officials investigating his suitability to hold a gaming license for Mount Airy Casino Resort. That charge was later withdrawn, but federal regulators barred DeNaples’ return to the board.
A lifetime banking ban for DeNaples was vacated earlier this year by a federal court.