First National Community Bancorp in Dunmore, Pa., is a small company, and most folks probably missed the bad news it announced last week, but its story is a reminder about how many community banks are still struggling to put the financial crisis behind them.
The $982 million-asset FNCB was fined $175,000by the Securities and Exchange Commission for allegedly hiding losses that occurred more than five years ago.
For a number of quarters FNCB failed to disclose $31.5 million in pre-income-tax losses that should have been recorded in 2009 and the first half of 2010, according to the SEC's cease-and-desist order. FNCB restated its results from that period in late 2011, only after it knew it was under investigation, the SEC said.
Chief Executive Steven Tokach said in a press release that FNCB's settlement with the SEC is "an important and positive step which further moves the company beyond a challenging period in its history."
A number of bank executives hope to be able to say the same. Many investigations of violations that banks made leading up to, or during, the financial meltdown are still ongoing even though it happened nearly seven years ago.
Probes are "still out there," said Kip Weissman, a partner at the Luse Gorman law firm who specializes in corporate and securities law. "Don't forget the secondary effects didn't appear until later."
SEC enforcement actions, for example, have a five-year statute of limitations from the time a violation occurred unless otherwise stated in securities law, and the agency can ask courts for more time based on special circumstances such as attempts to hide violations.
For FNCB, the accounting issue has been one of several lingering problems in recent years.
In its cease-and-desist order against the bank the SEC said that William Lance, then FNCB's principal financial officer and executive vice president, "failed to establish and maintain the necessary policies and procedures" for proper accounting practices. Lance assumed defaults on securities would be far lower than actually happened, and evaluated securities on a broad basis that did not take into account the risk factors of individual credits, the order said.
Lance resigned in February 2010, though the bank is also said to have reported incorrect provisions for losses in quarterly statements made after his departure. On Oct. 27, 2010, the company acknowledged that its accounting for losses on investment securities in the 2009 annual report and first two quarterly statements of 2010 were wrong; it re-filed them in December 2011 after the SEC subpoenaed its records that August, the securities regulator said.
This wasn't the only time FNCB has had legal problems.
In 2012 shareholders brought suit against the bank for allegedly covering up more than $44 million of losses on loans to members of the company's board who later defaulted on them. FNCB settled with shareholders in December 2013 for $5 million, without admitting or denying the allegations.
The Federal Reserve forced the company's then-chairman, Louis DeNaples, to resign in 2012 for allegedly violating the section of the Federal Deposit Insurance Act that prohibits banks from employing people who have been convicted of or indicted for fraud, breach of trust, or money laundering. A Pennsylvania district attorney charged DeNaples with perjury over his testimony in a case relating to the casino he owned, Mount Airy Casino Resort, and alleged connections to organized crime. DeNaples transferred ownership of the casino to his daughter as part of a settlement of the case, according to a report by the Lehigh Valley Express-Times.
The bank's financial health has improved. Profit rose 78.9%, to $3.4 million, in the third quarter.
The bank was required in 2010 by the Office of the Comptroller of the Currency to meet higher capital standards total capital of at least 13% of risk-weighted assets and Tier 1 capital at or above 9% of adjusted total assets ; FNCB met the first of those requirements at the end of 2013, and the second in mid-2014.
Multiple requests for comment for this story from FNCB went unanswered.
Ongoing scandals like FNCB's can have a lingering effect on community banks due to the relationship and trust-building that are particularly important in a smaller market. Assuming board's place a priority on ensuring future compliance, said Anita Newcomb, the founder and president of A.G. Newcomb, a bank consulting firm in Columbia, Md., then reaching out to crisis-management professionals should be next.
Recovering from multiple crises of confidence "takes expert advice from a public relations firm," Newcomb said. "Community banks sometimes try to cut corners" when it comes to community relations, she said.
Jonathan Bernstein, president of Bernstein Crisis Management, advocated reaching out to a broad range of stakeholders, including customers and employees.
"Personal communication is more important for a small bank," Bernstein said. "A small bank can't risk upsetting a lot of people." In a community bank, Bernstein said, "everyone is a PR representative for you whether you want them to be or not. They need to understand the situation and be reassured that this won't affect their jobs."
Banks under scrutiny will have to keep their guard up for the near future, Weissman said.
"I think it's not a dead issue," Weissman said. "There are active investigations and all kinds of agencies" still probing the aftermath of 2008's financial crisis.
Jackie Stewart contributed to this article.