The Scranton-area bank directed by landfill magnate Louis A. DeNaples has handed out the biggest loan yet — for $50 million — from a taxpayer-backed program to help mid-sized businesses during the coronavirus pandemic.
The recipient: the Mount Airy Casino Resort, owned by trusts for DeNaples’ children and grandchildren. DeNaples had to relinquish his own ownership to resolve charges that he’d concealed his ties to organized crime.
FNCB Bank’s loan to the casino could throw an unflattering light on the federal government’s strategy of deputizing banks to write loans under its $600 billion Main Street Lending Program, which was authorized this spring over fears that lenders might cease supporting even thriving businesses.
Small banks such as Dunmore-based FNCB don’t typically make such large loans and aren’t equipped to evaluate repayment risks and other potential perils that come with issuing the large amounts of debt permitted by the federal program, analysts said.
If borrowers default, it’s mostly the public’s money — not the bank’s — that runs the risk of not being repaid.
This particular case could draw special scrutiny because of the family ties between FNCB and the Mount Airy casino, where revenue from gambling had flattened even before the coronavirus stopped its roulette wheels and slots and now threatens to upend the entire gaming industry.
DeNaples, 79, is chairman of FNCB and its biggest shareholder, with a 9.2% stake in the bank as of April 3, according to regulatory filings. His son Louis A. DeNaples Jr. is also on the board as the bank’s vice chairman with a 1.3% stake, and is the beneficiary of one of the seven trusts that share ownership of the Mount Airy casino.
Another board member is DeNaples’ nephew, Joseph L. DeNaples, while his brother Dominick L. DeNaples is a former chairman who continues to advise the company as director emeritus.
The loan may not even have been possible but for a decision by the Federal Reserve and the Treasury Department to exempt the Main Street program from longstanding rules barring banks from making taxpayer-backed loans to businesses owned by their directors.
But it may still trigger the federal restrictions on insider lending that cover all activity by regulated banks, known as “Regulation O,” said Braden Perry, a lawyer who specializes in banking compliance.
“If you see a $50 million loan of your money going to an insider or a family member of an insider, it certainly raises some concerns,” said Perry, who formerly tried cases for a federal financial regulatory agency.
Some critics of the Trump administration’s response to the coronavirus, meanwhile, cast the loan as another case of rescue money being channeled away from those who need it most.
Less than a tenth of a percent of the cash available through the fund has been lent, while businesses throughout the country could not qualify under the program’s relative narrow guidelines or are too beaten down to consider taking on more debt.
“This money was meant to help Main Street businesses, not casinos owned by families with alleged mafia connections,” said Kyle Herrig, president of left-of-center watchdog group Accountable.US.
The Federal Reserve, which runs the program with cash from the U.S. Treasury Department, said in a statement that it is unable to comment on specific transactions.
“There are rules in place against making loans that favor businesses owned by bank officers or owners of a significant interest in the bank,” it said. “We expect banks making Main Street loans or any other loans to follow these rules.”
FNCB president Jerry A. Champi said that the bank handles all insider transactions “properly,” but declined to discuss specific steps taken to ensure the Mount Airy loan’s compliance.
He also said his bank was fully capable of evaluating any risks associated with the large loan.
“Not all of us have worked for community banks our whole careers, so we have a lot of exposure to the credit-underwriting process,” he said. “Credit is credit.”
Casino officials declined to be interviewed, but said in a statement that “the loan will be used to “improve the strength of our business, which was deeply impacted by the COVID-19 pandemic.”
“These funds will be used to secure the jobs of nearly 1,000 Pennsylvanians employed by Mount Airy,” it said.
A message left for DeNaples at his auto-parts business was not returned.
Mixing bank business with directors’ other ventures already led to trouble for the bank seven years ago, when it paid $5 million to shareholders and their lawyers to settle a lawsuit alleging that it tanked the company’s stock price by lending millions of dollars to insiders who then defaulted on the loans.
One such insider was a bank director, Michael Conahan, the onetime Luzerne County president judge convicted in the “Kids for Cash” scheme during the early 2000s, under which the judges sent children to for-profit jails and received payoffs. Federal prosecutors said Conahan used the FNCB loan to purchase a Florida condominium used to launder the kickbacks.
Shareholders also faulted the bank in their complaint for abruptly refocusing its lending on “land subdivisions and solid waste landfills — among the business of DeNaples and [brother] Dominick.”
DeNaples, whose sprawling Northeastern Pennsylvania commercial empire also includes auto salvage yards, heavy-equipment sales, and towing services, moved to get into the casino business in 2005 by applying for one of the slot licenses that were newly being awarded in the state. He aimed to redevelop the Poconos’ storied Mount Airy Lodge into a gaming resort.
As a generous political donor and philanthropist with strong ties to business and governmental leaders across the state, DeNaples was seen as a likely licensee. Common Cause Pennsylvania, a good-government advocacy group, tallied his contributions to Pennsylvania office seekers at $403,125 from 2002 to 2007.
DeNaples did have on his record a 1978 no-contest plea to charges that he and three others bilked the federal government out of recovery funds following Tropical Storm Agnes. But that did not disqualify him, thanks to a provision that had been written into Pennsylvania’s gaming regulations letting applicants off the hook for criminal convictions that occurred more than 15 years in the past
He was granted his casino license in late 2006 and opened his $412 million resort about a year later.
By early 2008, however, he had been indicted on perjury charges, in part for allegedly lying about his relationships to mobsters including William D’Elia, a former leader of the crime family of Northeastern Pennsylvania kingpin Russell Bufalino (played by Joe Pesci in the 2019 film The Irishman.)
Those charges were eventually dropped in a deal that required DeNaples to pass control of the casino to his adult daughter, Lisa DeNaples. But Louis DeNaples was allowed to continue advising the casino.
Ownership of the casino’s parent company, Mount Airy #1 LLC, was later divided equally among seven trusts in the names of DeNaples’ children and grandchildren, records show.
Still, Louis DeNaples appears to have remained in the casino’s orbit.
Last September, FNCB sold the casino 2.2 acres of land at the corner of state Route 611 and Woodland Road, about a mile southwest of the casino, for $375,000, county records show.
Over the years, DeNaples has also repeatedly petitioned state gaming regulators to allow businesses he owns to provide services such as waste disposal or vehicle repairs to the Mount Airy resort.
Those requests have been rejected under the argument that his deal to hand off the casino barred him from profiting in any way from the resort.
Pennsylvania Gaming Control Board spokesman Doug Harbach declined to address whether granting the loan might have also violated those terms, and what sanctions would apply if it did.
DeNaples also joined a ceremony at the casino last year to mark the completion of a $40 million expansion project there. The businessman, standing between his daughter Lisa and State Sen. Mario Scavello, a Republican whose district includes the casino, cut the ribbon at the event, seen in an online video by the Pocono Record newspaper.
A spokesperson for Scavello did not return a phone message.
While it was completing the renovations, Mount Airy had also been mapping out a now-lapsed plan to build and operate a separate mini-casino about 300 miles to the west in Beaver County under the state’s 2017 gambling-expansion law that allows gaming businesses to apply to open smaller satellite casinos.
Late last year, however, the gaming board declined to award Mount Airy a permit for what was to have been called Mount Airy Pittsburgh, ruling that the operator had “utterly failed to produce any evidence that it can satisfy the financial fitness requirements for this project” because no bank would back the $50 million-plus project.
“As the gaming market in Pennsylvania matures, with revenues for Mount Airy and some other Pennsylvania casinos stabilizing, Mount Airy’s desire to establish a second casino in Western Pennsylvania is untenable in the eyes of financiers,” gaming board chairman David M. Barasch wrote in the agency’s denial notice.
The Main Street Lending Program was devised as part of financial rescue legislation in the spring to help businesses that are too big to qualify for the better known Paycheck Protection Program, but too small to benefit from the Fed’s big purchases of corporate debt.
Unlike the PPP program’s forgivable loans, funds from the Main Street program must be repaid. Loan standards are also more selective, requiring participants to have been in solid financial shape with a manageable existing debt load before the pandemic.
Banks write loans under the program, but are then able to hand 95% of that debt off to the Fed, so they have fewer of their own assets at risk. The idea was to make banks less nervous about lending during what was expected to be a long period of tight credit.
Despite that opportunity to offload risk, few banks have so far signed up to participate in the program.
Nationwide, only $497 million in Main Street loans had been made as of Aug, 19, although details of only the first $92.2 million of that cash — accounting for 13 transactions — have so far been disclosed.
The Mount Airy loan is one of only two in the country that are for more than $5.5 million.
It appears in county property records as a mortgage on the Poconos property, against which an affiliate of Fortress Investment Group, the New York private equity firm owned by Japan’s SoftBank Group, already had a $170 million loan.
The Fortress loan was increased by $20 million on July 13, the same day the casino closed on the $50 million Main Street loan, giving the resort a total infusion of $70 million in new cash.
The Main Street loan is listed as a “second lien,” meaning that Fortress would have first dibs on casino assets should the resort be foreclosed on.
Chris Marinac, who analyzes banks as a research director with financial adviser Janney Montgomery Scott LLC, said it was “extreme” for a bank of FNCB’s size to be making a $50 million loan, even if only $2.5 million of that was staying on its books.
Banks tend to make loans of no more than around 1.5% of their asset value, so only a little of their capital is tied up in any one venture, Marinac said. For FNCB, with $1.4 billion in assets, that works out to $21 million.
Another potential issue for regulators may be the relationship between the bank’s board and the casino’s ownership, especially Louis DeNaples Jr.‘s overlapping ownership interests.
Small Business Administration regulations that have long governed loans made by banks using federal funds include a provision prohibiting banks from lending to other businesses owned by their directors, including ones such as DeNaples Jr. who are not also executives.
The government based its rules for disbursing coronavirus-relief funds on those SBA regulations, but the prohibition on bankers’ lending to their non-executive directors’ businesses was dropped for PPP. Since PPP loans are made under the same terms for all borrowers, there was no chance of favoring insiders, the agency reasoned.
When the Main Street loans started up, officials largely adopted the modified SBA rules for that program as well, including the relaxation of insider-lending rules designed around PPP.
The Mount Airy loan may, however, be covered by more general “Regulation O” banking rules regarding insiders, said Perry, the banking-compliance lawyer.
The rules set limits on how much a bank can lend to insiders including non-executive directors, or to their other businesses. The rules also require banks to document that loans to insiders don’t include preferential terms, or are especially risky.
Having Louis Denaples Jr. as both a board member and beneficiary of one of the seven trusts that own the casino appears to be the sort of connection the rules would cover, Perry said.
“It does not look good from an outsider’s point of view and is a disservice to the taxpayer if the proper underwriting and vetting procedures were not followed,” he said.