In New Jersey, a Bank Is Dead, but Not Buried

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The old First BankAmericano headquarters on North Broad Street in Elizabeth is vacant, but for an American flag on a pole that someone forgot to remove. If you look closely, you can see where decals with the bank’s logo have been scraped off the windows.

Former CEO Holly Bakke recalls last spring, when one borrower after another -- mostly commercial real estate developers -- failed to repay their loans.

“It was sort of like when people say that drip, and then the next drip, and then the next drip,” Bakke says.

Holly Bakke can explain everything she did to try to stabilize the bank in those last few months, and how traumatic it was when the regulators came in last July to shut the bank down. But because she joined the bank late in the game, in 2007, Bakke can’t explain how First BankAmericano ended up with such a lopsided portfolio of bad loans -- or why the board allowed it to happen.

WNYC examined the publicly available records and found something interesting: First BankAmericano made a lot of loans not only to developers, but also to its own board of directors. Almost one loan dollar in ten was to a director. Which prompts the question: were board members serving the bank’s interests, or their own?

In 2002, First BankAmericano lent $575,000 to Raymond Lesniak, a state Senator and a member of the bank’s board. A small Cape Cod-style home was listed as the collateral. At the time, no homes in the area were selling for near the amount of the loan. Two years later, Lesniak sold the home for $375,000, a price that’s more typical.

It looks like a loan for greater than the value of the home -- something most banks stay away from. But Raymond Lesniak says there’s a good explanation.

"Anybody who has any modicum of knowledge of lending practices probably at the level of the eighth or ninth grade in school understands that mortgages are given as collateral for many things,” Lesniak says.

He recalls using the money to buy stock in First BankAmericano. Banking attorneys say this kind of arrangement is not unusual.

But another loan has gotten the attention of regulators. The Federal Deposit Insurance Corporation says First BankAmericano wrote off $92,000 borrowed by a former director. That director didn’t repay the money he owed, and later lost his seat on the board. In a letter to the bank’s lawyer, the FDIC says First BankAmericano didn’t scrutinize loans to directors and allowed conflicts of interest.

Raymond Lesniak disagrees. And he rejects the FDIC’s choice of the words “insider loan.”

"They're not an insider loan, they're a director loan allowed by federal regulations and encouraged by good biz practices,” he says. "So any person who calls them insider dealing is just a very devious person who is trying to mislead the public."

Lesniak says directors borrowed from the bank not for their own benefit, but so that First BankAmericano could earn the interest. Banking attorneys say it’s fine for directors to borrow from their own institution, as long they don’t get preferential treatment.

But the FDIC’s letter says unsound lending to directors was only one of many problems. The letter identifies 29 bad practices bank officers may have permitted, and says the bank piled on "negligently underwritten loans" between 2003 and 2007. It’s a harsh portrait of a carelessly run bank. And, says former FDIC attorney Jeff Gerrish, it’s a warning.

"Since the bank failures started in '08," Gerrish says, "there've been a bunch of these nastygrams go out to the directors."

Not only the directors of First BankAmericano, but to the boards of a lot of failed banks. Gerrish says the so-called “nastygram” shows that FDIC is interested in recovering some of the tens of billions of dollars it’s spent closing banks down over the past couple of years -- including the $15 million it cost to dissolve First BankAmericano.

“First they've got to determine that the directors and officers are culpable. Second is they've got to determine whether somebody’s going to pay them,” Gerrish says.

Raymond Lesniak, who claims an annual income of more than $2 million, is not prepared to settle with anyone.

“We operated this bank with all due diligence in a reasonable business manner and were besieged by a very troubled economy that took down giants,” Lesniak says.

The FDIC would not comment for this story. Its investigation of First BankAmericano is ongoing. Since the recession began, no bank boards have yet been sued by the regulator. But the statute of limitations is some years away.

Journalist Daniel Denvir contributed reporting to this story.