Wednesday, May 08, 2002

Regulators look closely at Peoples

Financial condition of bank being monitored

By Jeff McKinney,
The Cincinnati Enquirer

        Federal and state banking regulators aren't saying much as they examine the books at Peoples Bank of Northern Kentucky.

        But banking experts say regulators are likely trying to determine the extent of the bank's exposure to the Erpenbeck Co., how it is handling the crisis and if they have any potential liability.

        The Kentucky Department of Financial Institutions, which regulates state-chartered banks such as Peoples, acknowledged that officials have been visiting the six-branch bank with assets of about $220 million in Crestview Hills in recent days to monitor it. While the Federal Deposit Insurance Corp. won't comment about any investigations at any local banks, employees at Peoples have confirmed that FDIC examiners are there. The FDIC typically examines banks every 12 to 18 months and rarely checks on them beyond those scheduled examination periods.

        The Enquirer talked to former federal banking regulators and industry experts about why regulators would be examining the books at Peoples Bank — as well as some 18 other local banks with apparent ties to Erpenbeck Co.

        Question: Why would examiners for such agencies as the Federal Deposit Insurance Corp. be interested in Peoples Bank, other local banks and their ties to a troubled home builder?

        Answer: Mainly, they want to know their level of exposure, likelihood of any loan losses and if their capital still meets regulatory requirements, said Alan Boughton, an account manager at SNL Financial in Charlottesville, Va. Mr. Boughton worked for nine years as a bank examiner in the Office of Thrift Supervision.

        FDIC examiners want to make sure the exposure to the financial institution does not exceed or drain the bank's capital reserves. The reason: If the bank's capital falls below regulatory minimums, the fund the FDIC manages could be become liable. It might not be at that point, but that's one of the bottom lines the FDIC is interested in.

        Bank failures are relatively rare. Through most of the 1990s, there have been fewer than 10 bank failures a year, the Associated Press reported. There were 15 in 2000 and 2001. In 1992, at the height of the banking crisis, 122 banks failed — mostly in Texas and New England as their oil and real estate booms, respectively, collapsed.

        Q: Are there more reasons why regulators such as the FDIC would join an investigation?

        A: In general, when the FDIC and others get involved with bank fraud cases, they do so for two reasons: to offer guidance to the FBI on banking-related matters or to determine the financial condition of the bank, said Ron Riggins, managing director at RP Financial, an independent financial-services consulting firm in Arlington, Va.

        The FDIC also could be concerned about whether there will be any unusual loan losses, particularly if it's wondering whether a bank exceeded lending limits to a single borrower, said Joe Peek, a professor of international banking and financial economics at the University of Kentucky.

        The FDIC also could be trying to determine whether the quality of the builder's collateral to get the loans — even secured loans — is high enough in value to cover any loan losses. Moreover, they could be worried about the reliability of numbers reported on banks' balance sheets, given the possibility of bank fraud, Mr. Peek said.

        Q: Should consumers be concerned?

        A: First of all, they should not panic, Mr. Boughton says.

        If they have deposits of $100,000 or less, they should not be too concerned because they're insured even if problems are discovered at a bank. For individuals and businesses with combined accounts of $100,000 or more, now would be the time to review those accounts and ask whoever they deal with at the institutions how their accounts would be affected should that need ever arise. (The FDIC only insures individuals and commercial deposits up to $100,000. One option that the FDIC suggests as a general rule: If you have, say, $1 million at one institution, consider depositing $100,000 each at 10 different banks, not branches of the same bank.)

        Q: What type of bank is Peoples?

        A: It has a very strong focus toward business lending, said Bert Ely, president Ely & Co. Inc., an Alexandria, Va., bank consulting firm. As of Dec. 31, according to FDIC reports, the bank had total loans of about $178 million. The biggest portion of its loans, about $78.6 million, were commercial loans secured by such things as office buildings, stores and factories.


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