Thursday, May 16, 2002

Erpenbeck fall batters small banks

Participants in loan group face trouble being repaid

By James McNair,
The Cincinnati Enquirer

        The small Kentucky and Indiana banks that joined a $30 million loan to the Erpenbeck Co. through Peoples Bank of Northern Kentucky will likely encounter a long and expensive legal process to recover their money, banking experts say.

        And depending on Peoples' conduct in the handling of Erpenbeck's accounts, they say, Peoples could face additional liability from those participating lenders.

        The crisis prompted the board of directors of Farmers Bank & Capital Trust Co. of Frankfort to discuss its estimated $15 million stake Tuesday, in conjunction with its annual shareholders meeting. Inquiries about the banks' involvement are striking raw nerves.

        “I will make no comment about that situation. Goodbye,” Farmers Bank CEO Tony Busseni said before hanging up Wednesday.

        Almost two dozen banks have been identified as creditors of the collapsed Erpenbeck building empire. Loss claims by lenders, subcontractors and house buyers now exceed $75 million, and with the FBI investigating the possibility of bank fraud, the banks brought into the deal by Peoples are nervous.

        “We're just keeping them advised, and they're keeping us advised,” Peoples lawyer Ivan Diamond of Covington said. “Everybody's evaluating their own position. Everybody doesn't have the same collateral.”

        Because of federal lending limits to borrowers, Peoples could lend only about $6 million to Erpenbeck for projects such as the Steeplechase subdivision in Boone County. That led the bank to assemble a group of banks outside the region to put up $24 million more. For the most part, the banks did not know the size of the overall loan package.

        The group includes banks in Frankfort, Lexington, Georgetown, Corbin, Hyden and Middlesboro, Ky.; and New Albany, Ind. Sources familiar with the banks' involvement say the lenders are concerned about their financial exposure and are sizing up their options.

        “Right now, all these banks that have these loans, I assure you, have been put on non-accrual,” said one longtime Kentucky banker close to one of the banks involved. “In other words, they're earning zip.”

        The banker, who asked not to be named, said the banks will be mired in cross-state legal proceedings that will not only consume time, but cost them additional money.

        “It will easily take from one to two years before they can get legal title to their property to dispose of it, and the legal expenses can be monumental,” he said. “Even if it (Erpenbeck) goes into bankruptcy, you've still got a protracted set of rules to go through to get your money back.”

        Only one of the banks contacted by the Enquirer returned a phone call.

        James Rickard, president of Community Bank Shares of Indiana, would not say how much his Community Bank of Southern Indiana loaned to Erpenbeck, but said it was well below its lending limit to an individual borrower. He said his credit department is still evaluating the loan, which has been classified, in bankers' terms, as nonperforming.

        “Obviously, anytime you enter a situation like that, you're concerned,” Mr. Rickard said. “It's an unfortunate situation. I guess it's something that no one expected.”

        Tim Barnes, CEO of another bank in the $30 million loan consortium, Bank of Corbin, didn't return calls. Nor did Mike Wasson, president of Community Trust Bank in Lexington. An e-mail to Burlin Coleman, chairman of Community Trust's parent company, Community Trust Bancorp in Pikeville, drew no response.

        Bank of Corbin and Community Bank of Southern Indiana have further loan exposure through John Finnan, who resigned two weeks ago as president of Peoples Bank of Northern Kentucky.

        Community Bank loaned $300,000 to Mr. Finnan in January through a note secured by Mr. Finnan's house in Summit Lakes in Crestview Hills and other collateral. In January 2001, Bank of Corbin loaned $744,300 to Jams Properties, a Finnan venture that bought model homes from Erpenbeck Co.

        Joe Peek, a banking professor at the University of Kentucky, said the downstream banks probably wish they hadn't made the loans. Among their biggest questions now, he said, are if the original loan amounts exceeded the value of the collateralized property, or if the value of the collateral has since declined.

        “You know some of your loans are going to go bad,” Mr. Peek said. “If you don't make loans, you're not doing your job. You just try to make an educated guess.”

        Participation loans are a common money-making venture for banks too small to make large loans. They are also attractive to banks in small, rural markets.

        “It's probably caused by the lack of loan demand in their own local markets,” said Charles Beach Jr., chairman of Peoples Exchange Bank in Beattyville, Ky., and a veteran of more than 50 years in banking. “They have to go outside their area to get participation loans.

        “Then again, it's best to make loans to people you know and trust — and can monitor carefully,” he said.


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