Friday, May 17, 2002

Bank pledges to pay its share

Peoples exec says it can absorb loss, stay solvent

By Jeff McKinney,
The Cincinnati Enquirer

        Peoples Bank of Northern Kentucky is ready to cover any financial obligations it has because of ties to the Erpenbeck Co., its president said Thursday.

        The bank plans to stay open and has no desire to sell itself, Merwin Grayson said in an interview Thursday at the bank's Crestview Hills headquarters. He took over as president in early May. “We're committed to making this work out,” he said. “Based on everything we know and our assessment of what we'll be doing, we'll be able to deal with this without raising capital. (But) If that should ever becomes an issue, the board is solidly behind us.”

        The FBI is investigating the Erpenbeck Co., an Edgewood-based home builder, for possible bank fraud. The bank has said the company deposited checks made payable to other banks into its own account. No charges have been filed.

        The new leader of the $209 million-asset bank says it has the backing of its board to cover potential loan losses. The board owns 80 percent of the privately owned bank's stock. It also will make restitution on improperly deposited checks and is aggressively working with state and federal banking regulators to put the Erpenbeck fiasco behind it, he said.

        Peoples Bank of Northern Kentucky also plans full-page advertisements in the Enquirer and Cincinnati Post today to reassure the public that the bank will do its part to help consumers affected by the crisis.

        The bank also acknowledged for the first time that it exceeded by about $2 million its lending limit of $6 million, saying bank examiners found that it made about $8 million in loans to the Erpenbeck Co. or related parties.

        Moreover, Mr. Grayson said his bank has determined that the Erpenbeck Co. used Peoples to redeem $15 million to $16 million in checks made out to other financial institutions for some house purchases.

        “We expect to be a major contributor in the funding to clear those checks, but we don't expect to be the only contributor,” Mr. Grayson said. “We're prepared to meet our fair share, and the courts will have to determine what our fair share is.”

        Whatever the bank's obligations, Mr. Grayson said Peoples is committed to remaining capitalized within regulatory guidelines and prepared to meet financial losses.

        Though Peoples could not exactly say what its exposure is, Mr. Grayson said part of the funding to cover any loan losses or the checks would come from excess capital, part of the privately owned bank's profits this year and a recapture of taxes it paid in previous years.

        Mr. Grayson said Peoples, before the Erpenbeck Co. fiasco, had capital of 10 percent of assets and pretax profits last year of $4.6 million. He said that from what it can determine, Peoples would still have a capital level of 7 percent to 8 percent after covering its obligations, which is above regulatory guidelines of about 5 percent.

        Bert Ely, an independent banking expert, says Mr. Grayson's comments are significant because it means that Peoples might be able to cover losses without having to raise money from the board or outside investors.

        “It appears the bank will be able to absorb losses without being crippled by this or forced to raise extra capital,” said Mr. Ely, president of Ely & Co., an Alexandria, Va.-based consulting firm.

        Mr. Ely estimates that, based on the capital level being reduced to 7 percent to 8 percent, Peoples' potential loss could be $6 million to $10 million. He said that's a rough estimate before taking into account tax effects, loan losses and the bank's contribution toward the checks.

        Mr. Ely also said Peoples could face a fine if the bank exceeded its regulatory lending limit, but that's not likely for several reasons.

        Among them, he said:

        • It has not been determined whether the loans to Erpenbeck Co. were considered loans to a single borrower or multiple loans.

        • Peoples could acknowledge that there was an infraction, and with the change in management, promise not to repeat it.

        • Peoples also could agree to change lending policies.

        “The regulators would not close it even if they're $2 million over the amount, because it's not insolvent,” Mr. Ely said. “The time regulators would close a bank is if it's insolvent.”

        Mr. Grayson said examiners from the Federal Deposit Insurance Corp. are still looking at Peoples' loan portfolio, mainly targeting the Erpenbeck Co. loans.

        “The FDIC and FBI have been our friends, and we're working with them,” Mr. Grayson said. “They have not issued their report yet, and it could be some time before they do.”

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