Wednesday, July 24, 2002

Bank of Kentucky agrees to buy
assets of Peoples


$16.8 million set aside to settle lawsuit

By Patrick Crowley, pcrowley@enquirer.com
and James McNair, jmcnair@enquirer.com
The Cincinnati Enquirer

        COVINGTON — Conceding its vulnerability in the spreading Erpenbeck Co. scandal, Peoples Bank of Northern Kentucky said Tuesday it has signed an asset-sale deal that will put the company out of business and give its branches, employees and customers to the Bank of Kentucky.

        Peoples also said it will set aside $16.8 million to settle a class-action lawsuit representing 209 buyers of Erpenbeck houses.

[photo] Tuesday's news conference included (from left) Peoples officials Mark Arnzen, Merwin Grayson and John Yeager.
(Patrick Reddy photo)
| ZOOM |
        Pending approval by Peoples' 220 shareholders and banking regulators, Florence-based Bank of Kentucky will acquire most of Peoples' assets — including loans, deposits and branches — for an undisclosed price. The transaction will leave Peoples, which over a decade has grown into a thriving community bank, with up to $45 million in cash to square away debts and pending lawsuits.

        The sale could close within 90 days, Peoples president and chief executive office Merwin Grayson said. The deal would create the largest community bank in Northern Kentucky.

        Federal authorities are investigating employees at Erpenbeck Co., an Edgewood homebuilder, for taking closing checks made out to other lenders and depositing them into the company's accounts at Peoples Bank. The case is also focusing on the roles of two Peoples executives dismissed in April, John Finnan and Marc Menne. Mr. Finnan was Peoples president.

        “Since the Peoples Bank board of directors first learned of the issues regarding Erpenbeck ... we have made it our priority to find the best solution for the affected homeowners, our customers, employees and shareholders,” Peoples board chairman John Yeager said. “We believe the sale of the of our assets to the Bank of Kentucky is in the best interest of all parties involved.”

WHAT'S NEXT
   Now that Peoples Bank of Northern Kentucky is selling its assets to Bank of Kentucky, here's how it affects people caught up in the Erpenbeck Co.-Peoples Bank scandal.
   Employees: Peoples' 73 workers will become employees of Bank of Kentucky.
   Account holders: Their accounts will be transferred to Bank of Kentucky.
   Shareholders: They won't know the liquidation value of their stock until cash on hand is applied to remaining liabilities.
   Homeowners: The 209 Erpenbeck Co. customers whose home loan checks were diverted by Erpenbeck employees at Peoples Bank will be wholly covered by a $16.8 million reserve set up by Peoples to cover all outstanding first-mortgage claims on their homes. They will drop their class-action lawsuit against Peoples when the money is placed in escrow.
   Other banks and title insurers: Those companies involved in the 209 home-sale closings remain defendants in Peoples' civil lawsuit in Boone County Circuit Court. Peoples expects these entities to share in the absorption of the $16.8 million payout.
   Subcontractors: They could be represented by a class-action lawsuit pending in U.S. District Court in Covington and also are unaffected by the deal.
   Homeowner associations that have sued Erpenbeck: Unaffected.
   FDIC: Regulators must approve sale (expected in 90 days).
        Cincinnati lawyer Stan Chesley filed a class-action suit on behalf of 209 area homeowners who had bought Erpenbeck homes but were facing the prospect of foreclosure because their mortgages had not been paid off. Erpenbeck was supposed to apply home-sale proceeds to its construction mortgages, but Peoples allowed Erpenbeck employees to deposit the money into the homebuilder's accounts. The practice began in late 1999.

        The sale of Peoples and the establishment of the escrow account will prevent any homes from being lost, said Mr. Chesley, who has agreed to drop the suit once the $16.8 million is placed into escrow and mortgages are released.

        “What I wanted more than anything else was resolution for my clients, the 209 people who are the true innocent victims,” Mr. Chesley said, who worked with Peoples officers, directors and lawyer over the last several days to reach the agreement.

        “It was my goal to get all of their liens released so that they would be made whole, unencumbered by any of these liens,” he said.

        But while the sale may bring some closure to homeowners, Peoples Bank — basically forced into selling because of the potential liability it faced over its dealings with Erpenbeck — still has legal battles to fight and settle.

        Peoples will try to recover some of the $16.8 million from the 14 other banks and 23 title companies involved in closings with the Erpenbeck Co. Talks are continuing, but if an agreement can't be reached, Boone County Circuit Judge Jay Bamberger will likely have to decide the financial exposure of the various institutions and parties involved.

        Peoples, which faces other lawsuits stemming from the scandal, will continue to exist as a corporation until all the claims are settled.

        “We have always said we would pay our fair share to protect the homeowners,” Mr. Grayson said. “But we're going to pursue and recover what we hope will be significant amounts of money from people who we've also said had culpability. What we're doing today is assuring the courts, assuring the homeowners that at the end of the day, their liens will be released.”

STORY ARCHIVE
Click here for all Enquirer reports on Erpenbeck Co.
INVESTIGATION
If you have any additional information on the business dealings of the Erpenbeck Co. or Peoples Bank of Northern Kentucky - or on the involvement of any parties not yet identified in our coverage - please email Enquirer business reporter James McNair at jmcnair@enquirer.com or Kentucky Enquirer reporter Patrick Crowley at pcrowley@enquirer.com.
        Once all the litigation is concluded, any remaining funds will be paid to Peoples' shareholders, Mr. Yeager said.

        Mr. Grayson said four other banks — including some large regional institutions — pursued Peoples. He would not name the other suitors, but said Bank of Kentucky offered “the highest and best bid.”

        Peoples had to complete an asset sale because a straight sale of the stock would have required the buyer to assume the bank's liabilities, Mr. Grayson said. And given what the bank faces in potential legal problems — as well as about $5 million in loans the Erpenbeck Co. still owes the bank — a stock sale was likely unattractive to other institutions.

        “All of the litigation stays with us, all the bad loans stay with us,” Mr. Grayson said. “But we will be in a more liquid fashion to be able to make settlements ... and we can take the gloves off. We will not have to make every decision based on the impact of what our customer base is thinking. So we will become much more aggressive in trying to recover money for our shareholders.”

        Fort Mitchell lawyer Mark Arnzen, a Peoples director who also represents the bank in legal matters, said that although federal regulators have been poring over the bank's books in recent weeks, the government put no pressure on the directors to sell.

        “This is a decision we made in conjunction with the Bank of Kentucky, and we felt it was in the best interest of our shareholders and our employees,” Mr. Arnzen said.

        Under terms of the agreement, Peoples' 73 employees will go to work for the Bank of Kentucky, which will assume all deposits and selected loans. Peoples' eight branches will become branches of the Bank of Kentucky, which has $535 million in assets and 17 branches. By comparison, Peoples has assets of about $200 million.

        Peoples had taken steps to right itself as the Erpenbeck scandal unfolded. In late April, Mr. Finnan and Mr. Menne, a senior vice president, were forced out of their jobs after directors discovered they operated a side business buying model homes from the Erpenbeck Co. and then leasing the homes back to the builders.

        Once the sale is consummated and the litigation settled, Mr. Grayson — a former Huntington Bank president brought in by the board after Mr. Finnan and Mr. Menne were dismissed — said he would return to his retirement home in South Carolina.

        Peoples' decision was its only choice



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