Thursday, September 12, 2002

Peoples computes Erpenbeck losses

By James McNair,
The Cincinnati Enquirer

        Heavy ties to the insolvent Erpenbeck home-building empire have cost Peoples Bank of Northern Kentucky more than $12 million in pretax earnings and dropped the Crestview Hills institution one notch on the federal yardstick for financial strength, the bank said Wednesday.

Click here for all Enquirer reports on Erpenbeck Co.
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 or Kentucky Enquirer reporter Patrick Crowley at
        Peoples said in an interview with the Enquirer that it accounted for most of its Erpenbeck-related losses by restating its year-end 2001 financial report. As a result, what had been a $3.1 million year-end profit turned into a $4.7 million loss.

        Easing the turnabout was an expected $4 million reimbursement of income taxes paid in 2001. But the bank continues to incur legal expenses from the morass of lawsuits involving home buyers, title insurance companies, subcontractors and other banks. The tab so far? $1.2 million.

        Peoples Bank president Merwin Grayson said Peoples' second-quarter earnings report, which is scheduled to be released this morning by the Federal Deposit Insurance Corp., reflects the bank's fall from the agency's highest category of financial strength. As of June 30, the bank's capital base of $16.6 million represents 8.94 percent of its $186.2 million in loans and investments. March 31, the ratio was more than 10 percent.

        “We are adequately capitalized,” Mr. Grayson said, using the FDIC's terminology for Peoples' new ranking. “That means we have sufficient capital available to manage our process. We are not in a forced-liquidation state.”

        Nevertheless, Peoples plans to live up to an asset sale announced in July that would cede its eight branch offices, 73 employees and most of its loans to Bank of Kentucky. The deal, subject to shareholder and regulatory agency approval, is said to be several months from completion.

        Founded in 1992, Peoples became a principal banker for Erpenbeck, a family-owned company in Edgewood that became Greater Cincinnati's third-largest home builder in 2000. The bank financed Erpenbeck subdivisions and business ventures. It also maintained checking accounts for Erpenbeck and parceled out loans to other banks when it maxed out regulatory limits on loans to single borrowers.

        At some point in 1999 or 2000, Erpenbeck's fortunes faded and, according to the FBI, the company started making off with home-sale closing proceeds that should have been paid to the company's construction lenders, including Peoples.

        More than 200 Erpenbeck customers remain saddled with $16.8 million in first mortgages that they thought had been paid off. After Erpenbeck collapsed in April, two of Peoples' top officers, including its co-founder and president, John Finnan, were forced to quit for failing to disclose that they were buying Erpenbeck model homes as a sideline venture.

        Mr. Grayson said Wednesday that the second-quarter and restated 2001 reports were prepared with the help of lawyers and a new outside auditor, Grant Thornton.

        In the reports, Peoples wrote down the value of its Erpenbeck loans by $5 million, leaving about $2 million on the books as non-earning assets. The reversal of the bank's 2001 earnings also includes a $6.25 million set-aside for what Mr. Grayson said represents the bank's fair share of the misdirected closing checks. That amount remains on Peoples' books as an unpaid liability.

        By steering its Erpenbeck losses into the past, Peoples is showing a cleaner slate for the first six months of 2002.

        Just two months ago, Mr. Grayson had predicted a break-even year for Peoples. Now, through June 30, the bank posted net earnings of $519,000. Peoples lost $215,000 in the second quarter, however, almost entirely because of the continuing legal expenses.


Three Fed governors will visit
- Peoples computes Erpenbeck losses
Cinergy hearing tonight on synthetic fuel
U.S. economy 'slow, uneven'
Hershey protests order to halt sale
Business digest
Tristate summary
Morning Memo
What's the Buzz?