Friday, September 13, 2002

Erpenbeck loans turn 'unperforming'

Small banks declare they're no longer earning interest

By James McNair,
The Cincinnati Enquirer

        More than a dozen Kentucky, Ohio and Indiana banks that left small-town confines to help finance Erpenbeck Co. housing developments in Greater Cincinnati are setting aside millions of dollars to cover potential losses, according to federal banking reports released Thursday.

        Peoples Bank of Northern Kentucky introduced the banks, from as far away as Pikeville and Middlesboro, Ky., to Erpenbeck. Because they are too small to have met all of Erpenbeck's loan needs singlehandedly, the distant banks banded together in so-called participation loans totaling about $28.5 million.

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        Erpenbeck's plunge into insolvency this spring left banks, homebuyers, subcontractors and other creditors with at least $107 million in claims and generated a storm of lawsuits. Although actual losses won't be known until all disputes are resolved, banks have begun the process of declaring their Erpenbeck loans as “non-earning,” beefing up loan-loss reserves and pursuing their collateral.

        “We're attempting recovery, of course,” said Aubrey Bailey, president of First State Bank of Pineville, Ky., which holds $3.8 million in mortgages on 14 condo buildings in Erpenbeck's Sherwood Lakes in Boone County. “We've got a whole team of attorneys and people working on it. We're not going to sit still on this and take a loss.”

        In second-quarter financial reports released Thursday by the Federal Deposit Insurance Corp., smaller banks are beginning to disclose the damage of their relationships with Erpenbeck and Peoples. The reports don't mention Erpenbeck loans specifically, but clearly reflect the fallout from the builder's collapse. The failed building company's effect on larger banks, with their billions of dollars in loans, is indiscernible.

        Bert Ely, an Alexandria, Va., banking consultant who has followed the Erpenbeck-Peoples affair, said the reports show how the demise of a major borrower can affect a small bank's finances.

        “What it generally illustrates is that there's pain, but they'll survive,” Mr. Ely said of the banks in the Peoples consortium.

        “At this stage of the process, they're anticipating losses and putting more into their loss reserves, but they're not charging off the losses until they know what the losses will be,” he said. “I would be surprised if their exposure causes any bank to suffer a loss for an entire year, other than Peoples.”

        Peoples accounted for its Erpenbeck losses by restating what had been a $3.1 million profit in 2001. The 10-year-old Crestview Hills bank wrote down its Erpenbeck loans by $5 million and took a $6.25 million charge to cover part of the $16.8 million in home-sale proceeds siphoned into Erpenbeck accounts at Peoples — a practice under investigation by the FBI. Consequently, Peoples now says it lost $4.7 million in 2001.

        The Kentucky and Indiana banks that took part in the participation loans don't appear to have gone as far as to have written off any part of their Erpenbeck loans. Instead, their filings with the FDIC reveal declarations that those loans are no longer earning interest.

        Among the banks hardest hit:

        Farmers Bank & Capital Trust Co. in Frankfort, which had lent Erpenbeck about $16 million. In its second-quarter report, the bank shows $11 million in non-earning loans, up from $1.4 million in the same period last year. The bad loans represented 4.5 percent of its total loans as of June 30, up from 0.5 percent a year ago.

        Bank of Corbin, which holds $4 million in Erpenbeck mortgages and a $744,300 mortgage from Jams Properties, the company — owned by former Peoples bankers John Finnan and Marc Menne — that bought model homes from Erpenbeck.

        In its second-quarter report, Bank of Corbin reported having $1.8 million in nonperforming loans, up from none in June 2001.

        Community Trust Bank, based in Pikeville, which has about $5.5 million in loans outstanding to Erpenbeck. Its non-earning loans increased 42 percent to $29 million in the past year.

        First State Bank of Pineville. The $200 million-asset bank posted $3.6 million in nonperforming loans as of June 30 — seven times the amount on the same day last year.

        Community Bank of Southern Indiana. The New Albany, Ind.-based bank disclosed $3.8 million in nonperforming loans as of June 30, up from $273,000 a year ago.

        Mr. Bailey, president of the Pineville bank, said he expects a protracted process to recoup its money.

        “We anticipate it being a good recovery, but it's such a mess, it's hard to sort it out,” he said.

        The Erpenbeck ripple effect extended to banks that lent money for individual home purchases, including Jams homes.

        A rural Ohio bank, the Eaton National Bank & Trust, reported hefty increases in nonperforming loans during the second quarter.

        So did a Greater Cincinnati bank, Guardian Savings Bank of Colerain Township.

        And West Chester-based Peoples Community Bank, which lent Erpenbeck about $4.5 million in construction loans the within the past 18 months, said Erpenbeck-related loans made up about 75 percent of its $7.45 million in non-earning assets as of June 30.

        “Erpenbeck-related loans are the lion's share for the uptick of nonperforming loans, but any potential losses on those loans have been fully reserved for,” said Tom Noe, Peoples Community Bank's chief financial officer.

        Staff writer Jeff McKinney contributed to this report.



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