Friday, September 20, 2002

Regulator: Peoples likely the worst

Bank fraud tops in Ky.'s history

By Jeff McKinney,
The Cincinnati Enquirer

        Kentucky's top banking regulator says the Erpenbeck-Peoples Bank of Northern Kentucky loan fiasco that ensnared about 20 financial institutions in the Bluegrass State could be the biggest case of bank fraud in the commonwealth's history.

        “This is the first case of this magnitude that I'm aware of,” Ella Robinson, commissioner of the Kentucky Department of Financial Institutions, said this week in her most extensive public comments about the case. “We might have some small bank-fraud cases that happen occasionally, but nothing this unique given the size of (potential) losses and number of people involved.”

        Banks from as far away as Pikeville and Middlesboro loaned the Erpenbeck Co. about $28.5 million through so-called participation loans arranged by Peoples.

        The bank with the most at stake is Frankfort-based Farmers Bank and Capital Trust, a 152-year-old bank that took a $15.3 million piece of the Erpenbeck loan package.

        Other banks, including Bank of Corbin, Community Trust Bank in Pikeville and First State Bank of Pineville, have joined Farmers Bank in declaring their Erpenbeck loans as “non-earning” and they have taken steps to recover their money.

        None of the banks appears to have suffered anything beyond flesh wounds — and embarrassment — from their foray into Northern Kentucky's residential real estate market.

        In reports filed last week with the Federal Deposit Insurance Corp., all said they remained in the highest bracket of capital-to-assets ratio — a chief indicator of a financial institution's health.

        Indeed, Ms. Robinson said she does not anticipate any need for intervention in the wake of the participation loans gone bad. She called it an “isolated situation.”

        Nor does her department plan to change its policies on how it regulates state-chartered banks after the Peoples-Erpenbeck fiasco, which has generated at least $107 million in legal claims by homebuyers, subcontractors, banks and other creditors.

        “Most banks have adequate controls in place to make sure this type of thing does not happen,” Ms. Robinson said. “If we review a bank's policy and procedures and see something out of place, then we step in.”

        Ken Pennington, the department's deputy commissioner, agreed the Peoples-Erpenbeck fiasco could be one of the state's biggest bank fraud cases.

        Ms. Robinson has worked for the department for the past 25 years, serving as commissioner since November 1999. He has been with the agency for 19 years.

        “I have not heard of another one like it since I've been here, and I think that's what the commissioner was referring to,” he said.

        Ms. Robinson's comments come five months after the FBI began investigating Erpenbeck, an Edgewood-based homebuilder, and its former president, A. William “Bill” Erpenbeck, for possible bank fraud.

        Though no charges have been filed, Peoples' image and finances have been tarnished by ties to the homebuilder and has shaken Northern Kentucky's banking landscape.

        The Erpenbeck fiasco also prompted Peoples Bank's board in July to agree to sell most of its assets and deposits to crosstown rival The Bank of Kentucky, a move that will leave Peoples as a corporate shell. Regulators and Peoples shareholders must approve the sale.

        Ms. Robinson said her agency did not influence the Peoples Bank board's decision to sell most of the $198 million-asset bank, but agreed with the sale.

        The state also was pleased with the board's earlier action to remove its former president, John Finnan, and an executive vice president, Marc Menne, in April.

        “If the board did not take those actions, it's likely the state would have moved in and taken similar actions,” Ms. Robinson said.

        She also said her department recently presented the Peoples Bank board with its final report of the examination of Peoples' records and books.

        She would not comment on the regulators' findings or recommendations, calling them confidential.

        Staff writer James McNair contributed to this report.



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