By Jeff McKinney
The Cincinnati Enquirer
When it became obvious that Peoples Bank of Northern Kentucky would not be able to survive on its own last summer, at least four regional banks went after the Crestview Hills banking company.
It was a bidding war that ended with an ironic twist: Robert Zapp, the president and chief executive of the Bank of Kentucky who helped John Finnan launch Peoples Bank in 1992, led the effort by his bank to take over the core operations of his crosstown rival.
All eight of Peoples' offices today officially become Bank of Kentucky branches after the deal became final Friday and signs were changed during the weekend.
Bank of Kentucky bought most of the operations of Peoples - a once-thriving community bank hurt severely because of its ties to Northern Kentucky home builder A. William "Bill" Erpenbeck.
But it wasn't easy. Bank of Kentucky, which would not disclose its initial bid, had to raise its price to $15 million when it became apparent that it had strong competition from the other banks.
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In an interview last week, Mr. Zapp laid out how his bank ultimately won the bidding.
In early June - about six weeks after the Erpenbeck fiasco broke and almost two months before Peoples Bank was forced to sell most of itself - Peoples directors narrowed their choice of a buyer to Lexington-based Central Bank & Trust Co. and Florence-based Bank of Kentucky, the two highest bidders. Other bidders included Cambridge, Ohio-based Camco Financial Corp., parent of Advantage Bank, with five offices in Northern Kentucky and three offices in Cincinnati; and Louisville-based Commonwealth Bancshares Inc., the parent of First Security Trust FSB in Florence.
Mr. Zapp said his company figured that $14 million would be the best offer that Central Bank of Kentucky could muster, after analyzing its books. So Bank of Kentucky made its second bid of $15 million.
"We didn't want to put all of our cards on the table at first, so we came back with a second offer that would be substantially higher and that would make it easier for them (Peoples board) to accept," he said.
That bid, which Mr. Zapp thinks saved Peoples from being taken over by federal regulators, ultimately brought the Bank of Kentucky about $180 million in assets, $162 million in deposits and eight Peoples branches sprinkled throughout Northern Kentucky.
Officials at Camco had no comment. Attempts to reach officials at Commonwealth Bancshares were unsuccessful.
First approach to Finnan
The purchase came after Mr. Zapp first approached Mr. Finnan, a close friend and Peoples' former president and chief executive, in late April. Mr. Zapp offered to buy $10 million to $12 million in loans - and up to $20 million in loans - from Peoples. He wanted to help Peoples, pointing out to Mr. Finnan that there could be a run on the bank's deposits with the Erpenbeck scandal developing daily.
Mr. Zapp didn't hear from Mr. Finnan. A few days later, April 30, Mr. Finnan and Mark Menne, a former Peoples Bank executive vice president, were forced by Peoples' board to resign because of business ties to Mr. Erpenbeck.
Mr. Zapp soon after got a call from Merwin Grayson, an ex-Huntington Bank executive hired by the Peoples board in early May to help rescue the troubled bank and keep it operating and independently owned. Mr. Grayson, apparently after talking to Mr. Finnan, decided to take Mr. Zapp up on his offer to buy $12 million in Peoples' loans at face value, helping make up for the amount of deposits that were quickly being withdrawn by customers nervous about the Erpenbeck scandal.
"They took the offer because the bank needed to stockpile some cash fast," Mr. Zapp recalled. "Plus, they were getting pressure from regulators to stockpile some cash."
Frank Gresock, a spokesman for the Federal Deposit Insurance Corp., the federal agency that insures deposits at the nation's banks and thrifts, said Friday that the FDIC doesn't comment on individual cases.
But John Yeager, Peoples' board chairman, said, "We knew that the situation was getting pretty bad and that we had to do something."
Mr. Yeager estimated that Peoples lost about $30 million in deposits during the months after the Erpenbeck fiasco. That's a substantial amount for any community bank, such as Peoples, because those banks primarily make money by using deposits to make loans to individuals and businesses. But he also said the runoff could have been worse.
"It shows that we (Peoples) had a pretty loyal customer base," he said. "Considering what was going on and some of the withdrawals we were seeing, it's amazing that the bank was not cash-strapped for more."
A few weeks later, in mid-May, it was revealed that Peoples could be liable for about $16.8 million in checks deposited into Erpenbeck Co. accounts that were supposed to pay off construction loans. Mr. Zapp figured that Peoples would no longer be able to survive on its own, that it would be forced to seek a partner even though Peoples' board wanted to keep the bank independent.
Mr. Zapp also noted that the $16.8 million didn't include another $25 million in so-called participation loans by other banks tied to Erpenbeck Co. that Peoples also could be exposed to.
"It appeared to me that they could have handled the Erpenbeck loans, but with the fraudulent checks, and another possible run on the deposits at that point, it became very obvious they were going to be forced to do something."
Asset sale proposed
Mr. Zapp arranged an informal lunch in late May or early June at a Northern Kentucky restaurant with Mr. Grayson and Mark Arnzen, Peoples' attorney, to talk about what Peoples was going to do. In that meeting, Mr. Zapp said, the comment was made, "Bob, nobody can buy us," largely because Peoples was getting hit with the threat of lawsuits from every angle.
After another meeting at Mr. Arnzen's office, Mr. Zapp proposed that Peoples consider an asset sale rather than attempting to sell the entire company. "I presented the asset sale as an alternative to what I thought would be inevitable ... that regulators would take them over anyway because of their liquidity problems," he said.
Calls to Mr. Arnzen were not returned.
A couple of weeks later, after the Peoples board met a couple of times to consider its options, Mr. Zapp said the Peoples board decided on an asset sale. He said the Peoples board then did an outstanding job of putting together a bid package, a hefty 200-plus-page document loaded with information about the then severely damaged Peoples Bank.
That data included all of the bank's loans; a yield analysis on loans; a listing of all deposits to business customers; employee salaries; fixed assets; and $20 million to $21 million in so-called "brokered deposits," something Peoples apparently sought from other banks at some point to make up for customer withdrawals.
After taking its time to get bids from suitors, Peoples entered into a nonbinding letter of agreement with Bank of Kentucky to buy its assets July 23. After the deal was announced, the Bank of Kentucky sent 12 to 13 people to conduct due diligence on Peoples' books. They worked from 7:30 a.m. to 6 p.m. the following Saturday, and half of them and Mr. Zapp went back that Sunday to wrap things up. They didn't look for anything tied to Erpenbeck or Erpenbeck-related parties, part of their agreement.
"What we found is what we thought we'd find: Most of their loans were business or construction loans secured by real estate such as office buildings," he said. "You take the suspected Erpenbeck fraud out of this and loans tied to him, you have a very strong community bank with quality assets."
Those assets - combined with the ability to pick up about 10,000 individual and business customers at eight branches in the Northern Kentucky communities of Hebron, Walton, Crestview Hills, Edgewood, Crescent Springs, Fort Wright, Independence and Highland Heights - intensified the bidding in the end.
Mr. Yeager, Peoples' board chairman, said the Central Bank of Kentucky "wanted everything" that Peoples offered in the asset sale, and in fact, made the most aggressive bid of all banks initially.
If successful, the bid would have allowed the Lexington-based bank to enter Northern Kentucky, an attractive banking market given the area's residential and business growth
Luther Deaton Jr., chairman, president and chief executive of Central Bancshares Inc., the $1.1 billion-asset parent of Central Bank & Trust Co., said his company submitted a bid because it liked what Peoples Bank offered, particularly the location of its branches.
"It would have been a good fit for us," Mr. Deaton said. "We made what we thought was the best bid for us and our company." He declined to say what the bid was.
In the end, the Bank of Kentucky's offer was the highest. "It was very, very close in the end, but the Bank of Kentucky came back and showed how much they wanted it," Mr. Yeager said.
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