The financial calamity at the Erpenbeck Co. produced its first casualties in the banking industry Tuesday.

        Sources close to the matter told the Enquirer that Peoples Bank of Northern Kentucky president John O. Finnan, head of the Crestview Hills bank since its founding in 1992, and Marc Menne, the bank's executive vice president for commercial loans, resigned Tuesday.

        Merwin Grayson, 60, the retired president of Huntington Bank in Greater Cincinnati, will be announced today as Mr. Finnan's replacement.

Finnan

Grayson

        Mr. Finnan and Mr. Menne did not return phone calls Tuesday.

        Peoples Bank board members huddled late Tuesday afternoon at the Edgewood office of developer John Yeager, a board member. Mr. Yeager came out of the meeting to meet briefly with a reporter, but said the management change would not be discussed until an announcement this morning.

        Sources close to the bank, which has six branches and 54 employees, said the board is turning to Mr. Grayson because of his banking experience and stature in the community. The board's hope is that his involvement will reassure customers who might be rattled by the Erpenbeck situation.

        Mr. Grayson is a well-known and respected figure in Northern Kentucky business and political circles. The former University of Kentucky trustee left Huntington in 2001 after 33 years.

        The Peoples resignations were the latest twist in the relationship among Erpenbeck Co., Peoples and its two senior officers. Erpenbeck, Greater Cincinnati's fourth-biggest home builder, has defaulted on millions of dollars in bank loans and business obligations. The FBI is investigating Erpenbeck for possible bank fraud, but isn't commenting on that probe. No charges have been filed.

        Mr. Finnan and Mr. Menne played a role beyond that of Erpenbeck's bankers. They ran a separate company that bought numerous properties, mostly model homes, from Erpenbeck. The venture doesn't appear to violate banking rules, but Peoples directors frowned on the practice.

        Less than two weeks ago, Mr. Finnan was the champion of the bank he co-founded. In a letter to Peoples' 7,000 account holders, Mr. Finnan said the bank was working with Erpenbeck to “address issues you may have seen in recent media reports.” He said Peoples is “strong and healthy and will continue to be so.”

        Although other banks are suing Erpenbeck for defaults on various projects, Peoples has not. Mr. Finnan would not disclose Erpenbeck's indebtedness to Peoples, but said it fell within its $6 million lending limit to a single borrower.

        Erpenbeck Co., meanwhile, has tumbled from construction sites into a vortex of lawsuits, liens and angry home buyers. Co-founder A. William “Bill” Erpenbeck, 41, stepped down as president in March, and his brother, Jeff, now runs the company. Neither has returned phone calls for comment.

        According to its latest financial report with the Federal Deposit Insurance Corp., Peoples had $209 million in assets as of Dec. 31 and showed no indication of carrying an abnormal amount in troubled loans. Bert Ely, a banking consultant who has observed the situation from his office in Alexandria, Va., said Peoples appeared to be healthy enough to weather the crisis.

        “Peoples may end up with a black eye at most and lose a few customers, but you'd be surprised at how resilient these banks are,” he said.

        Peoples bankrolled some of Erpenbeck's many residential projects across the Tristate, but Mr. Finnan and Mr. Menne maintained a parallel relationship with Erpenbeck outside of the bank.

        Along with their wives, the two men formed a company called JAMS Properties in 1997 to buy model homes and property from Erpenbeck Co. or its subsidiaries. (JAMS is an acronym for the first names of the bankers and their spouses.) According to property records in area courthouses, JAMS has bought at least 18 properties exclusively from Erpenbeck for $4.8 million since 1997.

        In Erpenbeck's Steeplechase subdivision in Union, for example, JAMS bought four lots on Foxhunt Drive and other unidentified property in 1999 for $876,000 and obtained a $1.7 million mortgage loan from First National Bank & Trust of Corbin, Ky. Model homes now occupy the four lots.

        In a recent interview, Mr. Finnan said JAMS leased the homes back to Erpenbeck until a buyer came along.

        “Oftentimes, builders sell their model homes because they don't want that debt on their books,” he said. “We made investments in purchasing several model homes that we leased back to the Erpenbeck Co. And at this point, we're trying to sell those homes.”

        That might prove a difficult proposition. Because Erpenbeck wasn't paying his bills, his developments are saddled with liens and, in some instances, are not being maintained. Projects are further being clouded by lawsuits from other banks.

        JAMS financed its purchases from Erpenbeck largely with out-of-town money. Among the banks making loans to JAMS, for example, was the Eaton National Bank & Trust in Eaton, Ohio.

        State and federal bank regulations don't put a blanket ban on sideline ventures between bank officers and their customers. Mr. Finnan conceded that people might erroneously think that JAMS was an endeavor of Peoples. He said the arrangement did not constitute a legal or ethical breach.

        Nevertheless, Peoples directors were dismayed at not having been informed about the JAMS transactions. Board member William Remke, chief executive of Covington-based Remke Markets, said last week that directors were “disappointed” at being kept in the dark.

        Gilbert Schwartz, a Washington banking lawyer who served on the Federal Reserve Board's legal staff from 1974 to 1985, said any impropriety from bank officers doing business with customers depends on what took place.

        “Bank officers and directors owe a duty of loyalty first and foremost to the bank,” Mr. Schwartz said. “So what it (JAMS) raises is a potential for a conflict of interest between that duty of loyalty and the business relationship that they have with their co-venturer.”

       Enquirer reporter Jeff McKinney contributed to this story.
       

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