Friday, May 10, 2002

Small banks shared $30 million in loans

By James McNair,
The Cincinnati Enquirer

        The crumbling of the Erpenbeck building empire is sending shock waves as far away as Middlesboro, Ky., and Frankfort, as small-town bankers who joined a $30 million loan originated by Peoples Bank of Northern Kentucky are trying to assess their exposure.

        A group of 15 bankers — representing banks such as Farmers Capital Group of Frankfort and Bank of Corbin — met Wednesday afternoon in Georgetown to discuss the matter. The emergency gathering was led by Ivan Diamond, the Peoples Bank lawyer who assembled 37 bankers, lawyers and title companies in a similar powwow at his Covington office last week.

        “They just wanted to check in and see what was going on,” Mr. Diamond said Thursday. “Everyone's just looking after their portfolios and checking out their collateral.”

        Because Peoples was prohibited from lending Erpenbeck more than $6 million, it found takers for the remaining $24 million from other small banks in Kentucky. Such so-called “participation loans” are a standard banking practice.

        “All commercial banks do that,” Mr. Diamond said. “It spreads the risk on loans and lets banks whose loan limits wouldn't let them make a whole loan to make a partial loan.”

        The entire list of participating banks was not available, but Mr. Diamond confirmed that it includes Bank of Corbin, Farmers Capital Bank Corp. and undisclosed banks in Middlesboro, Hyden and other Kentucky towns. Farmers Capital is a 152-year-old bank holding company for institutions such as Farmers Bank & Capital Trust of Frankfort and Farmers Bank & Trust in Georgetown.

        Peoples Bank of Northern Kentucky maintains that the Erpenbeck fiasco doesn't jeopardize its financial condition, although the situation was grave enough to prompt the replacement of its founding president, John Finnan, on April 23.

        A bank director, John Yeager, disclosed later that Mr. Erpenbeck used Peoples to redeem $15 million in home-sale proceeds intended for his construction loan lenders. The practice prompted Cincinnati trial lawyer Stan Chesley to file a class-action suit against Peoples on Thursday.

        Peoples filed a lawsuit Wednesday, a foreclosure action against Erpenbeck. But the suit did not say how much money was in arrears, nor did it attach a copy of the original mortgage agreement, as foreclosure suits generally do. The lawsuit also did not mention any of the banks participating in the Peoples-brokered loan.

        The Enquirer left messages Thursday for Peoples President Merwin Grayson, Farmers Capital CEO Tony Busseni and Bank of Corbin CEO Tim Barnes. The calls were not returned.


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