ANB Financial Comes Under Tighter Federal Scrutiny

By Kim Souza

Wednesday, February 20, 2008 10:06 AM CST
Editor’s note: Today is the first of four reports on the northwest Arkansas banking industry. Thursday’s edition will review financial performance of small banks in 2007. Friday will do the same for medium-size banks and Saturday will end the series with the review of large banks.

ROGERS — ANB Financial of Rogers is operating under tighter scrutiny by the federal regulators following the bank’s fourth-quarter 2007 net income loss of $58.9 million.


The Arkansas National Bank at 100 S. 28th St. is seen in Rogers on Tuesday. Problem loans in 2007 resulted in more federal oversight of the bank.

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And if the bank is not able to effectively collect on more than $380 million in potential bad loans, federal oversight could take the form of day-to-day management of the bank.

A fourth quarter net income deficit of $75 million caused the bank to fall short of the capital guidelines it agreed to in an August reprimand by the Office of Comptroller of the Currency, the overseer of national banks, such as ANB.

Restoring its capital ratios is a must for ANB because capital reserves are considered a buffer against future losses, said Tim Yeager, Arkansas Bankers Chair and finance professor of the University of Arkansas.

He said the bank’s failure to meet the federal guidelines in December is serious.

ANB CEO Dan Dykema said the bank is working with regulators to regain compliance in its capital ratios. He said the bank’s holding company, ANB Bancshares, is trying to raise needed capital for the bank through a stock offering. Dykema did not release details of the offering filed with the Securities and Exchange Commission in November because the directors are awaiting approval from regulators.

The bank said it began 2008 with $97 million in capital, and experts estimate the bank will need to raise at least $50 million in the near term, given its large number of non-performing loans.

John Dominick, banking professor at the University of Arkansas, said the bank is experiencing a domino effect resulting from the large loan loss provisions — $110 million — it had to make in 2007, due to the bad loans on its books.

Dykema said the loans relate to residential development and about half of the troubled loans are for projects in Northwest Arkansas. The bank also has three loan offices in Wyoming, Utah and Idaho.

Dominick said when federal regulators examined the bank in June and issued the reprimand in August, the bank was forced to deal with its problem loans.

The bank began 2007 with $19 million set aside for loan losses. Throughout the year, the bank increased its loan loss reserves to $88 million. The extra loan loss provision resulted in $69 million the bank could not count as earnings in 2007, resulting in the net income loss of $58.9 million for the full year.

When a bank does not have earnings to draw from, loan loss provisions must come from the bank’s capital reserves.

Dominick said the bank is facing a perilous time as it does not have enough capital on reserve to offset its bad loans should they all default — not a likely scenario, he added.

A recent federal filing indicates the bank’s total risk-based capital ratio fell to 6.82 percent, short of the 11 percent required by federal guidelines the bank agreed to in August.

The bank’s tier 1 capital — high-quality capital — such as stock reserves and retained earnings also fell below the federal guidelines due to the recent losses.

The bank was to achieve a tier 1 capital ratio of 8 percent by Dec. 31. It reported a tier 1 capital ratio of 4.66, down from 9.17 percent at the end of September.

Banking experts said if tier 1 ratios fall below 4 percent federal regulators could take over daily operations.

Yeager said the bank could prop up capital ratios by merging with another bank, getting a capital injection from the board of directors or the bank could reduce its asset size.

Aside from the pending stock offering, Dykema said, the bank’s immediate focus is to collect on troubled loans to avoid future losses. He said the bank has not explored a sale or merger.

According to the recent FDIC filings, the bank faces $388 million in non-performing loans, compared to $39 million a year ago.

This means the bank’s income has been hindered as these loans are not paying interest. Lower income could make it harder for the bank to add to its loan loss provision without further depleting capital, said Scott Alaniz, financial analyst with Boston Mountain Money Management.

“The bank still has a lot of wood to chop, but they have some capable people in place which should help with recovery,” Alaniz said.

The FDIC filing indicates 22 percent of the bank’s loan portfolio is non-performing. Experts said 5 percent is considered high.

The FDIC report revealed 73 percent, or roughly $3 out of every $4 the bank has loaned, was in the real estate construction and development sector.

“Unfortunately for ANB, this was the sector hardest hit in 2007,” Yeager said.

Dykema said the relative decline in the development of residential real estate hit the bank hard in 2007. He remains optimistic that the bank will get past this trouble, acknowledging that more work is necessary in collecting on bank’s non-performing loans.

Dominick warned that as troubled loans grow, legal expenses rise, further draining future earnings.

The banking experts agree that federal regulators will likely give ANB some additional time to get back into compliance, but not without restricting the bank’s asset growth. The bank could be prohibited from expanding its business, Yeager said.

If capital ratio’s don’t improve, Dominick said, the bank could face restrictions in the number of brokered certificates of deposits it is allowed to sell. For ANB, such deposits represent 85 percent of the bank’s core deposits.

Dykema said he does not expect problems with this segment of its business.

Ironically, in 2006 ANB was one of the top performing banks of its size in the nation with a return on assets of 2.40 percent — considerably better than the industry benchmark of 1 percent.

As the dominos fell in 2007, the bank posted an ROA of -3.11 percent. This was the bank’s first loss in its 13 year history, Dykema said.

He said 2008 would be a challenging year with a contraction in the bank’s balance sheet, but he expects to salvage earnings in the second half of the year.

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John R. Taylor

“Focus on Financial Planning” is published every Sunday. John R. Taylor is senior vice president of the John R. Taylor Financial Group, a division of Sterne, Agee & Leach Inc. He can be contacted via e-mail at johntaylor@sterneagee.com. He can be seen frequently on KFSM 5NEWS as the stations's financial expert. Sterne, Agee & Leach Inc. is a registered broker/dealer and a member of SIPC.