Past Due Values up 140 Percent, ANB Eyed by Feds

(To see a list of which banks have the most past due loans, click here for a pdf.) 

Dan Dykema’s voicemail is full.

In 2007, ANB Financial NA lost $58.9 million, saw loans in its delinquent categories balloon to $388.1 million, faced a $20 million lawsuit from developer Hollis Cunningham and its holding company has been put on a short leash by both of its federal regulators.

On Jan. 29, ANB Bancshares Inc. was given a regulatory enforcement letter from the Federal Reserve Bank of St. Louis, concerning its need to raise more capital, come up with a plan for cash flow to service debt and strict guidelines for dividend distributions to its shareholders. The holding company has until mid-March to provide some specific plans to the Fed.

The document became public on Feb. 19 and the bank’s phone lines were jammed the following morning.

Dykema, the chairman and CEO of ANB Bancshares Inc., did not return calls the week of Feb. 18. The bank did not issue a news release and its Web site didn’t address the news in any way.

But in a statement obtained by the Business Journal on Feb. 15, Dykema said, “It will take some work but we’ll get past this. We’ve taken a hard look at our credit files and we’re being proactive – that’s where our focus is right now.”

The enforcement letter puts pressure on ANB to earn some money – fast. But in this falling rate environment it will be harder for ANB to make a decent margin on its spreads. The bank was offering the highest area rates for certificates of deposit (see chart, right) on Feb. 20 to entice new customers.

There may not be enough new customers in Northwest Arkansas to cover ANB’s appetite for brokered deposits, which will eventually mature and be lost. As of Dec. 31, 85 percent, or $1.59 billion, of the bank’s deposits were purchased from out-of-market banks to fund loan growth.

There were subtle indications from employees of the bank that Dykema and the bank’s board of directors are looking for a helping hand, but there’s no guess as to what form that may take.

ANB has many problems, few desirable deposits and slim margins, so no one is sure what investor may be willing to sink millions into it. The bank’s existing shareholders may be skittish or unable to pony up the needed coin.

The bank closed the year with $97.3 million in capital, only a 4.86 percent equity-capital-to-assets ratio. The norm is in the 8 percent to 9 percent range, so there’s a lot to come up with.

“Capital cures all,” said one banker who asked to not be identified.

“Now, where do you think he’s going to come up with this capital?” asked another banker who would only talk under the same condition. “He’s going to have to go outside this market. But why would you as an investor be willing to put in that kind of money? Where is the return going to come from?”

Jacob W. Thompson, managing director of Commerce Street Capital LLC in Dallas, assists banks with raising capital, mergers and acquisitions. He has no clients in Northwest Arkansas but he is familiar with the market.

Thompson said the M&A business in Texas has seen some softening in prices due to reduced earnings tied to the real estate market. In his experience, buyers aren’t going to line up for ANB.

“If I’m an acquirer and you’ve got hot money and problem assets, I’m not going to pay a lot,” he said. “I’m not paying for somebody else’s problems.”

Market Health

As of June 30, there were 27 distinct, full-service institutions doing business in Benton and Washington counties, including three thrifts, whose fourth quarter data is not yet available, and out-of-state Regions Bank and Bank of America, whose data would wildly skew any comparison.

According to uniform bank performance reports filed with the Federal Financial Institutions Examination Council, the 22 other banks doing business in the two-county market had a combined $638.7 million worth of loans on their books that were not accruing interest as of Dec. 31.

That value is up 140.8 percent from $265.2 million at the end of the third quarter, and up 236 percent from the first quarter.

ANB’s share is 60 percent of the fourth quarter total.

If all three “problem” columns – loan values 30-89 days past due, 90 days past due and nonaccruals – are tallied, those 22 banks are dealing with $871.3 million in past due debt as of Dec. 31. That’s up from $368.6 million as of March 31.

According to the Arkansas State Bank Department, a ratio of 3 percent or greater in total past dues and nonaccurals is a red flag. Twelve banks on the chart on Page 19 are above 3 percent.

A ratio greater than 1 percent in the nonaccrual column alone should raise eyebrows as well, according to the ASBD. Seventeen banks fall within that criteria.

The total value of the banks’ credit losses for 2007 was $87.6 million, up from $13.5 million at the end of the first quarter.

The 22 banks’ combined “other real estate owned,” which includes but is not limited to foreclosed properties or properties turned back in lieu of foreclosure, was valued at $100.7 million.

Jerry Sadler, CEO of Parkway Bank of Rogers, said $1.2 million of his bank’s OREO was in property that had been purchased for a future branch.

“We recognized all of our problems in ’07,” Sadler said. The bank is in the process of working its way out of those problems, he said, and he looks forward to a productive 2008.

“We’ve had a good January. We made a profit in January, which is really good,” Sadler said.

Startup Showings

The Business Journal has always considered Parkway a “semi-startup” because it began with a partial management group that had worked at Arvest Bank and relocated its charter from Portland, Ark., to Rogers in 2004. That was the same year groups announced the formations of Pinnacle Bank, Signature Bank of Arkansas and Legacy National Bank.

At the time, many in the industry – mostly long-timers who weren’t looking to change jobs – cautioned that the startups would have to take more risks and pay premiums for deposits.

Three of the startups (including Parkway, which ejected its original management team last spring) are in the lower half of the chart on Page 19, ranked by percentage of total past due and nonaccrual loans.

But Signature Bank of Arkansas in Fayetteville topped the chart with only 1.18 percent of its loans in past due or nonaccrual status.

“I just think that we’re very fortunate to have senior leadership and we’ve taken advantage of that,” said Gary Head, chairman and CEO of White River Bancshares Inc., the holding company for Signature. “Our bank is a reflection of our customers and our customers are in good shape.”

On the opposite end of the spectrum is Legacy National Bank, which opened its doors the same year as Signature. The Springdale bank had 9.32 percent of its loan portfolio in past due status.

“The bottom line for us mirrors the challenges in the community because we are a community bank,” said Don Gibson, president and CEO of LNB.

Gibson insists the bank is sound despite a few problem loans and will be able to overcome its challenges soon, even hinting at forthcoming “growth plans.”

The bank was a participant lender in the Legacy Building in Fayetteville, which was foreclosed on for an outstanding balance of $18.1 million on Jan. 2.

Pinnacle Bank, the other startup in the group of four, fared in the middle of the pack with 3.24 percent of its loans in past due status at the end of the fourth quarter. The original management team, Joe Mills and Kevin Beasley, also were removed last year.

Outside Influences

Banks such as Metropolitan National Bank, Bank of the Ozarks, First Security Bank, Liberty Bank of Arkansas and Arvest Bank have significant business interests outside of the two-county market. That business inflates the overall nonaccruals for the sample group, but there’s no way to break out what was loaned in Northwest Arkansas without each bank providing it.

The same holds true for ANB, which has three loan production offices in western states.

Most of those banks have declined to calculate how much of their nonaccruals were in the two-county market, saying they don’t track it or they would prefer not to.

However, a spokesman from Arvest Bank Group, said the year end past dues were “slightly” higher in Northwest Arkansas than in its other markets, though still at low levels.

Bankwide, Arvest is below the 3 percent red flag mark.

Jeff Dunn, president and CEO of Bank of Arkansas NA, said his Tulsa-based holding company, BOK Financial, owns a subsidiary called Dealer Financial Services that finances paper at new car dealerships. About $170 million of his bank’s loan portfolio is tied up in car loans through that subsidiary, he said. If those were omitted, Bank of Arkansas’ past due loans would be closer to 1.25 percent, he said.

“Do we have problem loans? Yeah, we’ve got $2 or $3 million, but it isn’t much,” Dunn said.

The trick a good performance ratio was to make sure borrowers had a secondary source of repayment, he said.