WASHINGTON — The failure of ANB Financial, which had the bulk of its lending in the commercial real estate market, may augur more bank collapses, observers said Monday.
Regulators have been warning about the dangers posed by such loans for the past three years, urging banks to raise capital on them even while community banks argued they knew how to handle the risks. But the closing of the Bentonville, Ark., subsidiary of ANB Bancshares Inc. of Rogers, Ark., was a textbook case of the situation regulators were concerned about.
The $1.9 billion-asset bank's construction and development portfolio exceeded 80% of its $1.67 billion in net loans in the fourth quarter. That, along with an appetite for out-of-state markets and a reliance on brokered deposits, proved a toxic combination.
Other banks that saw commercial real estate as an engine for growth could soon find themselves in similar straits, observers said.
"We're going to see a fair number of failures over the course of this year and on into next," said Peyton Green, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp. "So far, it's proven to be that people went where the growth was, and those markets cooled almost overnight, and a lot of people are going to pay the price for that."
Regulators, in particular the Office of the Comptroller of the Currency, have warned banks to raise capital on commercial real estate portfolios and take other steps.
"The agencies have been concerned about commercial real estate for years, and have been quite vocal about it," said Raymond Natter, a partner at Barnett Sivon & Natter and a former OCC deputy chief counsel. The failure of ANB "is an example of why the regulators had concerns."
Wayne Rushton, the OCC's former chief national bank examiner, agreed that banks with an overconcentration in one lending area are especially worrisome right now.
"When you as a bank decide to concentrate your business on that particular niche market, you're most likely taking on significant risk in the event of a downturn," said Mr. Rushton, now a senior adviser to the chairman and chief executive officer at Promontory Financial Group. "That's the cause of all the anxiety right now."
"There's a saying among bank examiners: Banks that make commercial real estate loans should be prepared to own and operate the property when conditions deteriorate."
The failure has already had ripple effects.
The $2.4 billion-asset Great Southern Bancorp Inc. in Springfield, Mo., said Monday that it must charge off $35 million of loans it made to ANB Financial, wiping out roughly nine months of earnings.
Great Southern said it is trying to determine whether the charge — which comes to $1.70 per share after taxes — should be taken in the first or second quarter.
Because of that uncertainty, the company said it would be late in filing its first-quarter results with the Securities and Exchange Commission.
Analysts said ANB also got burned by its use of brokered deposits. The $1.6 billion of brokered funding it used to support construction lending was about 86% of its deposit base.
"If you take out the $1.6 billion, they're a small player. They principally grew their loan book and said, 'How do we fund it?' And they went to the brokered CD market," Mr. Green said.
Bain Slack, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., said brokered deposits are "not a stable source of funding as is core deposit funding where you have that relationship with the customer."
ANB received a regulatory order from the Federal Reserve Bank of St. Louis in January and signed a consent agreement with the OCC in June 2007. The latter demanded that ANB hire a new senior loan officer, increase its risk-based capital ratio to 11%, and better manage its CRE concentration limits.
ANB also ran into trouble by trying to build its loan portfolio in other states, including Idaho, Wyoming, and Utah.
"The pain that has been reflected is typically in markets outside of a company's historical footprint," Mr. Green said. ANB "grew very quickly, and grew very quickly out of footprint, and that's very much in line with the examples of institutions that have issues. Without a doubt, this was an example of a bank … that not only dove deeply into construction and development lending, but also went out of market to do it."
