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Behind the Rapid Fall of ANB Financial

The Arkansas-based bank's woes were forecast by issues many depositors overlooked.

Late last Friday, the Office of the Comptroller of the Currency announced the closing of ANB Financial NA, of Bentonville, Ark.

In its announcement, the OCC noted that ANB Financial, with $1.9 billion in total assets, was undercapitalized and that its "unsafe and unsound practices also weakened the bank's condition and seriously prejudiced the interests of the bank's depositors and the deposit insurance fund."

This was the third bank closing this year, and the largest since


was shut down in September 2007. ratings had already downgraded its rating for ANB Financial to an E (very weak financial strength) in March, based on December 2007 financial results. ANB had been previously rated a D- (weak) since June 2007.

ANB Financial's $212.9 million in FDIC-insured retail deposits were assumed by Pulaski Bank and Trust Company, of Little Rock, Ark. Most of ANB's deposits were acquired through brokers, who were to be paid directly for the amount of their customers' insured funds.

David Barr, the FDIC's Assistant Director for Public Affairs, says four banks made bids to take over ANB's branches and retail deposits, and Pulaski Bank and Trust made the lowest bid. The FDIC expects the closing to cost its insurance fund about $214 million.

ANB's customers had about $39.2 million in uninsured deposits in 647 accounts. When a bank is closed, depositors become creditors to the receivership for their uninsured funds. As the FDIC disposes the failed bank's assets, these creditors are typically paid "dividends" for a significant portion of their uninsured deposits.

Uninsured depositors didn't receive an immediate dividend payment when ANB was closed, but Mr. Barr expects them to receive dividend payments as the failed banks assets are disposed by the FDIC.

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A Rapid Fall

While the institution's loan quality had worsened steadily through the first three quarters of 2007, its year-end results were shocking, as nonperforming assets shot up to $422 million, or 21% of total assets. Being forced to set aside as much as possible for loan loss reserves, ANB lost $75.5 million in the fourth quarter, causing its capital levels to drop. The bank was considered undercapitalized at year-end, with a risk-based capital ratio of 6.82%. This ratio needs to be at least 10% for a bank to be considered well capitalized under regulatory guidelines and 8% to be adequately capitalized.

Most of ANB Financial's problem loans were commercial real estate and construction loans, Arkansas, Idaho, Wyoming and Utah.

During the first quarter of 2008, things got even worse, with nonperforming assets rising to 34% of total assets and the risk-based capital ratio dropping to 3.50%. The bank was critically undercapitalized, pretty much forcing the OCC to shut it down.

The news hasn't hurt the

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, which was recently trading at $34.08, 2% higher on the day.

Once again, we see how important it is for depositors to consider the safety of their financial institutions. provides conservative, objective financial strength ratings for all U.S. banks and S&Ls. While you may feel no need to worry about your bank's health if you have deposits of less than the FDIC's standard $100,000 limit, chances are that you or someone you know is associated with a business, school district or other entity with large uninsured deposits in a local bank. You can quickly check your institution's rating using the ratings screener.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.