Great Southern loses $35M after Arkansas bank fails

The recent failure of ANB Financial has forced Great Southern Bancorp Inc. to write off $35 million it loaned to the northwest Arkansas bank – a loss that was foremost on shareholders’ minds at Great Southern’s annual meeting last week.

On May 9, the Office of the Comptroller of the Currency at the U.S. Department of the Treasury closed the failing Bentonville, Ark.-based ANB Financial, and the Federal Deposit Insurance Corp. was named receiver, according to an FDIC news release.

Publicly traded Great Southern (Nasdaq: GSBC) had loaned $30 million to ANB for “general corporate purposes” and $5 million in related “undersecured” loans to shareholders, Great Southern President Joe Turner said.

While Securities and Exchange Commission filings filed earlier this year indicated Great Southern officials knew there was a chance ANB might default on the loan, bank executives say they were still surprised to learn that the bank – a business partner for more than a decade – had failed.

“We had the relationship for 11 years, and ANB was a very profitable company – strongly capitalized,” Turner said. “Obviously, we’re surprised and disappointed by the way it turned out.”

The immediate impact was felt in Great Southern’s stock prices, which have been steadily declining from about $27 per share a year ago. In the days following the announcement of ANB’s failure, Great Southern shares traded as low as $12.40 – the lowest level since June 2001.

The charge-off is equal to $1.70 a share after tax, which is expected to significantly reduce quarterly earnings, though the bank’s accountants haven’t yet determined which quarter.

However, subsequent quarters shouldn’t be affected, Turner said.

“If we were to make the same amount of money in ’08 that we made in ’07, excluding this charge-off, we would wind up making about 45 cents a share,” he said. “We’ll take the charge, and we’ll move on. … That’s the lending business.”

Great Southern, which has about $2.5 billion in assets, has only one other bank stock loan, worth roughly $2 million, Turner noted.

Shooting straight with shareholders

In addressing shareholders during Great Southern’s May 14 annual meeting at its South Glenstone Avenue operations center, Turner tackled the write-off head-on.

“We will not make excuses,” Turner told shareholders, according to a script of his speech available on online at www.great

southernbank.com. “We made the loan with the confidence it would be paid back, and at the end of the day, it wasn’t repaid. I believe we did everything we reasonably could throughout this situation and planned for this eventuality.”

Turner told Springfield Business Journal that Great Southern remains well capitalized, and he pointed to positive developments on the horizon, specifically mentioning the bank’s dominant deposit market share in southwest Missouri and the opening of another branch in Lee’s Summit by early next year.

Analyst Jason Werner of Howe Barnes Hoefer & Arnett, a Chicago brokerage firm that specializes in community banks and collects data on Great Southern, said the bank’s loss appears to be an isolated event.

“You’re not going to see a lot of this happening … but the bad news is that it takes away some of their capital cushion. They had pretty healthy capital ratios and now they’re a little thinner. That’s the biggest negative,” Werner said. “The bigger question for the company is what happens going forward. They do a lot of construction and development lending, and with what’s going on in the housing sector, that stuff is at risk right now.”

Joe Stieven, an investment adviser with St. Louis-based Stieven Financial Advisors who assisted Great Southern with its initial public offering in 1989, said numerous banks and financial institutions sustained first-quarter losses.

“These are unprecedented times right now,” he said, pointing to the recent collapse of Bear Stearns. “The industry is facing some dark clouds out there. … This is a cycle. I think that’s what people need to realize.”

ANB Financial’s failure

ANB Financial had about $2.1 billion in assets and $1.8 billion in total deposits as of Jan. 31. According to the FDIC, ANB Financial had about $39.2 million in 647 deposit accounts that exceeded the federal deposit insurance limit. Those accountholders received immediate access to their insured deposits and will become creditors of the receivership for the amount of their uninsured funds, FDIC officials said.

ANB was “undercapitalized and had experienced substantial dissipation of assets and earnings due to unsafe and unsound practices,” according to an OCC news release.

The bank emphasized real estate development and residential construction lending primarily for projects in northwest Arkansas and Utah.

After reviewing bids from four banks, the FDIC Board of Directors moved ANB’s insured deposits to Little Rock-based Pulaski Bank and Trust Co., which will assume $212.9 million of the failed bank’s insured nonbrokered deposits for a premium of 1.01 percent and will purchase $235.9 million of assets, according to an FDIC release.

FDIC spokesman David Barr said confidentiality requirements barred him from identifying any other banks forced to write off loans made to ANB Financial.

ANB is the third bank to fail this year. The other two – Douglass National Bank of Kansas City and Hume Bank – were in Missouri, but Barr said there are few similarities.

Barr noted that the bulk of ANB Financial’s assets were commercial real estate loans and that brokered deposits accounted for 85 percent of the bank’s deposit base.

“Brokered deposits are fine; a lot of institutions use them,” he said, noting that the banking strategy isn’t without its drawbacks. “They tend to be volatile. (Brokers are) out there chasing high interest rates. So if you’re funding your operations with brokered deposits, you need to keep them coming in.”

Barr added, “You have to be careful in how you use them and to what extent you use them.”