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From risk to ruin

Aggressive lending pushed the value of Lynn Alexander’s stock holdings in ANB Financial to $600,000.

The bank vice president from Rogers decided early on that ANB shares would allow her to retire in comfort.

For most of her 12 years with the bank, Alexander’s stock value rose alongside its healthy profits in booming Northwest Arkansas.

ANB grew by leaps and bounds, funding key developments and evenexpanding out West.

“I’d been in banking for over 22 years,” said Alexander, 50. “I thought I’d be secure.”

Now, it’s clear the bold commercial lending that did so much to fuel the financial hopes of Alexander and pad the pockets of many developers and business owners in Northwest Arkansas ultimately caused the bank to collapse under its own weight.

With concerns mounting about ANB’s lending practices, federal regulators shut down the bank in May 2008.

ANB was the third U.S. bank to fail in 2008, and 22 others crumpledbefore the year was out, according to Federal Deposit Insurance Corp. records. In the previous seven years, only 27 banks were shut down.

When the bank shut its doors, 297 customers had accounts that exceeded the $100,000 limit protected by the FDIC by a total of $19.8 million. The agency in 2008 guaranteed the protection of an account holder’s first $100,000, but after ANB and other banks failed, the limit was raised late that year to $250,000 per account.

The financial regulatory overhaul act signed by President Obama on Wednesday made the $250,000 insurance limit permanent and retroactive to the start of 2008. The FDIC already hadrepaid ANB account holders for about one-third of their losses above $100,000, using money from the sale of bank assets. Now, the federal agency will cover the remainder up to $250,000.

The FDIC said 31 of the 297 ANB customers hadaccounts that exceeded $250,000, and they will not receive any money above that amount.

Yet, some who borrowed money from ANB are mired in bankruptcy and foreclosure after their loans were purchased from the FDIC at firesale prices; huge residential developments in the western United States are languishing in one-time boomtowns; and three former employees, not including Alexander, are suing to recover losses after the bank’s stock became worthless.

Former employees, customers and those in the banking community don’t point at any one person for the cause of ANB’s collapse.

They say the bank’s assertive stance and growth-atall-costs strategy crashed headlong into the faltering economy.

Dan Dykema, ANB’s president from its founding in 1994 until its demise, had been a rising star at other Northwest Arkansas banks.

“I’ve always liked money,” he told the Arkansas Democrat-Gazette in a 1997 interview. “Maybe that’s why I’m in banking. I just like money.”

Dykema and ANB’s aggressive lending was notable in 2005, when the bank opened a loan-production office in fast-growing St.

George, Utah.

“That was like an ATM down there,” said Tracy Tremelling, a vice president of residential and new construction in ANB’s loan-production office in Idaho Falls, Idaho, another place where the Northwest Arkansas bank set up shop.

“There was money flying out the door left and right,” and ANB employees weren’t verifying that projects were advancing on schedule.

BANKS CRUMBLE

Bank failures increased as the nation’s economic woes spread into 2009 and 2010.

There were 140 failures in 2009, and 2010 failures stood at 103 as of Friday.

“Any ship can sink in a hurricane,” said Nat Bothwell, an executive vice president for marketing with ANB.

ANB failed before the federal government took a huge step meant to assist banks. It wasn’t until late 2008 that Congress approved the $700 billion Troubled Asset Relief Program that’s often referred to as the “bank bailout.” By then, ANB was long gone.

Tim Yeager, a banking professor at the University of Arkansas at Fayetteville,said the federal bailout wouldn’t have helped ANB.

The aid went to the biggest banks, and ANB wasn’t that big.

“They were so farout on the commercial lending curve that they failed before most banks did,” Yeager said. “They were more aggressive than other aggressive banks. That’s why they failed first.”

A STRONG START

The Democrat-Gazette article published in 1997 told how Dykema opened his first savings account at age 5, and how he was depositing the rewards of his lawn-mowing business into a checking account by the time he was 10.

By the time Dykema moved from rural Iowa to Arkansas to attend college and then work at banks, Northwest Arkansas was growing into a significant metropolitan region.

The U.S. Census Bureau determined that the Fayetteville-Springdale-Rogers Metropolitan Statistical Area grew in population by 23.7 percent from 1990-96. It was the sixth-fastest growing area of the nation, the bureau said.

ANB’s opening in 1994 seemed to come at a perfect time as newcomers would be looking for a new bank and home loans.

A photo published June 2 that year in the Benton County Daily Record showed Dykema, president of ANB, sporting a T-shirt reading “There’s a new bank in town” on the bank’s first day in business.

In its early years, ANB paid higher interest rates on certificates of deposit than competitors. Whether by coincidence or caused by ANB’s arrival, other Northwest Arkansas banks followed suit.

“When bankers are publishing rates higher than anyone else in the community, it raises eyebrows, even with bankers,” said Ken Hammonds, president and CEO of the Arkansas Bankers Association in Little Rock. “It’s ‘Gosh, how can they pay that rate?’ We know where you go to get money and what you can make on it, and when someone starts publishing rates that are considerably higher than everyone else in town, you need to get suspicious.”

FDIC records show ANB building a substantial share of deposits. It had $99.3 million in deposits by June 1996, a 3 percent share ofall bank deposits in Benton and Washington counties - considered substantial for a 2-year-old bank.

The rapid growth was noticed by other bankers who suggested in the Democrat-Gazette article that Dykema was a risk taker. Don Walker, then president of the Bankof Bentonville, said Dykema was “pushing his attempt to grow to the edge.”

“That can be dangerous, but I don’t think he’s in any serious trouble,” Walker said at the time.

Reminded of his comments, Walker said it would have been impossible to predict ANB’s demise.

“He’s not a bad banker,” said Walker, now president and CEO of Arvest Tulsa.

“He was comfortable taking more risks than the average banker, and that ultimately did cause the collapse of his bank.

“I will not say that all of the mistakes were Dan’s.

Some of the people he hired because it was growing fast were also causes of the bank’s failure.”

Dykema, who lives in a 6,820-square-foot, two-story home on Spring Valley Road in Bentonville, declined repeated requests to be interviewed for this article.

ANB’s deposits had nearly doubled by mid-1998 to $190.5 million, or 4.9 percent of the regional market.

The partners who started the bank - Dykema, Debra Jackson, Harry Brown, Bill Fleeman and Victor Evans - appeared to be doing well.

By 2004, ANB had branches in every major city in Benton and Washington counties and had relocated its Bentonville headquarters to a spiffy site in Rogers, just west of Interstate 540.

By then, Dykema ran the second-largest bank in Northwest Arkansas. Only Arvest Bank was bigger.

THE ‘GO-TO BANK’

Nearly every big-time developer in Northwest Arkansas did business withANB, including Brandon Barber of Fayetteville.

The bank provided him with all of the $4.85 million he needed to buy land near Dickson Street for Divinity on Dickson, a swanky hotel that was never built. Barber filed Chapter 7 bankruptcy in July 2009, claiming debts up to $53 million.

“The word on the street is you could close the deals with ANB in days, but I’m not going to say that was that uncommon with a handful of banks,” Barber said. “Dan was a brilliant guy. He’s just the kind of guy you want your banker to be.

He could talk to anyone and make you feel very relaxed in whatever situation you were in.

“His bank was notorious for its aggressiveness.”

ANB quickly earned a reputation as the “go-to bank when you wanted to get something done,” said John Nock, principal of Nock Investments in Fayetteville.

Nock said ANB financed as much as 30 percent of his real estate projects - $40 million worth - by the time regulators shut it down.

“ANB had glowing reviews in the preceding years, attracting both new- pants,” Nock said.

The closure of ANB, however, had a huge impact on the real estate market.

And it “cost me, and many others, millions of dollars,” Nock said.

Nock, through Cosmopolitan Ventures LLC, borrowed $18.37 million from ANB in 2006 to renovate the Cosmopolitan Hotel in downtown Fayetteville.

That project to modernize the hotel, which previously operated under Hilton and Radisson banners, came to a halt after federal regulators closed ANB.

ANB Ventures LLC, the company created to handle some of the loans after ANB closed, filed for foreclosure on April 19 against Cosmopolitan Ventures LLC. The Fayetteville hotel remains open.

The case is scheduled to be heard Sept. 9 by Washington County Circuit Judge Kim Smith.

Nock, the hotel’s coowner with Richard Alexander, said he was talked out of closing it for renovations because its 235 rooms are needed for conferences and conventions. Instead, 134 rooms on floors 9-14 are in various stages of renovation.

He’s spent about $16 million of the loaned amount.

The Cosmopolitan loan was the biggest made by ANB in Benton or Washington counties during the bank’s 14-year history, according to WACO Title Co., a Fayetteville firm that tracks public mortgage records. From 2003 to 2008, the bank made 21 loans of more than $7 million each in the two counties, the title company’s records show.

TROUBLE BREWING

ANB’s health was deteriorating by 2005.

The post-closure audit made public in November 2008 by the federal Treasury Department’s Office of Inspector General criticized the federal Office of Comptroller of the Currency for taking no “forceful action” against ANB after identifying problems in 2005.

According to auditors, ANB’s nonperforming loans in 2005 were twice the national average when compared with banks of similar size.

The comptroller reprimanded ANB in June 2007, saying the bank engaged in “unsafe and unsound banking practices.” The bank lost $120 million that year, the comptroller said.

The inspector general’s report said poor supervision by the comptroller wasn’t the cause of the bank’s failure, however. The reasons listed in the report were “the bank’s strategy of aggressive growth without adequate control; heavy reliance on wholesale funding, including brokered deposits;

inadequate risk management ... in commercial real estate;

and unsound underwriting practices.” Those practices were aggravated by the unfavorable economy, the report stated.

Brokered deposits are obtained through large investment houses by offering clients high interest rates on products such as certificates of deposit.

Despite those troubles that could have caught the attention of the bank’s highest-ranking officers in 2005, ANB was still expanding, though not solely in Arkansas.

Northwest Arkansas was good to ANB during its first decade in business, but three areas in the West appeared to be new, better places for the bank to expand.

LOOKING WEST

Joe Renner, who was executive officer at ANB’s branch on 28th Street in Rogers, said growing competition in Northwest Arkansas had nothing to do with ANB’s decision to expand into Utah, Idaho and Wyoming.

Rather, the bank’s top brass suspected Northwest Arkansas’ growth was fizzling out by 2004, and they identified a handful of other areas seeming to be on the cusp of new growth, including Idaho Falls, Idaho; St.

George, Utah; Jackson, Wyo.; and suburbs near Phoenix.

They were like Northwest Arkansas was in about 1999, Renner said.

St. George topped the list. ANB never made it to Phoenix.

Renner eventually came to run the bank’s loan-production office in Utah.

“I had the question ‘Why Utah?’” said Renner, who now makes loans for Regions Bank in Springfield, Mo. “We talked about it and they specifically laid out why they were going to Utah. I didn’t know a thing about Utah and that was scary to me. We didn’t have any local market knowledge.”

Privately, others, too, questioned the move.

“I just felt like it was a very bad mistake to branch out that far,” said Bobbie Griffith, who worked as an ANB purchasing agent from 1999 to 2007.

“They put a lot of faith and stock in people and paid people rather handsomely out there, and they didn’t know the people,” said Griffith, now mayor of Centerton, near Bentonville.

The bank set up a loanproduction office in 2005 on busy Convention Drive in St. George.

“They made themselvesvery obvious,” said Scott Hirschi, director of the Washington County Economic Development Councilin St. George.

“They swept the market.

They made a big splash.

“They just looked like someone coming in and trying to pick up a goodchunk of the local market.

It certainly was a much less conservative approach to banking than we were used to.”

BIGGER LOANS, MORE RISKS

About 120 miles northeast of Las Vegas, St. George was a boomtown for the better part of 40 years. The city’s 75,000 residents are 10 times the number residing there in 1970.

That growth, coupled with developers’ willingness to take on multimillion dollar loans for huge residential and commercial projects, was attractive to ANB, former employees said.

“They got off to a quick start,” said Tom Cover, a St.

George resident who helped ANB with its marketing in Utah until 2007. “The people from Arkansas said they had a lot of experience with commercial lending, and they felt they had the expertise. It started rapidly and grew much faster than everyone expected.

“I told them it was growing too fast. They said they could maintain the growth.

I left them in 2007. I was out of there. It made me uncomfortable.”

The loans that ANB made in Iron and Washington counties in southern Utah were far bigger than the ones made in Benton and Washington counties inArkansas.

ANB’s 21 loans of $7 million or more in Arkansas involved $186.7 million.

The 21 biggest loans in two Utah counties over three years totaled $265.1 million, county recordersrecords show.

To support that lending, ANB dramatically increased its reliance on high-interest brokered deposits. Such deposits in mid-2005 were near $250 million, but the amount increased to $615 million by mid-2006 and $1.6 billion by the end of 2007.

Brokered deposits provided cash that bank officers in Utah needed to make hefty commercial loans.

The rewards were handsome for ANB’s loan officers in Utah, too. For every $1 million they loaned, they received a $1,000 bonus.

Former ANB employees said the bonuses were paid quarterly.

Both Hammonds, who was in banking for 35 years before becoming head ofthe Arkansas Bankers Association in 1999, and Yeager said they’ve never heard of a program that rewarded loan officers for making loans.

“You never pay a bonus simply on the origination without any concern for the risk,” Yeager said.

ANB didn’t provide any immediate financial incentive to encourage lenders to make good, safe loans, said Chandler Church, who spent three decades in banking before Dykema hired him in 2005 to run ANB’s loanproduction office in Jackson, Wyo., near the famous Jackson Hole resort.

“His primary interest in being here was growing the bank into a big bank, bigger than he could grow it in Arkansas,” Church said. “Hehad targeted growth markets to grow into: St. George, then Jackson, and then the third was Idaho Falls.

“He wanted to make money. I just think he wanted to make more and more money.”

BETTING ON A NEW BOOM

Few seemed capable of seeing that ANB or the economy could falter.

Idaho developer Roland “Rollie” Walker moved quickly when he found out he could buy 2,400 prime acres near Hurricane, Utah, 18 miles east of St. George.

He’d never done business in southern Utah, but he knew many Idaho retirees headed south for the winter and that the St. George area was a preferred location for those “snowbirds.”

The land’s price was steep: $28 million, and the owner wanted to close the deal fast. It often takes three to six months to get a bank to provide such a big loan, Walker said.

“I had to close the deal in 30 days or less, so that wasn’t going to work,”Walker said. “We had a huge opportunity, so Dan flew in from Arkansas, jumped in a helicopter to review the property and promised to do two days’ work every day on my project.”

Walker’s loan from ANB - $18.4 million in April 2005 - arrived in time.

Out of Walker’s new relationship with Dykema and the bank came a second loan and the biggest one ANB made in Utah. It was for $24 million in December 2007 to pay for sewer lines, water lines, streets, engineering and design for what’s now Elim Valley. There’s space for 10,400 homes.

The second loan hadn’t been repaid by the time regulators closed ANB. Residential lots expected to sell for $135,000 each now are being offered for $35,000.

“Dan was very good and very thorough and very quick,” Walker said. “I have no beef with Dan Dykema.

He’s a victim of the economy in a raging market.”

Others suggest that ANB’s top brass should have noticed the approaching trouble in St. George.

The city had a sevenyear inventory of residential subdivision lots, said Nathan Christensen, a vice president of commercial lending in ANB’s loan-production office in Jackson in 2006 and 2007.

Yet, ANB loaned new money to Walker and others planning to develop more.

The people in Utah weren’t interested in hearing negative thoughts about St. George’s economy, said Lecia Langston, a regionaleconomist with the Utah Department of Workforce Services. The 1,000 attendees at an economic summit in St. George in January 2005 heardLangston’s comments.

“I was the only voice saying ‘no.’ It was obvious we were in boom status. It was creating a bubble market, and it was going to collapse,” Langston said.

She drew sharp criticism for her assessment. Hirschi, head of the economic development council, thought Langston was crazy.

“I remember coming away from that meeting with ‘What’s she thinking and what’s she doing?’ That prediction will never come true,” Hirschi said. “And within two years, it was obvious she had nailed it.

“But should the management of ANB have realized it? If they had, they would have been a heck of a lot smarter than every bank here. The consensus was there was no end in sight.”

BANK’S BIG FALL

Dykema wanted to build a big bank, and ANB’s expansive growth was obvious in its final years.

In an audit made public six months after the bank’s shutdown, the federal Office of Inspector General noted ANB’s rise.

“From January 2005 to January 2007, the bank’s real estate loan portfolio increased from $440 million to $1.6 billion, and its construction and development loans increased from 22 percent to 73 percent of gross loans,” the audit report noted.

Yeager, the UA banking professor, said 73 percent is incredibly high, compared with other banks. In 2004, a typical bank put 10 percent of its money into commercial and development loans. The average grew to 16 percent by 2008, he said.

The three ANB offices in the West - St. George, Jackson and Idaho Falls - churned out 63 percent of the bank’s loan portfolio by March 2008, regulators said.

ANB’s commercial lending activities were scattered across the nation, and by 2008, ANB had 39 percent of its commercial loans secured by Utah properties. Another 18 percent were secured by properties in Idaho, Nevada and California, according to regulators.

In Hurricane - the Utah town where Walker still hopes to see his Elim Valley development support homes someday - Mayor Tom Hirschi said ANB financed many of the city’s failed developments.

“They call us stupid for letting [Elim Valley] go that far and leaving it vacant, but guys like Rollie Walker, you have to like the guy,” the mayor said. “The word ‘no’ is not in his vocabulary, but I think he’s spitting in the wind with Elim Valley.”

IDAHO’S SMALL POTATO

While the Utah operation was huge for ANB, with loans supporting projects from its southern to northern edges, the company never got as big in Idaho.

Tremelling, the ANB vice president, worked six years at the small Citizens Community Bank in Idaho Falls before being hired by his new competitor. Citizens Community Bank consistently lost business to ANB’s loanproduction office in Jackson, Wyo., located 90 miles to the east.

“I just couldn’t keep up with them,” Tremelling said.

“They were so aggressive with what they were lending and how they were lending.”

Tremelling helped ANB establish its Idaho office in 2007.

The Idaho Falls market was good to ANB, and loandelinquencies were less than 10 percent, Tremelling said.

“The reason our portfolio was so solid was the inspections and the loans we made,” Tremelling said. “A couple of times a month, I’d take an afternoon and do inspections.

“That wasn’t happening in St. George.”

Tremelling eventually reviewed many of ANB’s Utah loan documents after they were shipped to his office in Idaho. Some construction projects languished for months without a single bank employee checking to see that they were advancing, he said.

“Everyone was geared toward production, and once [the loan] was on the books, there wasn’t a whole lot of follow-up,” Tremelling said.

Both Tremelling and Church, who ran the loan office in Jackson, Wyo., said the St. George market was where ANB managers tolerated risky loans that approached the outer edges of what federal regulations allow.

Church - using a hypothetical example - said a customer in St. George interested in buying land for $5 million might find its appraisal to show a worth of $6.2 million. ANB, in that case, was willing to loan up to 80 percent of the value, which is $5 million.

A more conservative bank is likely to loan $3-4 million, or 60-80 percent of the purchase price, Church said.

Lending less ensures that adeveloper uses some of his own money and assumes some of the risk, Church said.

“You want him to be at risk as well,” Church said.

LUCKY WESTERNERS

For all of ANB’s loan difficulties in the West, its employees in Utah, Idaho and Wyoming escaped the worst of the harm that came with the shutdown. Church said that’s because they had far less time to invest in company stock.

Employees in Arkansas like Lynn Alexander suffered the most because they used a portion of every paycheck for years to buy company stock.

“That’s one of the real tragedies,” Church said.

For many depositors, though, it was business as usual. ANB was closed on a Friday and reopened the following Monday as Pulaski Bank & Trust Co., a subsidiary of Iberiabank Corp. of Lafayette, La. The bank purchased $213 million in ANB deposits. The FDIC later packaged ANB’s unresolved loans and offered them onthe investment market.

“I was insured, and I was fine,” said Mildred Eoff, 88, a neighbor of Alexander and an ANB depositor. “I don’t have that much money.

“But nobody likes to see a bank close. Things are not as good these days as they used to be.”

According to Federal Reserve System records, officers and board members of ANB Bancshares in Rogers owned 61 percent of the bank stock when it closed.

Employees owned 18 percent.

Anita Deen, an ANB employee, claims she should have been able to obtain money from the sale of her stock in late 2007. She said the bank didn’t provide the money before it was closed.

After a divorce and a move to Nashville, Tenn., Deen received about $23,000 she had in a 401(k), but thebank didn’t give her about $75,000 for the ANB stock she owned. She asked for the money about eight months before the bank was shut down.

“I blame Dan Dykema and all the people who were supposed to take care of that money for us for losing it,” Deen said. “They misled me.”

That’s also the claim of three former ANB employees - Jan Taylor, Carla Crosswhite and Laura Godsey - who filed the federal lawsuit to recoup their losses. The defendants are Dykema and the bank’s board members.

The three women and many other ANB employees declined to answer questions for this article about their time at the bank or the lawsuit.

The three are seeking class-action status, so if they wish, Alexander and other former employees could become part of a larger lawsuit against the defendants if the federal court grants the class.

Taylor, a Rogers resident, spent nine years with the bank. Godsey, who lives in Centerton, was at the bank for 2 1/2 years.

Crosswhite, who worked at ANB for five years, told attorneys during a deposition in March that she rolled over $29,227 from a 401(k) retirement account at a previous job to buy ANB stock.

After she left ANB in 2005, she stayed invested in ANB stock. The last account statement she received showed it was worth about $297,000, she told the attorneys.

“Were there any other reasons why you remained invested in ANB stock after you terminated employment?” asked Gregory Braden, an attorney representing the bank.

“It was making money,” Crosswhite replied.

This article was published July 25, 2010 at 5:00 a.m.

Front Section, Pages 1 on 07/25/2010

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Over the past two decades, fortunes were made and lost in Northwest Arkansas' real estate and development market. The region, dubbed the "economic engine of Arkansas," grew as developers and builders reshaped the rural landscape.
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