Executives dismiss failure speculation; consolidation possible
Worries on 3 Black-Owned Lenders in New Orleans
Summary of an article appearing in the American Banker Newspaper
Tuesday, December 13, 2005 by Damian Paletta
WASHINGTON - Nearly four months after Hurricane Katrina hit, industry executives in New Orleans and observers in Washington are talking about bank failures.
Not that one is imminent, but the supposition is that three small, black-owned institutions might not make it. Liberty Bank and Trust Co., Dryades Savings Bank, and United Bank and Trust Co., all based in New Orleans, are concentrated in the hardest-hit areas and serve the most vulnerable customers and businesses. They have branches that remain closed, employees who have scattered, and customers they cannot contact.
Though the outlook is challenging, the speculation may be ahead of reality. And even if these three banks cannot operate independently, acquisition is more likely than failure, several experts said.
William Cunningham, a specialist on minority-owned banks as a senior investment advisor with Creative Investment Research Inc. in Minneapolis, said he expects the three banks to merge with each other or another bank in the next two years.
"Given the damage that the region has experienced, consolidation is a good idea and will be something that happens," he said.
The possibility of bank failures was first publicly raised last Thursday by Rep. Richard Baker at a hearing on Katrina's impact.
"I've learned that it will not be unexpected to see a very significant number of Louisiana institutions forced into financial condition that will not warrant continued operations for lengthy periods of time," the Louisiana Republican said. "I'm saying that as carefully as I can. These are extraordinary circumstances, and they are extraordinarily bad."
In interviews, the presidents of Dryades and United said their banks are not in danger of failing. Each said he is concentrating on day-to-day operations, such as contacting customers, opening branches, and trying to measure losses. Dryades, which was chartered in 1994 and has $111 million of assets, "is not in trouble of failing," said Virgil Robinson, its president and chief executive. "It just means, profitwise, we don't make as much money - if we make money at all" in the short term.
Howard Brooks, United's president and CEO, said that the $25 million-asset bank is anxious for help from the federal government and other lenders - but that even without it, "I do not anticipate United Bank failing."
Mr. Brooks would not talk about its financial condition or expected losses. The state chartered United in 1990.
Liberty is the largest of the three, at $340 million of assets, and the oldest - it received its Louisiana charter in 1972. Alden McDonald Jr., its president and chief executive, did not return several messages Friday or Monday.
Mr. Robinson was the most forthcoming about financial condition. He said Dryades, a federal thrift, made a small profit in September and will break even this quarter.
He agreed that mergers are a possibility.
"I would never rule anything out," he said. "But it's too early, because people are focused on getting their banks stable and assessing their customers' current situation.
"Consolidations cannot happen until after that happens," he said. "You have to know what you are consolidating into."
Like other banks, Dryades waived many fees and told customers they did not have to make mortgage payments until early December. What impact this forbearance will have will not be known until January, when fourth-quarter call reports are filed.
But regulators have told banks to start measuring their losses from the hurricane. In a Nov. 30 advisory, federal regulators told banks to report "probable losses that can be reasonably estimated" and adjust their estimates as more information comes in.
They have not said whether small banks will be given more rope than larger, more diversified ones.
Acting FDIC Chairman Martin Gruenberg was in New Orleans Monday visiting Liberty Bank branches and meeting with Mr. McDonald as well as other Gulf Coast banking officials, according to Peter Gwaltney, the chief executive of the Louisiana Bankers Association.
"It was a very good meeting," Mr. Gwaltney said Monday afternoon. "I was very pleased with the attitude of the FDIC in regards to regulatory flexibility."
He would not be more specific about the sorts of flexibility Mr. Gruenberg discussed.
Mr. Brooks and Mr. Robinson said they do not expect their banks' losses to be severe.
Mr. Brooks said close to 90% of United's residential mortgage exposures had flood insurance.
Mr. Robinson said that there is flood insurance on many of the loans on Dryades' books, and that it sells most of its residential mortgages into the secondary market. Dryades is working on a "forward-looking plan" to become involved in the rebuilding of the greater New Orleans area, he said.
"The next three to five years will be more rebuilding," he said. "You have to formulate a strategy around the rebuilding effort and how you will provide support for it."
Two of Dryades' four branches are still closed. Two of its three commercial lenders have moved out of Louisiana. It has lost about 25 employees, half of its pre-hurricane total, Mr. Robinson said.
Many of the bank's commercial customers have moved but are still in the area, he said. It is the consumer customers who worry him; Dryades has been unable to communicate with many of them, mainly because they have moved away, he said.
Many of these people withdrew their money before they left, Mr. Robinson said. "In the early aftermath of Katrina there was so much misinformation and bad information that was going on, they were getting skittish because they didn't know what to do," he said. "They were making large withdrawals of cash because they were scared." Some of the money has come back, but not all, he said.
United's status is less certain. One of its three branches is still closed because of the storm. Its two open branches are in Wal-Mart stores, and the bank has opened a third free-standing branch since the storm in a neighboring town.
Liberty's situation could be even more troublesome. On Nov. 25, The New York Times quoted Mr. McDonald as saying six of the bank's eight branches were still closed and residents had not returned to many of the inner-city areas where Liberty has branches.
"When people talk about the city repopulating, it's all in uptown New Orleans - it's on the West Bank, it's in the Quarter," Mr. McDonald told the Times. "None of this is repopulated," he said, referring to the New Orleans areas where Liberty operates.
Norma Hart, the president of the National Bankers Association, a trade group for minority-owned banks, said she had consulted with the New Orleans bankers and remained optimistic about their prospects.
"They are working as though everything is going to be fine," she said. "They are doing the best they can under the circumstances. It's just unfortunate what's happened."
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