20. How deep was the hole?

One of the knottiest questions for Hibernia Bank after Katrina was whether the company would suffer loan losses from the catastrophe, and if so, how much?  When Rita hit a few weeks later, the problem intensified.   It was particularly thorny because of the pending merger with Capital One.

The McLean, VA, credit card company clearly had an interest — and a need to know.  Not only did it want to determine whether the pricing formula to which it originally agreed would hold up, but its executives and directors also had to be wondering about whether the deal was even viable anymore or whether, in legal terms, “a material adverse effect” had occurred, one which might force them to seek new terms or even to walk away.

Wall Street, too, was deeply interested; investors had the same concerns.

~ ~ ~ ~ ~

Nothing about the bank she did not know

MARSHA GASSAN: A lot rested on her shoulders / Photo: Russ Hoadley

MARSHA GASSAN: A lot rested on her shoulders / Photo: Russ Hoadley

Marsha Gassan, despite her diminutive stature, was a formidable chief financial officer, respected or feared throughout the bank, depending on where one’s performance stood at the moment.

At 53, Gassan had spent her whole career at Hibernia in both line and staff roles.  There was virtually nothing about the bank she did not know.  Her years in loan review and audit equipped her especially well to spot things that were amiss.  She was distinctly a “no-nonsense” person.

Married 22 years, she and her husband, Mark, had two children, 18 and 16.  After evacuating, Gassan and her family found themselves in a house with no phone, only a couple of TV channels and poor radio reception.  For an avowed information junkie, it was maddening.  She sat in her car to listen.

She made her way to Lafayette, then Baton Rouge, to get at the critical financial issues.  The first was to figure how impaired the loan portfolio might be.

~ ~ ~ ~ ~

The important ‘loss provision’

On bank financial statements, an item called the “provision for loan losses” is one of the critical variables that can cause earnings and net worth to fluctuate.  Banks had to calculate and then report what they thought was a reasonable expense based on inherent risk in the loan portfolio.

Regulators also want to know

This calculation was one that bank regulators paid particular attention to.  They took a keen interest not only in the result but also in the methods used to obtain this number.  They dealt firmly with banks that didn’t do a good job assessing potential loan losses.  It was the job of Cindy Collins, Hibernia’s chief risk management officer, to manage the bank’s relationship with them.  And she knew how tough they could be at time.  She had been a federal bank examiner herself before coming to Hibernia 11 years earlier.

Critically important

It was going to take a full-court press by the company’s financial folks to come up with a reasonable analysis and a figure quickly.  It was needed by Monday, Sept. 12, because merger-related talks would take place between the CEOs of Hibernia and Capital One.

~ ~ ~ ~ ~

‘Going to make it’

CINDY COLLINS: How would regulators react? / Photo: Donn Young

CINDY COLLINS: How would regulators react? / Photo: Donn Young

Cindy Collins, 46, had been with Hibernia 11 years after a 13-year career as a bank examiner.  An executive vice president, she was in charge of risk management (audit, loan review and real estate appraisal) and was the company’s highest-ranking African-American.

She and her husband, Keith, had been married 22 years and had a daughter, 16.  They were getting ready for a week’s vacation when Katrina hit, and instead evacuated to Dallas.

Her key concern was the loan portfolio’s condition and how bank’s regulators would view efforts to recover.

In the early ‘90s, she had seen Hibernia “hit rock bottom” during a collapse of the commercial real estate industry.   She worried that the storm’s impact could be as bad, but “Once I started learning that we were in better shape than most, when our systems were up and running and people had access to their money, I wasn’t as concerned … I had confidence within a couple of days that we were going to make it.”

~ ~ ~ ~ ~

In such matters, “the buck stopped” at the desk of Marsha Gassan, the company’s chief financial officer.  It was natural for her to take charge.  Gassan had spent all 28 years of her working life at Hibernia.  Significantly, she was slated to transition to the chief credit officer’s chair after the planned merger.  A slight, fiery-red haired wife and mother of two teens, as CFO she was arguably second only to the CEO in influence over the enterprise.  She was known for hard work and a comprehensive command of the company’s finances.  She held her ground with anyone on either the theory or practice of financial accounting and reporting, and she did not suffer fools lightly.

Helping her with the task would be Rob Stuart, Jan Macaluso, Linda Meche-Crochet, Pauline Appleby and Scott Kisner.

~ ~ ~ ~ ~

‘It was chaotic’

ROB STUART

ROB STUART

Rob Stuart, 49, was chief credit officer.  He had spent much of his career in Baton Rouge as a commercial lender and Hibernia’s city president.  Married 26 years, he and his wife, Donna, had three children, 22,  20 and 17.

Stuart played an important role in the first days, helping Boydstun pull together his executive team, interacting with state officials, assessing credit damage and contacting commercial customers.  “It was chaotic.”

~ ~ ~ ~ ~

Gassan and her family evacuated to Eunice, LA, near Lafayette, but she had to scramble at the last minute to get out of town after flying to Dallas Saturday with fellow exec Bob Kottler and management trainee Michael Fischer for the grand opening of a new branch office.  By 11:30, exhausted, the Gassans decided to sleep a few hours and head out in the early hours.  Using the I-10 contra-flow, they made it in only five hours.

By Monday afternoon, like others, Gassan thought the city had “dodged a bullet again.”  She was feeling pretty good.  By Tuesday afternoon, the picture had turned grim.  “I realized I really needed to get back to the bank – get connected – and begin an assessment of the loan book.”

She actually had much more to worry about.

Issues piling up

Renting a car, she drove 50 miles to the bank’s Lafayette main office.  There she began to assemble a team.  However, issues were growing.

First, where were her people?  Through eight departments reporting to her, Gassan had 100 employees in financial accounting, line of business control, management information systems, corporate insurance, strategic planning, treasury, investor relations and corporate law.  All were needed desperately.

Second, what were the insurance implications for the company?  Did Hibernia have enough property and casualty insurance for such a catastrophe?

Third, what about her family?  Where were they to live?  What about school for her teenagers?

Finally, but urgently, what about the merger?  Gassan guessed before many others that the deal might need to be re-priced.  How would they go about that?  Most immediately, how would a hurricane-related loan loss provision play into reshaping the deal?

It was a daunting “to do” list and it seemed there was no time.

Confronting the difficult task

By the end of the week, however, true to her nature, Gassan had tracked down her managers, gotten an early assessment of the insurance picture, found a place to live and begun assembling a team to work on the provision issue.

With Capital One urging them on, it was going to take that first weekend after Katrina – thankfully, a long one because of Labor Day – to analyze loans and come up with an answer.  She delegated pieces to different areas:

  • Small business loans went to Suzette Prechter, a senior person in the company’s credit underwriting area, who was in Houston. Also, Randy Bidleman and Danny Hebert in small business loan processing.
  • Commercial loans went to Bill Herrington, head of commercial banking, who also evacuated to Houston.
  • Consumer loans were analyzed by Peter Brown, consumer risk manager, and Bryan Glenn, portfolio risk assessment manager.
  • Mortgages were handled by Paul Peters, president of mortgage banking in Baton Rouge.

Many others assisted behind the scenes.  Mike Quinn, head of consumer lending and loan services and systems, recalled it vividly.  “Somebody said we have to be able to forecast the impact of the storm on our loan portfolios, and we have to do it fast.  We worked literally all day, 12-14 hours a day, right through Labor Day weekend.”

~ ~ ~ ~ ~

They rescued their elderly neighbor

BILL & FRANCES HERRINGTON: 'We heard a muffled sound' / Photo: Bill Herrington

BILL & FRANCES HERRINGTON: ‘We heard a muffled sound’ / Photo: Bill Herrington

Bill Herrington was part of the team working on the loan loss analysis.  A consummate commercial banker, known widely in the New Orleans business community, he had helped many budding entrepreneur in his 23-year career. 

He and his wife, Frances, returned to their Metairie home Sept. 4 to get a few belongings.  Their street was flooded, but a neighbor took them in a small boat.

Coming out, “We heard a muffled sound.  My 82-year-old neighbor, Mr. Harrigan, had been trapped by rising water.”  The man was delirious and weak after 7 days alone, and his voice was barely audible. 

“We pulled closer, raised the window, and found him holding a loaded .38 revolver in one hand and clutching his rosary in the other.”  At first, Harrigan refused to give up his gun, but then “allowed us to empty his weapon and help him into the boat.”

The elderly man was a WW II veteran.  Understandably emotional,  “He likened what he saw in Metairie that day to the destruction in Hiroshima many years before.”  After the storm, he had survived by drinking water from his backed-up plumbing, but despaired of seeing his son and family ever again.

Herrington was able to wave down a Coast Guard helicopter and went to a dry spot on nearby railroad tracks. A rescuer dropped down and helped Harrigan into a stretcher.  “I said we hoped he could be taken to a military hospital.”

The couple unloaded their belongings from the boat, but the helicopter’s prop wash began to blow their things into the floodwater.  The couple jumped on their pile to hold it down.  “One of our wedding photos was sinking to the bottom … We looked at each other as we lay on our heap.  Somehow, we managed a smile.”

Months later, on a  trip back from Houston, Herrington noticed a FEMA trailer in the man’s front yard.  “I knocked, and seated in his new electric wheelchair, he greeted me warmly.”  Harrigan had been evacuated to the airport and was noticed by none other than Defense Secy. Donald Rumsfeld, who took a personal interest in the old vet.  Rumsfeld ordered him flown to Barksdale Air Force Base in Shreveport for treatment.  Later Harrigan  reunited with his son in the upper Midwest, but after a cold winter there, decided he’d rather live in a FEMA trailer in New Orleans. 

“I still have the bullets from his revolver.  I’m going to keep them as a souvenir.”

~ ~ ~ ~ ~

A unique problem

JAN MACALUSO: 'No empirical basis to do a forecast' / Photo: Russ Hoadley

JAN MACALUSO: ‘No empirical basis to do a forecast’ / Photo: Russ Hoadley

It was a unique problem.  “Here we were,” Quinn recalled, “asked to forecast losses for a hurricane, the magnitude of which none of us had ever seen, the impact of which none of us had ever seen.  So there is no history, no background, no empirical basis to do a forecast, but we had to do a forecast. To complicate that, the breach of the levees was a totally separate and distinct item from the hurricane.”

Gassan and her crew worked from the second floor of the Lafayette building, grabbing time on computers, camping sometimes in the bank’s boardroom.  Macaluso was in an Arkansas hotel room, working with them by phone before shortly driving to Baton Rouge.

With Hibernia’s mainframe out of commission, a great deal of information had to be garnered from field reports, from partial or older files and from memory.

Macaluso remembered the merger was in the back of everyone’s mind:  “There were really only a few things we could do to try and help.  Do we have the risk-based capital ratios that could sustain a $100-million potential reserve for loan loss provision?  And still maintain our independence?  Or are we forced just to take whatever they’re going to offer?  That kind of stuff I could do from the hotel room …

“I took my briefcase, so I had an annual report and a calculator.  I had some stuff with me.  Did I have everything that I needed?  No, but we had enough to get close.  At that point, while I’m looking at things I need to be looking at, I also can’t ignore the fact that I’ve got a lot of different levels of people that report to me, and it wasn’t beyond the realm of thought that some of my folks could be in that Convention Center.”

While Macaluso was doing the high-level analysis, Gassan decided to examine specific commercial loans.  A preliminary assessment and a presentation had to be completed by Labor Day, Monday, Sept. 5, with a final version before the release of the company’s third-quarter earnings in early October.

~ ~ ~ ~ ~

‘Hell on wheels’

PAULINE APPLEBY: 'There was no easy way' / Photo: Russ Hoadley

PAULINE APPLEBY: ‘There was no easy way’ / Photo: Russ Hoadley

Pauline Appleby was head of business line controllers and asset-quality reporting.  She was a seasoned financial expert to whom managers throughout the bank, including the CEO, went for deep analysis of performance.

She and her husband, Ian, lived on the north shore with two sons, 19 and 18.  An avid equestrian, she already had her horse, Talisman, boarded in Folsom.

The Applebys evacuated early Sunday to Jacksonville, FL, “just grabbing a bag, assuming it was only for 2-3 days …”

After first trying to assure that her co-workers were safe, Appleby got in touch with CFO Marsha Gassan.  Returning, she stayed briefly in Hammond and Baton Rouge, then came home, commuting from there.

“It was hell on wheels … There was no easy way to do it.”

~ ~ ~ ~ ~

As the group worked long into each night, a picture began to emerge.  Gassan and Appleby became the arbiters of what the final answer would be.  The most optimistic scenario indicated a storm-related loss of about $100 million; the most pessimistic, about $225 million.

Appleby particularly drilled the numbers, applying statistical tools to assess what would be realistic.  She, too, was the right person for the job.

She had been with Hibernia 11 years after stints at Citibank and Price Waterhouse.  She’d cut her teeth on financial analysis at those two institutions and was accustomed to dealing with tricky situations and with making projections.  “It was a very judgmental process,” she recalled of Hibernia’s loan loss project.  She remembered that early estimates from the various business units appeared to be somewhat low.

An estimate emerges

Among other things, she looked at the underlying capital for each of the portfolio components.  She also examined historic loss ratios and risk elements, trying to tease out something that made sense.  However, to decide what losses experienced in the past might be relevant in this unrivaled situation?  Now, that was a question.

Eventually, she and Gassan agreed on a number.  The storm related loan loss estimate that looked best to them was about $175 million.  Added to other reserve needs, this meant the company would report a total loan loss reserve of just over $402 million at Sept. 30, 2005, up 71% from a year earlier.  The provision would be $197 million, of which most was attributable to the disaster.

Gassan would opine famously at the final meeting of the Board of Directors before the merger:

“The one thing we know about this number is that it is wrong.”  Meaning, of course, that it was after all an estimate.  There was no way to determine the exact impact of storm-related losses on the $16-billion loan portfolio so soon after the events.

DARRELL MIPRO: Helped with loan loss estimates / Photo: Russ Hoadley

DARRELL MIPRO: Helped with loan loss estimates / Photo: Russ Hoadley

Other losses

There were also other real and potential expenses related to the storms beyond the provision for loan losses, although that, by far, was the largest single cost.  There was also:

  • Extra salary and benefit expense covering extraordinary hours being worked.
  • Additional occupancy and equipment expense for temporary space and additional office equipment.
  • Higher stationery and supplies expense related to so much work in distant locations.

Even larger expense categories included data processing, public relations and marketing, and employee-related needs, primarily short-term lodging.  A small group consisting of Darrell Mipro, a line of business controller, Scott Kisner, head of strategic planning, Steve Hebert, Tommy Doiron and others provided input.  Eventually, a full-blown estimate was developed, totaling just over $186 million, most of it the loan loss provision.

When all of the work was done, “We felt we understood the impact,” Randy Bryan noted.

This fact-based picture was used in a variety of ways – to plan for further contingencies, to assist in earnings projections, to apprise the board of directors and to communicate with Capital One.

The ability of Hibernia’s analysts in finance and accounting, as well as people in the field, to accurately assess the impact became crucial to the overall recovery.

Postscript

In June 2006, the bankers completed another review, this time using guidelines issued in by the Federal Deposit Insurance Corp., Federal Reserve, Office of Comptroller of the Currency, Office of Thrift Supervision and National Credit Union Association.  It used portfolio managers and credit analysts to identify and catalogue hurricane-impacted borrowers.

Participants included Mike Wack, Herrington and Steve Hemperley (commercial banking), Margie Olsen (loan documentation), Rob Stuart, Gassan, Prechter and Meche-Crochet (credit policy), and Bill Galloway (small business banking).  Others were involved who were in direct contact with borrowers.

Once the loan portfolios had been scoured, individual loans that had been significantly downgraded due to the storms were monitored on a monthly basis.

Surprise:  Delinquencies improve

Interestingly – and a surprise to many — from September 2005 to April 2006, delinquency trends improved in most loan areas – commercial, small business, consumer and indirect categories.  Only the mortgage portfolio saw a downturn.  Trends in non-accruals and charge-offs, while somewhat different, generally exhibited similar improvement.

The review’s conclusion was that a significant number of customers seemed to be holding up financially after the storm.  Some businesses were working overtime to rebuild in the damaged areas.  Some had record sales.  Some borrowers were taking advantage of government-sponsored programs such as tax credits and loan programs.

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