Cleaning up after Hurricane Katrina is a formidable task, but at least it offers more tangible rewards than measuring the storm's cost.
Sixteen banking companies estimated aggregate third-quarter costs of about $1.4 billion related to the Aug. 29 hurricane and its aftermath. They listed uninsured losses on properties; incidental expenses for room, board, and travel for relocated employees; and lost revenue from waived fees. But by far the most significant portion of the cost was in provisions for loan losses.
Aggregate costs seem certain to move higher, because some key players have yet to report. The $8.9 billion-asset Whitney Holding Corp., which ranked third in the New Orleans market with 16% of deposits, expects to quantify Katrina's costs when it releases earnings on Nov. 9.
Quantifying losses, like everything else about the hurricane, is messy and fraught with danger. It also lands banks back in the familiar spot of trying to please both banking regulators and the Securities and Exchange Commission in accounting for loan losses. Katrina has made that dilemma thornier than usual.
Can a borrower be delinquent if the Postal Service can't find the address to deliver a bill? If generally accepted accounting principles require that lenders place most loans 90 days past due on nonaccrual status, how should banks respond to public pressure to waive interest and principle payments for 90 days?
If a borrower who has taken advantage of a 90-day waiver fails to repay after that period expires, is the loan 30 days or 120 days delinquent? Though the banking regulators urge banks to be flexible with borrowers, should banks also make provisions for loans with late or restructured payments?
Banks have tackled these questions to determine third-quarter results, and it's likely that Katrina's costs will trickle into the fourth quarter.
"I would be surprised if the magnitude was significant, but there will be some yearend cleanup," said Kevin Reynolds, who covers southeastern banks for Stanford Group. "In the bankers' defense, I think it is impossible to have figured out exposure when they closed the books on the [third] quarter."
Accounting rules make it clear that banks have no choice but to attempt the impossible. They must assess their portfolio and assign a dollar value to the losses they have likely suffered - but not realized - at the end of each financial period.
The $4.9 billion-asset Hancock Holding Co. of Gulfport, Miss., expressed confidence it covered all of Katrina's costs in the third quarter.
"We feel comfortable that the loan provision that we established is sufficient to address the loans that we feel have the potential for loss," said Carl Chaney, the banking company's chief financial officer.
Its $35.2 million provision was offset somewhat by a $14.1 million gain the company expects to record from insurance claims on branches.
"The four or five branches that got hit the hardest were those of our very oldest branches that were right on the waterfront," Mr. Chaney said. The branches "had been written down on our books over time to low values, but now that we're faced with getting insurance proceeds that will be the cost of replacing those facilities, we're looking at a sizable gain."
At the other end of the certainty spectrum is Bank of America Corp., which has hardly any physical presence in the communities affected by Katrina but made a $50 million provision to cover potential loan losses. The company warned the number could change.
The provision "is really, really a rough estimate of the range," chief financial officer Al de Molina told investors during an Oct. 19 conference call. "We will refine those estimates."
First Horizon National Corp., which recognized $7 million of costs related to Katrina, expressed similar concerns. It said in its Oct. 17 earnings release that its estimates "are inherently imprecise due to a variety of factors, including the unprecedented nature of the disaster and the preliminary nature of the information used to prepare" them.
Public statements by Fannie Mae and Freddie Mac put a face on the problem of measuring loss. Neither has come up with a definitive number. Fannie has estimated its costs will be $250 million to $550 million; Freddie was only slightly more precise, with a range of $150 million to $300 million.
Bank regulators are generally forgiving of the difficulty in estimating costs. In separate statements issued at the end of August, both the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency asked banks to "work constructively" with customers affected by Katrina. Similar exhortations followed hurricanes Rita and Wilma.
The consistent line: "Extending repayment terms, restructuring existing loans or easing terms for new loans, if done in a manner consistent with sound banking practices, can contribute to the health of the community and serve the long-term interests of the lending institution."
True enough, but those practices don't make accounting for loan losses any easier, which the regulators recognized in questions and answers they jointly issued on Oct. 13.
"As financial institutions are able to obtain additional information about their loans to borrowers affected by the hurricanes, the agencies would expect that estimates of the effect of the hurricanes on loan losses could change over time and that the revised estimates of loan losses would be reflected in financial institutions' subsequent regulatory reports," they wrote.
In other words, federal regulators acknowledged that banks "wouldn't necessarily have sufficient information to have their estimates as refined as perhaps they will this next quarter," said one official familiar with the guidance.
Other Washington emanations further muddy the situation. Lawmakers are weighing measures that could affect both the timing and extent of banks' losses related to hurricanes. In the meantime, silence at the SEC and the Public Company Accounting Oversight Board is making bankers nervous.
"Everyone is focusing on the regulatory relief, but a lot of these guys are going to go through an audit cycle before an examination cycle," said Dennis Hild, the vice president of accounting and financial management policy at America's Community Bankers. "It's fine for regulators to provide some relief efforts, but that doesn't change generally accepted accounting principles. At the end of the day, nonaccrual is nonaccrual."
The federal banking official said the agencies "routinely discuss our issuances with" the SEC and the Financial Accounting Standards Board. "We're not changing or bending any accounting rules. The rules are still there."
As banks try to figure out how to satisfy banking regulators and the SEC, they also face substantial skepticism from investors.
One buy-side analyst, who asked not to be identified because he regularly trades banking stocks, said that though costs related to Katrina are legitimate, they can distort banks' financial performance.
"Because of hurricane provisions, banks can grow earnings by running down reserves for a couple of years," this investor said. "My concern is that now they are calling it one-time, but then they bleed that one-time event into earnings over the next two years."
With credit costs bouncing along at historic lows, banks are particularly prone to that accusation, Mr. Reynolds said.
"We have been concerned for some time about some of the larger regional banks in the Southeast driving down their reserves, and for a long time when credit quality was at its peak, the SEC and the auditors were winning the battle of reserve practices and provisioning," he said. "Banks were allowing their reserves to run off, using the cover of the SEC and the auditors to essentially make earnings estimates against the backdrop of core fundamental weakness."
Now, Mr. Reynolds said, "there is some need to add to reserves, and I think that Katrina gave some banks the cover to do that."
Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners LP, said the potential for gaming the reserve exists "because there is no practical way for us to verify the specific costs" that banks claim in the face of Katrina damages.
Analysts say that they won't be surprised if some banks end up reversing a portion of their Katrina costs in future quarters, and that banks' calculations lead to one inescapable conclusion:
"There is still a certain amount of hocus pocus to doing the loan-loss reserve," said Chris Marinac, an analyst with FIG Partners in Atlanta.
In the midst of all the second-guessing that banks face as they quantify the short-term effects of Katrina is an impolitic truth that bankers and investors are reluctant to articulate.
"Hurricanes are good for business," said Mr. Marinac. "They are terrible for peoples' lives, and they are a personal and emotional hardship. But at the end of the day, the economics of them are very favorable."
Hurricanes trigger increased costs in the quarter they occur, but "go two or three quarters out and you start to see non-interest-bearing deposits accelerate because of insurance proceeds and government assistance," Mr. Fitzsimmons said.
"And you also see something that lasts a little longer - in the case of Katrina it will be several years: You will have the wind at your back for loan growth," he said.
"New Orleans was not known as being a growth market from a loan standpoint," Mr. Fitzsimmons said. "With all the disruption that happened, when that market starts to rebuild, it's going to be a 10-year growth market."
That time frame is a popular estimate.
"We are talking about a rebuilding effort that is probably going to last a decade," Mr. Reynolds said. "The risk to that argument is: What if people are tired of getting blasted by hurricanes and they never come back?"
