Hibernia CEO to Wall Street: Don't Punish Us for Candor

Stephen A. Hansel took on Wall Street Tuesday, arguing that Hibernia Corp. has been unjustly penalized by investors for facing up to its loan problems.

"The market tends to punish people who are early," the chief executive officer of the $15 billion-asset banking company said in an extensive inteview with American Banker. "We thought we would get more credit for being forthright, up front, and disciplined."

Hibernia's stock has been pummeled in recent weeks since the company announced that it would take losses on more than $60 million in nonperforming loans. That announcement was the beginning of what Mr. Hansel said will likely be a long series of such disclosures from banks as the credit cycle shifts.

In response to critics, Mr. Hansel is in New York this week giving what he describes as a "full" picture of Hibernia's business to analysts, investors, and the media.

"If we do it right, we'll get credit later," he said.

Clearly, Mr. Hansel has his work cut out for him. Hibernia has been stung first by two large nonperforming loans, then by analysts who wondered aloud whether the bank has a sound credit culture.

The criticism has stemmed mostly from a $33 million unsecured exposure to United Companies Financial Corp., the subprime lender that filed for bankruptcy protection on March 1. Hibernia was one of more than 20 banks that participated in the $850 million loan in 1997, but it was hit harder than most because of its relatively large exposure.

That loan, along with another nonperforming $29 million loan to Forcenergy Inc., prompted Hibernia last month to raise its loan-loss provision by 150% to $30 million. The set-aside helped lower first-quarter profits at the bank 28% to $29.6 million.

"We're seeing more credit problems and will see more credit problems," Mr. Hansel said. "Corporate earnings have been mixed for a while. I think it would be unrealistic that bank earnings were going to ignore that forever."

Mr. Hansel acknowledged that the criticism against Hibernia has hit hard. The bank's stock price has dropped about 40% since July 1998 to around $13 a share. Shares closed up 50 cents Tuesday, at $12.6875.

"It's been a strange feeling to be presiding over the cheapest bank stock in the top 50," Mr. Hansel said. "That was never one of my ambitions."

But he also conceded that Hibernia's history of credit problems makes it more susceptible to critics. Seven years ago, Hibernia, like many other banks, was on the verge of failure. Bad loans and a shortage of capital had the company on the ropes.

Mr. Hansel, then chief financial officer at Barnett Banks Inc., was brought in to complete a strategic recapitalization of Hibernia. Indeed, annual expenses were reduced by $12 million and the bank's overall loan portfolio-once two-thirds commercial-has been divided more evenly among commercial (39%), small business (20%), and consumer loans (41%).

"Suddenly this quarter we've had some problems," Mr. Hansel said. "We think that because of the history of the company, it's particularly important to be early and forthright in recognizing problems. We've tried to build the company for long-term value and I think we've done that."

In light of Hibernia's comeback and regional strength, Mr. Hansel believes the criticism has been shortsighted and harsh. He said that even though some loans have defaulted, the bank expects to recoup a "significant" amount of the original value when the borrowers liquidate.

But Mr. Hansel also warned that the company expects to absorb more losses from nonperforming assets in the future and that in the worst scenario Hibernia's nonperforming asset ratio could hit 1% in the near future. That ratio stood at 0.75% at the end of the first quarter, up from 0.41% a year ago.

"We think it's entirely possible we will have other nonperforming loans ... and a greater amount before we have less," Mr. Hansel said. "But the loss content, if it comes, would be tiny compared to what we've already recognized in the first quarter."

The market is beginning to show some signs of optimism. According to analyst predictions compiled by First Call/Thomson Financial, Hibernia is expected to register the biggest stock price gain over the next 12 months of any major banking company.

"In the case of Hibernia, I think the market did overreact a little," said Lana Chan, an analyst with CIBC Oppenheimer. "But Hibernia did get caught with a large loan to a subprime company. It really caught everyone by surprise."

Ms. Chan said Hibernia has "taken a lot of good steps" to inform investors about the extent of its credit problems. "I'm not sure what else they can do except not have any more loan losses," she added.

To offset more losses, Mr. Hansel said Hibernia has made changes in its risk management process. Even before the United Cos. loan defaulted, Hibernia limited the amount it would lend to large investment-grade corporations at $50 million. That limit declined as borrowers' credit profile worsened.

After the debacle, the bank has set smaller limits for some less creditworthy borrowers, although top-rated borrowers can still get up to $50 million. The bank's credit group, in place for more than six years, is still active. Hibernia also is conducting an ongoing evaluation of its portfolio and its national lending strategy is under evaluation, he said.

"We don't expect we're going to have anywhere near the losses we recognized in the first quarter," he said. "There could be more, but it's something beyond our control at this point because (what) we're looking at we don't control as directly."

As for the lending practices that led the bank to lending to United Cos and Forcenergy, Mr. Hansel said, "both of these were companies that fit our profile. They had a Louisiana tie and they made sense in our overall large- market strategy."

Mr. Hansel said that United Cos. had been a longtime customer of a predecessor bank that Hibernia merged with in the 1980s. He also acknowledged that relationship was influenced by the fact that J. Terrell Brown, United Cos.' CEO, was a director on Hibernia's board when Mr. Hansel was hired in 1992.

"The United Companies credit was a 25-year relationship that Hibernia inherited," Mr. Hansel said adding, "I think in this particular case you had an industry that really came apart at the seams."

Finally, Mr. Hansel said he wasn't surprised by the reaction to Hibernia's first quarter announcement, recounting a long list of stock price swings at Barnett and Hibernia that were triggered by earnings announcements. But, Mr. Hansel said, he knows the difference between short- term loan cycles and long-term credit problems.

"I think one of the last things you want to do in our business is kid yourself," Mr. Hansel said.

Institutional memory is sometimes in short supply among lenders, but Mr. Hansel says he has it in abundance.

"I've been in the business 29 years and through a number of cycles. My first year in the business was here in New York with Chemical Bank and I saw Penn Central go down in 1970."

That's Penn Central, not Penn Square. Mr. Hansel pointed out. The bankruptcy of the railroad, which left banks reeling from loan losses, predated by 12 years the failure of the Oklahoma oil-patch bank, which triggered the near-collapse of Continental Illinois Bank Corp.

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