Hibernia Running Out of Time To Heal Itself

Hibernia Corp. is in the midst of a crisis: It must find fresh investors or a merger partner within a perilously short time or risk becoming a ward of the federal government.

The New Orleans-based company warned last week in a regulatory filing that "intervention by regulatory authorities" could be necessary if it fails to meet the stringent terms of a cease-and-desist order and strengthen capital ratios. Underscoring the urgency, Hibernia acknowledged that it probably would default on the covenants of an $85 million loan from Chase Manhattan Corp. if it fails to arrange a recapitalization by Oct. 31.

Chase conceivably could elect to foreclose on Hibernia's Texas operations, experts say. Chase said Thursday that it was "working closely with Hibernia's management" but declined to elaborate.

Weakened by the $82.7 million loss it reported for the first half, and facing continued heavy deterioration in its loan portfolio, Hibernia is pushing for a quick solution. The company already has spent half a million dollars in its quest for fresh capital. And it recently hired Goldman Sachs Inc. to help in the search for at least $200 million.

Good for Market Entry

The largest bank holding company in Louisiana, with more than $6 billion of assets and 160 offices in that state, Hibernia is an attractive market-entry vehicle. The company would no doubt like to elicit a stakeout agreement of the sort that rival Premier Bancorp, Baton Rouge, entered with Banc One Corp., Columbus, Ohio.

But Hibernia's instability is a red flag. In the first half, Hibernia's problem assets soared a breath-taking 58%, to $339 million, or 7% of gross loans.

"Hibernia's problems have arisen so fast that it will be difficult for the company to attract a buyer," said Peter Tuz, a banking analyst with Morgan Keegan & Co., Memphis.

First Commerce Says No

So far, Hibernia's merger quest is a tale of the big fish that got away. NCNB Corp., Charlotte, N.C., looked over Hibernia but then balked. Similarly, the revived Worthen Banking Corp., Little Rock, Ark., looked at Hibernia but took no action.

And the company arguably best positioned to acquire Hibernia, First Commerce Corp., Baton Rouge, says it is not interested. Relatively healthy and already the second-largest banking company in Louisiana, with $4.6 billion in assets and 81 branches, First Commerce could achieve considerable savings through an alliance with Hibernia.

Wall Street also has distanced itself from Hibernia.

Briefly reaching $5.75 when it became known that NCNB was looking over Hibernia, the company's common shares plummeted after NCNB balked and Hibernia reported a $33.2 million second-quarter loss. Hibernia common closed Wednesday at $3.625, a discount of 64% from book value.

One of Hibernia's goals is to sell its 25-branch Texas franchise, which contains $1.1 billion of assets. The sale would help Hibernia pay the $85 million note owed to Chase. And if a premium was fetched, the sale potentially would increase the parent company's capital ratios.

Sources still consider NCNB Texas National Bank as a potential buyer of the unit.

List of Candidates

Other likely suitors include Central Bancshares of the South, Birmingham, and Comerica Inc., Detroit. Both companies have built Texas franchises exceeding $1 billion of assets, have capital, and are planning further expansion in the state. Team Bancshares Inc. also is seen as a potential acquirer.

Bidders are expected to drive a hard bargain, however. They know Hibernia is desperate to make a sale. And there is concern that bad publicity surrounding the Louisiana parent company has hurt the fledgling Texas franchise, assembled from failed banks and thrifts.

Aside from the risk of selling the Texas unit at a loss, Hibernia would be divorcing itself from a crucial funding source. The Texas unit "has routinely provided [funds] to the Louisiana bank," according to company reports.

Hibernia may already be in a precarious funding situation. The company has unusually heavy reliance on jumbo deposits exceeding the $100,000 limit on federal deposit insurance. Experts say customers are inclined to withdraw funds that exceed the insurance limit from banks experiencing financial problems. At midyear, Hibernia held $1.38 billion of jumbos, equaling 25% of domestic deposits.

Rocked by withdrawals, operating losses and loan defaults, Hibernia already has conceded "there can be no assurances" that emergency funding plans recently devised at the order of the Office of the Comptroller of the Currency will prove adequate.

As of a week ago, Hibernia officials said the company had not been forced to borrow from the Federal Reserve System. Regulators have ordered Hibernia to submit weekly reports on its funding position.

A further problem is continued loan defaults. At midyear, 15.7% of Hibernia's $381 million HLT portfolio was delinquent, as was 26% of the $701 million realty portfolio.

Frank Anderson, a senior analyst with Stephens Inc., Little Rock, Ark., estimates Hibernia will suffer a $100 million increase in problem assets during the last half of 1991, pushing the company's nonperforming asset ratio to roughly 9% and provoking added losses.

Meanwhile, the parent company is facing a cash squeeze.

Though in need of funds "to service its debt and pay other expenses," regulators have barred Hibernia's lead Louisiana bank from paying dividends to its parent. And it is not clear whether regulators will extend required approvals for dividend transfers from the Texas bank.

"The parent company has no other sources of income," Hibernia told the Securities and Exchange Commission.

On top of all that is a management crisis at Hibernia. After pocketing $8.94 million of cash compensation - equal to 42.7% of cumulative earnings over the past 42 months - the four top officers recently were ousted following orders from the Comptroller's office that the company seek all legitimate means of cutting their salaries.

More Trouble to Come?

That being the case, it appears that Hibernia could be shunned until the depths of the banking company's problems are more fully known. The company in turn may have to withstand several more rough quarters with just the capital on hand.

Citing "questionable and/or inappropriate accounting transactions and practices," federal regulators have ordered Hibernia to restate certain call reports.

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