WASHINGTON - Speculation is beginning to mount that without federal intervention several small New Orleans banks will fail, unable to recover from the blow delivered by Hurricane Katrina on Aug. 29.
The sober assessment comes as a three-month mortgage-payment waiver expires and momentum wanes in Washington to offer the banking industry a crutch.
"For some of these community banks, the default rates on their loans has to really be ringing alarm bells," said James Wilcox, a professor at the University of California-Berkeley's Haas School of Business. "Given the terrible economic toll, not to mention the human toll, it's going to be hard to believe that there aren't going to be some failures of some sort."
Bert Ely, a banking analyst in Alexandria, Va., says there will probably be four or five bank casualties.
"There is a growing sense that the recovery in the worst-hit areas is going to go a lot slower than expected," he said. "It will take years instead of months. In that regard, in effect the banking markets just aren't going to be there."
Some believe that other failures could follow once the first bank goes down.
"There's always this idea of a contagion effect - guilty by association," said Larry R. White, associate professor of banking and finance at Mississippi State University. "If you have one bank that starts to suffer, then another bank is vulnerable and it starts to suffer, and it starts to spread."
According to the Federal Deposit Insurance Corp., 214 financial institutions in Louisiana and Mississippi were affected by hurricanes Katrina and Rita and 173 branches were still closed as of Nov. 16.
Some healthier banks might step in and buy weaker competitors.
"There are probably some banks that could have some difficulties if they have a lot of loans that were not protected by flood insurance and the borrower doesn't have capacity to repay," said James Hudson, the president and chief executive of Omni Bank in Metairie, La., and the chairman of the Community Bankers of Louisiana.
"But I believe in my heart that community bankers here will band together and try to help those banks that are having some problems," Mr. Hudson said.
Diane Casey-Landry, the president of America's Community Bankers, said regulators will begin pitching such marriages once it is clear which institutions need rescuing. This was a common practice during the savings and loan crisis.
"If we look at history as a precedent, the regulators could absolutely be encouraging acquisitions or making introductions between one bank and another," Ms. Casey-Landry said.
Larger banks might pursue such buyouts, hoping to get bargain prices and earn goodwill with regulators, Mr. Ely said. But some banks could be "so far gone that no one wants to buy them," he said.
Sid Seymour, the chief examiner of Louisiana's Office of Financial Institutions, said it is too soon to predict failures or consolidation. "I know that there is a lot of speculation out there," he said. "I haven't heard anybody that knows for sure what the severity of the loss is going to be."
In an interview Wednesday, he said it will take at least a year for losses to be fully recognized.
In the meantime, lenders are looking to Washington for help.
The Department of Housing and Urban Development announced Monday that it would make the monthly payments on roughly 20,000 mortgages for one year for certain borrowers with Federal Housing Administration insurance.
And for the past three months banks were allowed to waive many fees and borrowers did not have to make mortgage payments. Just before the forbearance period ended Dec. 1, federal regulators released a list of questions and answers addressing Gulf Coast lenders' issues. The agencies advised lenders to work with borrowers on a case-by-case basis and consider restructuring some loan terms, but stopped short of extending the forbearance period.
Regulators have not indicated whether they would step in if a bank is failing.
"At present, we're not aware of significant supervisory problems among state-member banks as a result of the hurricanes," a spokesman for the Federal Reserve Board said Wednesday. "Obviously, a number of uncertainties remain and we will work with institutions if the need arises."
Former FDIC Chairman Don Powell has said he did not expect Hurricane Katrina to force any banks into failure. "There has never been a bank closed because of a natural disaster, and these banks are coming off some very strong years," he said on Sept. 19.
Mr. Powell, now the coodinator of the Bush adminstration's efforts to rebuild the region, was in New Orleans Wednesday and unavailable to comment but FDIC spokesman David Barr echoed his comments yesterday.
Congress is also considering ways to stave off failures.
Rep. Richard Baker introduced a bill last month that would create a federal agency to buy troubled mortgages, fix up properties, and resell them. The Louisiana Republican has said that without assistance, banks could begin foreclosing on as many as 100,000 homes next year.
Rep. Baker has argued that the Louisiana Redevelopment Corp. would help both homeowners and their bankers, but enactment is unlikely as Congress hurries to finish budget-related business before adjourning soon.
A spokesman for Sen. Mary Landrieu, D-La., said the senator has been reviewing the bill and could make a decision about whether to introduce a Senate version by next week. But Senate Banking Committee Chairman Richard Shelby has no plans to hold a hearing on the issue.
"If Shelby doesn't have hearings, banks will fail," said Rusty Cloutier, the president and CEO of the $538 million-asset MidSouth Bank in Lafayette, La. "It doesn't take a genius to figure out that once you've got those kinds of losses, it's hard to come back."
Tracking the health of Gulf Coast banks is difficult. Some small banks with heavy concentrations of residential and commercial mortgages have not even filed third-quarter call reports. Regulators will not have a clear picture until fourth-quarter results are filed.
But state and federal regulators are trying to get a handle on the impact by visiting affected banks. Michael Bush, the president and CEO of the $107 million-asset Mississippi River Bank in Belle Chasse, La., said he spent two hours Wednesday morning meeting with FDIC and state banking officials interested in how his bank was performing.
"Knock on wood, it looks like we are going to be one of the extremely lucky banks in the area and the impact is going to be minimal," said Mr. Bush. But the examiners told him that not all banks are so fortunate.
"It sounded like in more cases than not, things were better than they thought in most of the banks they had talked to," Mr. Bush said. "But in some of the cases, things were worse than they thought."
He said he did not know which banks these might be.
Most expect the toughest stretch to begin next quarter, once the emergency inflow of money has slowed and bankers have to start trying to collect loans.
"I'm not going to predict failures," said Peter Gwaltney, the Louisiana Bankers Association's CEO. "I don't know enough about the specific banks and their portfolios. But the impact is so big and the economy has been so devastated, that it's going to be difficult to avoid problems without a meaningful federal response.
"We're still looking for that."
