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Community Banks in Peril From Storms

Quick thinking makes up for hurricane-related branch closures, but what happens next?

According to the FDIC, there were 343 financial institutions directly affected by Hurricanes Katrina and Rita. Among the hardest hit banks - measured in terms of branch closures as of early October - were New Orleans-based Hibernia National Bank ($22 billion in assets), which was forced to close 52 of 300 branches; and Whitney National Bank ($8 billion in assets), which was forced to close 31 of 139 branches.

But, as difficult as it will be for these relatively sizable institutions to weather the storm, the burden of rebuilding will be even greater for small banks. For example, Cameron State Bank (Lake Charles, La.; $469 million in assets) had 18 of its 26 branches closed, and Bank of New Orleans (Metairie, La.; $229 million in assets) was left with only its main branch open, with two temporary branches filling in for three that are closed.

Nevertheless, these financial institutions have done what it takes to restore at least basic services. "All of our members have operating locations," says Viveca Ware, director of payments policy, Independent Community Bankers of America (ICBA), a Washington, D.C.-based trade association. "All of their customers can walk into a facility and obtain banking services."

Many of these facilities are temporary locations - trailers or warehouse space, in some cases - shared with other financial institutions. But it's service nonetheless. "The banks are really focusing on having operating facilities for their customers," says Ware. "They're focused on keeping their Web sites up to date and just answering the myriad of customer questions." Cooperation has been a key part of the restoration of service. "There are about 16 banks in the New Orleans area sharing two locations," notes Ware.

Lessons Learned
To be sure, the logistics of facilities sharing will be a part of future business continuity plans for banks with any significant exposure to hurricane risk. Although banks are required to have disaster preparedness plans in place, it was hard to find any organization ready for a disaster of the scope of Hurricane Katrina.

"In the case of Katrina, we have a whole region that was victimized and really decimated," observes Ware. "In the future, an individual bank's business continuity plan must have a regional component as well." Going forward, says Ware, banks will need to collaborate with their state, local and federal representatives in order to develop such a plan. "That's the biggest lesson learned to date."

The ICBA will play a role in facilitating the bank-to-government communication, as will other trade associations at the regional and state level. "If the community knows that banks are taking the lead in terms of developing a regional disaster recovery plan to ensure that they have banking services available to customers, that's going to speak volumes about the commitment of community banks to their communities," observes Ware.

Another key lesson has been the banking industry's dependence on the telecom infrastructure. "Going forward, banks will need to pursue more-creative telecommunications options," Ware says. "Maybe you have handheld radios for certain employees, and you also may give key employees satellite telephones."

Financial Reconstruction
Of course, a complete damage assessment - beyond just facilities - will take months. Considering the widespread loss of property, jobs and lives, the financial health of the region's banks remains a big question mark.

Although the FDIC insures savings accounts, the banking system is poised to bear the brunt of the uninsured losses in real estate and business assets from firms and families experiencing severe financial distress. Absent a massive government bailout on top of the FDIC guarantee, it's hard to imagine the banks, particularly the smaller ones, walking away unscathed. Consequently, the ICBA has suggested that Congress and bank regulators adopt policies designed to keep community banks afloat. Among the suggestions:

  • A fund to allow the federal government to purchase impaired loans of borrowers affected by the disaster;
  • Issuance of $10 billion in triple-tax-free Katrina Redevelopment Bonds;
  • And enactment of 20 percent and 50 percent community bank tax credits, which are provisions of the Communities First Act introduced to the House in May.

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