Oil spill could sour loans, pressuring banks


It’s not just businesses that are sweating the effects of the Gulf of Mexico oil spill. Standing in the background, their lenders are a little fidgety, too.

Many banks along the coast, particularly in Alabama and Florida, were already saddled with bad loans following the real estate bust. Now, they have to wonder whether borrowers harmed by the spill can continue to make their payments.

Some banks are beginning to restructure a trickle of endangered loans, according to bankers interviewed by the Press-Register.

The key questions are whether customers will collect sufficient money from the BP PLC claims process, and how much wiggle room that regulators will give banks to help out their borrowers.

“The first immediate need is to have BP start writing checks,” said Gulf Shores City Councilman Jason Dyken, who is leading a committee exploring spill-related credit problems. “That process will fix most of this problem.”

When the oil spill hit, banks moved to take stock of how many loans they had made in affected areas and industries.

“We encouraged them to look through their portfolio to get a sense of what their exposure is,” said Trabo Reed, Alabama’s deputy bank superintendent.

Big lenders, like Regions Bank and the Wachovia Bank of Wells Fargo & Co., rolled out public relations messages, publicizing customer assistance teams honed after 2005’s Hurricane Katrina and the real estate bust.

“We’ve had a lot of customers just coming in to talk about it,” said Leigh Collier, who heads Wachovia operations on the Alabama coast and in Mississippi.

Collier added, “No one’s said, ‘I’m coming to turn in my keys because I can’t pay my bills.'”

Royce Cumbest, the president of Merchants & Marine Bank in Pascagoula, said that businesses in his area may have benefited overall, thanks to cleanup contracting.

But for sport fishing and tourism enterprises, the timing “could not have been worse,” said Joey Ginn, president of Vision Bank. “A lot of people generate their money from Memorial Day to Labor Day.”

Vision, a Florida-based arm of Park National Corp., operates in Baldwin County.

Joel Daves, head of Mobile operations for Regions, said “a very small number” of customers had cash-flow issues while waiting for BP to start writing claims checks. He said Regions made arrangements with them, and has yet to see lasting problems.

Some banks, including Hancock Bank and Whitney National, have begun to set aside money, expecting loan losses from the spill or the offshore drilling ban.

Ginn said that Vision has restructured loans for some customers, with a range of options such as temporary interest-only payments or longer repayment periods.

Gulf Shores Mayor Robert Craft testified before the House Financial Services Committee on July 29 that state and federal agencies need to loosen the reins on banks so they aren’t forced to choke off borrowers.

Craft said that regulators have at least twice forced banks to mark down a loan for which payments were current, based on an appraisal that showed the value of the real estate securing the loan had fallen since the spill.

In such a case, a bank could demand money from the borrower to hold as collateral, refuse to renew a loan or renew it for a smaller amount.

Asked about the Craft testimony, Tom Dujenski, the regional administrator for the Federal Deposit Insurance Corp., said, “That’s not the guidance our examiners are following.”

Dujenski said, “We do not write down performing loans that are properly underwritten.”

He said that regulators want banks to be flexible in their approach, and that new appraisals would not be required to renew loans if no new money were borrowed.

U.S. Rep. Spencer Bachus, R-Vestavia Hills, is asking federal agencies to issue written guidance so banks will feel safe to loosen up.

“We actually are urging them to declare a moratorium, for a period of a year, on declaring write-downs of loans based on appraisals,” said Bachus, the ranking Republican on the House Financial Services Committee.

Dyken, who accompanied Craft to Washington, D.C., said he’d like to see the federal government go further, instructing banks to let borrowers defer or stretch out payments and cut interest rates. “For our long-term survival, our businesses don’t need more debt,” he said. “We just need to restructure debt we have.”

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Stuart H. Smith is an attorney based in New Orleans fighting major oil companies and other polluters.
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