NEW ORLEANS —
To reach the executive suite of the Liberty Bank and Trust Company here, you first have to navigate a stretch of town that still lacks street signs. Finding an entrance to the bank's headquarters is another challenge. You have to circle behind the building, a six-story glass box that is still missing several windows, and — as if there to work on the plumbing — walk up a set of corrugated steel steps sandwiched between a Dumpster and an oversized air-conditioning unit.
After traversing a bare room that smells of mildew and walking past three disabled elevators, you trudge up five more flights of steel stairs to reach the office of Alden J. McDonald Jr., the chief executive of this institution, which was the country's third-largest black-owned bank until Hurricane Katrina and floodwaters roared through New Orleans one year ago.
Mr. McDonald and his staff count themselves among the fortunate, despite the general state of disrepair inside and outside their building. While their neighborhood wants for many basic amenities, including mail delivery and phone service, their company is one of the few enterprises back in business in the vast northeastern quadrant of New Orleans. And in a city where an estimated two in three businesses remain shuttered, Liberty is not only open but also turning a profit.
Floodwaters still covered much of New Orleans last September when Mr. McDonald first agreed to allow a reporter to chronicle his efforts and those of his staff to resuscitate their battered bank. Working out of a beachhead that Mr. McDonald established in Baton Rouge just after the storm, Liberty seemed on the edge of ruin. Its long-term survival seemed in doubt.
Liberty's most impressive accomplishment, like that of New Orleans itself, may simply be that it has regained some semblance of its old self in only 12 months. But Liberty is also like New Orleans and its ravaged economy in another crucial way: its recovery has a long way to go.
Liberty faces enormous hurdles, chief among them the lingering doubts about the viability of large stretches of the drowned-out, predominantly black eastern half of the city, where Liberty's customers were concentrated and which is still largely in ruin. Liberty's success in helping black professionals and others settle the east established a large African-American homeownership class for the first time in the city's history. But that legacy, combined with the bank's backing of the city's small but growing ranks of black entrepreneurs, prompts concern among experts contemplating how well Liberty will fare if its carefully cultivated customers never return. Liberty's very success, it seems, presents the bank with its greatest challenge.
Hurricane Katrina delivered body blows to virtually every business along the Gulf Coast, but few were more devastated than Liberty. One year after the storm, only half of the bank's eight New Orleans branches are open, and one of those has limited hours. Flooding badly damaged five branches and looters stole $700,000 from several branches, according to Mr. McDonald. Floodwaters overwhelmed a one-story operations center, which housed its paper records, and putrid water sat for weeks on the ground floor of its headquarters in New Orleans East, destroying the building's electrical system and elevators. Wind damage and rain destroyed sections of the building's top floors.
Insurance will offset some of those losses, but there is no compensating Liberty for the miseries visited upon its customers. Jobs disappeared as businesses closed and flooding destroyed or badly damaged the homes of roughly three-quarters of Liberty's customers — and of most of the bank's staff, including Mr. McDonald.
By some measurements, Liberty is doing astonishingly well. After posting losses of $3.4 million in 2005, its worst performance since opening its doors 34 years ago, Liberty reported a $2 million profit in the first half of 2006. "We're feeling very hopeful about the future," Mr. McDonald said recently. Even so, Liberty has already slipped to fifth in a ranking of the country's largest black-owned banks, according to Creative Investment Research, a firm that tracks minority-owned financial institutions.
"Liberty seems to have done a remarkable job in a trying situation, certainly better than I ever thought possible," said William Michael Cunningham, an African-American who runs Creative Investment Research in Minneapolis. "But my concern is with the health of the bank two years, three years out, especially with so many questions around the rebuilding."
Will New Orleans truly come back, or is it destined to stand as a paler, less diverse version of its former self? There may be no better stand-in for addressing that question than this homegrown bank that, until Katrina, sparkled as a success tale, a black-owned institution in a predominantly African-American city that offered crucial service to sections of town historically underserved by mainstream banks.
Alden McDonald awoke early on the Sunday before Katrina hit New Orleans last year. He planned to check on Liberty's various properties, ensuring that they had been properly secured, and then to join his wife inside the concrete fortress of the Hyatt hotel in the central business district, to ride out the storm. But Mr. McDonald, a native New Orleanian, changed his mind about staying as he toured the city. Listening to his car radio, he began to appreciate the might of Katrina. He phoned his wife, who checked them out of the Hyatt one hour after checking them in. The pair decided to retreat to the home of good friends in Atlanta.
Then Mr. McDonald, like much of the world, hunkered down helplessly as he watched television coverage of his flooded city and tried hard to think about something other than retiring. "My entire operation was under water," Mr. McDonald, 63, said. "Which meant I had to go back and rebuild everything. I had to rebuild all systems. I had to rebuild all files. I didn't know how many of my customers would stay with me."
He also did not know the fate of tens of millions of dollars that Liberty had lent to homeowners and entrepreneurs in the part of the city that locals referred to simply as "the east."
"The only thing I could think of is, 'All of these people lost their real estate, which I had as collateral,' " Mr. McDonald said. "I knew I had insurance on a lot of it, but I still didn't know how much at the time." Sitting in his friend's home, he wondered if his bank's days as an independent institution were over.
This bout of pessimism lasted two or three days, Mr. McDonald said, and over the coming months he was careful never to betray even a hint of doubt about the bank's future. He had been Liberty's chief executive since its founding in 1972, when its sole facility was a trailer in a sketchy part of town. He knew about hard times. After a few days in Atlanta, he started working on a survival plan that would quickly bring him to Baton Rouge.
"There were a lot of people depending on me to make this thing come back," he said. "My staff. The community."
Liberty had three outposts in Baton Rouge, 80 miles northwest of New Orleans, and two in Jackson, Miss., 160 miles due north. Those branches would prove crucial in the coming months, providing both ballast in unstable times and a base from which to operate. For the next six months, one of the Baton Rouge branches, a homely, spacious brick building missing a corner of its corrugated tin roof, served as the command post for Mr. McDonald and about 20 employees. Two of them, seated on beat-up borrowed chairs behind a pair of folding tables, served as Liberty's loan department. Four tables pushed together in the middle of a room accommodated a makeshift call center — after BellSouth installed extra phone lines, nine days after the hurricane.
Even after the bank set up a dozen phone lines to field calls, customers preferred driving to Baton Rouge from as far away as Houston and northern Louisiana, in order to meet in person with a bank employee. "Basically it's everyone's job to deal with customers right now," Mr. McDonald said at the time, "including mine."
Customer service was one major concern right after the storm; reconnecting the bank to the global A.T.M. system was another. Unlike larger banks, which had operation centers around the country, and smaller ones, which tended to outsource data processing, Liberty housed its central computers in New Orleans, which was without electricity or working telephone lines in Katrina's aftermath.
Mr. McDonald had prepared for the hurricane the same way he prepared for past storms, by creating several backup copies of the bank's computer records. Two employees got copies and Mr. McDonald sent two more via FedEx to a Pennsylvania company that handles the bank's computer operations during emergencies. But Mr. McDonald did not hear from either employee for more than a week after the storm, and Katrina interrupted FedEx's service for days.
With customers scattered around the nation and desperate for cash, Mr. McDonald faced a tough choice: to lock out customers from A.T.M.'s and branches in the midst of the crisis and risk being cast as a Scrooge, or to allow them to withdraw cash and risk being ripped off because he temporarily had no way to determine how much money customers actually had in their accounts. Mr. McDonald chose the second option, permitting anyone with a Liberty account to withdraw up to $100, and then up to $500, per day. In the end, that cost the bank hundreds of thousands of dollars in overdrafts during the 10 days that Liberty's records were off the A.T.M. network.
Mr. McDonald's next big worry was cash flow. The same floods that destroyed homes also wiped out jobs. That meant Liberty needed to brace for a steep drop in deposits and mortgage payments. Liberty, like many other area banks, gave both homeowners and its small-business customers until Jan. 1 to resume monthly loan payments — depriving the bank of its two largest revenue streams for four months while it racked up a number of extraordinary expenses.
Emergency computer services were costing the bank more than $50,000 a month, so Mr. McDonald ordered a new computer system, despite its $500,000 price. He spent thousands of dollars dispatching boats to eastern New Orleans to assess damage and to retrieve computers and furniture for Liberty's temporary home in Baton Rouge. Once the floodwaters receded, he brought in emergency generators to keep air blowing through his headquarters to fight mold; filling the generators' fuel tanks cost $1,500 a week. Apartments in Baton Rouge for displaced employees cost thousands of dollars a month.
"I hate losing money," Mr. McDonald said in early October, six weeks after the storm. "But everywhere I look I'm losing money." He had packed only a few short-sleeved shirts and one pair of slacks when he left New Orleans, thinking that he was leaving for a few days. Yet four weeks passed before he was finally able to take a day to relax in Baton Rouge and buy new clothes. "Thank goodness I thought to bring four pair of underwear with me," he joked.
A courtly man with a shock of wavy white hair and a bushy white mustache, Mr. McDonald is more animated than one might expect of a bank president. He laughs often, and, to underscore a point, will let his mouth hang slack-jawed. It would be a month after Katrina before he visited his home for the first time in New Orleans East — a journey he took, he said, because "my wife was bugging me to get stuff out of the house."
Amid muck and mold, he found little to salvage in his home.
At the end of each day, usually around 7 p.m., Mr. McDonald convened a small group in his office for what he called "my daily crisis management meeting." Early on, the gatherings served as forums for sharing bad news. The new computer had arrived (cheers) but parts were missing (groans). New parts had arrived (huzzahs) but not crucial software components (more groans). Tasks that people thought might take a week or two, such as reviving the bank's Web site, ended up requiring a month or more.
The daily financial updates were still more depressing. Before the storm, Liberty generated $150,000 a month in loan fees, but those funds largely evaporated in the first weeks after the storm because the bank was writing virtually no loans. The bank normally collected $70,000 in monthly charges from checking accounts — but Liberty temporarily suspended this fee for most of its customers.
These grim financial realities invariably caused people to ask Mr. McDonald how Liberty could survive. The bank had roughly $40 million in securities, an ample cushion against insolvency if Mr. McDonald could stabilize its finances. But the clock was ticking, and to raise much-needed cash, Liberty sold a portion of its securities at a $1 million loss.
"'These are nervous times for the bank," said Norman C. Francis, Liberty's chairman, five weeks after Katrina.
Mr. McDonald was largely alone in those first months after the storm. The bank's chief operating officer had resigned earlier that year to take a job in Detroit and Mr. McDonald had let his chief financial officer go shortly after the storm.
Monthly board meetings continued, but directors had their own distractions. All but one had lost a home in the storm, and all had other responsibilities that needed attention. "All of us had a lot going on," said Mr. Francis, the president of Xavier University, a historically black college in New Orleans that had been flooded. That was especially true for Mr. McDonald, who was appointed by Mayor C. Ray Nagin to the 17-member commission created last September to devise a blueprint for rebuilding New Orleans.
"Anything we do to get people back in town helps my bank," Mr. McDonald said at the time.
If the first two months after the storm were about bailing water to keep a sinking bank afloat, the next six months were about reigniting Liberty's financial engines. Mortgage payments would restart after the first of the year, and the bank could once again count on a steady stream of fee income. But every week brought more closing of accounts by longtime customers, often because there were no Liberty branches near their new homes.
The top priority during this second phase was to analyze the bank's loan portfolio and to gauge the likelihood of loan defaults. That meant figuring out who had adequate homeowner insurance and who did not. Those without flood insurance were likely to default on their loans and leave Liberty with largely worthless collateral: flood- and hurricane-ravaged homes and businesses. Analyzing potential defaults would have been fairly routine if the bank had access to its paper records, but the floods had destroyed those. So Mr. McDonald assigned a small team of people to track down individual borrowers.
"I can't even begin to tell you how many hundreds of hours we spent on that piece," he said. (In time, though, he will know the precise costs: he has asked his new chief financial officer to tally the figure so he can submit it with insurance claims.)
In October, Mr. McDonald opened a pair of branches in neighborhoods that were beginning to repopulate: the Garden District and the West Bank. Almost immediately, lines began to form as customers were eager to get on with their lives. By November, the precipitous drop in Liberty's deposits had stopped.
"People were increasing their balances rather than decreasing their balances," Mr. McDonald said. It was then, he realized, that his bank might make it.
He might have been confident about the bank's prospects, but a large portion of his customer base still had no idea when they would move home, if ever. Working with lobbyists in Washington, he tried, unsuccessfully, to have Congress pass a law requiring the federal government to funnel a large portion of Gulf Coast redevelopment funds through smaller community banks like Liberty. He thought, too, about raising his profile nationally and catering to larger corporate depositors, like Aetna and American Express, which he already had as customers.
In the end, "Phase 2," as Mr. McDonald took to calling it, entailed doing what the bank always did — selling its services to individuals — but doing so with more creative flair.
Earlier this year, Liberty repackaged certificates of deposits as Katrina Investment Deposits, or K.I.D.'s, which were nothing but C.D.'s offered at a below-market interest rate and wrapped in a feel-good package. Countless people had offered to help Liberty, and this was the financial vehicle it created to capitalize on that goodwill.
Though he gave people a choice between interest rates of 2 percent and 2.5 percent, "quite a few people chose 2 percent," Mr. McDonald said. (That rate was well below the 5 percent or so that a customer could have earned on a regular C.D. last spring.) Over the coming months, Liberty would sell $10 million worth of K.I.D.'s — using the money to jump-start lending, its primary source of profits.
To further bolster his flagging loan business, Mr. McDonald offered 100 percent mortgage financing and set in motion a plan to open loan centers in strip malls in other parts of Louisiana as well as Texas and Mississippi.
"I needed those fees," he said. "I needed to get my interest income up." Liberty's staff was able to qualify enough people to approve $10 million in loans in less than three months. That amount exceeded Mr. McDonald's expectations, but it was still just a fraction of the $10 million a month that Liberty lent, on average, before Katrina. Today the bank is writing no more than $3 million a month in loans, Mr. McDonald said, and has stopped writing riskier, no-money-down loans.
In time, Mr. McDonald would complain that while he took time every Monday to drive to New Orleans to attend meetings of Mayor Nagin's commission, the group never discussed the core issue of what to do about the city's most heavily damaged neighborhoods. To this day the city is without a coherent plan for the east. But his trips gave Mr. McDonald an excuse to drive through neighborhoods to see where people were returning. Those tours persuaded him to open two branches in January in Gentilly, a large, racially mixed area in the center of New Orleans.
Other banks, including Chase and Whitney National Bank, a venerable local institution, have followed him into Gentilly. A visit to all three banks in mid-August found what seemed to be a brisk pace of business. But Mr. McDonald stressed that he was the first to open in Gentilly, and that move inspired envy in at least one rival.
"Right now I wish I had a branch in Gentilly," said Virgil Robinson Jr., the chief executive of Dryades Savings, a smaller black-owned bank based in New Orleans. An executive at Liberty until leaving in 1994, Mr. Robinson said his former boss had deftly negotiated that delicate balance between reopening a branch too early and waiting too long.
"We want to be back in the area early but not so early that we're the first one out there," said Mr. Robinson. "There's protection in numbers."
Mr. McDonald proved a trailblazer again in March, when he moved back into his headquarters in the east. When he is too tired to commute back home to Baton Rouge, he sleeps in a borrowed recreational vehicle.
Viewed from the vantage point of the central business district or the French Quarter, the city and its business environment can seem to be in good shape. These areas have been repopulated, and businesses large and small have returned. Most of the city's hotels are open again, as are most of its major employers and its more popular restaurants and music clubs. Focusing solely on Liberty's branches in the western, predominantly white half of the city also might suggest that the bank's operations are more or less back to normal.
But there appears to be relatively little forward motion in the city's eastern business corridors. In New Orleans East, for instance, home to 90,000 people before Katrina, maybe a half-dozen restaurants have opened. A few car dealerships are back in business, along with several gas stations and a giant Home Depot — and Liberty.
Mr. McDonald had anticipated that Katrina would translate into $10 million to $12 million in losses in the last four months of 2005. It ended up costing him half that much. When Katrina hit, Liberty was on pace to post a $3 million profit for the year. Instead, it lost $3.6 million.
Some bright spots emerged. Only seven borrowers let their flood insurance lapse after taking a loan from Liberty; out of a $150 million loan portfolio, Liberty wrote off only $2 million last year. Most of those bad loans, Mr. McDonald said, were car loans or credit card debt. Like many other banks across the Gulf Coast region, Liberty is now flush with cash as people park large insurance settlements in their accounts while considering their next financial steps.
This year has brought Mr. McDonald and his staff more good news. Based on results from the first half of 2006, he predicted that the bank would earn $4 million for the entire year. "This is going to be the most profitable year in the history of this company," he said.
Yet Liberty's buffed-up bottom line can be deceiving. A widespread lack of housing in New Orleans, Mr. McDonald acknowledged, has meant that the bank has fewer employees than it needs. Where he once had 160 employees, he now has 90. The shortage has kept expenses low, bolstering profitability, but the same shortage makes it hard to generate new revenue. Mr. McDonald wishes that he could hire more tellers, branch assistants, and loan officers and open a fifth branch in New Orleans, he said, "except I'd have no one to staff it."
One year ago, Liberty had 35,000 customers. Today it has 20,000 to 25,000, Mr. McDonald said. "I know I have to get an exact count on that," he added, before letting his voice trail off. His half-staff bank, it seems, has other priorities.
Elevator repairs alone will cost Liberty $350,000, and the bank has lost about $100,000 a month in rental income from tenants who once leased office space in its New Orleans headquarters but now have no immediate plans to move back home.
Water, not wind, did most of the damage to Liberty, and it is still uncertain how much its insurers will cover. Mr. McDonald had business-interruption insurance, for instance, but he said it was not clear, even one year after Katrina, whether insurers would approve flood claims. "Everyone is still struggling with insurance companies," he said.
There is another question preoccupying anyone with a financial stake in the eastern half of New Orleans: Which parts of the city will come back and which will end up as forlorn, half-occupied neighborhoods without basic services? Mr. Nagin ended up ignoring his own commission's recommendation that New Orleans devote its limited resources to neighborhoods that can prove that a critical mass of their residents are returning. Instead, the mayor has encouraged people to rebuild anywhere they want in the city.
Mr. McDonald's best guess is that only half the population of the east will eventually move home — if that. Of the 150 families in his subdivision in New Orleans East, he knows about 10 families that are returning. He even counts himself among the undecided.
From his sixth-floor office, Mr. McDonald has a perfect view of the mall next door. Its huge parking lot is empty, except for piles of debris, and its stores sit as ruined reminders of how much the east has lost and how little it has recovered. Mr. McDonald, meanwhile, intends to try to "go to where my customers are" by opening loan centers in strip malls and in places like Houston and some cities elsewhere in Louisiana and in Mississippi.
"Whenever you have obstacles," he says, "you always have opportunities."