After a year as chairman of National Bank of Washington, Luther Hodges Jr. says that although NBW has restructured its financial portfolio and management team and brought assets over $1 billion for the first time, high interest rates are holding back improvement on the bottom line.
"We've been hampered by this extraordinary interest-rate environment, and it's going to take a while," Hodges said recently. "The bottom line is our biggest problem. The world will not know that we've done a good job until the proof is in, and the proof is in the operating performance."
But, by public relations, financial or any other criteria, 1981 was easier than 1980--a year that saw dramatic shifts in NBW's leadership and charges of improper loans and other activities that shook the bank and the community. "The thing that bothered most people was the uncertainty," Hodges said.
A federal investigation of those activities is continuing, although the probes apparently involve people who have left NBW. Hodges said the bank itself is not a target of a continuing U.S. attorney's investigation. And Hodges and officials of the Office of the Comptroller of the Currency say NBW has complied with the requirements of a tough agreement on management practices that governs its operations and its relationship with its principal stockholder, the United Mine Workers. "All is as well as can be expected," said one federal official.
But the proof--by Hodges' measurement--is not in. For NBW, the city's third-largest bank, has not had a good year if profits are to be the primary measurement of the bank's success or failure.
Profits in the bank's third calendar quarter fell to $272,995 (20 cents a share) from $1.34 million ($1.00) last year, after a second quarter in which earnings rose above their level in a terrible 1980 second quarter. First-quarter profits fell to about 55 percent of their 1980 level.
Yet, under Hodges' leadership, the bank's total assets have grown significantly from $863 million at the close of 1980 to more than $1 billion last month, a figure Hodges said NBW will top for the year. The bank's average loan figure rose to $563 million last month from $504 million last year, and average deposits in November were up to $744 million from $603 million at the same time in 1980.
New people have been brought in to fill four key positions in the bank, although Hodges said personnel weaknesses were not the bank's principal problem. "Part of it was turnover, part of it was judgment, part of it was the kind of people that had worked here and the circumstances that brought them into top positions even though they weren't bankers or managers," he said.
"The bank was a lot better than people thought because the middle management, the troops, were damn good," Hodges said. "They just hadn't been led, directed, challenged, rewarded and compensated. The hardest thing was to get people's attention because so many people had come and gone.
"They understand now that we're in business to succeed and to make money. I don't think they ever thought about that before. I think the bank assumed you could just rock along, that banking was an easy business, that everybody would get their annual increase and at the top they could enjoy their perquisites."
Hodges said the bank has cut out many of those benefits, including automatic salary increases. "Everybody is sharing in these difficult times," he said, noting that shareholders, too, have felt the pinch in light of a recent 50 percent cut in the bank's dividend. "It is a positive thing, in that the financial community should realize the bank is being run prudently and responsively."
But, according to Hodges, the biggest problem NBW faced was a cash management structure with many of the characteristics of a savings and loan institution, such as a dependency on fixed-rate loans and other instruments that are out of sync with the realities of today's volatile financial markets.
"I had thought that by now we'd have taken care of our earnings problems, but the interest environment has put that on a slower timetable," he said. "In fact, the burden of the fixed-rate real estate loans and the bad loans is still here.
"The earnings level of the bank is about half of what it should be. Add to that the interest-rate environment, and it drops to about 25 percent of what it should be," he said, noting that about half the bank's assets are tied up at rates below market.
"By 1983, much of that portfolio will have rolled over into the current market rates," he said. "I learned long ago not to bet on interest rates, but the thing to do is to get the bank into a position to make money on high or low rates. But we're moving as fast as we can to where we don't care. This bank is structured to make money only in low-rate times. Professional management doesn't get caught that way."
Consequently, NBW has launched a more aggressive program of spreading its deposits offshore and into foreign banks, and at the end of the third quarter had $144.8 million in deposits in foreign offices--in this case Nassau--up from less than $86 million last year. In fact, of the bank's assets last year, only $1.5 million were in time depsits with banks, a figure that has risen to $57 million at the close of the recent quarter. "In order to grow, we are finding windows to make money," he said.
In a period when the bank is constrained by high interest rates and consumed with short-run problems, Hodges seems most excited by NBW's prospects in a city with a rapidly awakening banking community. "I think everybody here knows that we want to be one of the acquiring banks, as opposed to being acquired," he said. "We have to move rapidly in this period before the rules are changed. I don't like being No. 3 at anything, but we haven't gone off and left the local market."
Although Congress and federal regulators have not laid out precise rules, District and suburban financial institutions will be expanding into each other's territories even more than today. "One thing that is a given is that the bank will become a Greater Washington bank," he said. "That has to happen, whether through acquisition in thrifts, banks or through machines.
"Then it becomes a question of whether you become a regional institution headquartered in Washington or a Middle Atlantic holding company with an emphasis in coal and energy, trading companies and the Baltimore Harbor, just to pick a course. Or you could be a part of a giant, multinational concern."
Hodges wants to see NBW positioned with Riggs National, American Security, and First American as one of the four major "Greater Washington" banks. "We'll find out who the partners are and how the cards are played over the next year or two," Hodges said.
"I've never said that Washington is the most dynamic banking community in the world, but that is changing rapidly," said Hodges, 44, who served as under secretary of Commerce in the Carter administration and chairman of North Carolina National Bank from 1974 to 1978.
"Washington as a banking community is behind the large banks. This has been a relatively conservative, protected economy. It wasn't one in which anybody had to get particuarly innovative," he said.
"But at this stage in my life, I'd much rather be here than just about anywhere because of the challenges of the community and the challenges of this bank. I wish the bank were much larger, but I've got all the challenge I need at this moment."