They've been awash in red ink at Perpetual American Bank for five of the past six years, but Thomas J. Owen and his crew have been bailing furiously and, by this time next year, they hope to be writing their log books in a more profitable color: basic black.
"We expected to end 1984 in the red and those expectations will be realized," says Owen, with the executive gaze of a man who has seen his share of choppy financial waters. The bank's losses, he hastens to add, won't be anywhere near the $6 million it lost in 1983.
Just how much the bank will lose isn't quite clear yet, but the winds seem to have shifted. After losing $4.1 million in the first quarter of 1984, the bank showed a $182,000 profit in the second quarter and a $208,000 profit in the following two months. That made the eight-month loss $3.7 million. Figures for the full year ending Oct. 31 will be out in about two weeks.
Looking ahead to 1985, Owen's goal is a 4 percent return on the bank's net worth of $172 million. A bit of arithmetic translates that into earnings of $1 a share from the bank's normal business activities. If the bank were to sell any of its real estate during 1985, as thrifts often do, that would help improve its earnings. For instance, the bank's most valuable piece of property is its office building at 15th Street and Pennsylvania Avenue NW, worth an estimated $25 million or more. The bank currently is committed to rehabilitating the building, but offers to buy it keep coming in.
Sensing that Perpetual American at last has caught favorable tides, investors and market makers (companies authorized to deal in the stock) recently boosted the savings bank's stock from its opening price of $7.50 to $8.75 a share, a gain of almost 20 percent in three months.
That has cheered Perpetual American watchers, who are intrigued by the challenge confronting Owen, the bank's potential for growth and the opportunity for long-range profit in the stock. Indeed, except for bad timing, they claim, the stock easily could have gone public in the $10.75-to-$14.25 range anticipated in the "red herring" (the industry name for the preliminary prospectus). But interest rates were rising, the public appetite for new bank issues was declining and Merrill Lynch, the lead underwriter, said $7.50 a share was all the market would take.
What might have been an $80 million issue (6.4 million shares at $12.50) became a $51 million issue when 6.8 million shares were sold eventually at $7.50. If that wasn't depressing enough for bank officials, listen to Owen talk about the Wall Street climate last summer when the offering was made:
"About the time we started our road show -- our presentations before the investment banking community -- Continental Illinois hit the papers. Forty-eight hours before we came public, Financial Corp. of America hit the headlines. Between those two events, The Wall Street Journal and the American Banker wrote a continuing commentary on the plight of the thrift industry. . . . "
(Those headlines told of the de facto failure of Continental Illinois National Bank, the nation's eighth-largest bank, and huge losses at Financial Corp. of America, the nation's largest savings and loan company.)
Like many chief executive officers, Owen thinks his bank's stock is undervalued. Even if it sold at 40 percent of book value ($27.50) -- not unusual for a thrift, according to Owen -- that is $11 a share. And he thinks his bank -- which has $3.8 billion in assets and operates in one of the nation's richest economic regions -- ought to be worth more than many others.
Owen owns almost $1 million worth of stock (about 133,000 shares). Officers, directors and employes own 13 percent of the stock. The limit is 25 percent.
The most favorable prospect for Perpetual American is the decline in interest rates. As rates go down, so does the cost of the bank's borrowing.When that happens, the bank can save millions of dollars, with the savings going straight to the bottom line.
"The notion of the appeal of the stock as an investment is the enormous leverage in a declining interest rate environment on a $4 billion asset base and the way it translates into income," said Charles T. Akre Jr., director of research for Johnston, Lemon & Co.
Eliot H. Benson, vice president and research director at Ferris & Co., says the bank has "an ambitious program to build up profitability. . . . There is a potential for considerable upside based on their earning power and the price of the stock."
Johnston, Lemon and Ferris & Co. are among the 12 market makers in Perpetual American stock.
To help beat the red ink and to compete in the new expanded banking environment, Perpetual American has diversified its businesses and its sources of income. Among its new profit centers, says Owen, are the bank's mortgage lending company, corporate lending operation, securities investment transactions and consumer lending.
The bank also is involved in joint venture real estate activity that includes office, townhouse and condominium construction. At this point, Owen says, these projects are a "drain on earnings." But he believes that, in the next few years, the bank will realize "meaningful increased earnings" from the projects.
The bank also tries to protect itself from sudden and costly interest rate fluctuations by engaging in interest-rate swaps, in which the bank joins with other financial organizations to hedge their lendings and borrowings. The bank currently has $200 million involved in interest-rate swaps and may go up to $400 million if rates continue to fall, Owen says.
Having been through four mergers in four years, (American, Washington-Lee, Guardian and Interstate), Perpetual American became the only federally chartered bank able to open branches and merge in the District, Maryland and Virginia. What this may mean, Owen says, is additional branches in the Washington area and new acquisitions or mergers.
"We're always looking," Owen says. "There's a whole sheaf of institutions that one could look at. On the list of institutions, there are some who would be friendly toward such an overture and there are others who wouldn't. The ones that are friendly maybe are so sick you don't want to go talk to them and the ones that are unfriendly may be so healthy, they don't need you."
Systems Technology Associates Inc. of Sterling, Va., which manufactures telecommunications equipment used in earth stations, has filed its first public stock offering. The company, in business since 1966, has 40 employes. It hopes to sell 1,437,500 shares at $2 a share. S. D. Cohn of New York is the underwriter. With 80 percent of its business overseas, Systems Technology had sales of $2.2 million and an after-tax profit of $363,000 (20 cents a share) in its 1984 fiscal year.
Ross Industries of Midland, Va., which manufactures machines used in the food industry, has filed an initial public offering of 450,000 shares at a price of $8 to $10 a share. The firm, located in Fauquier County, will sell 400,000 shares, while 150,000 shares will come from present stockholders. Ferris & Co. of Washington and Scott & Stringfellow of Richmond are managing the new issue.