Profits at the National Bank of Washington plunged 69 percent in the second quarter compared to the same period last year as a result of "certain problem loans" and "extraordinary legal expenses, growing out of an internal bank investigation of loan practices, bank officials announced yesterday.
Net income for the three months ending June 30 at Washington's oldest bank, and its third largest, was $517,767, compared to $1,660,138 for the same period last year.
Bank president Dale L. Jernberg said in a two-page statement that the sharp drop in earnings was the "result of the bank making provisions for certain problem loans through the bank's loan loss reserve."
"By addressing these problems now," Jernberg continued, "We are taking the second step forward to resolving certain difficulties which have plagued the bank for some time . . ."
The first step, Jernberg said, was taken in April when the bank's board of directors ordered an internal investigation into loan practices at the bank after it was discovered that the NBW's general counsel, Ronald G. Nathan, was a silent partner in a gas well inestment venture that received $1 million in loans from the bank.
Also a partner in the gas well deal, which has sparked a federal grand jury investigation, was then NBW director and real estate developer Bruce D. Lyons.
It was reported last week that the federal grand jury had issued a subpoena for a board range of NBW records in a major investigation into loan practices there. The investigation also concerns any influence exerted by the bank's major stockholder, the United Mine Workers of America, where Nathan was a former legal strategist.
The downward spiral in NBW's earnings comes at a time when the city's other major banks have reported increases in second quarter profits, all of them around 25 to 30 percent. One banking official said the increases came after a favorable "spread" developed between the cost of money to the banks and the relatively high interest rated charged to customers.
This banking official, who tracks the earnings of all the city's banks, said the 69 percent NBW drop was the largest single quarter decline for a major D.C. bank in recent history. "That just doesn't happen here," he said.
The second quarter decline coupled with weak first quarter figures left NBW with a 38 percent earnings drop for the first six months of 1980 compared with the same 1979 period. The half-year earnings were $1,886,251 for 1980 compared with $3,038,608 in 1979.
Though Jernberg said that major legal expenses from the internal investigation would continue for the rest of the year, "earnings for the second half of the year should be substantially greater than those for the first half." Bank officials also stressed privately that the volume of bank business had not declined.
Other banking officials have predicted a softening in bank profits generally for the remainder of the year due to steady declines in the prime rate, which affects all other interest rates charged by banks for the money they lend.
No specific loans were mentioned in the bank's statement yesterday, but Jernberg acknowledged in an earlier interview that chief among NBW's recent problem loans was a $4.5 million grant made to a New Jersey real estate entrepreneur Joseph E. Shamy to refinance the Laurel Raceway north of Washington.
At the time the loan was made in August 1978, Shamy was in default on the original loan used to buy his interest in the track. Moreover, Shamy was the target of an FBI investigation looking into charges of misappropriated funds from the track. Shamy was eventually convicted on those charges.
NWB officials also disclosed earlier this year that they were holding more than $2 million in problem loans for Lyons and his partner, Robert D. Holland, whose Holland & Lyons Associates Inc. had been one of the most active condominium development firms in the city until this year when it suffered dramatic financial setbacks.
Jernberg himself has been embroiled in the controversy over the influence of the mine workers union in the bank, where some professional staffers have complained that bad loans were pushed through by handpicked mine workers representatives on the bank's board of directors.
Bank sources have said that Jernberg pushed the Laurel Raceway loan through a committee of senior loan officers even though most of them recommended against the loan.
The report of the internal inestigation, which is being conducted by the California law firm of Gibson, Dunn & Crutcher, is due next month.