The Post's Aug. 4 editorial attributed the fall of the National Bank of Washington to "years of mismanagement and internal quarreling" and to "too many banks in this country to survive efficiently and profitably." A proud community institution and its former employees and shareholders deserved a fuller account.
The seeds of NBW's problems were planted 20 years ago. The bank, which was owned by the United Mine Workers of America, changed management frequently throughout the 1970s and engaged in heavy international lending that created problems later. It also made no serious effort to adapt to competition in the era of deregulation. Its profitability was largely maintained by the sale of bank-owned premises. Operating performance steadily declined, culminating in 1980 with charges of insider abuse. By today's standards the bank had failed and was ripe to be taken over by regulators.
When I assumed management in November of 1980, the government was sensitive to union ownership and was not inundated by banking problems. Thus the Comptroller of the Currency worked closely with new management on rehabilitating the bank, so that by 1985 the union was able to sell its interest to new investors for $70 million.
The bank's recovery, never complete, was nevertheless acknowledged in 1985 when the Comptroller of the Currency removed it from its "problem list." It peaked with record earnings in 1988. The holding company's stock, worth $5 1/2 in 1980, recorded a high of $25 1/2 in 1986 and traded at $17 as late as March 1990. Bank employees toiled diligently to effect this turnaround and should be proud of their effort.
But a number of circumstances present in 1980 later matured into problems.
The bank had attempted to compete as a wholesale institution. Its loan portfolio consisted of international loans, construction and interim real estate lending and permanent mortgages at low, fixed rates. Also as a D.C. bank, it was unable, under existing laws, to enjoy suburban opportunities. These circumstances and the evolution of U.S. banking rendered inevitable its sale to a larger institution.
The problems in NBW's international loans began to emerge. Government regulators decided in 1987 that the problems with NBW's international loans had crystallized sufficiently to require write-offs, seriously affecting profitability. We tried to offset the international concentration of loans by developing domestic corporate loans, but we were unsuccessful. Thus we expanded our real estate lending.
The bank's real estate portfolio had been a strength and repeatedly passed regulatory review. However, the real estate market and related regulatory policy changed dramatically. In spring of 1990, regulators discounted the prospect of real estate recovery and required reclassification of these loans. Precious capital was diverted to reserves for losses, which led to the holding company's posting a major loss.
I agreed with the editorial that the bank's failure rested on a combination of factors, not solely a decline in the economy and real estate. Also in February of 1988, the bankruptcy of a major law-firm borrower triggered the largest loan default in the bank's history.
Further, the bitter fight for corporate control that erupted in October of 1988 and was carried forth in the press, costly litigation and the political process, undoubtedly took its toll in customer perceptions and our energies.
Moreover, after I resigned in January of 1990, some questionable actions are alleged to have occurred regarding the holding company's commercial paper; these will be explored in the courts and elsewhere.
Banks fail because of some combination of inadequate government policy or regulation, fraud, changes in the business cycle and mismanagement. NBW traveled its own particular path. Never in the past three decades has it been considered a particularly strong, profitable institution, but it was on the mend and could boast of many loyal customers and employees -- and a laudable record of community involvement and service of community banking needs.
LUTHER H. HODGES JR. Washington The writer was chairman of the board at the National Bank of Washingtonfrom 1980 to January 1990.