The chairman of Washington Bancorporation, parent firm of the District's oldest financial institution, said yesterday the bank company lost $80 million in the second quarter because of problems with its real estate loans and that its "ability to continue as an ongoing concern is in doubt."
Chairman John J. Mason said the company and its subsidiary, the National Bank of Washington (NBW), no longer meet federal requirements for capital, the cash cushion that bank owners provide to protect the federal deposit insurance fund from losses. The chairman also said the bank's second-quarter results forced him to abandon a previously announced plan to raise fresh capital from private investors.
"Unless Washington Bancorporation can develop and implement a plan to restore its and NBW's capital, can restructure its nonperforming assets, and reach an accommodation with its creditors, its ability to continue a going concern is in doubt," Mason said.
However, he added that "as grim as the picture may seem, I don't really believe that this 108-year-old institution is going to go away."
The company noted that deposits at its banking subsidiaries continue to be insured by the Federal Deposit Insurance Corp. (FDIC) up to $100,000 per customer account.
Mason said for the bank company to survive, he will need the cooperation of creditors while he pursues a restructuring that includes shrinking NBW, the fourth-largest bank in the District with $1.8 billion in assets. Making the bank smaller would reduce the need for capital, making it easier to meet regulatory requirements.
When Mason became chairman six weeks ago, he said he was confident that he could raise money for the bank company from private investors. Part of that money was going to be used to pay off more than $25 million that Washington Bancorporation (WBC) owes to customers who invested in the company's commercial paper, or short-term debt. WBC defaulted on that debt at the beginning of May.
But Mason said yesterday that his plans to raise money fell through after he realized that federal regulators were going to require the bank to report mammoth losses in the second quarter because of the softening real estate market.
Federal regulators have been at the bank and its parent company for the past month conducting a thorough review of the quality of all assets. As a result of the examination, NBW reported a $96 million increase in its nonperforming loans -- those that are considered in doubt of repayment. More than half of those are nonperforming real estate loans, Mason said.
With the increase in troubled loans, the bank was forced to add $61 million to its loan-loss reserve, the pool of money that protects the bank against possible loan defaults. It was this addition that seriously depleted the bank's capital position, Mason said.
For the first six months of 1990, WBC reported a net loss of $86 million compared with earnings of $7.1 million ($1.01 a share) last year.
WBC's stock closed yesterday at $2.75, up 12 1/2 cents. The announcement of the bank's troubles was made after the stock market closed.
At a board meeting yesterday, the bank company's directors authorized Mason to formulate a plan acceptable to federal regulators to increase capital in the bank and in WBC.
Mason said it is unclear whether the bank will raise enough money to pay off its commercial paper holders. "It's clear we won't be able to pay 100 cents on the dollar," he said. Any payment will depend upon Mason's ability to sell assets, most of which are real estate related. In the current economic climate, those sales are likely to be difficult.
One of the bank company's commercial paper holders, George Hyman Construction Co., has filed a lawsuit against the bank, claiming that NBW defrauded its customers by investing their funds in WBC's high-risk, uninsured paper. Creditors contacted yesterday said they intend to file similar suits and were considering taking other serious steps against the company to try to recoup their money.
Mason said any action against the bank company would hurt both the creditors and WBC.
Mason said assets of the holding company are about $50 million and include real estate owned by NBW, mortgage loans, a venture capital company and other securities. However, sources familiar with these assets said so far there are no buyers.
If the bank is unable to raise enough money, federal regulators may have no choice but to find a buyer for the bank or take it over and liquidate it. Such an action would cost the FDIC millions of dollars, Mason said. And it would come at a time when the fund already is under stress, said its chairman, L. William Seidman.