The Federal Home Loan Bank Board has approved a voluntary merger of First Federal Savings and Loan Association of Arlington and Arlington-Fairfax Savings and Loan, effective Jan. 1.

The new institution, Continental Federal Savings and Loan Association, will be Virginia's largest, with assets of $770 million. First Federal, which is based in Fairfax City, has assets totaling $405 million, while Arlington-Fairfax has assets of $365 million.

Continental's executive offices will be in Fairfax City. The new S&L will operate 31 branches initially for its 130,000 savings and checking account holders in Northern Virginia.

David Anderson, chairman of Arlington-Fairfax, will retain that title with Continental, and Allan R. Plumley Jr. will be president and chief executive officer. Plumley currently is president of First Federal of Arlington.

Jack R. Jones, First Federal's chairman, will become vice chairman of Continental and chairman of its executive committee. Robert E. Johnson, president of Arlington-Fairfax, has been named senior vice president and chief administrative officer of the new association.

The merger of the two associations will result in "significant" cost savings, Plumley said. Further, it will "allow us to be competitive with all major financial institutions in our market area," he said.

Officials of the two S&Ls first proposed a merger about five months ago, and some departments of each already have begun working together, Plumley said.