For much of this century, leaders of Washington and suburban Maryland savings and loan associations have taken a weekend off in late May or early June for a few restful days in Atlantic City or at such spas as the Greenbrier in West Virginia and the Homestead in Virginia.
At these annual conventions of the Metropolitan Washington Savings and Loan League, there would be meetings in the morning, golf or a swim for the afternoon and dinners at night. It was a pleasant break for competitors in a closely knit business that first built the District's neighborhoods and then the suburbs through mortgage lending.
But there won't be a convention in 1982 at some distant resort. Faced with record operating losses and a savings institution crisis across the country, the area S&L league has opted for a briefer meeting in the city. There are fewer and fewer S&L executives to attend such a meeting in any event: A year ago there were 16 S&Ls in the District, but mergers have reduced the total to 10 and, by next year this time, there could be five or six.
With the benefit of hindsight, area S&L spokesmen said in interviews over recent weeks, an economic downturn in 1974 should have been an early warning signal that hard times were coming soon. Although the national recession, Arab oil embargo and resulting inflation were topics of discussion at that meeting in 1974, those events caused only a slight ripple among savings and loan associations in metropolitan Washington.
Most S&L officials here regarded the cycle as a temporary drag on earnings and returned to business as usual when the economic climate began to show improvement, especially in a metropolitan area still experiencing boom-style growth and unprecedented affluence.
For the most part, savings executives had grown secure, if not complacent, in the knowledge that large reserves of retained earnings, built up over the good business years, had given them staying power to withstand radical shifts in the economy.
But with the industry awash in a sea of red ink and in its worst earnings posture since World War II, the present slump poses serious problems for some area S&Ls. Indeed, for some it is a real threat to survival.
Just as nearly 70 percent of the nation's federally insured S&Ls experienced losses in the first half of 1981, all but 10 of 38 in metropolitan Washington were in the red going into the third quarter. As a group, those 38 associations had losses of $21 million at the end of the first six months.
Further examination of financial data for Washington area S&Ls shows that if losses continue at the rate that prevailed during the first half, some institutions will run out of reserves by the end of the year. In fact, a few of those institutions already are perilously close to the zero level.
What's more, 24 percent of the federally insured institutions in metropolitan Washington are below the minimum reserve-ratio level of 4 percent set by the Federal Home Loan Bank Board, a guideline requiring that total net worth of an S&L be equal to at least 4 percent of liabilities (savings accounts, other deposits).
New institutions have 20 years in which to build their reserves to the required 4 percent level. While most District S&Ls have been in business for at least 20 years (minority-owned Independence Federal opened in 1968) several suburban associations are younger.
Nonetheless, with some institutions at or close to a 2 percent ratio, the Federal Savings and Loan Insurance Corp. (FSLIC) can be expected to step in for closer scrutiny. In fact, two area institutions are considered "basket cases," and barring a dramatic turnaround soon will be acquired by another institution in a merger organized by federal regulators and possibly with financial assistance from FSLIC, which insures deposits.
For the most part, however, Washington-area S&Ls appear to be strong enough to withstand nagging interest rate pressures and the prolonged earnings squeeze that has weakened the entire industry.
Third-quarter results are not yet available from the Federal Home Loan Bank Board, the federal agency that regulates all but state-chartered S&Ls. However, the same factors that combined to devastate earnings in the first half continue to dog the industry, although the recent decline in interest rates has bolstered hopes among most officials. Area S&L executives said they are confident most associations here can ride out the storm for at least another year or two.
"Most associations in this area are much better than elsewhere in the country," said T. William Blumenauer Jr., president of Columbia First Federal Savings and Loan Association. "Most of us can ride this thing longer than the average association."
The current president of the Metropolitan Washington Savings and Loan League agrees with that assessment. But in a more candid evaluation, William Sinclair observed: "Unfortunately, the S&L leadership wasn't shaken enough during the recession of 1974. It was painful then, but we're bleeding now."
Unlike what they did in 1974, S&Ls "can't go back in the market and make those long-term commitments" after the current crisis is over, Sinclair asserted.
Financial reports obtained from the bank board tend to support the position that most local S&Ls can "ride out the storm." The ratio of net worth to savings at the end of the first half, for example, was 8.72 for District S&Ls--the highest in the nation.
Applying the same yardstick to S&Ls in Maryland produced a ratio of 6.88 percent, while the level in Virginia was 5.65 percent, both well above the 4 percent standard required by the bank board.
At least eight metropolitan Washington S&Ls that are FSLIC-insured had reserve ratios of twice the required level or more on June 30.
The District's Perpetual American Federal--with $1.5 billion in assets, the area's largest S&L--and Prince George's Savings and Loan Association had ratios almost three times as high as the standard set by federal regulators. And OBA Federal finished the first half with a whopping 25.7 percent--nearly four times the average for all S&Ls in the area.
Not surprisingly, all three of those associations were among the few that finished the first half in the black. It should be pointed out, however, that OBA over the years hasn't been one of the more active mortgage lenders in the area and is less vulnerable to interest-rate pressures.
While reserve ratios of local S&Ls continue to outstrip the national average, return on assets--another key barometer of industry performance--fell to minus 0.60 in the first six months of 1981 from minus 0.01 at the end of 1980. The return on assets for all Maryland S&Ls at the end of June was minus 0.44, and for Virginia institutions, minus 0.49--matching the national average.
While state-chartered S&Ls in metropolitan Washington have become victims of the same malaise as their federally chartered counterparts, the problems for most don't appear to be as critical. This reflects, in part, the rapid growth of suburban Maryland S&Ls in more recent years when interest rates have been higher and their overall mortgage portfolios do not include large numbers of loans at rates that prevailed before the mid-1970s.
Financial results for individual associations insured by the Maryland Savings-Share Insurance Corp. are unavailable. With few exceptions, such as Government Services Savings and Loan of Bethesda, most MSSIC members are mutual associations and aren't required to make public their results. Government Services has suffered steep losses in the past year and agreed to work on joint development of its headquarters property on Wisconsin Avenue as one method of building up financial strength.
However, aggregate figures provided by MSSIC show that while net worth declined 8.5 percent to $98.49 million in the 12-month period ended June 30, savings at member S&Ls increased 20.4 percent, to $2.73 billion.
In that same period, federally insured institutions were hit hard by disintermediation as depositors withdrew savings and invested them in instruments with higher yields. But most state-chartered associations, not guided by federal regulations that limit interest on savings accounts, have offered depositors more competitive interest rates.
Although deposits increased at MSSIC associations, their savings-to-net worth ratio declined from 6.25 percent on June 30, 1980, to 4.64 percent a year later.
"That isn't all that bad," insisted Charles Hogg, president of MSSIC. "It's the new savings that our associations can invest to offset the negative spread between interest earned on mortgage loans and that paid out on deposits . . . Certainly, from what I hear about the national averages, our associations are doing better," Hogg added.
State legislatures have been a step ahead of federal regulators in recent years and have taken greater strides to increase the asset base of state-chartered savings and loans associations by allowing them greater flexibility, said William S. Bergman, executive vice president of the National Association of State Savings and Loan Supervisors.
Variable-rate mortgages--where mortgage interest costs to consumers rise or fall with inflation rates--until recently were authorized only by state legislatures, Bergman pointed out.
"Obviously, in those states where variable-rate mortgages have been aggressively marketed, S&Ls which offer them are in far better shape today than other state-chartered associations and their federal counterparts that were locked into a fixed rate of 8, 9 or 10 percent," said Bergman.
Although his association has reported sharp losses recently, Government Services President Alex R. M. Boyle said he believes MSSIC members enjoy a distinct advantage over competitors in the D. C. area.
"I think in many ways the MSSIC-insured associations have been benefited by their freedom from [federal interest ceilings] and theirability to pay higher rates," said Boyle. "We have the flexibility to do things that enable us to compete with the money markets."
Government rate ceilings were designed to ensure an adequate flow of funds into the housing industry by allowing S&Ls to pay depositors a quarter percentage point more interest than do commercial banks. Both MSSIC and federally insured S&Ls in Maryland compare favorably with associations in other regions, said Charles Kresslein, executive vice president of the Maryland Savings and Loan League.
But Kresslein and other S&L officials in the region expressed concern about overall interest rates and where they might go in the next six months. "With money tied up in high-interest rate liabilities, we can't get out from under," said Mark Saurs, president of the Virginia Savings and Loan League in Richmond.
"The first thing that the business needs is a continuing drop in interest rates," observed John Stadtler, chairman of National Permanent Federal Savings and Loan Association of the District. In a flat interest period where the rate settles around 12 percent, "most of the S&Ls in this area could last for years," added Thomas J. Owen, chairman of Perpetual American.
Assuming that interest rates will continue their downward trend for the next quarter at least, they won't have much of an impact on S&L earnings before mid-1982. "Even if the prime [the rate charged top business customers by banks] goes to 10 percent tomorrow, that's not an immediate fix for the industry," conceded Allan Plumley, president of First Federal Savings and Loan Association of Arlington.
Meanwhile, management officials at most S&Ls here are in agreement that once the current crisis is over, it won't be business as usual. "Their whole outlook on running their associations will have to change," said a veteran S&L official who asked that his name not be used. "By and large, the top savings and loan management in this city has been very complacent," he added.
"I think the advent of Thomas J. Owen, with his innovative ideas and progressive moves, have shown other local S&L executives the way," said the same official, who described Owen as a "catalyst."
Owen, who was elected president of Perpetual American in 1976 and chairman and chief executive officer two years later, has spearheaded an aggressive course in maintaining the association's solid position as the region's largest. The key to Perpetual American's profitability in this latest downturn has been a series of innovations that few other S&Ls in the region have tried.
For more than two years, for example, Perpetual American has offered discounts of 5 to 20 percent to customers who prepay mortgage loans under certain prescribed conditions. This gets rid of low-yielding mortgages approved in earlier years. "Of course, we take a loss," said Owen. "But we still think it's better to do that because it allows us to invest those funds in more mortgages and other investments."
In yet another program designed to provide flexibility in its mortgage loan portfolio while increasing income, Perpetual American allows assumptions at less than market rates "on the theory that if you didn't you wouldn't get any upgrading of your portfolio anyway," Owen explained. Under this plan, a purchaser can assume the previous owner's mortgage at a higher rate than had been charged but somewhat below the current market--a gain for both the S&L and buyer.
Owen said his association also maintains an active refinancing program in which an older mortgage rate is blended with a newer one closer to, but at a lower level, than prevailing rates, a program that aids current owners who want to use some of the assets they have built up in a house for remodeling, college educations or other spending.
Two years ago, when S&Ls were profitable, Perpetual American's reserve position had increased to a point where it was virtually impossible to take advantage of tax benefits to which the industry is entitled. Perpetual American solved its problem by selling about $130 million of its lower-yielding mortgages and taking a loss that improved its tax position.
And Perpetual American's newest gambit could even change the competitive environment in this region if the Federal Home Loan Bank Board goes along.
Under an agreement that was disclosed last month, Perpetual American would acquire a Northern Virginia holding company and its savings and loan subsidiary, Washington-Lee Federal of McLean. The interstate merger proposal is a bit unusual because federal policy until now has been to sanction interstate mergers only as a last resort to save a failing S&L.
Washington-Lee, while not a failing institution, has a reserve ratio of just over 3 percent and it lost $1.9 million in the first half. Though Washington-Lee's reserves are adequate, said Owen, "they aren't the kind they'd like to have or that the bank board would like them to have."
A merger would boost Perpetual's assets to about $1.9 billion. More important, its branch network would extend through Northern Virginia, making it the only local S&L with offices in all three jurisdictions. Its four suburban Maryland offices existed before federal policy prohibited new branches across state lines in the mid-1950s.
Perpetual American's interstate merger proposal is being watched closely by competitors in the District, who for years have railed against laws barring interstate branching.
"If Washington-Lee is determined to be a hospital case, I think Perpetual American will get them," predicted National Permanent's Stadtler. "I don't think any S&L in Virginia is large enough to take them [Washington-Lee] over," he said.
While suburban S&Ls that compete in the same metropolitan market may expand their operations in their respective states, District associations are restricted to a smaller geographic market--just 60 square miles.
The fact that S&Ls in this market compete for the same deposits is an argument that has failed to sway Congress or federal regulators. Indeed, Perpetual American's four Maryland branches last year accounted for 50 percent of its more than $1 billion in deposits.
It is little wonder that other large District S&Ls--including National Permanent and Columbia First, second and third largest in the region--are contemplating interstate mergers as well. In a changed environment where that has been made possible by weakened positions of some suburban institutions, Perpetual American's bid is likely to be duplicated.
"We're keeping our eyes open and our ears close to the ground," said Columbia First's Blumenauer. And Stadtler confirmed that his association has been "talking to various associations on both sides of the line over the last several months."
Stadtler denies being close to a merger agreement with a suburban association, but is prepared to act "if the right circumstances arise. I guess it could be sooner than later," he added.
Merger activity has proliferated in metropolitan Washington in the past year. Most of the mergers have taken place in the District, however.
All but two in this region have been voluntary, prompted by the certainty of tougher competition in the financial services industries and the conclusion that consolidation of relatively strong institutions would make it easier to compete.
Nothing here compares with the collapse or near failure of some S&Ls around the country. Nevertheless, the FSLIC has played a role in at least two mergers involving Washington-area S&Ls this year.
In both cases, neither of the failing S&Ls had been in business long enough to amass reserves that were strong enough to withstand the onslaught of high interest rates and the severe slump in housing.
Community Federal Savings and Loan Association opened for business in 1974 with considerable fanfare as the second minority controlled S&L in the District. But a slumping economy and high interest rates caught up with the small and struggling S&L, eventually forcing management to throw in the towel by agreeing to merge with Independence Federal, also minority-controlled.
Before closing its doors, Community had watched its net worth drain away to a minus $427,424.
County Federal, of Rockville, was merged earlier this year with Metropolitan Federal of Bethesda. The merger was finally completed after months during which the FSLIC had shopped around for a merger partner.
In fact, the exercise was one of the first in which federal regulators opened the bidding for a failing institution to out-of state associations. At least five District S&Ls were invited to submit merger bids for County.
Acquisition of County by a District S&L would have broken down the legal barrier to interstate branching in metropolitan Washington. However, FSLIC officials decided to keep ownership of the S&L in Maryland by approving the merger with Metropolitan.
After reviewing County's financial position, one District S&L official called it a "can of worms."
FSLIC officials refused to disclose details of the agency's financial assistance in the supervisory merger but County's first-half report to the bank board showed a negative net worth of $4.7 million.
With losses piling up, with net worth shrinking and reserve-ratios slipping dangerously close to the critical level, at least a half dozen area S&Ls appear to be candidates for supervisory mergers if conditions don't improve soon.
"When you're down to 2 percent, the FSLIC takes an interest in you," remarked the president of one of the area's larger associations.