First Savings and Loan Association of Suffolk, Va., an institution with $125 million in assets, was notified this week by banking authorities that it would have to be merged because it has $35 million in problem loans to developers.

While this is not an uncommon situation these days, it is unusual for the S&L involved to make a public announcement. As a stock corporation, it was required to report events that could affect investors. Had it been a mutual association, the matter would have been handled in secret by regulators until a merger was arranged so as not to alarm the public and cause a run on the S&L.

Despite the announcement, Executive Vice President Mills W. Staylor said yesterday that after being reassured deposits were insured up to $100,000 by the Federal Savings and Loan Insurance Corp., depositors did not make any substantial withdrawals. In fact, there were even some new accounts opened.

The S&L cited loan transactions involving housing projects in Newport News and Gaithersburg. Virginia Service Corp., a First Savings subsidiary, incurred a debt of $4.96 million from overruns in the construction and rehabilitation of the 489-unit Stuart garden apartment complex in Newport News. Staylor said the S&L was counting on a loan from the Virginia Housing Development Authority to clear up the debt.

The remaining problem loans, totaling $30.41 million, were made in conjunction with the Diamond Farms project in Gaithersburg. About half of the 540-unit garden apartments are being converted into condominiums that sell for $49,500 to $61,000. Thus far, 68 of the units have been sold.

The loans were made in June 1981 to developer D.B. Fry of Norfolk. Fry was unable to repay the $4.13 million cash advance due by January and the $3.4 million owed the seller of the property. First Savings said it advanced additional funds, but admitted the conversion project, which is continuing, will need more cash.

Because First Savings is federally insured, it must abide by loan limitations set by the Federal Home Loan Bank Board. These provide that no single loan may exceed 10 percent of withdrawal (passbook) accounts or may exceed an S&L's net worth. First Savings has total deposits of $80 million. Its net worth has not yet been figured by examiners, Staylor said. There are about 600 First Savings stockholders.

Sidney Bailey of Virginia's State Corporation Commission said yesterday he is still investigating whether the loans to Diamond Farms Associates violated any regulations. He said it would depend on the nature of the assets involved, including, for example, whether First Savings had any ownership interest in the project.

Fry insisted the S&L has no equity in Diamond Farms. He said the $30 million consisted of second martgages, wraparound and underlying mortgages as well as cash. Nor, he added, does J.R. Dixon III, chairman and president of First Savings, have any equity interest in the project.

Dixon, whom Staylor described as a substantial stockholder in First Savings, was asked to resign by federal regulators. A board member was appointed interim president. First Savings is now operating under a "consent resolution" from the Federal Home Loan Bank and the SCC that outlines their "concern and uncertainty as to the financial condition of First Savings."

Under this, authorities have started merger discussion and have put restrictions on the S&L's operations. These actions mean, among other things, that First Savings is limited to making single-family residential loans and may not lend to any more developers.