Savings and loan associations in greater Washington, like those around the country, suffered their worst operating losses ever in the first half of this year. Reports from 39 S&Ls insured by the Federal Savings and Loan Insurance Corp. and 102 insured by Maryland Savings Share Insurance Corp. together showed losses amounting to $76.6 million. Nationally losses rose to a record $3.3 billion.
While this bad news should cause no direct alarm to savers whose deposits are insured up to $100,000, it would cause the industry great alarm were it not for the fact that better times apparently are just around the corner. Decreasing interest rates have already improved the situation since June, and recent legislation offers the opportunity for more aid.
The red ink flowed a little faster this year in the metropolitan area than elsewhere. According to the Federal Home Loan Bank Board, federally insured S&Ls here lost on average $1.43 for every $100 of assets, compared with $1.01 nationwide. Nevertheless, federally insured S&Ls here have a somewhat larger cushion than those in the rest of the nation. The average ratio of reserves to deposits was 5.13 percent, down from last year but still higher than the national average of 4.73 percent.
The heaviest losses in dollar terms were sustained by the District's S&Ls: $42,221,000 versus $39,250,000 in the previous six months. The greatest increase in losses occurred in Maryland, where 10 suburban federal S&Ls posted a total negative income of $10.4 million compared with $6.8 million last year. The Virginia S&Ls included in the bank board's report lost $20.9 million, compared with $18.8 million last year.
Seven out of 39 federally insured S&Ls finished in the black. The largest profit in dollar terms, $3 million, belonged to Northern Virginia Savings and Loan, which attributed it to the sale of four branch offices to a commercial bank. Second was Dominion Federal, which earned $1.3 million. McLean Savings and Loan showed the highest return on assets of $1.06 per $100.
Dominion's President William L. Walde attributes his institution's continued success to the practice of selling off mortgage loans and depending more on origination and servicing fees. "We were selling loans as far back as 1974-75" when Dominion was established, he said. Now many S&Ls have also begun this practice to protect themselves against the volatility of interest rates.
Dominion is one of several S&Ls listed in the bank board's report that operate on different fiscal years. The six months' results shown reflect operations between September 1981 and March 1982. In the following three months, Dominion actually increased its profits to $1.5 million.
Another success story is Liberty Savings and Loan of Warrenton, founded in 1978 when interest rates were starting their skyward climb. Its actual profits in the first six months of 1982 amounted to $45,000. Its spread -- the percentage difference between the yield on loans and the interest rate paid on deposits -- was a positive 2.75 at a time when some S&Ls are suffering from a negative spread almost as large. Deposits, assets and loans all increased by 50 percent in the period, said Liberty's President Jon Burleson. "Business couldn't be better," said Burleson, who specializes in construction loans in Northern Virginia's Fauquier, Prince William and Stafford counties.
Total net worth in all three jurisdictions declined by aproximately 16 percent. However, the changes experienced by individual institutions showed an enormous range, from a gain of 80 percent to a decline of 88 percent. Yet, even when these extremes, which were caused by quirks in accounting, are discounted, the operating results reveal a wide variance.
Changes in the net worth and reserve ratios of S&Ls that were merged out of existence are not indicated because purchase accounting make the figures meaningless. After the June 30 report, Perpetual American acquired Guardian and Washington-Lee; Montgomery was acquired by First Federal of Hagerstown. Herndon was taken over by First Federal of Northern Virginia. More recently, Washington-Federal took over Jefferson, and today National Permanent announced it was buying all the stock of Suburban in Virginia.
Assets declined slightly at most institutions. A bank board statistician attributed this phenomenon to a change in accounting regulations last year that shifts some items from one side of the balance sheet to the other as well as to market conditions that caused many S&Ls to sell off substantial amounts of loans to take a loss and then buy participations in mortgage-backed securities. It is also true that fewer new loans were made in a stagnant market to replace those maturing in the portfolio.
Total deposits inched up in the last six months. In the District, an equal number of S&Ls had net deposit outflows as gains. The biggest gainers on a percentage basis were Columbia First and Washington Federal. However, suburban S&Ls were the real winners. Mount Vernon recorded an 83 percent jump, while Northern Virginia, Liberty and Jefferson were in the 30- to 35-percent range. Standard had the best record in Maryland.
Accounting methods for S&Ls are currently being revised. Last week bank board chairman Richard T. Pratt warned that purchase accounting could present "a distorted picture of net worth" in the case where an S&L sells loans it acquired at a discount in a merger. In this case a long-term amortization is turned into a short-term profit. There has been a surge in such sales, he noted.
Accounting practices and extraordinary events aside, the results for the metropolitan area show some institutions in very much worse shape then others. Reserve ratios vary from a fat 23.3 percent to a precarious 1.2 percent. A quarter of the remaining S&Ls now have reserve ratios under the 3 percent statutory limit, with a few a short distance away from insolvency.
Until passage of the Depository Institutions Act of 1982 last month, regulators routinely merged S&Ls under the limit. Now they have a chance of survival, although voluntary mergers are expected to continue. The act provided an alternative in the form of capital assistance. S&Ls with net worth of 3 percent or less will be eligible for promissory notes from the Federal Savings and Loan Insurance Corp. for 50 percent of their losses in the last reporting period; those with net worth of 2 percent or less are eligible for 60 percent. William Fitzgerald, president of Independence Federal Savings and Loan, said he, for one, looked forward to receiving income capital assistance as a means of getting a fresh start.
MSSIC associations, the majority of which remained in the black in the last half of 1981, this year posted a collective loss of $3 million for the first half. Despite the operating losses, net worth increased by 2.6 percent. MSSIC President Charles Hogg explained that this seeming contradiction resulted from capital stock purchases, a $2.5 million increase in subordinated debentures and hypothecations. (The last represent pledges of savings accounts that are considered net worth in the event of a problem.)
Aggregate assets rose by 12.3 percent to $3.2 billion. Deposits were up by 15.1 percent to $2.8 billion. Reserve ratios fell to 4.29 percent from 4.81 percent, reflecting a larger increase in deposits than net worth. MSSIC associations have aggressively marketed their high-yielding variable rate accounts, a type of retail purchase agreement covered by MSSIC insurance, which are not duplicated in the surrounding jurisdictions. No individual figures are available for MSSIC-insured S&Ls because they are not required to report to federal regulators and MSSIC is forbidden by Maryland law to release identifiable information.
Despite these gloomy statistics there is a sense of relief in the savings industry that the worst is over, and of optimism about the future. Soon the savings and loan industry will begin to compete more directly with commercial banks and money market mutual funds. For example, Perpetual American, in conjunction with other S&Ls around the country, will shortly commence its Invest program of brokerage subsidiaries located in S&L branch offices. Commercial checking accounts offer a promising source of new funds as do market rate limited transaction accounts, due to make their debut by the end of the year.