Until last week, Second National Building & Loan Association of Annapolis was not very high on anybody's list of stocks to watch, but the savings and loan crisis in Maryland may have changed that.
Second National is a state-chartered S&L that specializes in lending in the resort areas along the Chesapeake Bay and the Delaware, Maryland and Virginia shores. A 61-year-old institution that was reactivated in 1972, Second National went public in September 1983 at $13.50 a share.
The stock dropped to as low as $11 but recently has been selling near its 52-week high of $17.25. Curiously enough, when the market closed Friday after a tumultuous week in which Maryland Gov. Harry Hughes put a $1,000-a-month withdrawal limit on privately insured thrifts, Second National's stock still was selling at $16.25 a share.
Second National President Henry A. Berliner Jr. took that event as a sign that his stockholders were not worried about the condition of his institution. He all but glowed when he talked about how the price of his stock held steady in the midst of panic withdrawals from state-chartered thrifts. "That's confidence," he declared.
Second National is one of the 102 Maryland state-chartered savings and loans insured by the troubled Maryland Savings-Share Insurance Corp. -- MSSIC for short. Of those thrifts, Second National is the only one whose stock is publicly traded and thus the only one required to give the public a detailed look at its finances.
Second National stockholders had a clear opportunity, if they were concerned about the Maryland savings and loan crisis generally, or the fate of Second National specifically, to show their displeasure in the price of the shares. Apparently, they were not worried. If they were, the price fluctuation could have been severe. There are only 1.5 million shares outstanding, with about 500,000 in the hands of bank officials. A small "float" -- as tradable stock is called -- lends itself to wide price swings.
The demonstration of stockholder confidence claimed by Berliner is rooted in the performance of his S&L during the past several years. Assets have climbed over the $500 million mark, making Second National the seventh-largest among the state-chartered institutions. Second National, which showed losses in the high interest rate periods of 1980 and 1981, posted profits of $3.6 million in 1983 and $4.1 million in 1984. For 1985, officials predict a profit of $4.8 million to $5 million.
Last year also brought tougher competition and higher costs that were a drag on profitability, as Second National expanded to 12 branches, added staff and tallied the start-up costs for the Second National Service Corp., which handles its real estate development and joint ventures.
Second National's lending activities include the Rainbow condominium in Ocean City, Md.; a Port Lewes, Del., town-house community; and the Ocean Club in Atlantic City, N.J.
Berliner, who is also chairman of the Pennsylvania Avenue Development Corp., emphasized that Second National has been much more conservative when it comes to property investments than some of the S&Ls that are in trouble. Second National, he said, has limited its investments to 2 percent of total assets, lower than the 3 percent federal limit.
Second National has only three direct real estate investments, totaling less than $5 million. The biggest was made in 1984, when Second National paid $4.2 million to buy 528 fully developed lots in Ocean Pines, a resort community near Ocean City whose lots had once gone begging. After the purchase, the company quickly turned around and sold 11 percent of the lots for $800,000 and said it believes that "an eventual sellout will result in a substantial profit."
Analyst David S. Penn, who tracks financial institutions for Legg Mason in Baltimore, said his recommendation on Second National is a "Hold" -- as opposed to a "Buy" or a "Sell" -- for reasons having less to do with the crisis in Maryland than with the earlier success of the stock.
For one thing, he says, Second National is selling well above its book value of $12 a share. At $16, the thrift's stock is selling for 133 percent of book value, compared with an industry average of 65 percent. That makes the price a bit rich for his taste.
On the other hand, Penn likes Second National's price-earnings ratio, which shows the stock to be selling at about five times its $3.20 estimated earnings for 1985. That's below the 6 to 6.5 P/E average for the industry, and it contains the seeds for a higher stock price in coming years. Penn believes the thrift has the potential to earn $3.50 a share in 1986 and $4 a share in 1987. If the stock were to sell at seven times earnings by then -- a modest increase -- the price would rise to $28 a share.
But, Penn said, he believes Second National's $1.10 dividend may be too high for the thrift's own good. Penn thinks Second National would be better off hanging onto some of that money, investing it and bringing the stockholders a 25 percent return.
Second National Controller William T. Russell III disagreed, saying that the board of directors thought it was giving stockholders a fair return.
The size of the Second National's dividend payment can be interpreted in several ways: as a substantial payment to officers and directors who hold a third of the stock, or as a way to limit the downside price of the stock. At $16, with a $1.10 dividend, the stock yields 6.8 percent. If the price of the stock were to fall to $14, it would yield 7.9 percent. As the price falls, and the yield rises, making the stock more attractive, the number of buyers increases and the price of the stock goes up.
The amount of the dividend also has impact on the Second National's net worth, which in turn has an important bearing on the thrift's ability to qualify for federal insurance. Had the dividend been 10 cents, instead of $1.10, Second National would have had an extra $1.5 million to add to its net worth. In any event, the way the federal regulators figure it, Russell said, Second National has a net worth of 3.53 percent, above the minimum requirement for federal insurance of 3 percent.
When despositors began their run on the Maryland thrifts, Second National lost some deposits, too, although Russell won't say how many. Berliner started last December down the road toward gaining insurance approval from the Federal Savings and Loan Insurance Corp. -- FSLIC. Berliner said he expected approval soon.
While that news would reassure old depositors and might even attract new ones, it is yet another good-news, bad-news situation. One of the key reasons that Maryland-chartered savings and loans preferred MSSIC was that it allowed for the payment of higher rates of interest. Second National, for example, has been paying 10 percent on both statement savings accounts and statement checking. Federally insured thrifts have been limited to 5.50 percent on passbook accounts, although some paid higher rates on NOW accounts.
Controller Russell said that it was not completely clear whether federal authorities would permit Second National to "grandfather" its 10 percent rates, allowing them to stay. The fate of its 10 percent rate is important to Second National; 60 percent of its deposits are in the two types of 10 percent accounts.
For now, Second National seems to have weathered the first blast of the season's biggest financial storm.