PSFS, the new kid on the block when it comes to Washington-area financial institutions, is 169 years old and still growing.

Last May, the Philadelphia-based company became the first out-of-state thrift institution to penetrate the Washington area by acquiring the District's troubled Capital City Federal Savings and Loan Association and Northern Virginia Savings and Loan Association. It consolidated the two into a new subsidiary called PSFS Savings Bank (Federal Savings Bank).

According to PSFS officials, the bank intends to embark on a course of aggressive competition and growth in this region, following in the footsteps of its parent. "The nation's capital is an attractive market, perhaps not as dynamic a growth market as California or Florida, but it certainly is a good market," said M. Todd Cooke, chairman of PSFS, in an interview in his Philadelphia headquarters.

PSFS, known for more than a century as the Philadelphia Saving Fund Society, is the country's oldest and largest savings bank. It is the fifth-largest thrift institution in the nation, topped only by four California savings and loans. With $16 billion in assets, it dwarfs all commercial banks in this area as well as most elsewhere.

The United States of America was just 40 years old and its fourth president, Republican James Madison, was in his second term when the Philadelphia Saving Fund Society was founded on Nov. 25, 1816. Twelve merchants organized a new kind of financial institution to serve people of modest means. By the end of the first day, five customers had deposited $25.

For 166 years, Philadelphia Saving Fund Society remained a mutual savings bank. In 1982, it expanded operations significantly by acquiring Western Savings Fund Society of Philadelphia with financial assistance from the Federal Deposit Insurance Corp. Later that year it bought Central Mortgage Co., also of Philadelphia. By the time it went public in 1983, PSFS counted as customers one out of four households in the region.

By then, PSFS had bigger ambitions and the ability to realize them, thanks to its Pennsylvania state charter, which permitted it to establish subsidiaries around the country. Today PSFS is a diversified financial services organization with a nationwide network of mortgage banking and consumer credit firms, a real estate development company and savings institutions. Its operations stretch from Connecticut to Florida to Minnesota to California. It counts more than a million customers in 50 states.

For the first half of 1985, PSFS had net income of $47.5 million ($1.35 per share), versus earnings of $56.1 million ($1.60) in the same period of 1984. The smaller profits reflect lower gains from the sale of investments and loans acquired in mergers and an increase in PSFS's loan-loss provision for its consumer-finance and credit-card operations. Despite heavy losses in 1981-82, PSFS bounced back with record earnings in 1984. Its return on assets in that year averaged an excellent 1.24 percent. In the same year, the industry average for return on assets for commercial banks was 0.65 percent.

Next month, PSFS plans to change its name to reflect its nationwide character more accurately. Cooke declined to reveal the new corporate name, but he said that all subsidiaries would have a common name and that it would be easier to pronounce. For this reason, exterior signs on the former Capital City and Northern Virginia S&L have not been changed; a simple PSFS decal on the door identifies the new owner.

PSFS's entry into the metropolitan Washington market was fortuitous, arranged courtesy of the Federal Home Loan Bank Board. In the spring of 1984, the savings bank fixed its eye on a money-making savings and loan association in Winter Haven, Fla. However, federal policy dictates that in exchange for picking up a healthy thrift, an out-of-state acquirer must purchase a troubled one as well to ease the burden on the Federal Savings and Loan Insurance Corp.

Prosperous PSFS ended up adopting not one, but three waifs. The regulators suggested that acquiring ailing First Federal of Titusville, Fla., was half a reasonable quid pro quo, so PSFS looked elsewhere to fulfill the rest of the bargain. It settled on Northern Virginia because of its proximity, and because PSFS had conducted mortgage business there for some years. (Coincidentally, a PSFS subsidiary, Central Mortgage Co., is about to open an office in Fairfax.)

"We thought the arrangement with Northern Virginia Savings and Loan in Arlington was all wrapped up when the regulators came back and asked us to consider Capital City as part of a package. It was clearly the tail-end of this arrangement," said Leonard T. Ebert, president of PSFS Savings Bank FSB.

Federal regulators had been seeking a buyer for some time. Because no institution in the District could afford to take over Capital City, it went out for bids in February 1984. Southmark Corp. of Dallas showed interest at one point, but the deal fell through when Southmark found that the accounting treatment of its purchase required by the Federal Home Loan Bank Board would not be helpful to its bottom line. According to informed sources, the FHLBB initially refused to permit PSFS to bid on Capital City on the grounds that it was too big.

Finally, a deal was struck in which the FSLIC agreed to pay PSFS $94 million in cash and $118 million in notes as part of the transaction for the two Washington-area thrifts, as well as to indemnify PSFS against certain capital losses at Capital City. The $118 million, in income capital certificates, will serve as the new subsidiary's capital. Assets of the new subsidiary stood at $826 million at the end of July; liabilities, $709 million. The estimated cost of the merger to the FSLIC is $79.4 million.

On Dec. 31, 1984, Northern Virginia had negative net worth of $5.1 million. Its problem, Ebert said in an interview, was one of interest-rate mismatch: The return on its fixed-rate mortgage portfolio was less than what it had to pay for customers' money. If Northern Virginia's balance sheet were reconstructed today, now that interest rates have declined, the institution would be in better shape, Ebert said. But he declined to say that the spread problem -- or the difference in the rates -- had been reduced significantly.

Capital City was clearly a basket case, with $24.1 million more in liabilities than assets at the end of 1984. It remained under regulatory supervision for two years, its losses growing all the while. Capital City unsuccessfully sought income capital certificates to boost its bottom line, but regulators, suspicious of management, decided to put the thrift up for sale.

The primary cause of Capital City's woes was a luxury residential and resort development in Prince George's County named Woodmore. In 1982, plans were announced for a 600-acre project in Mitchellville, with a 27-hole golf course designed by champion golfer Arnold Palmer. But things went wrong from the start. One participant described Woodmore as "the wrong project in the wrong place at the wrong time" and blamed the county for failing to provide an access road. A county official responded that the development was unable to sell the $200,000 houses fast enough.

The Arnold Palmer-Buckley Development Co. filed for bankruptcy, and Capital City, which had a $12 million exposure, foreclosed on the development. Included in the transfer of Capital City to PSFS was the Woodmore development, its past liabilities assumed by FSLIC. Ebert said the subsidiary is trying to work out Woodmore's problems, and construction is continuing. Frank Coburn of PSFS said the houses, now selling for between $250,000 and $275,000, no longer are being built on speculation. He said 13 units on the lakeside have been completed and sold, while another five are under construction. About 30 single-family dwelling lots have been sold, and there are houses on 20 of them.

As for the future, Ebert declared, "We are not in the home-building business. I mean, we are in there to minimize the losses from this transaction and to recover what we can. If a developer came along with sufficient funds to buy it -- about $15 million -- we would certainly consider it. But at the moment, no developer is available."

Ebert, 65, retired as vice chairman of PSFS at the beginning of May after 47 years with the company. Cooke persuaded him to take on the presidency of the Washington-area subsidiary on a temporary basis. Martin L. Schnider, who was Northern Virginia's chief executive, resigned the day of the takeover. James I. Schwartz, president of Capital City, resigned at the end of May.

The seven directors on PSFS Savings Bank FSB's board, headed by Cooke, all are officers of the parent company. However, Cooke emphasized that PSFS doesn't plan to run the Washington operation from Philadelphia. "We are obviously going to set objectives, some policies and some financial goals. But we want FSB to operate energetically, actively and competitively as a local organization." Ebert's number two and eventual successor will be named this fall, presumably after a local talent search. For the moment, Ebert is concentrating on setting the wheels in motion for what he calls "a foundation for growth in this area. Frankly, it's a major rebuilding job."

PSFS Savings Bank FSB plans to offer mortgage, consumer, commercial and student loans -- in short, the full range of banking services with the possible exception of trust services. It plans to join an automated-teller-machine network. Ebert said he anticipates rapid growth through aggressive marketing, convenience, product range and service.

Ebert and Cooke both spoke of expanding PSFS Savings Bank FSB in the region either through acquisitions or new branches. "Maryland does interest us," Ebert said. "Like so many others, we have two legs on a three-legged stool, Virginia and the District." Cooke added, "We've got an institution in the metro area that's big enough to be a competitive factor, but we would like to grow. It's a good market. We think Virginia is a very attractive state. We have set some rather ambitious growth targets for the 1986-90 period."

The parent company has expanded rapidly since Cooke became chief executive officer in 1979. The goals of a five-year program were attained in less time. "Through a combination of luck and smarts, we were able to get a great deal more done in 1984 than we planned to," he said, adding that acquisitions in 1985 and 1986 would not follow the same frantic pace.

In 1984, PSFS bought three mortgage banking businesses for $146.6 million, the home-equity loan unit of General Electric Credit Corp. for $567.5 million and Midland-Guardian Investment Co. and its manufactured-housing finance unit for $69.7 million. This year, in addition to the savings and loans, it has acquired Shorewood Corp., a real estate developer in Indianapolis, for $15 million.

The acquisition binge may be fueled by tax write-offs left over from years in which PSFS incurred losses. These tax net operating loss carryforwards amounted to $816 million at the end of 1984. According to Sanford C. Bernstein & Co., which analyzes thrifts, "the most likely way for PSFS to take advantage of this is to make sizable acquisitions of companies with earnings."

"Our aim is to create a presence as a competitive, nationwide retail financial services company. By the acquisitions we have made, we've indicated the lines of business that are appropriate for us: depository banking, retail banking, consumer finance, mortgage banking."

Cooke said he regards not only commercial banks but also financial services companies, such as the giant American Express Co., as PSFS's competitors. On the other hand, Cooke said PSFS isn't yet ready to go head-to-head with money-center banks. Therefore, he favors the evolution of interstate banking within regions of the country rather than going to full nationwide interstate banking.

Nevertheless, PSFS's direction seems clear. On Jan. 1 of this year, PSFS hired Frederick S. Hammer from Chase Manhattan Corp. as president. It is expected he will succeed Cooke, who is scheduled to retire next spring. (Hammer received an up-front bonus of $100,000, $185,000 as compensation for profit-sharing payments he would have received from Chase, a salary of $350,000 and a bonus of $100,000 plus stock options -- all in his first year. His contract also calls for a further payment of $500,000 if he is not named chief executive officer before Dec. 31.)

Hammer will be the first non-Philadelphian to head what is now called PSFS. While at Chase, he directed that bank's worldwide consumer operations. Cooke said the five-year plan for 1986-90, which Hammer helped create, does not call for any international operations. Rather, the emphasis will be on retail or consumer banking. "There are plenty of opportunities ahead of us without going overseas," he said.