American Security Corp., prompted by federal regulators, announced yesterday it would add $37 million to its reserves to cover potential loan losses -- primarily in loans it made to companies in the energy and maritime transportation industries.
American Security, which owns Washington's second-biggest bank, said the large addition to its reserves would result in a fourth-quarter loss for the institution, which has assets of $3.84 billion. But the company said it would report a "modest" profit for all of 1984.
Government sources and financial analysts emphasized yesterday that loan losses do not threaten the soundness of American Security Bank, traditionally one of the most conservative and profitable in the nation. American Security Corp. said it expects improved earnings next year and beyond.
The company, whose principal asset is the bank, said it boosted its loan loss provision as a result of an examination by the Office of the Comptroller of the Currency, the regulator of nationally chartered banks. Regulators, using the tougher standards they have been enforcing in recent months, apparently determined that some American Security loans were weaker than the bank's managers thought.
Problems in American Security's loan portfolio first surfaced in the second quarter of this year. The bank then began to add additional funds to its loan loss reserves and, as a result, reported declines in both second- and third-quarter profits.
For the first nine months of this year, American Security added $24.7 million to its loan loss reserves. For all of 1983, its loan loss provision was $9.6 million.
A bank's loan loss reserve is supposed to give the institution the financial strength to absorb bad loans. Under bank accounting procedures, the addition to the loan loss reserve comes out of a bank's profits, while an actual loan write-off is charged against that reserve.
At the end of September, American Security's loan loss reserve was $29.1 million. It has roughly $2 billion in loans outstanding.
The bank also said it was in the process of "resolving certain enforcement concerns" with the comptroller's office. Regulators may take steps as mild as a consultation or as severe as a cease-and-desist order to enforce its judgments. A bank spokesman said the "enforcement concerns" did not involve a cease-and-desist order.
Other banks also have been forced to add to their reserves because of tougher standards federal regulators are using to determine the quality of bank loan portfolios and the losses that might be realized from them.
In late September, the First National Bank of Chicago announced that it would add $308 million to its loan loss reserves and wrote off as bad debts nearly $280 million in loans. The bank reported a $70 million loss for the third quarter.
Regulators also have been demanding that banks add to their equity by selling new stock or debt that can be used as a second line of defense against losses. American Security, more than any other Washington area bank, buys deposits in the so-called money markets. Money market analysts said that American Security, like many other banks, has spent the last several months buying longer-term deposits to reduce volatility in their deposit base.
Consumer deposits are generally stable because they are insured up to $100,000 by the Federal Deposit Insurance Corp.
Analysts reached last night said they were not surprised by the American Security announcement and said they doubted it would have much impact on the bank's ability to attract money market funds. "American Security is a sound bank that's got some earnings and loan problems. It is not a troubled bank," said one analyst.
Besides problems in its maritime and energy loans, an American Security spokesman said it has lesser difficulties with some communications and real estate loans.
Regulators began to take closer looks at bank loan portfolios after the failure of Penn Square National Bank in 1982. That scrutiny intensified as other banks encountered problems with loans to energy and other industries.