BIG NUMBERS, LITTLE THRIFTS Wise borrowing, sound lending keys to success

THE BALTIMORE SUN

Forget the modern-day image of the thrift industry -- a cascading tale of bad real estate loans and fraudulent deals, of billion-dollar failures and government bailouts, of jailed executives and fresh indictments.

Consider this instead: two Maryland thrifts that are simply perfect.

Cowenton Federal Savings and Loan Association in White Marsh and First Security Federal Savings Bank in Chevy Chase both have the right to carry that banner, according to the latest ratings by IDC Financial Publishing Inc.

Both thrifts, judged on three dozen financial ratios, attained the top ratings for the three-month period that ended March 31.

The two small thrifts could barely raise a ripple within Maryland's $20 billion savings and loan industry. But they stand as a signpost for what many of the state's largest banks and thrifts are working to rediscover -- the industry's bedrock of making money by simply borrowing and lending well.

"We don't do very much speculative construction lending. It's kind of risky," explained Cowenton's president, Terry L. Neifeld. "We concentrate on home lending because that's what the S&L; industry has done from the get-go."

The similarities between the two small thrifts are unmistakable. Both are run by executives who are happiest when their companies are safest. Neither institution is publicly traded, worried about stockholders and stock prices. And both have stuck with the traditional role of providing home mortgages, avoiding riskier -- and potentially more profitable -- commercial real estate loans.

The differences between them and most of the rest of the industry are equally unmistakable. More than 6 percent of the $20 billion in assets held by the thrift industry in Maryland was listed as troubled at the end of the first quarter, according to IDC's figures. Cowenton and First Security combined have one bad loan.

While the average IDC rating for a thrift in Maryland was 124, Cowenton and First Security hit the top possible score of 300. A third savings and loan, Custom Savings Bank FSB, also obtained a 300 rating.

The Pikesville-based thrift has a very different operating strategy than its two smaller cousins. With assets of $318 million at March 31, most of Custom's funds are invested in government securities backed by mortgages. Only about $700,000 of permanent home mortgages remain on its books. Efforts to reach Custom executives to learn details of the thrift's strategy were unsuccessful.

Few institutions are able to maintain a top score consistently for years, but executives at Cowenton and First Security are not worried. Their goal: to continue being boring.

2& "If you look at us a year from now

or two years from now," said Edwin Rector, president of First Security, "we'll be doing the same thing."

Cowenton

Cowenton is not a large operation.

* The post office, located across the street, keeps returning mail sent to Cowenton's street address because the thrift has no mailbox for the carrier's rural route. If it did, it would be in the post office's parking lot.

* It doesn't have a fax machine.

* It did get a computer, but that meant the conference table had to be moved into the lobby.

* And its one office is in a flood plain, which for years made it too expensive to install an indoor toilet. The problem was solved two years ago, however, and Cowenton's three employees stopped using the bathroom at the fire station next door.

Cowenton has a simple purity. Although the tools of the trade have changed drastically since Cowenton was founded in 1888 -- or even since Mr. Neifeld's father ran the thrift in the 1940s -- its style of business has not. "Rapid growth is not healthy," said Mr. Neifeld, 43.

Mr. Neifeld, his vice president, who also serves as the thrift's chief lending officer, and the company's secretary-treasurer -- Cowenton's entire staff -- double as the tellers. With only 1,200 accounts -- representing about 600 families -- lines are rarely a problem.

"Basically, they're savers," Mr. Neifeld said of the customers, who, under the thrift's charter as a mutual company, are also the owners. "They don't come in that often."

Cowenton has $20.3 million in assets and its 10 percent capital-to-assets ratio places the company well above levels required by federal regulators. Roughly one-fourth of its money is in cash or liquid assets, one-fourth is invested in government securities and one-half is lent out as home mortgages, according to data from the Office of Thrift Supervision.

There are no business loans. There are no consumer loans. And, most important, there are no bad loans.

In the past few years, Cowenton has been flush with cash, as interest rates fell and customers rushed to refinance mortgages. But new home sales slumped, and Cowenton has had a difficult lTC time finding new homebuyers who want mortgages.

Although Mr. Neifeld would rather lend the money than hold it, he expects to maintain the thrift's current position until demand for mortgages returns. Besides, he said, "If the wind blows in the wrong direction, then the one who has cash is king."

Making money under this scenario has not been hard.

Cowenton made $465,000 on the interest collected from mortgages and investments during the first quarter. It paid out $315,000 to depositors.

After selling a building for $79,000, paying taxes and salaries, the thrift made $112,000 in the first three months of this year. Operating income before taxes grew another 15 percent during the second quarter.

The banking business is in the blood of Mr. Neifeld, who remembers his father working on the thrift's books at the kitchen table in the evenings.

The younger Mr. Neifeld graduated magna cum laude with an accounting degree from the Baltimore College of Commerce and worked at the tax division at Arthur Andersen & Co. before joining Cowenton in 1974.

After the head of the thrift died, Mr. Neifeld's father turned down a request to return to his old position. He suggested that his son take the post instead.

The younger Mr. Neifeld quickly learned the realities of operating a small savings and loan. More than half the loans were delinquent -- not because customers had financial problems but because the thrift's books were out-of-date.

When Mr. Neifeld pressed for repayment of overdue loans, one customer complained about the strongly worded letter. The man explained he had suffered a heart attack and hadn't known his payment was late.

That evoked guilt and sympathy from the young savings and loan executive.

"But I did some checking," Mr. Neifeld recalls. "The guy had had the heart attack four or five years after the loan was supposed to be paid off."

All of the loans were eventually paid.

Cowenton's four-room operation hasn't changed much over the years. Perhaps the most dramatic change came when the thrift obtained federal insurance, which was required after Maryland's savings and loan crisis in the mid-1980s. In order to qualify for FSLIC insurance, Cowenton dropped its tradition of opening only Tuesday nights and began full-time hours.

It was then, in 1989, that the bathroom was installed.

Mr. Neifeld recalls, "The only thing that FSLIC did for us was get us an indoor restroom."

First Security

First Security is a simple thrift with a twist.

"We are pretty small," said Mr. Rector, 51, president of the one-shop thrift, founded in 1920. "We don't try to do everything that larger institutions do."

First Security's size and simple appearance are deceptive, however. It is a combination mortgage bank and thrift, providing textbook examples of each.

When a lender grants a mortgage, it has two basic options: It can keep the loan and earn the interest, or it can sell the loan and take a quick profit.

Cowenton does the former; First Security does the latter.

Although First Security listed $15.8 million in assets at March 31 -- well below the size of Cowenton -- it was able to provide $80 million in mortgages during the first half of this year by quickly selling many of the new mortgages to other investors and removing those loans from the thrift's books.

The tactic of selling mortgages, which accounted for $582,000 in first-quarter revenue, was the thrift's single-largest producer of income for the period, according to First Security's quarterly report. The privately held thrift earned $160,000 during the first three months of the year.

That strategy is First Security's foundation.

More than one-fourth of the thrift's 40 employees work at finding and writing new mortgages through a decade-old subsidiary, First Security Mortgage Bankers. Nearly half the workers process mortgages.

Meanwhile, profits from selling the mortgages help pay for two tellers, a half-dozen managers and two employees in accounting. And for at least eight straight years since Mr. Rector joined the thrift, profits have increased.

A native of Kansas, Mr. Rector graduated from the Naval Academy, then earned a law degree and worked as a lawyer for the United Railway Association, which oversaw the creation of Conrail. By 1980, he had begun working in mortgage banking, and he joined First Security in 1983.

He moved the thrift from Dorsey four years later to be closer to its mortgage-making unit and the booming housing market of suburban Washington.

Like Cowenton, First Security has made its money from mortgages, the traditional stronghold of the savings and loan industry.

More than $13 million of its money is invested in residential

mortgages, while slightly more than $700,000 is tied to two companies with commercial loans.

But reality might be creeping into the operation. One mortgage worth $94,000 went bad during the second quarter, the first one to sour since Mr. Rector joined the thrift.

"It is a cyclical business, and we are really combining two industries, banking and mortgage-making, both troubled industries right now," Mr. Rector explained. "But we're doing OK."

Perfect 300s

Figures as of March 31

Cowenton Federal S&L;

Assets -- $20.3 million

Loans -- $10.1 million

Deposits -- $17.4 million

Permanent home mortgages (as % of loans) -- 97.1

Repossessed assets -- $0

Construction loans -- $75,000

Net income 1st qtr. -- $112,000

RATING: 300

First Security S&L;

Assets -- $15.8 million

Loans -- $14.0 million

Deposits -- $13.3 million

Permanent home mortgages (as % of loans) -- 93.2

Repossessed assets -- $0

Construction loans -- $169,000

Net income 1st qtr. -- $160,000

RATING: 300

' SOURCE: Company reports

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