For years, savings and loan associations have been generally slighted as a medium of investment and were just about the last thing anyone associated with the word "growth."

Now, suddenly, the word is getting around that maybe savings and loan firms are not as dissociated from growth as they were thought to be. As a matter of fact, growth has been stirring in savings and loan companies. For example, a strange new form of corporate entity called First Charter Financial Corporation, which owns or holds a half-dozen savings and loan associations in California came to the Big Board at 17½ for a total worth of $52.5 million. The stock went up as high as 49¾ in 1961.

Why all this sudden interest in a hitherto rather obscure industry? The answer is the newly realized growth in savings and loans. A look at some statistics proves this point. In 1958 the industry reported $55 billion in assets, a tenfold gain over the $5.7 billion of 1940. This kind of growth is very rare, even among the most highly priced popular issues. In 1958 alone, the savings and loan industry achieved a net gain of $6.2 billion in deposits, compared to $2.3 billion for mutual savings banks. In 1959 it scored its greatest rate of gain in history against only a slight year-to-year gain for most other savings and banking institutions. In 1960 its assets rose to $60 billion, and they are expected to climb to $165 billion by 1970—a big stride for any industry in a single decade.

What has made savings and loan firms so attractive to depositors is their ability to pay an average dividend of 3.5 per cent and, in the case of Western firms, 4, 4½ or even 5 per cent on depositors' funds.

Where does this dividend-paying ability come from? For one thing, loan firms have been rapidly moving in on the high-yield home mortgage market, which accounted for 40 per cent of all home mortgage funds in 1960 and is expected to reach 50 per cent by 1970. For another, they are deep in conventional mortgages which carry a higher interest rate than loans secured or guaranteed by federal agencies.

Basically, the profits of savings and loan companies depend upon the spread between the cost of money borrowed from depositors and the return they get from mortgage loans, after deducting an average of 25 per cent of gross for general and administrative expenses. So their future growth will, to a large extent, be determined by the continued or accelerated growth in mortgage income.

The record of loan firms as home mortgage lenders, in comparison with other institutions, is indeed impressive. Nationally, their mortgage loans increased about two-and-a-half times during the fifties. In California, where loan firms are heavily concentrated, the increase was fourfold, from $666 million to over $2.6 billion. Most California-based loan firms are secured by first mortgage or trust deed on residential real estate. The delinquency rate on such mortgages is considerably lower in California than it is nationally.

The growth of California-based savings and loan associations in the past decade is phenomenal, due chiefly to the Golden State's population explosion. From 1950 to 1959 the California population shot up 42 per cent compared to 17 per cent for the United States as a whole. In California personal income rose 102 per cent against a national increase of 72 per cent. The result was a fast-growing demand for housing on the West Coast which generated a greatly expanded market for mortgage loans. In the past decade, the value of U.S. nonfarm mortgages of $20,000 or less almost doubled; California's nearly tripled.

As a group, savings and loan firms are the largest lenders of funds for home mortgages, providing 41 per cent of all institutional home financing in 1959. It has provided $53 billion in mortgage funds in the past five years. According to one estimate, they would have been able to provide only about $30 billion had they not enjoyed the special status in tax deferral.

The 12 per cent special tax deferral allowance was originally enacted by Congress to protect savings and loan firms from bad debt and is believed to have contributed most importantly to their past growth. Complaints about this special tax treatment generated quite a few congressional efforts to eliminate or at least reduce the tax benefits.

The loan industry has also been helped by the passage of a congressional bill in 1960 which has made permanent a ban on further acquisition of more units by savings and loan associations which, though appearing to be negative by limiting further expansion, has actually acted to prevent entry of new competitors into the exclusive clubs of existing savings and loan holding companies.

According to historical patterns, savings accounts of loan firms have risen slightly faster than mortgage loans outstanding. During the 1950-59 period, for instance, savings with loan firms rose 290 per cent to $54.5 billion, while the total home mortgage debt held by them grew from $13.1 billion to $49.7 billion. In the past decade, savings in California-based firms have grown 1.7 times faster than those of other institutions (including commercial banks, insurance companies, etc.), while loans grew 1.6 times faster.

The major cloud on the industry's horizon is the downward trend in the interest rates loan firms can charge on their mortgage loans as a result of a general drift toward lower interest rates throughout the country. If the downward trend should continue, then they would have to make themselves less attractive by reducing dividends to depositors.

Other industry worries come from growing competition from commercial banks and other lending institutions and possible action from Congress which might affect the amount of dividends (interest paid on savings accounts) deductible as interest expenses.

In evaluating shares of savings and loan companies, stress is laid on book value per share as well as the increase in book value per share. While book value has become less and less a factor in evaluating shares of industrial stocks, especially companies in the new industries, it is still predominantly important in evaluating securities of the so-called money companies, whose book value is largely determined by cash and equivalents.

The loan shares are comparatively new in the market and are still considered more or less for professionals in the sense that they have only begun to be appraised by the market. The potential in this old-line industry has been present all the time although it has been only recently that Wall Streeters have suddenly awakened to the new growth inherent in this hitherto lackluster industry.

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