<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated August 16, 1994
to Prospectus Dated January 28, 1994
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
JUNE 30, 1994
----------------------------
<PAGE>
<PAGE>
TABLE OF CONTENTS
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at June 30, 1994 and
September 30, 1993
(b) Consolidated Statements of Operations and Deficit
for the three-month and nine-month periods
ended June 30, 1994 and 1993
(c) Consolidated Statements of Cash Flows for the
nine-month periods ended June 30, 1994 and 1993
(d) Notes to Consolidated Financial Statement
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three Months Ended June 30, 1994 Compared to
Three Months Ended June 30, 1993
Nine Months Ended June 30,1994 Compared to
Nine Months Ended June 30, 1993
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<TABLE>
<CAPTION>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
June 30 September 30
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Commercial $ 111,795 $ 109,513
Hotel 111,175 111,484
Other 4,584 3,985
------------ ------------
227,554 224,982
Accumulated depreciation (68,753) (62,626)
------------ ------------
158,801 162,356
Land parcels 38,419 38,411
Cash and cash equivalents 28,200 2,710
Other assets 109,042 17,079
------------ ------------
Total real estate assets 334,462 220,556
------------ ------------
Banking
Cash and due from banks 172,196 178,508
Interest-bearing deposits 3,851 4,691
Federal funds sold 9,000 0
Investment securities (market value $4,368 and $4,822, respectively) 4,368 4,789
Loans held for sale 53,157 176,027
Loans held for securitization and sale 662,000 300,000
Mortgage-backed securities (market value $1,090,168 and $1,528,060, respectively) 1,090,168 1,501,192
Loans receivable (net of reserve for losses of $58,544 and $68,040, respectively) 2,010,261 1,861,753
Federal Home Loan Bank stock 31,940 31,150
Real estate held for investment or sale (net of reserve for losses of $116,838 and $111,644, respectively) 331,589 388,459
Property and equipment, net 141,996 135,800
Cost in excess of net assets acquired, net 7,207 9,383
Excess servicing assets, net 16,527 27,573
Purchased mortgage servicing rights, net 16,369 20,472
Other assets 196,231 232,974
------------ ------------
Total banking assets 4,746,860 4,872,771
------------ ------------
TOTAL ASSETS $ 5,081,322 $ 5,093,327
============ ============
LIABILITIES
Real Estate
Mortgage notes payable $ 187,198 $ 264,776
Notes payable - secured 175,000 0
Notes payable - unsecured 39,902 38,661
Deferred gains - real estate 109,383 109,027
Other liabilities and accrued expenses 36,443 37,689
------------ ------------
Total real estate liabilities 547,926 450,153
------------ ------------
Banking
Deposit accounts 4,081,640 3,870,023
Securities sold under repurchase agreements and other short-term borrowings 2,049 88,266
Bonds payable 24,030 24,605
Notes payable 7,779 7,925
Federal Home Loan Bank advances 132,000 412,000
Custodial accounts 31,602 25,925
Amounts due to banks 35,439 26,723
Other liabilities and accrued expenses 43,108 40,034
Capital notes -- subordinated 160,000 138,500
------------ ------------
Total banking liabilities 4,517,647 4,634,001
------------ ------------
Minority interest held by affiliates 34,509 34,495
Minority interest -- other 74,307 74,307
------------ ------------
TOTAL LIABILITIES 5,174,389 5,192,956
------------ ------------
SHAREHOLDERS' DEFICIT
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares
authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million 516 516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
6,641,598 shares issued 6,642 6,642
Paid-in surplus 92,943 92,943
Deficit (140,681) (157,882)
Net unrealized holding loss (10,639) 0
------------ ------------
(51,219) (57,781)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (93,067) (99,629)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 5,081,322 $ 5,093,327
============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
/TABLE
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<TABLE>
<CAPTION>
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Three Months For the Nine Months
Ended June 30 Ended June 30
(In thousands, except per share amounts) 1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REAL ESTATE
Income
Commercial properties $ 4,584 $ 11,850 $ 12,361 $ 37,590
Hotels 13,256 12,824 33,577 33,541
Other 1,170 583 2,109 1,581
------------ ------------ ------------ ------------
Total income 19,010 25,257 48,047 72,712
------------ ------------ ------------ ------------
Expenses
Direct operating expenses:
Commercial properties 1,702 3,633 5,190 10,733
Hotels 8,802 8,816 24,791 24,531
Land parcels and other 397 342 1,047 1,048
Interest expense 9,615 12,487 29,040 37,881
Amortization of debt expense 395 847 1,351 2,352
Depreciation 2,049 3,105 6,174 9,358
Advisory, management and leasing fees - related parties 1,870 2,000 4,904 5,560
General and administrative 491 492 1,458 1,380
Write-down of real estate to net realizable value 0 0 1,380 0
------------ ------------ ------------ ------------
Total expenses 25,321 31,722 75,335 92,843
------------ ------------ ------------ ------------
Equity in earnings of partnership investments 843 0 2,467 0
Loss on sales of property 0 0 0 (684)
------------ ------------ ------------ ------------
REAL ESTATE OPERATING LOSS $ (5,468) $ (6,465) $ (24,821) $ (20,815)
------------ ------------ ------------ ------------
BANKING
Interest income
Loans $ 64,273 $ 56,688 $ 190,520 $ 178,391
Mortgage-backed securities 16,671 22,883 54,967 72,902
Trading securities 202 0 917 0
Investment securities 73 2,451 226 8,001
Other 1,972 1,221 5,011 3,838
------------ ------------ ------------ ------------
Total interest income 83,191 83,243 251,641 263,132
Interest expense ------------ ------------ ------------ ------------
Deposit accounts 33,075 31,090 97,188 96,093
Short-term borrowings 2,068 2,599 8,823 10,553
Long-term borrowings 5,061 6,592 18,549 19,811
------------ ------------ ------------ ------------
Total interest expense 40,204 40,281 124,560 126,457
------------ ------------ ------------ ------------
Net interest income 42,987 42,962 127,081 136,675
Provision for loan losses (11,701) (12,933) (27,600) (55,894)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 31,286 30,029 99,481 80,781
------------ ------------ ------------ ------------
Other income
Credit card fees 3,332 6,058 14,056 20,124
Loan servicing fees 18,578 11,054 48,019 35,217
Deposit servicing fees 5,112 4,722 14,726 13,789
Gain on sale of investment securities, net 0 8,895 0 8,895
Gain on sales of trading securities, net 1,604 0 2,037 0
Earnings (loss) on real estate held for investment or sale, net 2,566 38 (75) (18,585)
Gain (loss) on sales of credit card relationships, loans and
mortgage-backed securities, net (684) 2,390 20,774 20,874
Gain (loss) on sales of mortgage servicing rights, net 1,020 (24) 5,150 2,744
Other 2,395 3,099 6,990 7,489
------------ ------------ ------------ ------------
Total other income 33,923 36,232 111,677 90,547
------------ ------------ ------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Three Months For the Nine Months
Ended June 30 Ended June 30
(In thousands, except per share amounts) 1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 22,934 $ 17,894 $ 65,579 $ 51,325
Loan expenses 1,637 3,503 9,735 8,828
Property and equipment 6,243 5,967 18,922 17,854
Marketing expenses 14,832 4,311 34,763 8,219
Data processing expenses 8,162 5,436 21,619 16,565
Deposit insurance premiums 2,819 2,993 8,596 8,315
Amortization of cost in excess of net assets acquired 699 715 2,174 2,203
Other 5,238 4,619 16,513 14,260
------------ ------------ ------------ ------------
Total operating expenses 62,564 45,438 177,901 127,569
------------ ------------ ------------ ------------
BANKING OPERATING INCOME $ 2,645 $ 20,823 $ 33,257 $ 43,759
------------ ------------ ------------ ------------
TOTAL COMPANY
Operating income (loss) before income taxes, extraordinary items,
cumulative effect of change in accounting principle,
and minority interest $ (2,823) $ 14,358 $ 8,436 $ 22,944
Provision for income taxes 0 6,086 6,195 10,638
------------ ------------ ------------ ------------
Income (loss) before extraordinary items, cumulative effect
of change in accounting principle and minority interest (2,823) 8,272 2,241 12,306
Extraordinary items:
Adjustment for tax benefit of operating loss carryovers 0 4,790 0 7,344
Loss on early extinguishment of debt, net of taxes 0 0 (11,315) 0
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest (2,823) 13,062 (9,074) 19,650
Cumulative effect of change in accounting principle 0 0 36,260 0
------------ ------------ ------------ ------------
Income (loss) before minority interest (2,823) 13,062 27,186 19,650
Minority interest held by affiliates 208 (2,154) (2,673) (4,878)
Minority interest -- other (2,437) (1,875) (7,312) (1,875)
------------ ------------ ------------ ------------
TOTAL COMPANY NET INCOME (LOSS) (5,052) 9,033 17,201 12,897
DEFICIT
Beginning of period (135,629) (157,116) (157,882) (160,980)
Dividend distribution - preferred 0 (688) 0 (688)
------------ ------------ ------------ ------------
End of period $ (140,681) $ (148,771) $ (140,681) $ (148,771)
============ ============ ============ ============
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (6,407) $ 7,678 $ 14,491 $ 8,832
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary items, cumulative effect
of change in accounting principle and minority interest $ (0.87) $ 1.43 $ (0.39) $ 1.71
Extraordinary items:
Adjustment for tax benefit of operating loss carryovers 0.00 1.00 0.00 1.52
Loss on early extinguishment of debt, net of taxes 0.00 0.00 (2.34) 0.00
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest (0.87) 2.43 (2.73) 3.23
Cumulative effect of change in accounting principle 0.00 0.00 7.51 0.00
------------ ------------ ------------ ------------
Income (loss) before minority interest (0.87) 2.43 4.78 3.23
Minority interest held by affiliates 0.04 (0.45) (0.55) (1.01)
Minority interest -- other (0.50) (0.39) (1.51) (0.39)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (1.33) $ 1.59 $ 2.72 $ 1.83
============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
/TABLE
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<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Nine Months
Ended June 30
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss) $ 5,243 $ (6,614)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation 6,174 9,358
Loss on sales of property 0 684
Write-down of real estate to net realizable value 1,380 0
Increase in accounts receivable and accrued income (15,288) (2,191)
Increase in deferred tax asset (38,409) 0
Increase (decrease) in accounts payable and accrued expenses (11,854) 7,709
(Increase) decrease in tax sharing receivable 40 (14,535)
Amortization of debt expense 1,351 2,352
Equity in earnings of partnership investments (2,643) 0
Other (10,532) (1)
------------ ------------
(64,538) (3,238)
------------ ------------
Banking
Net income 10,695 19,511
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of premiums, discounts and deferred loan fees (1,035) (6,911)
Depreciation and amortization 13,167 12,070
Amortization of cost in excess of net assets acquired, purchased mortgage servicing
rights and excess servicing assets 18,211 20,079
Loss on extinguishment of debt 10,476 0
Provision for loan losses 27,600 55,894
Net fundings of loans held for sale (773,915) 0
Proceeds from sales of trading securities 604,265 (613,964)
Proceeds from sales of loans and securities held for sale and/or securitization 1,152,715 1,508,777
Earnings on real estate 27 (4,553)
Provision for losses on real estate held for investment or sale 11,682 28,234
Gain on sales of real estate held for investment or sale, net (8,658) 0
Gain on sale of investment securities, net 0 (8,895)
Gain on sales of trading securities, net (2,037) 0
Gain on sales of credit card relationships, loans and mortgage-backed securities, net (20,774) (20,874)
Gain on sales of mortgage servicing rights, net (5,150) (2,744)
Minority interest held by affiliates 2,673 4,878
Minority interest - other 7,312 1,875
(Increase) decrease in other assets 44,692 (6,476)
Increase in other liabilities and accrued expenses 11,790 3,993
Increase (decrease) in tax sharing payable (40) 14,535
Other, net 5,722 4,123
------------ ------------
1,109,418 1,009,552
------------ ------------
Net cash provided by operating activities 1,044,880 1,006,314
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (3,767) (5,769)
Property sales 0 241
Equity investment in unconsolidated entities 1,230 0
Other investing activities (8,535) (392)
------------ ------------
(11,072) (5,920)
------------ ------------
Banking
Proceeds from maturities of investment securities 300 0
Proceeds from sales of loans 0 4,916
Net proceeds from sales of real estate 70,267 33,113
Net proceeds from sales of mortgage servicing rights 5,150 2,744
Net fundings of loans receivable (921,414) (450,143)
Principal collected on mortgage-backed securities 385,376 314,424
Purchases of investment securities 0 (4,691)
Purchases of mortgage-backed securities (243,153) (381,327)
Purchases of loans receivable (186,232) (174,165)
Purchases of property and equipment (15,400) (4,416)
Purchases of mortgage servicing rights (888) (15,914)
Excess servicing assets capitalized 0 (11,841)
Disbursements for real estate held for investment or sale (45,395) (6,312)
Other investing activities, net 911 4,429
------------ ------------
(950,478) (689,183)
------------ ------------
Net cash used in investing activities (961,550) (695,103)
------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Nine Months
Ended June 30
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 461 $ 2,100
Principal curtailments and repayments of mortgages (75,944) (4,073)
Proceeds from sales of secured notes 175,000 0
Proceeds from sales of unsecured notes 8,144 3,077
Repayments of unsecured notes (6,903) (13,688)
Costs of obtaining financings (9,243) (4,582)
Proceeds from the issuance of redeemable referred stock 0 25,000
Other financing activities, net 0 (1,426)
------------ ------------
91,515 6,408
------------ ------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 9,059,664 7,916,479
Customer withdrawals of deposits and payments for maturing certificates of deposit (8,848,047) (7,996,471)
Net decrease in securities sold under repurchase agreements (81,517) (321,328)
Advances from Federal Home Loan Bank 736,300 447,000
Repayments of advances from Federal Home Loan Bank (1,016,300) (411,000)
Proceeds from other borrowings 328,282 39,653
Repayments of other borrowings (333,703) (41,710)
Cash dividends paid on preferred stock (7,313) 0
Repayment of capital notes - subordinated (134,153) 0
Net proceeds from issuance of capital notes - subordinated 143,603 0
Net proceeds from issuance of preferred stock 0 71,869
Other financing activities, net 5,677 19,344
------------ ------------
(147,507) (276,164)
------------ ------------
Net cash used in financing activities (55,992) (269,756)
------------ ------------
Net increase in cash and cash equivalents 27,338 41,455
Cash and cash equivalents at beginning of period 185,909 121,169
------------ ------------
Cash and cash equivalents at end of period $ 213,247 $ 162,624
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 170,926 $ 161,212
Income taxes 535 2,307
Supplemental schedule of noncash investing and financing activities:
Rollovers of notes payable - unsecured 5,166 3,845
Loans receivable exchanged for mortgage-backed securities 0 51,956
Loans held for sale exchanged for mortgage-backed securities held for sale 359,139 338,967
Mortgage-backed securities transferred to loans and securities held for sale 0 131,390
Loans receivable transferred to loans held for sale and/or securitization 962,000 344,177
Investment securities transferred to loans and securities held for sale 0 173,036
Loans made in connection with the sale of real estate 14,214 51,177
Loans receivable transferred to real estate acquired in settlement of loans 3,321 21,955
Loans classified as in-substance foreclosed transferred to loans receivable 15,008 0
Loans held for sale and/or securitization transferred to loans receivable 3,507 0
Investment securities transferred to investment securities available-for-sale 4,789 0
Mortgage-backed securities transferred to mortgage-backed securities available-for-sale 1,501,192 0
The Notes to Consolidated Financial Statements are an integral part of these statements.
/TABLE
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements
reflect all adjustments necessary for a fair presentation of the Trust's
financial position and results of operations. All such adjustments are of
a normal recurring nature. These financial statements and the accompanying
notes should be read in conjunction with the Trust's audited consolidated
financial statements included in its Form 10-K for the fiscal year ended
September 30, 1993. The results of operations for the nine months ended
June 30, 1994 are not necessarily indicative of results to be expected for
the year.
2. The accompanying financial statements include the accounts of B.F.Saul
Real Estate Investment Trust and its wholly-owned subsidiaries (the "Real
Estate Trust"), which are involved in the ownership and development of
income-producing properties. The accounts of the Trust's 80%-owned banking
subsidiary, Chevy Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase"
or the "Bank") have also been consolidated. Accordingly, the accompanying
financial statements reflect the assets, liabilities, operating results,
and cash flows for two business segments: Real Estate and Banking. All
significant intercompany balances and transactions have been eliminated.
3. The Real Estate Trust voluntarily terminated its qualification as a
real estate investment trust under the Internal Revenue code during fiscal
1978. As a result of the Trust's acquisition of an additional 20% equity
interest in the Bank in June 1990, the Bank became a member of the Trust's
affiliated group filing consolidated federal income tax returns. The
current effect of the Trust's consolidation of the Bank's operations into
its federal income tax return results in the use of the Trust's net
operating losses and net operating loss carryforwards to reduce the federal
income taxes the Bank would otherwise owe.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Account Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Effective October 1, 1993, the Trust adopted SFAS 109, which
changes the manner in which companies record deferred tax liabilities or
assets and requires ongoing adjustments for enacted changes in tax rates
and regulations. The adoption was recorded as a cumulative effect of a
change in accounting principle of approximately $36.3 million and had the
effect of increasing the Trust's net deferred tax asset by approximately
$33.5 million.
The income tax provision for the nine months ended June 30, 1993 was
determined under APB 11 and has not been restated to reflect adoption of
SFAS 109.<PAGE>
<PAGE>
4. BANKING:
LOANS HELD FOR SALE:
At June 30, 1994 and September 30, 1993, loans held for sale is composed of
single-family residential loans.
LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale is composed of the following:
June 30, September 30,
1994 1993
------------- -------------
(In thousands)
Credit card receivables $ 500,000 $ 300,000
Home equity credit line receivables 162,000 -
------------- -------------
Total $ 662,000 $ 300,000
============= =============
SECURITIES:
Investment Securities and Mortgage-backed Securities:
Effective October 1, 1993, the Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"), which was issued in May 1993. SFAS
115 requires enterprises to classify and account for debt and equity
securities in one of the following three categories:
1. Debt securities that an enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity and
reported at amortized cost.
2. Debt and equity securities that are purchased and held
principally for the purpose of selling them in the near term and
mortgage-backed securities held for sale in conjunction with
mortgage banking activities are classified as trading securities and
reported at fair value, with unrealized gains and losses included in
earnings. See "Trading Securities."
3. Debt and equity securities not classified as either held-to-
maturity or trading securities are classified as available-for-sale
and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity, net of the related tax effect.<PAGE>
<PAGE>
At June 30, 1994, all investment securities and mortgage-backed
securities held by the Bank are classified as available-for-sale and
recorded at fair value. At June 30, 1994, net unrealized holding losses
in the amount of $13.3 million, net of the related income tax effect, are
included in a separate component of stockholders' equity.
Gross unrealized holding gains and losses in the Bank's investment
security portfolio as of June 30, 1994 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ------------ ----------- --------
(In thousands)
U.S. Government securities $ 4,397 $ - $ (130) $4,267
Other securities 101 - - 101
---------- ---------- ---------- -------
Total $ 4,498 $ - $ (130) $4,368
========== ========== ========== =======
A comparison of amortized cost and fair value for investment securities,
along with the contractual dates of maturity, by category of investments as
of June 30, 1994, is as follows:
Aggregate
Amortized Fair
Cost Value
--------- --------
(In thousands)
Investment securities available-for-sale:
U.S. Government securities:
Maturing within one year $ - $ -
Maturing after one year,
but within five years 4,397 4,267
--------- --------
Total U.S. Government securities 4,397 4,267
--------- --------
Other securities:
Maturing within one year 101 101
--------- -------
Total other securities 101 101
--------- -------
Total investment securities available-for-sale $ 4,498 $ 4,368
========= =======
<PAGE>
<PAGE>
Gross unrealized holding gains and losses in the Bank's mortgage-backed
security portfolio as of June 30, 1994 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ------------ ----------- ----------
(In thousands)
FNMA $ 37,105 $ 105 $ (306) $ 36,904
FHLMC 882,065 1,492 (24,242) 859,315
Private label,
AA-rated 192,868 1,103 (22) 193,949
----------- ------------ ----------- --------
Total $1,112,038 $ 2,700 $ (24,570) $1,090,168
=========== ============ =========== ==========
Trading Securities:
As part of its mortgage banking activities, the Bank exchanges loans held
for sale for mortgage-backed securities and then sells the mortgage-backed
securities to third-party investors in the month of issuance. In
accordance with SFAS 115, these mortgage-backed securities are classified
as trading securities. The Bank realized net gains on sales of trading
securities of $1.6 million for the three months ended June 30, 1994 and net
gains of $2.0 million for the nine months ended June 30, 1994. There were
no unrealized gains or losses during the three months and nine months ended
June 30, 1994.
<PAGE>
<PAGE>
LOANS RECEIVABLE:
Loans receivable is composed of the following:
June 30, September 30,
1994 1993
------------- -------------
(In thousands)
Single-family residential $ 1,251,037 $ 1,111,306
Home equity 13,568 60,549
Commercial and multifamily 98,243 95,611
Real estate construction 77,978 69,940
Ground 19,437 19,340
Credit card 334,472 454,520
Automobile 248,289 106,725
Overdraft lines of credit 46,573 42,198
Other 45,948 31,295
------------- ------------
2,135,545 1,991,484
------------- ------------
Less:
Undisbursed portion of loans 73,953 63,620
Unearned discounts 1,524 1,543
Net deferred loan origination
costs (8,737) (3,472)
Reserve for loan losses 58,544 68,040
------------- ------------
125,284 129,731
------------- ------------
Total $ 2,010,261 $ 1,861,753
============= =============
IMPAIRED LOANS:
Effective October 1, 1993, the Bank adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), which was issued in May
1993. Under SFAS 114, a loan is impaired when, based on all current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the
agreement, including all scheduled principal and interest payments. SFAS
114 requires that impaired loans be measured based on the present value of
expected future cash flows, discounted at the loan's effective interest
rate. As a practical expedient, impairment may be measured based on the
loan's observable market price, or, if the loan is collateral-dependent,
the fair value of the collateral. When the measure of the impaired loan is
less than the recorded investment in the loan, the impairment should be
recorded through a valuation allowance. A change in the fair value of the
impaired loan is reported as an increase in or reduction to the provision
for loan losses. In addition, SFAS 114 requires that impaired loans for
which foreclosure is probable be accounted for as loans. Such loans, with
aggregate principal balances of $15.0 million, were reclassified from real
estate held for sale to loans receivable during the quarter ended
December 31, 1993. The Bank classifies certain credit card loans in which
customers have agreed to modified terms as impaired loans in accordance
with SFAS 114.
<PAGE>
<PAGE>
At June 30, 1994, the recorded investment in loans and related reserve for
losses on loans for which impairment has been recognized in accordance with
SFAS 114 is as follows:
Reserve for
Losses on
Impaired Impaired
Loans Loans
------------ -----------
(In thousands)
Real estate $ 15,014 $ 1,232
Credit card 29,681 2,968
------------ -----------
$ 44,695 $ 4,200
============ ===========
REAL ESTATE HELD FOR INVESTMENT OR SALE:
The Bank's real estate held for investment is carried at the lower of
aggregate cost or net realizable value. The Bank's real estate acquired in
settlement of loans is considered to be held for sale and is carried at the
lower of cost or fair value (less estimated selling costs).
Real estate held for investment or sale is composed of the following:
June 30, September 30,
1994 1993
------------- ------------
(In thousands)
Land, development, construction
and rental properties $ 69,672 $ 69,313
Investments in limited partnerships (2,406) (1,580)
Investment in real estate ventures 8,911 8,898
------------- ------------
Total real estate held for
investment 76,177 76,631
------------- ------------
Real estate held for sale 385,034 434,616
------------- ------------
Less:
Reserve for losses on real estate
held for investment 10,089 10,182
Reserve for losses on real estate
held for sale 106,749 101,462
Accumulated depreciation and
amortization 12,784 11,144
------------- ------------
Total real estate held for
investment or sale $ 331,589 $ 388,459
============= ============
<PAGE>
<PAGE>
SUBORDINATED DEBENTURE REFINANCING:
On November 23, 1993, the Bank sold $150.0 million principal amount of 9 1/4%
Subordinated Debentures due 2005 (the "1993 Debentures"). On December 23,
1993 and December 24, 1993, the Bank redeemed its outstanding 13 1/2%
Subordinated Capital Debentures due July 15, 2002 (the "1987 Debentures")
and 15% Subordinated Capital Debentures due November 15, 2003 (the "1988
Debentures"), respectively. The Bank received net proceeds of $143.6
million from the sale of the 1993 Debentures, of which approximately $134.2
million was used to redeem the 1987 Debentures and the 1988 Debentures.
The remaining net proceeds were used for general corporate purposes. The
Bank incurred a loss of $6.3 million, after related income taxes, in
connection with the redemption of the 1987 Debentures and the 1988
Debentures. The principal amount of the 1993 Debentures is includable in
the Bank's supplementary capital for regulatory capital purposes.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The principal business conducted by the Trust and its wholly-owned
subsidiaries is the ownership and development of income-producing
properties. The Trust owns 80% of the outstanding common stock of Chevy
Chase Bank, F.S.B. ("Chevy Chase" or the "Bank"). At June 30, 1994, the
Bank's assets accounted for approximately 93% of the Trust's consolidated
assets.
The Trust has prepared its financial statements and other disclosures on a
fully consolidated basis. The term "Trust" used in the text and the
financial statements included herein refers to the combined entity, which
includes B.F. Saul Real Estate Investment and its subsidiaries, including
Chevy Chase and Chevy Chase's subsidiaries. "Real Estate Trust" refers to
B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding
Chevy Chase and Chevy Chase's subsidiaries. The business conducted by the
Bank and its subsidiaries is identified by the term "Banking," while the
operations conducted by the Real Estate Trust are designated as "Real
Estate."
The financial data on Banking reflect certain purchase accounting
adjustments made by the Trust in connection with its acquisition of the
Bank and therefore differ in certain respects from the comparable financial
data set forth in the unconsolidated financial statements of the Bank.
FINANCIAL CONDITION
REAL ESTATE
On August 26, 1993, the Real Estate Trust transferred its 22 shopping
center properties and one of its office properties, together with the debt
associated with such properties, to Saul Holdings Limited Partnership
("Saul Holdings Partnership") and a subsidiary limited partnership in
exchange for securities representing a 21.5% limited partnership interest
in Saul Holdings Partnership. The Real Estate Trust's investment portfolio
at June 30, 1994, which consisted of office properties, hotels and
undeveloped land parcels, was relatively unchanged from September 30, 1993.
Office space in the Real Estate Trust's office property portfolio was 89%
leased at June 30, 1994, compared to a leasing rate of 77% at September 30,
1993 and June 30, 1993. The improvement from June and September 1993 was
primarily attributable to additional space leased in two of the office
properties located in Atlanta. At June 30, 1994, the Real Estate Trust's
office property portfolio had a total gross leasable area of 1,363,000
square feet, of which 74,000 square feet (5.4%), 456,000 square feet
(33.4%), and 200,000 square feet (14.7%) are subject to leases whose terms
expire in the balance of fiscal 1994 and in fiscal 1995 and 1996,
respectively. The ability of the Real Estate Trust to re-lease office
space subject to expiring leases and the terms of any such new leases will
depend on conditions in the markets for the applicable properties during
such periods.
<PAGE>
<PAGE>
For the nine months ended June 30, 1994, the nine hotel properties owned by
the Real Estate Trust experienced an average occupancy rate of 60% and an
average room rate of $57.62, compared to an average occupancy rate of 61%
and an average room rate of $55.30 in the first nine months of fiscal
1993. Three of the hotels showed improved occupancies and eight showed
higher average room rates in the current nine-month period compared to the
prior corresponding period.<PAGE>
<PAGE>
BANKING
General. The Bank recorded operating income of $2.6 million during the
June 1994 quarter, compared to operating income of $20.8 million in the
prior corresponding period. The decrease in the June 1994 quarter was
primarily attributable to increased operating expenses and a decrease in
other (non-interest) income resulting primarily from a decrease in gain on
sale of investment securities. The decrease in income was offset in part
by an increase in loan and deposit servicing fees, an increase in earnings
on real estate held for investment or sale and a decrease in provision for
loan losses. See "Results of Operations."
At June 30, 1994, the Bank remained in compliance with all of its
regulatory capital requirements under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"). The Bank's tangible,
core (or leverage) and risk-based regulatory capital ratios of 4.74%, 5.11%
and 11.06%, respectively, exceeded the requirements of 1.5%, 3.0% and 8.0%,
respectively. Additionally, at June 30, 1994, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios of 5.11%, 6.29% and 11.06%,
respectively, exceeded the corresponding ratios of 5.0%, 6.0% and 10.0% for
"well-capitalized" institutions established under the prompt corrective
action regulations of the Office of Thrift Supervision (the "OTS"). On the
basis of its balance sheet at June 30, 1994, the Bank met the FIRREA-
mandated fully phased-in capital requirements and, on a fully phased-in
basis, met the capital standards established for "adequately-capitalized"
institutions under the prompt corrective action regulations.
In the June 1994 quarter, the Bank securitized and sold $300.0 million of
credit card receivables consistent with its portfolio funding strategy.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), the Bank's investment security and mortgage-backed security
portfolios are classified as available-for-sale and reported at fair value,
with net unrealized holding gains (losses), net of related income taxes,
reported in a separate component of stockholders' equity. See Notes to
Consolidated Financial Statements included in this report. During the June
1994 quarter, as a result of an increase in market interest rates, net
unrealized holding losses increased $11.2 million from $2.1 million at
March 31, 1994 to $13.3 million at June 30, 1994. The net unrealized
holding gain (loss) on the Bank's available-for-sale portfolio will
fluctuate based on market interest rates and the composition of the Bank's
investment security and mortgage-backed security portfolios and is fully
includable in (deducted from) tier 1 capital for regulatory capital
purposes pursuant to interim guidance issued by the OTS. The OTS, together
with the federal commercial bank regulatory agencies, is currently
reviewing the treatment of the net unrealized holding gain (loss) under
SFAS 115 for regulatory reporting and capital purposes.
The Bank's assets are subject to review and classification by the OTS upon
examination. The OTS is currently conducting an examination of the Bank.
<PAGE>
<PAGE>
Asset Quality. The improvement in the Bank's asset quality during recent
periods continued in the third quarter of fiscal 1994. The Bank will
continue to resolve problem real estate assets and enhance risk management
efforts.
Non-Performing Assets. The following table sets forth information
concerning the Bank's non-performing assets at the dates indicated. The
figures shown are after charge-offs and, in the case of real estate
acquired in settlement of loans ("real estate held for sale" or "REO"),
after all valuation allowances.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Non-Performing Assets
June 30, March 31, September
(Dollars in thousands) 1994 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential and home equity $ 8,295 $ 8,165 $ 9,108
Commercial and multifamily 2,927 3,029 --
Commercial construction and ground 12,088 11,956 --
---------- ---------- ----------
Total non-accrual real estate loans 23,310 23,150 9,108
Credit card 17,200 18,656 20,557
Consumer and other 312 319 314
---------- ---------- ----------
Total non-accrual loans (1) 40,822 42,125 29,979
---------- ---------- ----------
Non-accrual real estate held for investment (1) 8,911 8,910 8,898
---------- ---------- ----------
Real estate acquired in settlement of loans 385,034 397,828 434,616
Reserve for losses on real estate acquired in settlement
of loans (106,749) (106,703) (101,462)
---------- ---------- ----------
Real estate acquired in settlement of loans, net 278,285 291,125 333,154
---------- ---------- ----------
Total non-performing assets $ 328,018 $ 342,160 $ 372,031
========== ========== ==========
Reserve for losses on loans $ 58,544 $ 58,545 $ 68,040
Reserve for losses on real estate held for investment 10,089 10,119 10,182
Reserve for losses on real estate acquired in settlement
of loans 106,749 106,703 101,462
---------- ---------- ----------
Total reserves for losses $ 175,382 $ 175,367 $ 179,684
========== ========== ==========
Ratios:
Non-performing assets to total assets (2) 6.91% 7.07% 7.63%
Reserve for losses on real estate loans to non-accrual
real estate loans (1) 78.54% 78.42% 219.29%
Reserve for losses on credit card loans to non-accrual
credit card loans (1) 230.26% 212.29% 228.08%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (1) 202.56% 246.39% 376.11%
Reserve for losses on loans to non-accrual loans (1) 143.41% 138.98% 226.96%
Reserve for losses on real estate held for investment
to non-accrual real estate held for investment (1) 113.22% 113.57% 114.43%
Reserve for losses on real estate held for investment
or sale to non-performing real estate held for
investment or sale (1) 29.66% 28.72% 25.17%
Reserve for losses on loans to total loans receivable (3) 2.11% 2.17% 2.83%
Reserve for losses on real estate held for investment to
real estate held for investment (1) 15.92% 15.84% 15.55%
(1) Before deduction of reserves for losses.
(2) Non-performing assets is presented after valuation allowances on real estate acquired in
settlement of loans but before reserves for losses on non-accrual loans and non-accrual
real estate held for investment.
(3) Includes loans receivable and loans held for sale and/or securitization, before deduction
of reserve for losses.
/TABLE
<PAGE>
<PAGE>
Non-performing assets include non-accrual loans (loans contractually past
due 90 days or more or with respect to which other factors indicate that
full payment of principal and interest is unlikely), non-accrual real
estate held for investment ("non-accrual REI"), and real estate acquired in
settlement of loans, either pursuant to in-substance foreclosure (prior to
the adoption of SFAS 114 in the December 1993 quarter) or through
foreclosure or deed-in-lieu of foreclosure.
Non-performing assets decreased to $328.0 million, after valuation
allowances on REO of $106.7 million, or 6.9% of total assets at June 30,
1994, from $342.2 million, after valuation allowances on REO of $106.7
million, or 7.1% of total assets at March 31, 1994. In addition to the
valuation allowances on REO, the Bank maintained $5.5 million of valuation
allowances on its non-accrual loans and non-accrual real estate held for
investment at June 30, 1994 and March 31, 1994. The decrease in non-
performing assets was attributable to declines in non-accrual loans and REO
of $1.3 million and $12.9 million, respectively, during the quarter ended
June 30, 1994.
The Bank's non-performing real estate assets, which include non-accrual
real estate loans, non-accrual real estate held for investment and REO,
totaled $310.5 million at June 30, 1994 or 94.7% of total non-performing
assets at that date. As shown in the following table, the Bank's non-
performing real estate assets, after valuation allowances on such assets,
have declined from their peak of $567.6 million in February 1992 to $306.9
million at June 30, 1994, reflecting both additional write-downs on non-
performing assets during that period and, in more recent periods, asset
sales. During the three months and nine months ended June 30, 1994, the
Bank sold various REO properties with a book balance totaling $21.9 million
and $72.1 million, respectively.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Decline in Non-Performing Real Estate Assets
--------------------------------------------
Total Valuation
Total Allowances on Total Cumulative
Non-Performing Non-Accrual Real Non-Performing Decline from
Real Estate Estate Loans and Real Estate February 29, 1992
Assets (1) Non-Accrual REI (2) Assets, net Amount Percent
-------------- ------------------- -------------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
December 31, 1991 .. $559,665 $ 6,692 $552,973
February 29, 1992 .. 574,321 6,712 567,609
March 31, 1992 ..... 551,960 5,490 546,470 ($21,139) -3.7%
June 30, 1992 ...... 512,729 10,224 502,505 (65,104) -11.5%
September 30, 1992 . 487,287 7,147 480,140 (87,469) -15.4%
December 31, 1992 .. 427,113 2,332 424,781 (142,828) -25.2%
March 31, 1993 ..... 394,672 2,635 392,037 (175,572) -30.9%
June 30, 1993 ...... 382,657 2,634 380,023 (187,586) -33.1%
September 30, 1993 . 351,160 2,427 348,733 (218,876) -38.6%
December 31, 1993 .. 345,968 3,493 342,475 (225,134) -39.7%
March 31, 1994 ..... 323,185 3,487 319,698 (247,911) -43.7%
June 30, 1994 ...... 310,506 3,620 306,886 (260,723) -45.9%
(1) Represents total non-accrual real estate loans and non-accrual REI
before deduction of valuation allowances and REO after deduction of
valuation allowances.
(2) Represents valuation allowances on non-accrual real estate loans
and non-accrual REI. At June 30, 1994, valuation allowances on non-
accrual real estate loans and non-accrual REI were $1.6 million and
$2.0 million, respectively.
</TABLE>
A larger portion of the affected properties financed by the Bank involves
residential rather than commercial properties. At June 30, 1994, $269.8
million or 86.9% of the Bank's total non-performing real estate assets
related to residential real estate properties, including the Bank's five
planned unit developments (the "Communities"). In general, the residential
real estate market was less significantly affected by the downturn in the
early 1990s than the commercial real estate market. The Bank has disposed
of the majority of its commercial REO and is continuing the orderly
disposition of the remainder of its REO. See "REO" and "Disposition of
REO".
Non-accrual Loans. The Bank's non-accrual loans totaled $40.8 million at
June 30, 1994, a decrease of $1.3 million from $42.1 million at March 31,
1994. At June 30, 1994, non-accrual loans consisted primarily of $23.3
million of non-accrual real estate loans and $17.2 million of non-accrual
credit card loans. The decrease in non-accrual loans resulted from a $1.5
million decrease in non-accrual credit card loans due primarily to the
securitization and sale in June 1994 of $300.0 million of credit card
receivables.
At June 30, 1994, the Bank had $17.2 million of credit card loans which
were classified for regulatory purposes as substandard and disclosed as
non-performing assets because they were 90 days or more past due. At that
date, the Bank also had $9.7 million of credit card loans classified for
regulatory purposes as substandard and $91.4 million of credit card loans
<PAGE>
<PAGE>
classified for regulatory purposes as special mention which were not
disclosed as either non-performing assets (i.e., credit card loans which
are 90 days or more past due) or potential problem assets. The amount
classified as substandard but not disclosed as non-performing assets ($9.7
million) primarily related to accounts for which the customers have agreed
to modified payment terms, but which were 60-89 days past due. Of the $9.7
million, $3.3 million was current, $0.3 million was 30-59 days past due and
$6.1 million was 60-89 days past due at June 30, 1994. The amount
classified as special mention ($91.4 million) primarily related to accounts
which have had purchasing privileges suspended, including accounts for
which the customers have agreed to modified payment terms and which were
less than 60 days past due. Of the $91.4 million reported as special
mention, $72.6 million was current, $12.1 million was 30-59 days past due
and $6.7 million was 60-89 days past due at June 30, 1994. All delinquent
amounts are included in the table of delinquent loans. See "Delinquent
Loans."
Non-accrual Real Estate Held for Investment. At June 30, 1994, March 31,
1994 and September 30, 1993, a participating loan to a developer with a
balance of $8.9 million, before valuation allowances of $2.0 million, was
non-performing.
REO. At June 30, 1994, the Bank's REO totaled $278.2 million, after
valuation allowances on such assets of $106.7 million. The principal
component of REO consists of the Communities, which had an aggregate net
book value of $222.4 million at that date. Four of the Communities are
under active development.
During the three months ended June 30, 1994, REO decreased $12.9 million,
primarily due to sales of one office building with a book value of $2.6
million after valuation allowances, two residential construction properties
with an aggregate book value of $0.8 million after valuation allowances and
sales in the Communities and other smaller residential properties. See
"Disposition of REO."
The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
See "Disposition of REO." The Bank capitalized interest in the amount of
$3.3 million during the nine months ended June 30, 1994, all of which
related to the Bank's four active Communities.
Disposition of REO. During the three months ended June 30, 1994, the Bank
received proceeds of approximately $25.1 million from the disposition of
REO consisting of one office building ($2.4 million), 335 residential lots
or units in the Communities and other smaller residential properties ($22.1
million) and various single-family residential properties ($0.6 million).
<PAGE>
<PAGE>
The following table sets forth the Bank's REO at June 30, 1994.
Balance Balance
Before All After Percent
Valuation Valuation Valuation of
Allowances Allowances Allowances Total
----------- ----------- ------------ -------
(In thousands)
Communities ............$ 301,034 $ 78,648 $ 222,386 79.9%
Residential ground and
construction ......... 58,264 20,802 37,462 13.5
Retail centers ......... 2,813 694 2,119 0.8
Commercial ground ...... 21,131 6,515 14,616 5.2
Single-family residential
properties ........... 1,792 90 1,702 0.6
---------- --------- ---------- ------
Total REO ...........$385,034 $106,749 $ 278,285 100.0%
========== ========= ========== ======
At June 30, 1994, the Bank had executed contracts to sell six of these
properties at their aggregate book value of $14.4 million at that date.
The four active Communities consist primarily of 13,224 residential lots or
units and 189.5 acres of land designated for retail use. At June 30, 1994,
8,735 residential units (66.1%) had been sold to builders, consisting of
6,598 units (49.9%) which had been settled and 2,137 units (16.2%) which
were under contract and pending settlement, and approximately 101.1 acres
(53.3%) of retail land had been sold to developers, including 20.5 acres
(10.8%) which were under contract and pending settlement. In addition, at
June 30, 1994, the Bank was engaged in discussions with potential
purchasers regarding the sale of additional residential units and retail
land.
The rate of home sales in the Bank's four active Communities during the
first three quarters of fiscal 1994 (1,089) declined slightly from the rate
in the first three quarters of fiscal 1993 (1,158). The decline resulted
primarily from severe winter weather conditions and increasing interest
rates during the current period. Management believes the Bank will
continue to maintain its market share and that the demand for its lots will
continue because new builders are being added to several of the
Communities, although there can be no assurances in this regard.
The Bank in some cases has made financing available in an attempt to
facilitate sales of lots in the four active Communities. The following
table presents, at the periods indicated, the outstanding balances of loans
provided by the Bank (subsequent to its acquisition of title to the
properties) to facilitate sales of lots in such Communities.
<PAGE>
<PAGE>
June 30, September 30,
1994 1993 1992
---------- ----------- ---------
(In thousands)
Residential construction loans......... $ 12,135 $ 10,386 $3,138
Single-family permanent loans (1)...... 56,471 79,104 93,856
---------- ---------- --------
Total................................ $ 68,606 $ 89,490 $ 96,994
========== ========== =========
(1)Includes $4.3 million, $8.8 million and $13.3 million of loans
classified as held for sale at June 30, 1994, September 30, 1993 and 1992,
respectively, in the Consolidated Financial Statements in this report.
The Bank anticipates that it will provide construction financing for
approximately 20% of the remaining unsold lot inventory in the Communities.
The Bank also anticipates that it will provide permanent financing for
approximately 25% of the homes to be sold in the Communities. The Bank
retains in its portfolio certain single-family permanent loans for which
the date of initial application is prior to October 1, 1991. The Bank's
policy is to sell all such single-family permanent loans for which the date
of initial application is subsequent to September 30, 1991. At June 30,
1994, the Bank had originated $157.2 million and sold $152.9 million of
such loans with application dates subsequent to September 30, 1991. The
remaining $4.3 million of such loans are classified as held for sale and
generally are expected to be sold in the fourth quarter of fiscal 1994.
Certain of the single-family permanent loans made by the Bank to purchasers
of homes in the Communities have terms which are more favorable to the
borrower than the terms of other single-family permanent loans made by the
Bank. The total pre-tax cost to the Bank of granting more favorable terms
to the borrowers was approximately $2.4 million, or 1.5% of the $157.2
million principal amount of the loans made. The estimated cost is
generally recognized by the Bank as a cost of sale at the time that the
Bank sells building lots to developers.
In furtherance of its objective of facilitating sales, the Bank has
continued to develop some of the Communities. The following table presents
net funds provided by development at the four active Communities for the
periods indicated.
Nine Months
Ended
June 30, Year Ended September 30,
1994 1993 1992
----------- --------- ----------
(In thousands)
Sales proceeds................. $ 55,226 $ 66,291 $39,594
Development costs ............. 34,319 51,649 35,803
--------- --------- --------
Net funds provided
by development............... $ 20,907 $ 14,642 $ 3,791
========= ========= =========
<PAGE>
<PAGE>
The Bank currently anticipates that sales proceeds will continue to
exceed the development costs expected to be incurred in future periods.
In the event development costs exceed sales proceeds in future periods,
the Bank believes that adequate funds will be available from its primary
liquidity sources to fund such costs. See "Liquidity."
In addition to the four active Communities, REO includes a fifth
Community, consisting of approximately 2,900 acres in Loudoun County,
Virginia, which is in the pre-development stage. At June 30, 1994, this
property had a book value of $32.6 million, after valuation allowances.
Under its written agreement with the OTS, the Bank may not increase its
investments in certain of its large REO properties beyond levels existing
at September 30, 1991 without OTS approval. The OTS has not objected to
the implementation of the Bank's budgets for additional investments in
these properties through September 30, 1993. The Bank has submitted
project budgets for fiscal 1994 to the OTS.
Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the
borrowers have not abandoned control of the properties, potential problem
assets are experiencing problems sufficient to cause management to have
serious doubts as to the ability of the borrowers to comply with present
repayment terms. The majority of the Bank's potential problem assets
involve borrowers or properties experiencing cash flow problems due
primarily to the downturn in recent years of the real estate markets in
which the properties are located.
At June 30, 1994, potential problem assets totaled $41.8 million before
valuation allowances of $12.3 million, as compared to $42.3 million, before
valuation allowances of $12.4 million at March 31, 1994.
Delinquent Loans. At June 30, 1994, delinquent loans totaled $44.8
million, or 1.6% of gross loans, compared to $47.8 million, or 1.8% of
gross loans at March 31, 1994. The following table sets forth information
regarding the Bank's delinquent loans at June 30, 1994.
<TABLE>
<CAPTION>
Principal Balance Total as a
------------------------------------- Percentage
Mortgage Non-Mortgage ofGross
Loans Loans Total Loans (1)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans delinquent for:
30-59 days .......... $ 8,606 $21,565 $30,171 1.1%
60-89 days .......... 1,679 12,928 14,607 0.5%
-------- -------- --------- ----
Total ............. $10,285 $34,493 $44,778 1.6%
======== ======== ======== ====
(1)Includes loans held for sale and/or securitization, before deduction of reserves.
</TABLE>
<PAGE>
<PAGE>
At June 30, 1994, mortgage loans classified as delinquent 30-59 days
includes one commercial permanent loan with a book balance of $0.1 million.
The remaining balance of the 30-59 day delinquency category and the 60-89
day delinquency category consists of single-family permanent residential
mortgage loans and home equity credit line loans. Total delinquent
mortgage loans increased to $10.3 million at June 30, 1994 from $9.2
million at March 31, 1994 primarily due to a slight increase in home equity
credit line loans delinquent 30-59 days.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
decreased to $34.5 million at June 30, 1994 from $38.6 million at March 31,
1994, primarily as a result of the securitization and sale in June 1994 of
$300.0 million of credit card receivables and an improvement in general
economic conditions. Non-mortgage loans delinquent 30-89 days as a
percentage of total non-mortgage loans outstanding decreased to 3.0% at
June 30, 1994 from 3.7% at March 31, 1994, primarily as a result of the
decline during the quarter of delinquent non-mortgage loans and a slight
increase in the balance of the Bank's portfolio of non-mortgage loans.
Troubled Debt Restructurings. A troubled debt restructuring occurs when
the Bank agrees to modify significant terms of a loan to assist a borrower
experiencing financial difficulties. The following table sets forth loans
accounted for as troubled debt restructurings, before deduction of
valuation allowances, at the dates indicated.
June 30, March 31, September 30,
1994 1994 1993
-------- --------- ------------
(In thousands)
Troubled debt
restructurings..... $30,236 $30,767 $36,729
======= ======= =======
At June 30, 1994, loans accounted for as troubled debt restructurings
included two commercial permanent loans with principal balances totaling
$13.2 million and two residential ground loans with principal balances
totaling $17.0 million. The decrease in loans accounted for as troubled
debt restructurings from March 31, 1994 resulted from the payoff of one
residential construction loan with a principal balance of $0.5 million.
The Bank maintained valuation allowances of $10.8 million on its loans
accounted for as troubled debt restructurings at June 30, 1994. Loans
accounted for as troubled debt restructurings at June 30, 1994 were
classified as potential problem assets. At June 30, 1994, the Bank had
commitments to lend $2.5 million of additional funds on loans that have
been restructured.
<PAGE>
<PAGE>
Real Estate Held for Investment. At June 30, 1994, real estate held for
investment consisted of seven properties with an aggregate book value of
$53.3 million, net of accumulated depreciation of $12.8 million and
valuation allowances of $10.1 million. This category includes one office
building (which was approximately 84.6% leased at such date) and two
apartment buildings (which were approximately 91.6% and 96.0% leased at
such date and are financed with bonds issued by a local housing finance
agency). These properties are owned and operated by subsidiaries of the
Bank. Also included is a loan to a developer with a book value of $8.9
million at June 30, 1994, before valuation allowances of $2.0 million,
which has a profit participation feature. The loan, which is secured by
commercial land, is included in non-performing assets. The Bank has
discussions from time to time with potential investors concerning the
possible sale of certain of its real estate.
Reserves for Losses. The following tables show loss experience by asset
type and the components of the reserve for losses on loans and the reserve
for losses on real estate held for investment or sale. These tables
reflect charge-offs taken against assets during the periods indicated and
may include charge-offs taken against assets which the Bank disposed of
during such periods.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Analysis of Reserve Balances on and Charge-offs of Loans
Three Months
Nine Months Ended Ended
June 30, June 30,
---------------------- ----------
(Dollars in thousands) 1994 1993 1994
--------- --------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 68,040 $ 78,818 $ 58,545
--------- --------- ----------
Provision for loan losses 27,600 55,894 11,701
--------- --------- ----------
Charge-offs:
Residential and home equity 1,400 41 498
Commercial and multifamily 766
Ground 4,274
Credit card 45,620 62,044 14,612
Consumer and other 577 3,218 247
--------- --------- ----------
Total charge-offs 47,597 70,343 15,357
--------- --------- ----------
Recoveries:
Residential and home equity 75 61
Credit card 10,169 10,178 3,480
Consumer and other 257 229 114
--------- --------- ----------
Total recoveries 10,501 10,407 3,655
--------- --------- ----------
Charge-offs, net of recoveries 37,096 59,936 11,702
--------- --------- ----------
Balance at end of year $ 58,544 $ 74,776 $ 58,544
========= ========= ==========
Provision for loan losses to average loans (1) (2) 1.38% 3.60% 1.70%
Net loan charge-offs to average loans (1) (2) 1.85% 3.86% 1.70%
Ending reserve for losses on loans to total
loans (2) (3) 2.11% 3.12% 2.11%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Components of Reserve for Losses on Loans by Type
June 30, March 31, September 30,
1994 1994 1993
------------------------ ----------------------- ------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
(Dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans
- --------------------------------------- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period allocated to:
Residential permanent $ 2,880 47.0 % $ 2,841 50.0 % $ 4,235 53.6
Home equity 523 6.3 460 5.3 250 2.5
Commercial and multifamily 9,096 3.5 9,098 3.6 9,606 3.9
Residential construction 1,508 1.1 1,526 0.9 4,125 1.5
Commercial construction 1,277 0.6 1,189 0.8 345 0.4
Ground 3,023 0.6 3,040 0.7 1,412 0.7
Credit card 39,605 30.1 39,605 29.7 46,886 31.4
Consumer and other 632 10.8 786 9.0 1,181 6.0
-------- -------- --------
Total $58,544 $58,545 $68,040
======== ======== ========
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Analysis of Reserve Balances on and Charge-offs of
Real Estate Held for Investment or Sale
Three Months
Nine Months Ended June 30, Ended
-------------------------- June 30,
(In thousands) 1994 1993 1994
- ------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 10,182 $ 14,919 $ 10,119
Real estate held for sale 101,462 94,125 106,703
----------- ----------- ------------
Total 111,644 109,044 116,822
----------- ----------- ------------
Provision for real estate losses:
Real estate held for investment (93) 946 (30)
Real estate held for sale 11,775 27,288 844
----------- ----------- ------------
Total 11,682 28,234 814
----------- ----------- ------------
Charge-offs:
Real estate held for sale:
Residential construction 676 - 205
Commercial ground - 73 -
Commercial permanent 5,812 761 593
Commercial construction - 18,903 -
----------- ----------- ------------
Total 6,488 19,737 798
----------- ----------- ------------
Total charge-offs on real estate
held for investment or sale 6,488 19,737 798
----------- ----------- ------------
Balance at end of period:
Real estate held for investment 10,089 15,865 10,089
Real estate held for sale 106,749 101,676 106,749
----------- ----------- ------------
Total $ 116,838 $ 117,541 $ 116,838
=========== =========== ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Components of Reserve for Losses
on Real Estate Held for Investment or Sale
June 30, March 31, September 30,
(In thousands) 1994 1994 1993
- ------------------------------------------ ----------- ----------- --------------
<S> <C> <C> <C>
Reserve for losses on real estate
held for investment:
Commercial and multifamily $ 7,945 $ 7,945 $ 7,945
Ground 1,974 1,974 1,972
Other 170 200 265
----------- ----------- --------------
Total 10,089 10,119 10,182
----------- ----------- --------------
Reserve for losses on real estate
held for sale:
Residential 89 73 102
Home equity 1 4 53
Commercial and multifamily - 728 4,678
Commercial construction 694 611 1,387
Residential construction 2,258 2,517 2,924
Ground 103,707 102,770 92,318
----------- ----------- --------------
Total 106,749 106,703 101,462
----------- ----------- --------------
Total reserve for losses on real
estate held for investment or sale $ 116,838 $ 116,822 $ 111,644
=========== =========== ==============
</TABLE>
<PAGE>
<PAGE>
The Bank maintains reserves for estimated losses on loans and real estate.
The Bank's total reserves for losses on loans and real estate held for
investment or sale remained constant at $175.4 million from March 31, 1994
to June 30, 1994. During the nine months ended June 30, 1994, the Bank
recorded net charge-offs of $7.8 million on loans secured by real estate
and real estate held for investment or sale and provided an additional
$11.3 million in valuation allowances on these assets.
<PAGE>
<PAGE>
The following table shows reserves for losses on performing and non-
performing assets at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1994
-----------------------------------------------
Performing Non-performing Total
---------- -------------- -----
(In thousands)
<S> <C> <C> <C>
Reserves for losses on:
Loans:
Real estate.............. $ 16,661 $ 1,646 $18,307
Credit card.............. 37,885 1,720 39,605
Consumer and other....... 522 110 632
-------- -------- --------
Total reserve for
losses on loans....... 55,068 3,476 58,544
-------- -------- --------
Real estate held for
investment............... 8,115 1,974 10,089
Real estate held for sale. - 106,749 106,749
-------- -------- --------
Total reserve for losses on
real estate held for
investment or sale...... 8,115 108,723 116,838
-------- -------- --------
Total reserves for losses.. $ 63,183 $112,199 $175,382
======== ======== ========
</TABLE
</TABLE>
<TABLE>
<CAPTION>
September 30, 1993
------------------------------------------------
Performing Non-performing Total
---------- -------------- -----
(In thousands)
<S> <C> <C> <C>
Reserves for losses on:
Loans:
Real estate.............. $ 19,518 $ 455 $19,973
Credit card.............. 44,830 2,056 46,886
Consumer and other....... 1,125 56 1,181
-------- --------- --------
Total reserve for
losses on loans........ 65,473 2,567 68,040
-------- --------- --------
Real estate held for
investment............... 8,210 1,972 10,182
Real estate held for sale. - 101,462 101,462
-------- --------- --------
Total reserve for losses on
real estate held for
investment or sale...... 8,210 103,434 111,644
-------- --------- --------
Total reserves for losses $ 73,683 $ 106,001 $179,684
======== ========= ========
</TABLE>
<PAGE>
<PAGE>
Reserves for losses on loans secured by real estate and real estate held
for investment or sale totaled $135.1 million at June 30, 1994, which
constituted 32.4% of total non-performing real estate assets before
valuation allowances and remained virtually unchanged from the level at
March 31, 1994.
Net charge-offs of credit card loans for the nine months ended June 30,
1994 were $35.5 million, compared to $51.9 million for the nine months
ended June 30, 1993. The decrease in net charge-offs for the fiscal 1994
period resulted primarily from a decline in payment defaults. The allowance
at any balance sheet date relates only to receivable balances that exist as
of that date. Because of the nature of a revolving credit card account,
however, the cardholder may enter into transactions (such as retail
purchases and cash advances) subsequent to a balance sheet date, which
increases the outstanding balance of the account. Accordingly, charge-offs
in any fiscal period relate both to balances that existed at the beginning
of the period and to balances created during the period and may therefore
exceed the levels of reserves established at the beginning of the fiscal
period.
The reserve for losses on credit card loans was $39.6 million at March 31,
1994 and June 30, 1994. The ratios of the reserve for losses to non-
performing credit card loans and to outstanding credit card loans changed
to 230.3% and 4.8%, respectively, at June 30, 1994 from 212.3% and 5.0%,
respectively, at March 31, 1994.
The reserve for losses on consumer and other loans (other than credit card
loans) decreased to $0.6 million at June 30, 1994 from $0.8 million at
March 31, 1994. The ratios of the reserves for losses on consumer and
other loans to non-performing consumer and other loans and to outstanding
consumer and other loans declined to 202.6% and 0.2%, respectively, at June
30, 1994 from 246.4% and 0.3%, respectively, at March 31, 1994.
Asset and Liability Management. A key element of banking is the monitoring
and management of liquidity risk and interest-rate risk. The process of
planning and controlling asset and liability mixes, volumes and maturities
to stabilize the net interest spread is referred to as asset and liability
management. The objective of asset and liability management is to maximize
the net interest spread within the constraints imposed by prudent lending
and investing practices, liquidity needs and capital planning.
The Bank is pursuing an asset-liability management strategy to control its
risk from changes in market interest rates principally by originating and
retaining interest-sensitive loans for its portfolio. In furtherance of
this strategy, the Bank emphasizes the origination and retention of
adjustable-rate residential permanent loans, adjustable-rate home equity
credit line loans and adjustable-rate credit card loans, which generally
have shorter terms and higher yields than those of mortgage loans. At June
30, 1994, adjustable-rate loans accounted for 83.2% of total loans.
Adjustable-rate mortgages ("ARMs") and home equity credit line loans with
rates adjustable in one year or less accounted for 16.7% of total loans,
and credit card loans accounted for 30.1% of total loans at June 30, 1994.
In recent periods, the Bank's policy has generally been to sell all of its
long-term fixed-rate mortgage production, thereby reducing the exposure to
market interest rate fluctuations typically associated with long-term
fixed-rate lending. The Bank retains in its portfolio the majority of its
adjustable-rate mortgage production.
<PAGE>
<PAGE>
A traditional measure of interest-rate risk within the banking industry is
the interest sensitivity "gap," which is the sum of all interest-earning
assets minus all interest-bearing liabilities subject to repricing within
the same period. A negative gap like that shown below for the Bank implies
that, if market interest rates rise, the Bank's average cost of funds will
increase more rapidly than the concurrent increase in the average yield on
interest-earning assets. In a period of rising market interest rates, the
differential effect on the average yield on interest-earning assets and the
average cost of interest-bearing liabilities may decrease the Bank's net
interest spread and thereby adversely affect the Bank's operating results.
Conversely, in a period of declining interest rates, a negative gap may
result in an increase in the Bank's net interest spread. This analysis is
based upon a parallel shift in all interest rates and does not reflect the
possibility that retail deposit pricing changes may lag those of wholesale
market funds which, under a rising interest rate scenario, might serve to
mitigate the decline in net interest spread.
The Bank views control over interest rate sensitivity as a key element in
its financial planning process and monitors its interest rate sensitivity
through its forecasting system. The Bank manages its interest rate
exposure and will narrow or widen its gap, depending on its perception of
interest rate movements and the composition of its balance sheet. For the
reasons discussed above, the Bank might take action to narrow its gap if it
believes that market interest rates will experience a significant prolonged
increase, and might widen its gap if it believes that market interest rates
will decline or remain relatively stable. A number of asset and liability
management strategies are available to the Bank in structuring its balance
sheet. These include selling or retaining certain portions of the Bank's
current residential mortgage loan production; altering the Bank's pricing
on certain deposit products to emphasize or de-emphasize particular
maturity categories; altering the type and maturity of securities acquired
for the Bank's available-for-sale portfolio when replacing securities
following normal portfolio maturation and turnover; lengthening or
shortening the maturity or repricing terms for any current period asset
securitizations; and altering the maturity or interest rate reset profile
of borrowed funds, if any, including funds borrowed from the Federal Home
Loan Bank ("FHLB") of Atlanta.
The following table presents the contractual maturities of the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 1994,
as adjusted for estimated prepayments and amortization and provisions for
adjustable interest rates. Adjustable and floating rate loans are included
in the period in which their interest rates are next scheduled to adjust,
and the prepayment rates assumed in each period for the Bank's loans are
those rates published most recently by the FHLB of Atlanta. Statement
savings and passbook accounts with balances under $20,000 are classified
based upon management's assumed annual attrition rate of 17.5%, and those
with balances of $20,000 or more, as well as all NOW accounts, are assumed
to be subject to repricing within nine months or less.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Table (Gap)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
(Dollars in thousands) or Less One Year Three Years Five Years Five Years Total
- ------------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1994
Mortgage loans:
Adjustable-rate $ 357,875 $ 147,727 $ 347,010 $ 345,081 $ 8,537 $ 1,206,230
Fixed-rate 10,332 9,235 48,747 34,798 101,816 204,928
Loans held for sale 53,157 - - - - 53,157
Home equity credit lines and second
mortgages 19,561 42 815 289 - 20,707
Credit card and other 379,506 28,985 109,512 94,149 24,788 636,940
Loans held for securitization and sale 662,000 - - - - 662,000
Mortgage-backed securities 444,091 252,331 389,219 3,729 798 1,090,168
Other investments 121,657 - 4,397 101 - 126,155
------------- ------------- ------------- ------------- ------------- -------------
Total interest-earning assets 2,048,179 438,320 899,700 478,147 135,939 4,000,285
Total non-interest earning assets - - - - 746,575 746,575
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 2,048,179 $ 438,320 $ 899,700 $ 478,147 $ 882,514 $ 4,746,860
============= ============= ============= ============= ============= =============
Deposits:
Fixed maturity deposits $ 325,372 $ 150,015 $ 161,944 $ 83,153 $ - $ 720,484
NOW, statement and passbook accounts 1,687,499 41,310 137,589 93,646 199,571 2,159,615
Money market deposit accounts 1,111,734 - - - - 1,111,734
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 134,456 107 24,209 582 6,505 165,859
------------- ------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities 3,269,061 191,432 323,742 177,381 356,076 4,317,692
Total non-interest bearing liabilities - - - - 199,954 199,954
Stockholders' equity - - - - 229,214 229,214
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities & stockholders'
equity $ 3,269,061 $ 191,432 $ 323,742 $ 177,381 $ 785,244 $ 4,746,860
============= ============= ============= ============= ============= =============
Gap ($1,220,882) $246,888 $575,958 $300,766 ($220,136)
Cumulative gap ($1,220,882) ($973,994) ($398,036) ($97,270) ($317,406)
Cumulative gap as a percentage
of total assets (25.7)% (20.5)% (8.4)% (2.0)% (6.7)%
/TABLE
<PAGE>
<PAGE>
The one-year gap, as a percentage of total assets, was a negative 20.5% at
June 30, 1994, compared to a negative 23.2% at March 31, 1994. As noted
above, the Bank's negative one-year gap might adversely affect the Bank's
net interest spread and earnings if interest rates rise and the Bank is
unable to take steps to reduce its gap.
In addition to gap measurements, the Bank measures and manages interest-
rate risk with the extensive use of computer simulation. This simulation
includes calculations of Market Value of Portfolio Equity and Net Interest
Margin as promulgated by the OTS's Thrift Bulletin 13.
Under the interest-rate risk component of OTS's risk-based capital
requirements, an institution that would experience a decrease in "portfolio
equity" in an amount in excess of 2.0% of the market value of the
institution's assets as a result of an increase or decrease in the general
level of interest rates of 200 basis points may be required to maintain
additional amounts of risk-based capital. Additional capital will have to
be maintained by affected institutions beginning September 30, 1994 based
on the lowest interest rate exposure at the end of the three previous
quarters. All analyses of the Bank's exposure conducted by the OTS to date
have indicated that the Bank would not experience a decrease in "portfolio
equity" in an amount in excess of 2.0% of its assets under this test and
therefore would not have been required to maintain additional amounts of
risk-based capital.
Capital. At June 30, 1994, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios
exceeded the ratios established for "well-capitalized" institutions under
OTS prompt corrective action regulations. On the basis of its June 30,
1994 balance sheet, the Bank also would meet the fully phased-in capital
requirements under FIRREA that will apply as certain deductions from
capital are phased in and, after giving effect to those deductions, would
meet the capital standards for "adequately-capitalized" institutions under
the prompt corrective action regulations.
The following table shows the Bank's regulatory capital levels at June 30,
1994, in relation to the regulatory requirements in effect at that date.
The information below is based upon the Bank's understanding of the
regulations and interpretations currently in effect and may be subject to
change.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Regulatory Capital
Actual Capital Required
---------------------- ----------------------
As a % As a % Excess
(Dollars in thousands) Amount of Assets Amount of Assets Capital
- ------------------------------------------ --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Capital per financial statements $281,860
Adjustments for tangible and core capital:
Intangible assets (51,628)
Non-includable subsidiaries (1) (6,351)
---------
Total tangible capital 223,881 4.74% $ 70,922 1.50% $152,959
Supervisory goodwill 17,730 ========= ========= ========= =========
---------
Total core capital (2) 241,611 5.11% $141,843 3.00% $ 99,768
--------- ========= ========= ========= =========
Total tier 1 risk-based capital (2) 241,611 6.29% N/A N/A N/A
--------- ========= ========= ========= =========
Adjustments for risk-based capital:
Subordinated capital debentures 152,900
Reserve for general loan losses 50,696
---------
Total supplementary capital 203,596
Excess loan loss reserves (2,665)
---------
Adjusted supplementary capital 200,931
---------
Total available capital 442,542
Equity investments (1) (17,684)
---------
Total risk-based capital (2) $424,858 11.06% $307,186 8.00% $117,672
========= ========= ========= ========= =========
(1)Reflects an aggregate offset of $5.7 million representing the amount of general reserves maintained
against the Bank's equity investments and non-includable subsidiaries which, pursuant to OTS
guidelines, is available as a "credit" against the deductions from capital otherwise required for such
investments.
(2)Under the OTS prompt corrective action regulations, the standards for classification as "well
capitalized" are a leverage (or "core capital") ratio of at least 5.0%, a tier 1 risk-based capital
ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
(3)Effective July 1, 1994, the percentage of non-includable subsidiaries required to be phased out from
core capital increased from 25% to 40% and the percentage of equity investments required to be
phased out from total capital for risk-based capital purposes increased from 60% to 100%. If these
phase-outs had been in effect on June 30, 1994, the Bank's tangible, core and risk-based regulatory
capital ratios would have been 4.65%, 5.02% and10.62%.
/TABLE
<PAGE>
<PAGE>
The Bank's stockholders' equity, and therefore its regulatory capital, was
adversely affected in the three months ended June 30, 1994 by a decrease of
$11.2 million, after related income taxes, related to market value
adjustments of the Bank's securities which are classified as available-for-
sale in accordance with SFAS 115. As market interest rates fluctuate, the
market value of the Bank's available-for-sale portfolio, and therefore its
stockholders' equity and regulatory capital levels, will also fluctuate.
However, because the majority of the available-for-sale portfolio has
either adjustable interest rates or maturities of less than five years, the
impact of such changes in interest rates generally will not be as
significant as the impact on institutions with a greater percentage of
their portfolios in longer-term fixed-rate securities.
Regulatory Action and Requirements. The Bank is subject to a written
agreement with the OTS, dated September 30, 1991 and amended in October
1993, which imposes certain restrictions on the Bank's operations and
requires certain affirmative actions by the Bank. Primarily because of its
level of non-performing assets, the Bank is also subject to restrictions on
asset growth. Under the applicable OTS requirements, the Bank may not
increase its total assets during any calendar quarter in excess of an
amount equal to net interest credited on deposit liabilities during the
quarter without prior written approval from the OTS. In September 1993,
the Bank received OTS approval, subject to certain conditions, to increase
incrementally its total assets during the period from July 1, 1993 through
June 30, 1994 by an amount up to $500 million. During this period, after
taking into account the Bank's sale and/or securitization of $942.7 million
of credit card and home equity credit line receivables, the Bank's assets
decreased $17.5 million. The Bank is also subject to a requirement to
obtain OTS approval for changes in directors and senior executive officers
and the imposition of increased OTS assessments and FDIC insurance
premiums. In January 1994, the OTS approved the appointment of three
additional directors to the Bank's Board of Directors. The OTS has
approved the payment of dividends on the 13% Preferred Stock provided
certain conditions are met. In the future, if the Bank is unable to
maintain capital compliance, the Bank could be subject to additional
regulatory sanctions.
Capital Maintenance Strategies. The regulatory capital requirements
applicable to the Bank will continue to increase over time as a result of
the gradual phase-out of various assets from regulatory capital. On the
basis of its balance sheet at June 30, 1994, the Bank met the FIRREA-
mandated fully phased-in capital requirements with tangible, core (or
leverage), and total risk-based capital ratios of 4.30%, 4.30% and 9.81%,
respectively, which exceeded the requirements of 1.5%, 3.0% and 8.0%,
respectively. At June 30, 1994, the Bank had $29.7 million, after
subsequent valuation allowances, of extensions of credit to, and
investments in, subsidiaries engaged in activities impermissible for
national banks ("non-includable subsidiaries") which were subject at
June 30, 1994 to a 25% phase-out from all three FIRREA capital
requirements. This phase-out increased to 40% on July 1, 1994 and will
increase to 60% on July 1, 1995 and 100% on July 1, 1996, in accordance
with a delayed phase-in period approved by the OTS pursuant to legislation
enacted in October 1992. At June 30, 1994, the Bank also had one equity
investment with a balance, after subsequent valuation allowances, of $37.2
million which was subject to a 60% phase-out from total capital for risk-
based capital purposes at that date. This phase-out increased to 100% on
July 1, 1994. Pursuant to OTS guidelines, $5.7 million of general reserves
maintained against the Bank's non-includable subsidiaries and equity
investments is available as a "credit" against the deduction from capital
otherwise required for such investments. The OTS adopted a rule, effective
April 19, 1993, eliminating the capital deduction for equity investments
related to activities which are permissible for national banks.
<PAGE>
<PAGE>
The Bank will continue to attempt to reduce the level of its investments in
non-includable subsidiaries and its level of equity investments. The level
of the Bank's investments in non-includable subsidiaries is a key factor in
the capital calculation because, under the fully phased-in capital
requirements, those investments represent dollar-for-dollar reductions in
core capital, which in turn limit the amount of supplementary capital which
may be included for risk-based capital purposes. The Bank does not
anticipate entering into any new transactions that would result in an
increase in its investments in non-includable subsidiaries, and is
attempting to reduce the existing level of those investments over the next
several years.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception
from treatment as an equity investment. If an REO property is considered
an equity investment, its then-current book value is deducted from total
risk-based capital. Accordingly, if the Bank is unable to dispose of any
REO property (through bulk sales or otherwise) prior to the end of its
applicable five-year holding period and is unable to obtain an extension of
such five-year holding period from the OTS, the Bank could be required to
deduct the then-current book value of such REO property from risk-based
capital. The following table sets forth the Bank's REO at June 30, 1994,
after valuation allowances of $106.7 million, by the fiscal year in which
the property was acquired through foreclosure.
Fiscal Year (In thousands)
----------- --------------
1990 (1) $131,472
1991 114,335
1992 15,904
1993 8,882
1994 7,692
-------------
Total REO $278,285
=============
(1)Includes one property with a net book value of $32.6 million, which the
Bank agreed in fiscal 1991 to treat as an equity investment for regulatory
capital purposes.
At June 30, 1994, the Bank had $49.3 million in supervisory goodwill, of
which $17.7 million was includable in core capital pursuant to statutory
provisions limiting the includable amount of supervisory goodwill to an
amount not to exceed 0.375% of tangible assets beginning January 1, 1994
and 0% beginning January 1, 1995.
<PAGE>
<PAGE>
The Bank's ability to maintain capital compliance will be subject to
general economic conditions, particularly in the Bank's local markets.
Adverse general economic conditions or a renewed downturn in local real
estate markets could require further additions to the Bank's reserves for
losses and further charge-offs. Any such developments would adversely
affect the Bank's earnings and thus its ability to maintain capital
compliance. In addition, further increases in market interest rates could
reduce the market value of the Bank's available-for-sale portfolio and thus
could adversely affect the Bank's regulatory capital levels under current
regulatory guidelines. The failure of the Bank to maintain capital
compliance could result in further regulatory sanctions.
Prompt Corrective Action. Under the OTS prompt corrective action
regulations which became effective on December 19, 1992, an institution is
categorized as "well capitalized" if it has a leverage (or core capital)
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%,
a total risk-based capital ratio of at least 10.0% and is not subject to
any written agreement, order, capital directive or prompt corrective action
directive to meet and maintain a specific capital level. At June 30, 1994,
the Bank's leverage, tier 1 risk-based and total risk-based capital ratios
were 5.11%, 6.29% and 11.06%, respectively, which exceeded the ratios
established for "well-capitalized" institutions, and the Bank was not
subject to any applicable written agreement, order or directive to meet and
maintain a specific capital level. The OTS has the discretion to
reclassify an institution from one category to the next lower category, for
example from "well capitalized" to "adequately capitalized," if, after
notice and an opportunity for a hearing, the OTS determines that the
institution is in an unsafe or unsound condition or has received and has
not corrected a less than satisfactory examination rating for asset
quality, management, earnings or liquidity. The Bank's levels of non-
performing assets may result in reductions in capital to the extent losses
are recognized as a result of deteriorating collateral value or economic
conditions. Further, under the OTS's regulatory capital requirements, the
Bank is required to phase out from regulatory capital supervisory goodwill
and certain investments in subsidiaries and equity investments. There can
be no assurance that the Bank will be able to maintain levels of capital
sufficient to continue to meet the standards for classification as "well
capitalized". On a fully phased-in basis at June 30, 1994, the Bank's
regulatory capital ratios would meet the ratios established for
"adequately- capitalized" institutions.
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements fall into
four categories: operating expenses (exclusive of interest on outstanding
debt), capital improvements, interest on outstanding debt and repayment of
outstanding debt.
Historically, the Real Estate Trust's total cash requirements have exceeded
the cash generated by its operations. As described below, this condition
is currently the case and is expected to continue to be so for the
foreseeable future. The Real Estate Trust's internal sources of funds,
primarily cash flow generated by its income-producing properties, generally
have been sufficient to meet its cash needs other than the repayment of
principal on outstanding debt, including outstanding unsecured notes
("Unsecured Notes") sold to the public, and the payment of capital
improvement costs. In the past, the Real Estate Trust has funded such
shortfalls through a combination of external funding sources, primarily new
financings (including the sale of Unsecured Notes), refinancings of
maturing mortgage debt, asset sales and tax sharing payments from the Bank.
Recent Liquidity Trends. The Real Estate Trust's liquidity position was
positively affected by the issuance on March 30, 1994 of $175.0 million
aggregate principal amount of 11 5/8% Senior Secured Notes due 2002 (the
"Senior Secured Notes"). After paying offering expenses of $8.8 million,
third-party mortgage indebtedness of $74.1 million, and affiliate
indebtedness of $8.9 million, the Real Estate Trust retained $83.2 million
of the net proceeds of the offering for application to general corporate
purposes, including a loan to an affiliate of $15.0 million. Of this
amount, approximately $25.8 million was deposited with the Trustee for the
Senior Secured Notes to satisfy one of the initial collateral requirements
with respect to such securities. This collateral requirement, which will
remain in effect as long as any Senior Secured Notes are outstanding, will
be recalculated each calendar quarter based on the estimated amount of one
year's interest payments on then outstanding Senior Secured Notes and
Unsecured Notes. Concurrently with the application of the net proceeds of
the offering to repay third-party mortgage indebtedness, the terms of
certain of the mortgage loans repaid in part were modified to waive
deferred interest, reduce interest rates and extend maturities. After the
application of such net proceeds and the modification of such loans, the
final maturity of loans with total balances of $111.1 million was 12 years
and the final maturity of a loan with a balance of $15.1 million was 15
years.
During the third quarter of fiscal 1994, the Trust purchased 473,500 shares
of common stock of Saul Centers, Inc. (representing 4.0% of such company's
outstanding common stock) for approximately $8.5 million. These shares
have been deposited with the Trustee for the Senior Secured Notes to
satisfy in part the collateral requirements for those securities, thereby
permitting release to the Trust of a portion of the cash on deposit with
the Trustee.
The Senior Secured Notes are secured, general obligations of the Trust
ranking pari passu with all other unsubordinated obligations of the Trust,
including the Unsecured Notes. The Senior Secured Notes are secured by a
<PAGE>
<PAGE>
first-priority perfected security interest in 80% of the issued and
outstanding common stock of the Bank, which 80% is owned by the Trust. The
Indenture pursuant to which the Senior Secured Notes were issued contains
convenants that, among other things, restrict the ability of the Trust
and/or its subsidiaries (excluding, in most cases, the Bank and the Bank's
subsidiaries) to incur additional indebtedness, make investments, sell
assets or pay dividends and make other distributions to holders of the
Trust's capital stock.
The maturity schedule for the Real Estate Trust's outstanding debt at June
30, 1994 is set forth in the following table. Of the $187.2 million
of mortgage debt outstanding at June 30, 1994, $135.0 million was
nonrecourse to the Real Estate Trust. The Senior Secured Notes are
designated "Notes Payable-Secured" in the table and in the Consolidated
Financial Statements included in this report.
Debt Maturity Schedule
(In thousands)
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- -------------------------------------------------------------------------
1994 (1) $ 2,021 $ -- $ 1,985 $ 4,006
1995 11,957 -- 7,167 19,124
1996 8,271 -- 5,731 14,002
1997 14,459 -- 4,976 19,435
1998 6,908 -- 5,918 12,826
Thereafter 143,582 175,000 14,125 332,707
-------- -------- -------- --------
$187,198 $175,000 $ 39,902 $402,100
======== ======== ======== ========
(1) July 1, 1994 to September 30, 1994.
The Real Estate Trust's capital improvement costs for the nine months ended
June 30, 1994, were $3.8 million. The Real Estate Trust anticipates that
its capital improvement costs for its existing portfolio in the next
several fiscal years after 1994 will be in the range of $2.0 to $3.0
million per year.
The Real Estate Trust believes that the liquidity provided by its existing
cash resources, cash generated by operations, sales of Unsecured Notes,
refinancings of existing mortgage debt and tax sharing payments and
dividends from the Bank will be sufficient to fund both debt amortization
and capital improvement costs for the balance of fiscal 1994 and the next
several years. However, the Real Estate Trust's ability to generate cash
from external sources will continue to be subject to significant
contingencies.
The Real Estate Trust's ability to refinance its existing mortgage debt
will depend on the value and types of properties in its portfolio as well
as the availability of long-term mortgage financing for such types of
properties. In recent periods, the availability of long-term fixed-rate
mortgage financing for income-producing properties on satisfactory terms or
at acceptable interest rates has been significantly curtailed. No
assurance can be given as to the availability of financing for income-
producing properties at acceptable terms and interest rates in the future.
<PAGE>
<PAGE>
The Real Estate Trust's current program of sales of Unsecured Notes to the
public was initiated in the 1970's as a vehicle for supplementing other
external funding sources. The Real Estate Trust is currently selling
Unsecured Notes principally to pay outstanding Unsecured Notes as they
mature. In paying maturing Unsecured Notes with proceeds of new sales, the
Real Estate Trust effectively is refinancing its outstanding Unsecured
Notes with similar new unsecured debt at the lower interest rates currently
prevailing in today's market. To the degree that the Real Estate Trust
does not sell new Unsecured Notes in an amount sufficient to finance
completely the scheduled repayment of outstanding Unsecured Notes as they
mature (which was the case in fiscal 1993), it believes it will be able to
finance such repayment from other sources of funds. In the nine months
ended June 30, 1994, the Real Estate Trust sold $13.3 million of Unsecured
Notes. During the same period, $12.1 million of Unsecured Notes matured
and were repaid.
Management believes that the Bank's improved regulatory capital ratios and
recent operating results should enhance the prospects of the Real Estate
Trust to receive dividends from the Bank. The Real Estate Trust to date
has not relied on cash dividends from Chevy Chase to meet its cash needs.
In October 1993, the Bank's written agreement with the OTS was amended to
eliminate the requirement that the Bank obtain the written approval of the
OTS prior to declaring or paying dividends on its common stock. The Bank's
ability to declare and pay cash dividends on its common stock is subject to
a number of restrictions, including restrictions under regulations issued
by the OTS and restrictions imposed by various agreements. Each of such
restrictions ties the Bank's dividend-paying ability primarily to its
levels of regulatory capital and/or income. The Bank's efforts to maintain
the required levels of capital and to generate the required levels of
income will be subject to all of the risks affecting its business. Under
the terms of the Bank's written agreement with the OTS, any tax sharing
payments by the Bank must be approved by the OTS. In the first two
quarters of fiscal 1994, the OTS approved, and the Bank made, tax sharing
payments of $9.6 million to the Real Estate Trust. No payments were made
during the current quarter.
As the owner, directly and through two wholly-owned subsidiaries, of a
21.5% limited partnership interest in Saul Holdings Partnership, the Real
Estate Trust will share in cash distributions from operations and from
capital transactions involving the sale or refinancing of the properties of
Saul Holdings Partnership. The partnership agreement of Saul Holdings
Partnership provides for quarterly cash distributions to the partners out
of net cash flow. In the nine months ended June 30, 1994, the Real Estate
Trust received total cash distributions of $3.3 million. It will receive
a cash distribution of $1.4 million in the fourth quarter of fiscal 1994.
The dividend payable at July 29, 1994 on the Saul Centers, Inc. shares
purchased in the current quarter was $185,000.<PAGE>
<PAGE>
BANKING
General. The standard measure of liquidity in the savings industry is the
ratio of cash, short-term U.S. Government and other specified securities to
net withdrawable accounts and borrowings payable in one year or less.
The OTS has established a minimum liquidity requirement, which may vary
from time to time depending upon economic conditions and deposit flows.
The required liquidity level is currently 5.0%. The Bank's average monthly
liquidity ratio for the month ended June 30, 1994 was 19.6%, compared to
18.7% for the month ended March 31, 1994. Additionally, the Bank met the
liquidity level requirements for each month of fiscal 1994.
The Bank's primary sources of funds historically have consisted of (i)
principal and interest payments on loans and mortgage-backed securities,
(ii) savings deposits, (iii) sales of loans, mortgage-backed securities and
investment securities and (iv) borrowed funds (including funds borrowed
from the FHLB of Atlanta). The Bank's holdings of readily marketable
securities constitute another important source of liquidity. At June 30,
1994, the Bank's portfolio included mortgage loans, U.S. Government
securities and mortgage-backed securities with outstanding principal
balances of $747.3 million, $4.4 million and $1.0 billion, respectively.
The estimated borrowing capacity of available mortgage loans, U.S.
Government securities and mortgage-backed securities that could be pledged
to the FHLB of Atlanta and various security dealers totaled $1.3 billion at
June 30, 1994, after market-value and other adjustments.
In recent periods, the proceeds from sales of credit card relationships and
other assets and securitizations and sales of credit card, home equity
credit line and automobile loan receivables have been significant sources
of liquidity for the Bank. During the June 1994 quarter, the Bank
securitized and sold $300.0 million of credit card receivables.
Additionally, during the second quarter of fiscal 1994, the Bank
securitized and sold $200.0 million of credit card receivables and sold
credit card relationships with related receivable balances of $96.5
million. At June 30, 1994, the Bank was considering the securitization and
sale of approximately $162.0 million of home equity credit line receivables
and $1.3 billion of credit card receivables, including $500.0 million of
receivables outstanding at June 30, 1994 and $800.0 million of receivables
which the Bank expects to become available, either through additional
fundings or amortization of existing trusts, to occur during the six months
ending December 31, 1994. As part of its operating strategy, the Bank
will continue to explore opportunities to sell assets and to securitize and
sell credit card and home equity credit line receivables to meet liquidity
and other balance sheet objectives.
The ability of the Bank to securitize and sell assets in the future will
depend on a number of factors, including conditions in the market for
asset-backed securities and competitive pressures in the credit card
industry. The Bank does not currently anticipate relying upon
securitizations of receivables other than credit card and home equity
credit line receivables. The Bank's currently projected levels of
securitization of credit card and home equity credit line receivables
reflect in part a reduction in the pool of receivables eligible for such
securitizations. The reduction in the amount of eligible receivables has
<PAGE>
<PAGE>
resulted from prior securitization and sales activities. Management
believes that to support future securitization activity, a sufficient pool
of eligible receivables will be provided by the existing portfolio of
receivables, the amortization of existing credit card trusts, increased
usage of existing accounts and originations of new accounts.
The Bank uses its liquidity primarily to meet its commitments to fund
maturing savings certificates and deposit withdrawals, fund existing and
continuing loan commitments, repay borrowings and meet operating expenses.
For the nine months ended June 30, 1994, the Bank used the cash provided by
operating, investing and financing activities primarily to meet its
commitments to fund maturing savings certificates and deposit withdrawals
of $8.8 billion, repay borrowings of $2.6 billion, fund existing and
continuing loan commitments (including real estate held for investment or
sale) of $1.9 billion, purchase investments and loans of $429.4 million and
meet operating expenses, before depreciation and amortization, of $146.5
million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $9.1 billion,
proceeds from borrowings of $2.2 billion, proceeds from sales of loans,
securities and real estate of $1.8 billion, and principal and interest
collected on investments, loans, mortgage-backed securities and trading
securities of $879.3 million.
The Bank is obligated under various recourse provisions related to the
securitization and sale of credit card, home equity credit line and
automobile loan receivables. Of the $1.5 billion of outstanding trust
certificate balances at June 30, 1994, the primary recourse to the Bank was
approximately $81.4 million.
The Bank also is obligated under various recourse provisions related to the
swap of single-family residential loans for participation certificates and
mortgage-backed securities issued to the Bank by the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association. At
June 30, 1994, recourse to the Bank under these arrangements was
approximately $5.9 million.
<PAGE>
<PAGE>
The Bank's commitments at June 30, 1994 are set forth in the following
table:
(In thousands)
Commitments to originate loans $ 68,243
-----------
Loans in process (collateralized loans):
Home equity ................................. 536,592
Real estate construction .................... 28,381
Commercial and multifamily ................... 2,934
Residential ground .......................... 2,429
-----------
570,336
-----------
Loans in process (unsecured loans):
Credit cards ................................ 5,292,356
Overdraft lines ............................. 38,934
Other ....................................... 1,275
-----------
5,332,565
-----------
Total commitments to extend credit ...... 5,971,144
Letters of credit ............................. 67,205
Recourse arrangements on asset-backed
securitizations ............................. 81,392
Recourse arrangements on mortgage-backed
securities .................................. 5,944
-----------
Total commitments ....................... $6,125,685
===========
Based on historical experience, the Bank expects to fund substantially less
than the total amount of its outstanding credit card and home equity credit
line commitments, which together accounted for 95.2% of total commitments
at June 30, 1994.
At June 30, 1994, repayments of borrowed money scheduled to occur during
the next 12 months were $34.5 million. Certificates of deposit maturing
during the next 12 months amounted to $475.4 million, of which a
substantial portion is expected to remain with the Bank.
There were no material commitments for capital expenditures at June 30,
1994.
The Bank's liquidity requirements in fiscal 1994 and for years subsequent
to fiscal 1994 will continue to be affected both by the asset size of the
Bank, the growth of which will be constrained by capital and other
regulatory requirements, and the composition of the asset portfolio.
Management believes that the Bank's primary sources of funds, described
above, will be sufficient to meet the Bank's foreseeable long-term
liquidity needs. The mix of funding sources utilized from time to time
will be determined by a number of factors, including capital planning
objectives, lending and investment strategies and market conditions.<PAGE>
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1994 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1993
REAL ESTATE
The following table sets forth, for the three-month periods ended June 30,
1994 and 1993, respectively, direct operating results for the Real Estate
Trust's (i) shopping center and office properties, (ii) commercial
properties portfolio, which represents the shopping center and office
properties results on a combined basis, and (iii) hotel properties. On
August 26, 1993, the Real Estate Trust transferred its 22 shopping center
properties and one of its office properties to Saul Holdings Partnership
and a subsidiary limited partnership of Saul Holdings Partnership in
exchange for securities representing a 21.5% limited partnership interest
in Saul Holdings Partnership (the "Saul Centers Transaction"). As a result
of the Saul Centers Transaction, the operating results of commercial
properties for the current quarter are not entirely comparable to the prior
period's results, which included the operations of the transferred
properties.
<PAGE>
<PAGE>
Three Months Ended
June 30,
------------------
1994 (1) 1993
------------------
(In thousands)
SHOPPING CENTERS
Revenue
Base rent $ -- $5,699
Expense recoveries -- 1,216
Percentage rent -- 468
Other -- 98
------- -------
Total revenue -- 7,481
------- -------
Direct operating expenses
Real estate taxes -- 528
Repairs and maintenance -- 386
Utilities -- 235
Payroll -- 256
Insurance -- 86
Ground rent -- 138
Other -- 113
------- -------
Total direct operating expenses -- 1,742
------- -------
Income after direct operating expenses $ -- $5,739
======= =======
OFFICE PROPERTIES
Revenue
Base rent $3,896 $3,947
Expense recoveries 470 322
Other 218 100
------- -------
Total revenue 4,584 4,369
------- -------
Direct operating expenses
Real estate taxes 364 478
Repairs and maintenance 476 427
Utilities 529 532
Payroll 162 146
Insurance 63 74
Other 108 234
------- -------
Total direct operating expenses 1,702 1,891
------- -------
Income after direct operating expenses $2,882 $2,478
======= =======
(1) Reflects the Real Estate Trust's transfer, in August 1993, of 22
shopping center properties and one office property to Saul Holdings
Partnership and a subsidiary limited partnership of Saul Holdings
Partnership.
<PAGE>
<PAGE>
Three Months Ended
June 30,
--------------------
1994 (1) 1993
--------------------
COMMERCIAL PROPERTIES (In thousands)
(SHOPPING CENTERS AND OFFICE PROPERTIES)
Revenue
Base rent $3,896 $9,646
Expense recoveries 470 1,538
Percentage rent -- 468
Other 218 198
------- -------
Total revenue 4,584 11,850
------- -------
Direct operating expenses
Real estate taxes 364 1,006
Repairs and maintenance 476 813
Utilities 529 767
Payroll 162 402
Insurance 63 160
Ground rent -- 138
Other 108 347
------- -------
Total direct operating expenses 1,702 3,633
------- -------
Income after direct operating expenses $2,882 $8,217
======= =======
HOTELS
Room sales $9,419 $8,821
Food sales 2,477 2,482
Beverage sales 674 728
Other 686 793
------- -------
Total revenue 13,256 12,824
------- -------
Direct operating expenses
Payroll 3,926 3,905
Cost of sales 1,139 1,278
Utilities 648 661
Repairs and mainenance 665 680
Adverting and promotion 648 627
Property taxes 280 304
Insurance 147 121
Other 1,349 1,240
------- -------
Total direct operating expenses 8,802 8,816
------- -------
Income after direct operating expenses $4,454 $4,008
======= =======
(1) Reflects the Real Estate Trust's transfer, in August 1993, of 22
shopping center properties and one office property to Saul Holdings
Partnership and a subsidiary limited partnership of Saul Holdings
Partnership.<PAGE>
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization
of $3.0 million and an operating loss of $5.5 million for the 1994
quarter compared to a loss before depreciation and amortization of $2.5
million and an operating loss of $6.5 million for the 1993 quarter. The
increase in the loss was largely attributable to the effects of the Saul
Centers Transaction.
Income after direct operating expenses in the 1994 quarter from commercial
properties, which includes only office properties, decreased $5.3 million
(64.9%)from such income in the 1993 quarter, which included income from
both shopping center and office properties. Because of the Saul Centers
Transaction, the Real Estate Trust received no income from shopping centers
in the current period. Income after direct operating expenses from
commercial properties held during both periods increased $872,000 (43.4
%)due to improved leasing at two properties.
Income after direct operating expenses from hotel properties increased
$446,000 (11.1%) in the June 1994 quarter. Room sales increased by
$598,000 (6.8%), while food and beverage sales declined by $59,000 (1.8%).
Total revenue increased by $432,000 (3.4%), while total expenses decreased
by $14,000 (0.2%).
Interest expense decreased by $2.9 million (23.0%) in the current period,
primarily as a result of the transfer of the mortgage debt associated with
the properties conveyed in the Saul Centers Transaction. Primarily for the
same reason, average balances of the Real Estate Trust's outstanding
borrowings declined to $403.6 million in the 1994 quarter from $470.0
million in the prior corresponding period.
Depreciation declined $1.1 million (34.0%), primarily as a result of the
transfer of properties in the Saul Centers Transaction.
Advisory, management and leasing fees--related parties declined $130,000
(6.5%) from the level in the June 1993 quarter. The effect of an increase
in the monthly advisory fee to $292,000 in the 1994 quarter from $157,000
in the 1993 quarter was more than offset by decreases in management and
leasing fees. The decreases in such fees resulted primarily from the
transfer of properties in the Saul Centers Transaction and, to a lesser
extent, reductions in rental and sales income on which the fees are based.
<PAGE>
<PAGE>
BANKING
General. The Bank recorded operating income of $2.6 million during the
three months ended June 30, 1994, (the "1994 quarter"), compared to
operating income of $20.8 million for the three months ended June 30, 1993
(the "1993 quarter"). The decrease in the 1994 quarter was primarily due
to a $17.1 million increase in operating expenses and a $2.3 million
decrease in other (non-interest) income. A substantial portion of the
increase in operating expenses was attributable to increased marketing and
other expenses incurred in connection with the active national solicitation
of credit card accounts, which the Bank resumed in June 1993 after
suspending such solicitation in November 1990. At June 30, 1994, the Bank
had $2.0 billion of credit card receivables outstanding, including
receivables owned by the Bank and receivables securitized, sold and
serviced by the Bank (both types of receivables collectively referred to
herein as "managed receivables"). The $2.3 million decrease in non-
interest income resulted primarily from an $8.9 million gain recognized on
the sale of investment securities during the 1993 quarter which was offset
in part by a $7.9 million increase in loan and deposit servicing fees.
Net Interest Income. Net interest income, before the provision for loan
losses, in the 1994 quarter remained unchanged from the prior period. The
Bank would have recorded interest income of $2.0 million for the 1994
quarter if non-accrual assets and restructured loans had been current in
accordance with their original terms. Interest income of $0.7 million was
actually recorded on non-accrual assets and restructured loans for the 1994
quarter. The Bank's net interest income in future periods will continue to
be adversely affected by the Bank's non-performing assets. See "Financial
Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resulting yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread
and net yield on interest-earning assets.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Net Interest Margin Analysis
Three Months Ended June 30,
---------------------------------------------------------------------
1994 1993
-------------------------------- -------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balances Interest Rate Balances Interest Rate
------------ -------- ------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $ 2,751,452 $64,273 9.34 % $ 2,102,190 $56,688 10.79 %
Mortgage-backed securities 1,154,226 16,671 5.78 1,452,825 22,883 6.30
Trading securities 12,629 202 6.40 - - -
Federal funds sold 39,787 379 3.81 10,005 73 2.95
Investment securities 4,599 73 6.35 150,013 2,451 6.54
Other interest-earning assets 176,445 1,593 3.61 160,496 1,148 2.86
------------ -------- ------------ --------
Total 4,139,138 83,191 8.04 3,875,529 83,243 8.59
-------- ------- -------- -------
Noninterest-earning assets:
Cash 118,430 106,285
Real estate held for investment or sale 340,481 444,854
Property and equipment, net 138,790 140,616
Cost in excess of net assets acquired, net 7,608 10,738
Other assets 144,986 191,370
------------ ------------
Total assets $ 4,889,433 $ 4,769,392
============ ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 869,352 5,923 2.73 $ 763,920 4,609 2.41
Savings deposits 1,293,344 10,890 3.37 891,325 7,233 3.25
Time deposits 729,152 7,029 3.86 919,353 9,609 4.18
Money market deposits 1,154,965 9,233 3.20 1,217,005 9,639 3.17
------------ -------- ------------ --------
Total deposits 4,046,813 33,075 3.27 3,791,603 31,090 3.28
Borrowings 481,514 7,129 5.92 667,797 9,191 5.51
------------ -------- ------------ --------
Total liabilities 4,528,327 40,204 3.55 4,459,400 40,281 3.61
Noninterest-bearing items: -------- ------- -------- -------
Noninterest-bearing deposits 67,389 53,377
Other liabilities 37,070 35,659
Stockholders' equity 256,647 220,956
------------ ------------
Total liabilities and stockholders' equity $ 4,889,433 $ 4,769,392
============ ============
Net interest income $42,987 $42,962
Net interest spread (2) ======== 4.49 % ======== 4.98 %
======= =======
Net yield on interest-earning assets (3) 4.15 % 4.43 %
======= =======
Interest-earning assets to interest-bearing liabilities 91.41 % 86.91 %
======= =======
(1)Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to
the extent reflected in the Consolidated Statements of Operations; however, the loan balance is
included in the average amount outstanding until transferred to real estate acquired in settlement of loans.
(2)Equals weighted average yield on total interest-earning assets less weighted average rate on total
interest-bearing liabilities.
(3)Equals annualized net interest income divided by the average balances of total interest-earning assets.
/TABLE
<PAGE>
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Bank during the periods
indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to
changes in volume (change in volume multiplied by old rate); changes in
rate (change in rate multiplied by old volume); and changes in rate and
volume.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Volume and Rate Changes in Net Interest Income
Three Months Ended June 30, 1994
Compared to
Three Months Ended June 30, 1993
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
(In thousands) Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 47,765 $ (40,180) $ 7,585
Mortgage-backed securities (4,432) (1,780) (6,212)
Trading securities 202 - 202
Federal funds sold 279 27 306
Investment securities (2,309) (69) (2,378)
Other interest-earning assets 122 323 445
------------ ------------ ------------
Total interest income 41,627 (41,679) (52)
------------ ------------ ------------
Interest expense:
Deposit accounts 2,624 (639) 1,985
Borrowings (5,951) 3,889 (2,062)
------------ ------------ ------------
Total interest expense (3,327) 3,250 (77)
------------ ------------ ------------
Increase (decrease) in
net interest income $ 44,954 $ (44,929) $ 25
============ ============ ============
(1) The net change attributable to the combined impact of volume and rate has been
allocated in proportion to the absolute value of the change due to volume and
the change due to rate.
(2) Includes loans held for sale and/or securitization.
/TABLE
<PAGE>
<PAGE>
Interest income of $83.2 million for the 1994 quarter was unchanged from
the prior period. The negative effect on interest income of lower average
yields earned by the Bank on the principal categories of its interest-
earning assets was offset by higher average balances of certain interest-
earning assets, principally loans receivable.
The Bank's net interest spread declined to 4.49% in the 1994 quarter from
4.98% in the 1993 quarter. The decline reflected marketing strategies
which included lower introductory rates for certain loan products,
primarily credit card and home equity credit line loans; the resumption of
active marketing of certain loan products, including credit card and
automobile loans; the Bank's asset securitization activities; and, to a
lesser extent, the adjustment of interest rates on certain of the Bank's
adjustable-rate products reflecting previous declines in market interest
rates to which the loan rates are indexed.
Interest income on loans, the largest category of interest-earning assets,
increased by $7.6 million (or 13.4%) from the 1993 quarter. The increase
in interest income on loans was attributable to higher average balances of
the loan portfolio. Average balances of single-family residential
permanent loans increased $282.5 million (or 28.0%) as a result of the
retention of adjustable-rate mortgage loans originated by the Bank. See
"Financial Condition - Asset and Liability Management." Interest income on
these loans increased $3.6 million (or 19.8%) from the prior period.
Average balances of credit card loans increased $146.7 million (or 18.8%)
during the quarter, primarily because of new account originations resulting
from the Bank's resumption of active national solicitation of credit card
accounts. An increase of $3.1 million (or 145.3%) in interest income on
consumer loans (other than credit card loans) was primarily attributable to
increased originations of automobile loans, which resulted in an increase
of $166.4 million (or 175.2%) in the average balances of consumer loans.
Average balances of home equity credit line loans increased $18.1 million
(or 12.8%), primarily because the prior period balances were affected by
the securitization and sale of the $194.2 million of home equity credit
line receivables in the December 1992 quarter. Interest income on these
loans increased $0.3 million (or 11.0%) from the prior period. Average
balances of commercial permanent loans increased $5.7 million (or 6.3%),
primarily as a result of an increase in loans made to purchasers of certain
of the Bank's REO in connection with the sales of such REO. See "Financial
Condition - Asset Quality."
Lower average yields on the loan portfolio partially offset the positive
effect of higher average balances on interest income. The average yield on
the portfolio in the 1994 quarter decreased by 145 basis points (to 9.34%
from 10.79%) from the average yield in the 1993 quarter. Special
introductory and promotional interest rates to new and existing credit card
holders contributed to a decline in the average yield on credit card loans
to 14.53% from 17.19%. The average yield on home equity credit line loans
decreased to 6.83% from 6.94%, primarily as a result of introductory rates
offered on new home equity credit line loans. The average yield on single-
family residential loans declined to 6.77% from 7.24% as customers
continued to refinance higher rate mortgage loans into lower rate mortgage
loans.
The Bank's securitization activity contributed to the decline in the
overall yield on the loan portfolio, because the proceeds from the
securitization and sale of credit card and home equity credit line
receivables are initially invested in lower-yielding short-term assets
pending investment into additional receivables.
<PAGE>
<PAGE>
Interest income on mortgage-backed securities decreased $6.2 million
because of lower average balances resulting from the early prepayment of
higher yielding mortgage-backed securities and, to a lesser extent, because
of lower average interest rates. Average interest rates declined to 5.78%
from 6.30% primarily as a result of the early prepayment of higher-rate
mortgage-backed securities and the purchase of mortgage-backed securities
with lower rates.
Interest income on investment securities decreased $2.4 million as a result
of the sale in June 1993 of U.S. Government securities with a book value of
$172.9 million, which resulted in lower average balances of such
securities.
Interest expense remained unchanged from the prior period. Interest
expense on borrowings declined by $2.1 million as a result of decreases in
interest expense of $1.1 million, $0.4 million and $1.0 million on
repurchase agreement transactions, FHLB of Atlanta advances and the Bank's
subordinated debentures, respectively. The decrease in interest expense on
repurchase agreement transactions and on FHLB of Atlanta advances was
attributable to a decrease of $157.8 million (or 81.6%) in the average
balances of repurchase agreements and a decrease of $70.8 million (or
23.5%) in the average balances of FHLB of Atlanta advances. Such decreases
were offset in part by an increase in the average cost of repurchase
agreements to 3.65% from 2.88% and an increase in the average cost of FHLB
of Atlanta advances to 3.96% from 3.54%. Interest expense on subordinated
debentures declined as a result of the refinancing of such debentures
consummated in the first quarter of fiscal 1994, which reduced the Bank's
average cost from 13.54% to 9.14%. See Notes to the Consolidated Financial
Statements in this report.
The decrease in interest expense on borrowings was partially offset by an
increase of $2.0 million in interest expense on deposits, the largest
category of interest-bearing liabilities. Interest expense on deposits
increased principally as a result of an increase of $255.2 million in
average deposit balances.
Provision for Loan Losses. The Bank's provision for loan losses decreased
to $11.7 million in the June 1994 quarter from $12.9 million in the prior
period. The provision for losses on credit card loans decreased $1.7
million primarily as a result of a decline in net charge-offs of credit
card loans in fiscal 1994. The securitization and sale of $300.0 million
of credit card receivables also contributed to the decrease in this
provision. The decrease was offset in part by a $0.6 million increase from
the prior period in the provision for losses on real estate loans. See
"Financial Condition - Reserves for Losses."
Other Income. The decrease in other income (to $33.9 million in the 1994
quarter from $36.2 million in the 1993 quarter) was primarily attributable
to a decrease in gain on sale of investment securities, a decrease in gain
(loss) on sales of credit card relationships, loans and mortgage-backed
securities and a decrease in credit card fees. These decreases were
partially offset by an increase in loan and deposit servicing fees, an
increase in earnings on real estate held for investment or sale and an
increase in gain on sales of trading securities.
The gain on sale of investment securities decreased by $8.9 million as a
result of the Bank's sale in June 1993 of its portfolio of five-year U.S.
Government securities with a book value of $172.9 million.
<PAGE>
<PAGE>
Loss on sales of credit card relationships, loans and mortgage-backed
securities in the 1994 quarter totaled $0.7 million, compared to the $2.4
million gain recorded in the prior corresponding period. The loss in the
current period was primarily attributable to a decline in the gains
recorded on sales of mortgage loans originated or purchased for sale by the
Bank as a result of the recent increase in interest rates. The Bank
recognized a $1.6 million gain on sales of trading securities during the
1994 quarter. Prior to the implementation of SFAS 115 in October 1993,
this gain would have been included in gain (loss) on sales of credit card
relationships, loans and mortgage-backed securities. See Notes to the
Consolidated Financial Statements.
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $2.7 million (or 45.0%) in the
1994 quarter from the 1993 quarter. The decrease was primarily
attributable to a $3.6 million increase in rebate expense on credit card
retail purchases, which the Bank incurred in connection with promotional
activities undertaken beginning in August 1993. The decrease was partially
offset by an increase in interchange fees and cash advance charges as a
result of increased account activity . The increased number of accounts
reflected the increase in new account originations in connection with the
Bank's resumption of active national solicitation of new credit card
accounts.
The $2.5 million increase in earnings on real estate held for investment or
sale was primarily attributable to a decrease of $1.8 million in the
provision for losses on such assets. See "Financial Condition - Reserves
for Losses." An increase of $1.3 million in the gain recorded on the sales
of the Bank's REO properties also contributed to the increase in such
earnings. This increase was partially offset by a $0.4 million decrease in
the operating income generated by the Bank's REO properties.
An increase of $3.0 million (or 37.3%) in excess servicing fees and $0.6
million in servicing fees earned by the Bank for servicing its portfolios
of securitized credit card loans contributed to an increase of $7.9 million
(or 50.2%) in loan and deposit servicing fees. Excess servicing fees
represent the contractual interest and fees paid by credit card holders
less certificate interest paid to holders of certificates in the trusts and
administrative fees paid to providers of services to the trusts. Such
excess servicing fees and servicing fees have increased in recent periods
as a result of greater securitization activity by the Bank. As the Bank
securitizes and sells assets, purchases mortgage servicing rights, or sells
mortgage loans and retains the servicing rights on those loans, servicing
fee income levels increase. The level of servicing and fee income declines
upon repayment of assets previously securitized and sold and upon
prepayment of mortgage loans serviced for others. Also contributing to the
increase in loan and deposit servicing fees in the 1994 quarter was a $4.1
million increase in excess servicing fees related to home equity credit
line securitizations primarily due to a decrease in the average prepayment
rate of the underlying receivables.
<PAGE>
<PAGE>
Operating Expenses. Operating expenses in the 1994 quarter increased $17.1
million, primarily as a result of increases in marketing expenses, salaries
and employee benefits and data processing expenses. The $10.5 million
increase in marketing expenses was primarily attributable to the active
national solicitation of credit card accounts, which the Bank resumed in
June 1993. A $5.0 million increase in salaries and employee benefits and
a $2.7 million increase in data processing expenses, resulting from the
increased number of credit card accounts outstanding and the activity
generated by such accounts during the 1994 quarter, also contributed to
higher operating expense levels. In order to take advantage of additional
opportunities to enhance profitability, the Bank may be required to incur
increased expenditures for salaries and employee benefits, loan expenses
and marketing expenses, which will contribute to higher operating expenses
in future periods.
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1994 COMPARED TO
NINE MONTHS ENDED JUNE 30, 1993
REAL ESTATE
The following table sets forth, for the nine-month periods ended June 30,
1994 (the "1994 period")and 1993 (the "1993 period"), respectively, direct
operating results for the Real Estate Trust's (i) shopping centers and
office properties, (ii) commercial properties portfolio, which represents
the shopping center and office property results on a combined basis, and
(iii) hotel properties. As a result of the Saul Centers Transaction, the
operating results of commercial properties for the 1994 period are not
entirely comparable to the prior period's results, which included the
operations of the transferred properties.
<PAGE>
<PAGE>
Nine Months Ended
June 30,
--------------------
1994 (1) 1993
--------------------
SHOPPING CENTERS (In thousands)
Revenue
Base rent $ -- $16,826
Expense recoveries -- 3,772
Percentage rent -- 1,823
Other -- 524
-------------------
Total revenue -- 22,945
-------------------
Direct operating expenses
Real estate taxes -- 1,612
Repairs and maintenance -- 938
Utilities -- 757
Payroll -- 741
Insurance -- 252
Ground rent -- 416
other -- 576
--------------------
Total direct operating expenses $ -- 5,292
--------------------
Income after direct operating expenses $ -- $17,653
====================
OFFICE PROPERTIES
Revenue
Base rent $11,165 $13,294
Expense recoveries 793 1,043
Other 403 308
--------------------
Total revenue 12,361 14,645
--------------------
Direct operating expenses
Real estate taxes 1,124 1,187
Repairs and maintenance 1,294 1,250
Utilities 1,688 1,644
Payroll 436 418
Insurance 192 216
Other 456 726
--------------------
Total direct operating expenses 5,190 5,441
--------------------
Income after direct operating expenses $ 7,171 $ 9,204
====================
(1) Reflects the Real Estate Trust's transfer, in August 1993, of 22
shopping center properties and one office property to Saul Holdings
Partnership and a subsidiary limited partnership of Saul Holdings
Partnership.
<PAGE>
<PAGE>
Nine Months Ended
June 30,
--------------------
1994 (1) 1993
--------------------
(In thousands)
COMMERCIAL PROPERTIES
(SHOPPING CENTERS AND OFFICE PROPERTIES)
Revenue
Base rent $ 11,165 $30,120
Expense recoveries 793 4,815
Percentage rent -- 1,823
Other 403 832
-------------------
Total revenues 12,361 37,590
-------------------
Direct operating expenses
Real estate taxes 1,124 2,799
Repairs and maintenance 1,294 2,188
Utilities 1,688 2,401
Payroll 436 1,159
Insurance 192 468
Ground rent -- 416
Other 456 1,302
-------------------
Total direct operating expenses 5,190 10,733
-------------------
Income after direct operating expenses $ 7,171 $26,857
===================
HOTELS
Revenue
Room sales $22,700 $22,156
Food sales 6,585 6,864
Beverage sales 2,024 2,298
Other 2,268 2,223
-------------------
Total revenue 33,577 33,541
-------------------
Direct operating expenses
Payroll 11,014 10,937
Cost of sale 3,171 3,534
Utilities 2,274 2,119
Repairs and maintenance 1,806 1,748
Advertising and promition 1,687 1,740
Property taxes 792 901
Insurance 434 401
Other 3,613 3,151
--------------------
Total dirct operating expenses 24,791 24,531
--------------------
Income after direct operating expenses $ 8,786 $9,010
====================
(1) Reflects the Real Estate Trust's transfer, in August 1993, of 22
shopping center properties and one office property to Saul Holdings
Partnership and a subsidiary limited partnership of Saul Holdings
Partnership.
<PAGE>
<PAGE>
The Real Estate Trust recorded a loss before depreciation, amortization
and non-cash charges of $17.3 million and an operating loss of $24.8
million for the 1994 period compared to a loss before depreciation and
amortization of $9.1 million and an operating loss of $20.8 million for the
1993 period. The increase in the loss was largely attributable to the
effect of the Saul Centers Transaction and, to a lesser extent, to a
decrease in operating income from hotels. The 1994 period also included a
$1.4 million write-down of real estate to net realizable value.
Income after direct operating expenses from commercial properties, which
includes only office properties in the 1994 period, decreased $19.7 million
(73.3%), from such income in the 1993 period, which included income from
both shopping center and office properties. Because of the Saul Centers
Transaction, the Real Estate Trust received no income from shopping centers
in the current period.
Income after direct operating expenses from commercial properties held
during both periods declined $725,000 (9.2%). The performance of the
office portfolio was adversely affected by a reduction in rental income.
Income after direct operating expenses from hotel properties decreased
$224,000 (2.5%) in the 1994 period. Room sales increased by $544,000
(2.5%), while food and beverage sales declined by $553,000 (6.0%). Total
revenues increased by $36,000 (0.1%), while expenses were higher by
$260,000 (1.1%).
Interest expense decreased $8.8 million (23.3%) in the current period,
largely as a result of the transfer of the mortgage debt associated with
the properties conveyed in the Saul Centers Transaction. Primarily for the
same reason, average balances of the Real Estate Trust's outstanding
borrowings declined to $343.6 million in the 1994 period from $474.6
million in the prior corresponding period.
Depreciation declined $3.2 million (34.0%), primarily as a result of the
transfer of properties in the Saul Centers Transaction.
Advisory, management and leasing fees--related parties declined $656,000
(11.8%) from the level in the prior fiscal period. The advisory fee in the
1994 period was $250,000 per month from October 1993 through March 1994
and $292,000 per month from April through June 1994, compared to $97,000
per month from October through December 1992 and $157,000 per month from
January through June 1993. The effect of this increase was offset by
decreases in management and leasing fees, which resulted principally from
the transfer of properties in the Saul Centers Transaction and, to a lesser
extent, from reductions in commercial rental and hotel sales income on
which these fees are based.
Higher legal expense in the current period contributed to an increase of
$78,000 (5.7%) in general and administrative expenses.
Writedown of real estate to net realizable value reflects a $1.4 million
reduction in the carrying value of a hotel property. The Real Estate Trust
reduced the carrying value of the asset based on management's evaluation of
the hotel's location, recent operating history and unlikely prospects for
a near-term recovery. <PAGE>
<PAGE>
BANKING
General. The Bank recorded operating income of $33.3 million during the
nine months ended June 30, 1994 (the "1994 period"), compared to operating
income of $43.8 million for the nine months ended June 30, 1993 (the "1993
period"). The decrease for the nine months ended June 30, 1994 resulted
from a $50.3 million increase in operating expenses and a $9.6 million
decrease in net interest income before provision for loan losses. The
negative effect of these items was offset in part by a $21.1 million
increase in other (non-interest) income and by a $28.3 million decrease in
the provision for loan losses. A substantial portion of the increase in
operating expenses was attributable to increased marketing and other
expenses incurred in connection with the active national solicitation of
credit card accounts, which the Bank resumed in June 1993. At June 30,
1994, the Bank had $2.0 billion of managed credit card receivables.
Net Interest Income. Net interest income, before the provision for loan
losses, decreased $9.6 million (or 7.0%) in the 1994 period, as the average
yield on interest-earning assets decreased at a rate greater than the
decrease in the average rate on interest-bearing liabilities. See
"Financial Condition - Asset and Liability Management."
The Bank would have recorded interest income of $7.3 million for the 1994
period if non-accrual assets and restructured loans had been current in
accordance with their original terms. Interest income of $1.9 million was
actually recorded on non-accrual assets and restructured loans for the 1994
period. The Bank's net interest income in future periods will continue to
be adversely affected by the Bank's non-performing assets. See "Financial
Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resulting yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread
and net yield on interest-earning assets.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Net Interest Margin Analysis
Nine Months Ended June 30,
--------------------------------------------------------------------------
1994 1993
---------------------------------- ----------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balances Interest Rate Balances Interest Rate
------------ ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $ 2,669,288 $ 190,520 9.52 % $ 2,073,196 $ 178,391 11.47 %
Mortgage-backed securities 1,280,323 54,967 5.72 1,510,778 72,902 6.43
Trading securities 19,685 917 6.21 - - -
Federal funds sold 23,986 629 3.50 14,242 318 2.98
Investment securities 4,660 226 6.47 165,446 8,001 6.45
Other interest-earning assets 184,023 4,382 3.17 162,269 3,520 2.89
------------ ---------- ------------ ----------
Total 4,181,965 251,641 8.02 3,925,931 263,132 8.94
---------- -------- ---------- --------
Noninterest-earning assets:
Cash 114,777 101,872
Real estate held for investment or sale 365,676 482,880
Property and equipment, net 137,571 142,707
Cost in excess of net assets acquired, net 8,495 11,482
Other assets 169,451 173,703
------------ ------------
Total assets $ 4,977,935 $ 4,838,575
============ ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 836,631 17,123 2.73 $ 739,903 13,340 2.40
Savings deposits 1,172,782 29,582 3.36 826,533 20,106 3.24
Time deposits 762,063 22,634 3.96 996,503 32,887 4.40
Money market deposits 1,163,406 27,849 3.19 1,250,457 29,760 3.17
------------ ---------- ------------ ----------
Total deposits 3,934,882 97,188 3.29 3,813,396 96,093 3.36
Borrowings 680,426 27,372 5.36 773,532 30,364 5.23
------------ ---------- ------------ ----------
Total liabilities 4,615,308 124,560 3.60 4,586,928 126,457 3.68
Noninterest-bearing items: ---------- -------- ---------- --------
Noninterest-bearing deposits 60,840 42,580
Other liabilities 35,600 34,210
Stockholders' equity 266,187 174,857
------------ ------------
Total liabilities and stockholders' equity $ 4,977,935 $ 4,838,575
============ ============
Net interest income $ 127,081 $ 136,675
Net interest spread (2) ========== 4.41 % ========== 5.25 %
======== ========
Net yield on interest-earning assets (3) 4.05 % 4.64 %
======== ========
Interest-earning assets to interest-bearing liabilities 90.61 % 85.59 %
======== ========
(1)Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the
extent reflected in the Consolidated Statements of Operations; however, the loan balance is included in the
average amount outstanding until transferred to real estate acquired in settlement of loans.
(2)Equals weighted average yield on total interest-earning assets less weighted average rate on total interest-bearing
liabilities.
(3)Equals annualized net interest income divided by the average balances of total interest-earning assets.
/TABLE
<PAGE>
<PAGE>
The following table presents certain information regarding interest income
and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-earning liabilities,
information is provided on changes attributable to changes in volume
(change in volume multiplied by old rate); changes in rate (change
in rate multiplied by old volume); and changes in rate and volume.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Volume and Rate Changes in Net Interest Income
Nine Months Ended June 30, 1994
Compared to
Nine Months Ended June 30, 1993
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
(In thousands) Volume Rate Change
- --------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 58,433 $ (46,304) $ 12,129
Mortgage-backed securities (10,404) (7,531) (17,935)
Trading securities 917 - 917
Federal funds sold 248 63 311
Investment securities (7,816) 41 (7,775)
Other interest-earning assets 500 362 862
------------ ------------ ------------
Total interest income 41,878 (53,369) (11,491)
------------ ------------ ------------
Interest expense:
Deposit accounts 3,890 (2,795) 1,095
Borrowings (4,147) 1,155 (2,992)
------------ ------------ ------------
Total interest expense (257) (1,640) (1,897)
------------ ------------ ------------
Increase (decrease) in
net interest income $ 42,135 $ (51,729) $ (9,594)
============ ============ ============
(1) The net change attributable to the combined impact of volume and rate has been
allocated in proportion to the absolute value of the change due to volume and
the change due to rate.
(2) Includes loans held for sale and/or securitization.
/TABLE
<PAGE>
<PAGE>
Interest income for the 1994 period decreased $11.5 million (or 4.4%) from
the level in the prior corresponding period, primarily as a result of lower
average yields earned by the Bank on the principal categories of its
interest-earning assets. The effect of the lower average yields on
interest income was offset in part by higher average balances of loans
receivable and, to a lesser extent, trading securities and other interest-
earning assets.
The Bank's net interest spread declined to 4.41% in the 1994 period from
5.25% in the 1993 period. The decline reflected marketing strategies which
included lower introductory rates for certain loan products, primarily
credit card and home equity credit line loans; the resumption of active
marketing of certain loan products, including credit card and automobile
loans; the Bank's asset securitization activities; and, to a lesser extent,
the adjustment of interest rates on certain of the Bank's adjustable-rate
products reflecting previous declines in market interest rates to which the
loan rates are indexed.
Interest income on loans, the largest category of interest-earning assets,
increased by $12.1 million (or 6.8%) from the 1993 period. The increase in
interest income on loans was attributable to higher average balances of the
loan portfolio. Average balances of single-family residential permanent
loans increased $381.3 million (or 40.8%) as a result of increased
origination of such loans during the current period. Interest income on
these loans increased $14.6 million (or 28.0%) from the 1993 period. An
increase of $7.2 million (or 124.7%) in interest income on consumer loans
(other than credit card loans) was attributable to increased originations
of automobile loans, which resulted in an increase in the average balances
of consumer loans (to $209.9 million from $79.4 million). Average balances
of commercial permanent loans increased $20.1 million (or 26.7%), primarily
as a result of an increase in loans made to purchasers of certain of the
Bank's REO in connection with the sales of such REO. Average balances of
credit card loans increased $75.3 million (or 8.9%) during the period,
largely as a result of new account originations in connection with the
Bank's resumption of active national solicitation of credit card accounts.
Average balances of home equity credit line loans declined during the
current period, largely as a result of the Bank's securitization and sale
activity. The securitization and sale of $194.2 million and $146.2 million
of home equity credit line receivables in December 1992 and September 1993,
respectively, contributed to a decline of $28.0 million (or 18.5%) in
average balances of home equity credit line receivables, which contributed
to a $1.9 million decline in interest income.
Lower average yields on the loan portfolio partially offset the effect of
higher average balances. The average yield on the loan portfolio in the
1994 period decreased by 195 basis points (to 9.52% from 11.47%) from the
average yield in the 1993 period. Special introductory and promotional
interest rates to new and existing credit card holders contributed to a
decline in the average yield on credit card loans to 14.92% from 17.74% and
a decline of $9.4 million in interest income on these loans. The average
yield on home equity credit line loans decreased to 6.65% from 7.06%
primarily due to introductory rates on new home equity credit line loans.
The average yield on single-family residential loans declined to 6.78% from
7.46%, as customers continued to refinance higher rate mortgage loans into
lower rate mortgage loans. The effect of these lower yields was offset in
part by an increase in the average yield on construction and ground loans
of 19 basis points (from 6.63% to 6.82%).
<PAGE>
<PAGE>
Interest income on mortgage-backed securities decreased $17.9 million
because of lower average interest rates and lower average balances, which
resulted from the sale of $127.8 million of mortgage-backed securities
during the 1993 period. Average interest rates declined to 5.72% from
6.43% primarily as a result of the early prepayment of higher rate
mortgage-backed securities and the purchase of mortgage-backed securities
with lower rates.
Interest income on investment securities decreased $7.8 million as a result
of the sale in June 1993 of U.S. Government securities with a book balance
of $172.9 million, which resulted in lower average balances of such
securities.
Interest expense decreased $1.9 million (or 1.5%) for the 1994 period
because of a decline of $3.0 million in interest expense on borrowings.
The decrease in interest expense on borrowings was primarily attributable
to a $4.5 million decrease in interest expense on repurchase agreement
transactions. The decrease was offset in part by increased interest
expense on FHLB of Atlanta advances.
The decrease in interest expense on borrowings was partially offset by a
$1.1 million increase in interest expenses on deposits, the largest
category of interest-bearing liabilities. Interest expense on deposits
increased principally as a result of an increase of $121.5 million in
average deposit balances.
Provision for Loan Losses. The Bank's provision for loan losses decreased
to $27.6 million for the 1994 period from $55.9 million in the prior
period. The provision for losses on credit card loans decreased $20.1
million primarily as a result of a decline in net charge-offs of credit
card loans in fiscal 1994 and because the securitization and sale of $200.0
million of credit card receivables and the sale of credit card
relationships with related receivable balances of $96.5 million in the
March 1994 quarter, and the securitization and sale of $300.0 million of
credit card receivables in the June 1994 quarter, reduced the amount of
such receivables against which the Bank maintains its reserve. The
provision for losses on real estate loans decreased $7.9 million,
reflecting the Bank's implementation of Statement of Position 92-3,
"Accounting for Foreclosed Assets" during the December 1992 quarter. See
"Financial Condition - Reserve for Losses."
Other Income. The increase in other income (to $111.7 million for the 1994
period from $90.5 million for the 1993 period) was attributable to an
increase in earnings on real estate held for investment or sale and an
increase in loan and deposit servicing fees. These increases were
partially offset by a decrease in the gain on sale of investment securities
and a decrease in credit card fees.
The $18.5 million increase in earnings on real estate held for investment
or sale was primarily attributable to a decrease of $16.6 million in the
provision for losses on such assets. The Bank's implementation of SOP 92-3
in the three months ended December 31, 1992 resulted in $19.0 million of
additional provisions for real estate losses in that period in order to
reduce the book value of the Bank's foreclosed assets to fair value. Also
contributing to the increase in earnings on real estate held for investment
or sale was an increase of $4.2 million in the gain recorded on sales of
the Bank's REO properties. These results were partially offset by a $2.1
million decrease in the operating income generated by the Bank's REO
properties.
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An increase of $9.2 million in excess servicing fees and $1.8 million of
servicing fees earned by the Bank for servicing its portfolios of
securitized credit card loans contributed to an increase of $13.7 million
(or 28.0%) in loan and deposit servicing fees. Such excess servicing fees
and servicing fees have increased in recent periods as a result of greater
securitization activity by the Bank. Also contributing to the increase in
loan and deposit servicing fees was a $1.5 million increase in excess
servicing fees related to home equity credit line securitizations primarily
due to a decrease in the average prepayment rate of the underlying
receivables.
Gain on sale of investment securities decreased by $8.9 million as a result
of the sale in the June 1993 quarter of U.S. Government securities with a
book value of $172.9 million.
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $6.1 million (or 30.2%) in the
1994 period from the prior period level. The decrease was primarily
attributable to a $7.6 million increase in rebate expense on credit card
retail purchases, which the Bank incurred in connection with promotional
activities undertaken beginning in 1993. The decrease was partially offset
by an increase in interchange fees and cash advance charges as a result of
increased account activity. The increased number of accounts reflected the
increase in new account originations in connection with the Bank's
resumption of active national solicitation of new credit card accounts.
Operating Expenses. Operating expenses for the 1994 period increased $50.3
million primarily as a result of increases in marketing expenses, salaries
and employee benefits and data processing expenses. The $26.5 million
increase in marketing expenses was primarily attributable to increased
solicitation by the Bank of its credit card products and services in
connection with the resumption of active national solicitation of new
credit card accounts. The $14.3 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card operations and discretionary bonuses paid to substantially all
employees in December 1993. The $5.1 million increase in data processing
expenses was primarily attributable to an increase in the number of credit
card accounts outstanding during the 1994 period.
