<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated May 18, 1994
to Prospectus Dated January 28, 1994
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
MARCH 31, 1994
----------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at March 31, 1994
and September 30, 1993 3
(b) Consolidated Statements of Operations and
Deficit for the three-month and six-month
periods ended March 31, 1994 and 1993. 4
(c) Consolidated Statements of Cash Flows for
the six-month periods ended March 31, 1994
and 1993. 6
(d) Notes to Consolidated Financial Statements 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) Financial Condition
Real Estate 14
Banking 16
(b) Liquidity and Capital Resources
Real Estate 38
Banking 41
(c) Results of Operations
Three Months Ended March 31, 1994 Compared
to Three Months Ended March 31, 1993
Real Estate 44
Banking 48
Six Months Ended March 31, 1994 Compared
to Six Months Ended March 31, 1993
Real Estate 56
Banking 60
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
March 31 September 30
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Commercial $ 110,534 $ 109,513
Hotel 110,567 111,484
Other 4,584 3,985
------------ ------------
225,685 224,982
Accumulated depreciation (66,719) (62,626)
------------ ------------
158,966 162,356
Land parcels 38,416 38,411
Cash and cash equivalents 62,317 2,710
Other assets 86,217 17,079
------------ ------------
Total real estate assets 345,916 220,556
------------ ------------
Banking
Cash and due from banks 161,787 178,508
Interest-bearing deposits 4,496 4,691
Federal funds sold 78,000 0
Investment securities (market value $4,719 and $4,822, respectively) 4,719 4,789
Loans held for sale 119,763 176,027
Loans held for securitization and sale 792,794 300,000
Mortgage-backed securities (market value $1,203,671 and $1,528,060, respectively) 1,203,671 1,501,192
Loans receivable (net of reserve for losses of $58,545 and $68,040, respectively) 1,726,328 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 $116,822 and $111,644, respectively) 344,879 388,459
Property and equipment, net 139,030 135,800
Cost in excess of net assets acquired, net 7,909 9,383
Excess servicing assets, net 17,854 27,573
Purchased mortgage servicing rights, net 16,642 20,472
Other assets 186,216 232,974
------------ ------------
Total banking assets 4,836,028 4,872,771
------------ ------------
TOTAL ASSETS $ 5,181,944 $ 5,093,327
============ ============
LIABILITIES
Real Estate
Mortgage notes payable $ 193,892 $ 264,776
Notes payable - secured 175,000 0
Notes payable - unsecured 41,264 38,661
Deferred gains - real estate 109,254 109,027
Other liabilities and accrued expenses 34,480 37,689
------------ ------------
Total real estate liabilities 553,890 450,153
------------ ------------
Banking
Deposit accounts 4,040,056 3,870,023
Securities sold under repurchase agreements and other short-term borrowings 7,881 88,266
Bonds payable 24,320 24,605
Notes payable 7,829 7,925
Federal Home Loan Bank advances 250,000 412,000
Custodial accounts 32,390 25,925
Amounts due to banks 26,305 26,723
Other liabilities and accrued expenses 47,080 40,034
Capital notes -- subordinated 160,000 138,500
------------ ------------
Total banking liabilities 4,595,861 4,634,001
------------ ------------
Minority interest held by affiliates 36,954 34,495
Minority interest -- other 74,307 74,307
------------ ------------
TOTAL LIABILITIES 5,261,012 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 (135,629) (157,882)
Net unrealized holding loss (1,692) 0
------------ ------------
(37,220) (57,781)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (79,068) (99,629)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 5,181,944 $ 5,093,327
============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Three Months For the Six Months
Ended March 31 Ended March 31
(In thousands, except per share amounts) 1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REAL ESTATE
Income
Commercial properties $ 4,054 $ 12,743 $ 7,777 $ 25,740
Hotels 9,639 9,936 20,321 20,717
Other 490 526 939 998
------------ ------------ ------------ ------------
Total income 14,183 23,205 29,037 47,455
------------ ------------ ------------ ------------
Expenses
Direct operating expenses:
Commercial properties 1,783 3,449 3,488 7,100
Hotels 8,084 7,687 15,989 15,715
Land parcels and other 321 334 650 706
Interest expense 9,661 12,559 19,425 25,394
Amortization of debt expense 477 870 956 1,505
Depreciation 2,050 3,119 4,125 6,253
Advisory, management and leasing fees - related parties 1,501 1,876 3,034 3,560
General and administrative 466 554 967 888
Write-down of real estate to net realizable value 0 0 1,380 0
------------ ------------ ------------ ------------
Total expenses 24,343 30,448 50,014 61,121
------------ ------------ ------------ ------------
Equity in earnings of partnership investments 899 0 1,624 0
Loss on sales of property 0 (145) 0 (684)
------------ ------------ ------------ ------------
REAL ESTATE OPERATING LOSS (9,261) (7,388) (19,353) (14,350)
------------ ------------ ------------ ------------
BANKING
Interest income
Loans 67,083 59,568 126,247 121,703
Mortgage-backed securities 17,939 24,113 38,296 50,019
Trading securities 303 0 715 0
Investment securities 72 2,761 153 5,550
Other 1,397 1,303 3,039 2,617
------------ ------------ ------------ ------------
Total interest income 86,794 87,745 168,450 179,889
Interest expense ------------ ------------ ------------ ------------
Deposit accounts 32,730 31,421 64,113 65,003
Short-term borrowings 3,537 3,185 6,755 7,954
Long-term borrowings 5,869 6,582 13,488 13,219
------------ ------------ ------------ ------------
Total interest expense 42,136 41,188 84,356 86,176
------------ ------------ ------------ ------------
Net interest income 44,658 46,557 84,094 93,713
Provision for loan losses (3,804) (15,207) (15,899) (42,961)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 40,854 31,350 68,195 50,752
------------ ------------ ------------ ------------
Other income
Credit card fees 4,888 6,605 10,724 14,066
Loan servicing fees 12,765 11,292 29,441 24,163
Deposit service fees 4,721 4,431 9,614 9,067
Gain (loss) on sales of trading securities, net (375) 0 433 0
Earnings (loss) on real estate held for investment or sale, net (2,357) 978 (2,641) (18,623)
Gain on sales of credit card relationships, loans and
mortgage-backed securities, net 18,968 5,820 21,458 18,484
Gain on sales of mortgage servicing rights, net 1,558 1,044 4,130 2,768
Other 2,257 2,587 4,595 4,390
------------ ------------ ------------ ------------
Total other income 42,425 32,757 77,754 54,315
------------ ------------ ------------ ------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Three Months For the Six Months
Ended March 31 Ended March 31
(In thousands, except per share amounts) 1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 21,239 $ 17,123 $ 42,645 $ 33,431
Loan expenses 5,947 2,929 12,421 5,628
Property and equipment 6,348 5,955 12,679 11,887
Marketing expenses 8,303 2,236 15,608 3,605
Data processing expenses 7,123 5,421 13,457 11,129
Deposit insurance premiums 2,819 2,993 5,777 5,322
Amortization of cost in excess of net assets acquired 959 744 1,475 1,488
Other 5,924 5,036 11,275 9,641
------------ ------------ ------------ ------------
Total operating expenses 58,662 42,437 115,337 82,131
------------ ------------ ------------ ------------
BANKING OPERATING INCOME 24,617 21,670 30,612 22,936
------------ ------------ ------------ ------------
TOTAL COMPANY
Operating income before income taxes, extraordinary items,
cumulative effect of change in accounting principle,
and minority interest 15,356 14,282 11,259 8,586
Provision for income taxes 6,903 4,320 6,195 4,552
------------ ------------ ------------ ------------
Income before extraordinary items, cumulative effect
of change in accounting principle and minority interest 8,453 9,962 5,064 4,034
Extraordinary items:
Adjustment for tax benefit of operating loss carryovers 0 2,554 0 2,554
Loss on early extinguishment of debt, net of taxes (4,982) 0 (11,315) 0
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest 3,471 12,516 (6,251) 6,588
Cumulative effect of change in accounting principle 0 0 36,260 0
------------ ------------ ------------ ------------
Income before minority interest 3,471 12,516 30,009 6,588
Minority interest held by affiliates (2,376) (2,606) (2,881) (2,724)
Minority interest -- other (2,437) 0 (4,875) 0
------------ ------------ ------------ ------------
TOTAL COMPANY NET INCOME (LOSS) (1,342) 9,910 22,253 3,864
DEFICIT
Beginning of period (134,287) (167,026) (157,882) (160,980)
------------ ------------ ------------ ------------
End of period $ (135,629) $ (157,116) $ (135,629) $ (157,116)
============ ============ ============ ============
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (2,697) $ 8,555 $ 19,543 $ 1,154
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
Income before extraordinary items, cumulative effect
of change in accounting principle and minority interest $ 1.46 $ 1.78 $ 0.49 $ 0.27
Extraordinary items:
Adjustment for tax benefit of operating loss carryovers 0.00 0.53 0.00 0.53
Loss on early extinguishment of debt, net of taxes (1.03) 0.00 (2.34) 0.00
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest 0.43 2.31 (1.85) 0.80
Cumulative effect of change in accounting principle 0.00 0.00 7.51 0.00
------------ ------------ ------------ ------------
Income before minority interest 0.43 2.31 5.66 0.80
Minority interest held by affiliates (0.49) (0.54) (0.60) (0.56)
Minority interest -- other (0.50) 0.00 (1.01) 0.00
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.56) $ 1.77 $ 4.05 $ 0.24
============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Six Months
Ended March 31
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss) $ 10,727 $ (7,032)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation 4,125 6,253
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 (971) (4,615)
Increase in deferred tax asset (38,409) 0
Increase (decrease) in accounts payable and accrued expenses (14,146) 5,006
(Increase) decrease in tax sharing receivable 1,310 (7,493)
Amortization of debt expense 956 1,505
Equity in earnings of partnership investments (1,657) 0
Other (11,318) (1,405)
------------ ------------
(48,003) (7,097)
------------ ------------
Banking
Net income 11,526 10,896
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of premiums, discounts and deferred loan fees (782) (5,324)
Depreciation and amortization 8,544 7,995
Amortization of cost in excess of net assets acquired, purchased mortgage servicing
rights and excess servicing assets 15,912 10,861
Loss on extinguishment of debt 10,476 0
Provision for loan losses 15,899 42,961
Net fundings of loans held for sale (599,508) (354,554)
Proceeds from sales of trading securities 446,537 0
Proceeds from sales of loans and securities held for sale and/or securitization 693,790 1,028,827
Earnings on real estate (5,936) (3,134)
Provision for losses on real estate held for investment or sale 10,868 25,668
Gain on sales of trading securities, net (433) 0
Gain on sales of credit card relationships, loans and mortgage-backed securities, net (21,458) (18,484)
Gain on sales of mortgage servicing rights, net (4,130) (2,768)
Minority interest held by affiliates 2,881 2,724
Minority interest - other 4,875 0
(Increase) decrease in other assets 47,377 (131,811)
Increase (decrease) in other liabilities and accrued expenses 6,628 (404)
Increase (decrease) in tax sharing payable (1,310) 7,493
Other, net 2,724 3,808
------------ ------------
644,480 624,754
------------ ------------
Net cash provided by operating activities 596,477 617,657
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (1,926) (4,303)
Property sales 0 241
Equity investment in unconsolidated entities (42) 0
Other investing activities 8 (371)
------------ ------------
(1,960) (4,433)
------------ ------------
Banking
Proceeds from sales of loans 0 4,505
Net proceeds from sales of real estate 49,841 43,677
Net proceeds from sales of mortgage servicing rights 4,130 2,768
Net fundings of loans receivable (496,979) (167,517)
Principal collected on mortgage-backed securities 291,360 198,699
Purchases of mortgage-backed securities (167,542) (115,239)
Purchases of loans receivable (148,047) (139,355)
Purchases of property and equipment (8,449) (2,788)
Purchases of mortgage servicing rights (888) (10,465)
Excess servicing assets capitalized 0 (11,841)
Disbursements for real estate held for investment or sale (36,119) (7,253)
Other investing activities, net 575 (21,011)
------------ ------------
(512,118) (225,820)
------------ ------------
Net cash used in investing activities (514,078) (230,253)
------------ ------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Six Months
Ended March 31
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 461 $ 1,900
Principal curtailments of mortgages (69,318) (3,800)
Proceeds from sales of secured notes 175,000 0
Proceeds from sales of unsecured notes 6,836 2,158
Repayments of unsecured notes (4,233) (7,395)
Costs of obtaining financings (8,761) (4,147)
Proceeds from the issuance of redeemable referred stock 0 25,000
Other financing activities, net 0 (732)
------------ ------------
99,985 12,984
------------ ------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 5,770,386 5,138,180
Customer withdrawals of deposits and payments for maturing certificates of deposit (5,600,353) (5,231,411)
Net decrease in securities sold under repurchase agreements (81,533) (312,093)
Advances from Federal Home Loan Bank 589,300 229,000
Repayments of advances from Federal Home Loan Bank (751,300) (203,000)
Proceeds from other borrowings 156,597 25,554
Repayments of other borrowings (155,830) (27,119)
Cash dividends paid on preferred stock (4,875) 0
Repayment of capital notes - subordinated (134,153) 0
Net proceeds from issuance of capital notes - subordinated 143,603 0
Other financing activities, net 6,465 12,062
------------ ------------
(61,693) (368,827)
------------ ------------
Net cash provided by (used in) financing activities 38,292 (355,843)
------------ ------------
Net increase in cash and cash equivalents 120,691 31,561
Cash and cash equivalents at beginning of period 185,909 121,169
------------ ------------
Cash and cash equivalents at end of period $ 306,600 $ 152,730
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 87,520 $ 110,088
Income taxes 356 2,115
Supplemental schedule of noncash investing and financing activities:
Rollovers of notes payable - unsecured 2,793 1,834
Loans receivable exchanged for mortgage-backed securities 0 51,956
Loans held for sale exchanged for mortgage-backed securities held for sale 278,440 230,335
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 792,794 361,716
Investment securities transferred to loans and securities held for sale 0 173,036
Loans made in connection with the sale of real estate 10,045 44,547
Loans receivable transferred to real estate acquired in settlement of loans 2,164 19,824
Loans classified as in-substance foreclosed transferred to loans receivable 15,008 0
Loans held for securitization and/or sale 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>
<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 interim periods are not
necessarily indicative of results to be expected for the year.
2. The accompanying financial statements include the accounts of the 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 Accounting Standard 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 six months ended March 31,
1993 was determined under APB 11 and has not been restated to reflect
adoption of SFAS 109.
<PAGE>
4. BANKING:
LOANS HELD FOR SALE:
At March 31, 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:
March 31, September 30,
1994 1993
(In thousands) ------------- --------------
Credit card receivables $ 650,000 $ 300,000
Home equity credit line receivables 142,794 -
------------- -------------
Total $ 792,794 $ 300,000
============= =============
SECURITIES:
Investment Securities and Mortgage-backed Securities:
Effective October 1, 1993, the Bank adopted Statement of Financial
Accounting Standard 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 shareholders' equity, net of the
related tax effect.
At March 31, 1994, all investment securities and mortgage-backed securities
held by the Bank are classified as available-for-sale and recorded at fair
value. At March 31, 1994, net unrealized holding losses in the amount of
$1.7 million, net of the related income tax effect, are included in a
separate component of shareholders' equity.
<PAGE>
Unrealized holding gains and losses in the Bank's investment securities as
of March 31, 1994 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
(In thousands) --------- ---------- ---------- ---------
U.S. Government
securities $ 4,694 $ - $ (77) $ 4,617
Other securities 102 - - 102
--------- ---------- ---------- ---------
Total $ 4,796 $ - $ (77) $ 4,719
========= ========== ========== =========
A comparison of amortized cost and fair value for investment securities,
along with the contractual dates of maturity, by category of investments as
of March 31, 1994, is as follows:
Aggregate
Amortized Fair
Cost Value
(In thousands) --------- ---------
Investment securities available-for-sale:
U.S. Government securities:
Maturing within one year $ 298 $ 298
Maturing after one year,
but within five years 4,396 4,319
--------- ---------
Total U.S. Government securities 4,694 4,617
--------- ---------
Other securities:
Maturing within one year 102 102
--------- ---------
Total other securities 102 102
--------- ---------
Total investment securities available-for-sale $ 4,796 $ 4,719
========= =========
Gross unrealized holding gains and losses of the Bank's mortgage-backed
securities as of March 31, 1994 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
(In thousands) ----------- ------------ ----------- -----------
FNMA $ 41,664 $ 291 $ (228) $ 41,727
FHLMC 951,024 6,377 (11,637) 945,764
Private label,
AA-rated 214,406 1,774 - 216,180
----------- ------------ ----------- -----------
Total $1,207,094 $ 8,442 $ (11,865) $1,203,671
=========== ============ =========== ===========
<PAGE>
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 losses on sales of trading
securities of $0.4 million for the three months ended March 31, 1994 and
net gains of $0.4 million for the six months ended March 31, 1994. There
were no unrealized gains or losses during the three months and six months
ended March 31, 1993.
LOANS RECEIVABLE:
Loans receivable is composed of the following:
March 31, September 30,
1994 1993
(In thousands) ------------- -------------
Single-family residential $ 1,225,203 $ 1,111,306
Home equity - 60,549
Commercial and multifamily 97,802 95,611
Real estate construction 77,435 69,940
Ground 20,196 19,340
Credit card 148,999 454,520
Automobile 198,337 106,725
Overdraft lines of credit 45,033 42,198
Other 36,597 31,295
------------- --------------
1,849,602 1,991,484
------------- --------------
Less:
Undisbursed portion of loans 71,231 63,620
Unearned discounts 1,644 1,543
Net deferred loan origination costs (8,146) (3,472)
Reserve for loan losses 58,545 68,040
------------- -------------
123,274 129,731
------------- -------------
Total $ 1,726,328 $ 1,861,753
============= =============
IMPAIRED LOANS:
Effective October 1, 1993, the Bank adopted, on a prospective basis,
Statement of Financial Accounting Standard 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
<PAGE>
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.
At March 31, 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 $ 14,985 $ 1,106
Credit card 28,988 2,899
------------ -----------
$ 43,973 $ 4,005
============ ===========
REAL ESTATE HELD FOR INVESTMENT OR SALE:
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:
March 31, September 30,
1994 1993
(In thousands) ------------- -------------
Land, development, construction
and rental properties $ 69,473 $ 69,313
Investments in limited partnerships (2,407) (1,580)
Investment in real estate ventures 8,910 8,898
------------- -------------
Total real estate held for
investment 75,976 76,631
------------- -------------
Real estate held for sale 397,828 434,616
------------- -------------
Less:
Reserve for losses on real estate
held for investment 10,119 10,182
Reserve for losses on real estate
held for sale 106,703 101,462
Accumulated depreciation and
amortization 12,103 11,144
------------- ------------
Total real estate held for
investment or sale $ 344,879 $ 388,459
============= =============
<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 OTS has approved the inclusion of the principal
amount of the 1993 Debentures in the Bank's supplementary capital for
regulatory capital purposes.
<PAGE>
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 March 31, 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 Trust 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
The Real Estate Trust's investment portfolio at March 31, 1994, which
consisted of office properties, hotels and undeveloped land parcels, was
predominantly unchanged from September 30, 1993. 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.
Office space in the Real Estate Trust's office property portfolio was 83%
leased at March 31, 1994, compared to a leasing rate of 77% at September
30, 1993 and 87% at March 31, 1993. The decline in the leasing percentage
from the March 1993 quarter reflects adverse economic conditions in the
metropolitan areas in which the Trust maintains office properties. The
improvement since September 1993 was primarily attributable to additional
space leased in three of the office properties located in Atlanta. At
March 31, 1994, the Real Estate Trust's office property portfolio had a
total gross leasable area of 1,363,000 square feet. Of the gross leasable
area at March 31, 1994, 106,000 square feet (7.8%), 439,000 square feet
(32.2%) and 205,000 square feet (15.1%) are subject to leases whose terms
expire in the balance of fiscal 1994 and in fiscal 1995 and 1996,
respectively. Due to a decline in lease rates for office space in the
markets served by these properties, the terms of certain of the new leases
to be entered into in the balance of fiscal 1994 may be less favorable to
the Real Estate Trust than the terms of the expiring leases. The ability
of the Real Estate Trust to re-lease office space subject to leases
expiring in fiscal 1995 and 1996, and the terms of any such new leases,
will depend on conditions in the markets for the applicable properties
during such periods.
<PAGE>
For the six months ended March 31, 1994, the nine hotel properties owned by
the Real Estate Trust experienced an average occupancy rate of 55% and a
$54.66 average room rate, compared to an average occupancy rate of 56% and
a $54.76 average room rate in the first six months of fiscal 1993. Five of
the hotels showed improved occupancies over the prior corresponding period,
while occupancy rates at four properties declined from the rates in the
1993 period.
Effective October 1, 1993, the Trust adopted statement of Financial
Accounting Standard No. 109, "Accounting For Income Taxes" ("SFAS 109").
SFAS 109 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 of SFAS 109 on October 1, 1993
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 amount by approximately $33.5 million. See Note 3 to the
Consolidated Financial Statements in this report.
The income tax provision for the six months ended March 31, 1993 was
determined under APB 11 and has not been restated to reflect the adoption
of SFAS 109.
<PAGE>
BANKING
General. The Bank recorded operating income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
of $24.6 million during the March 1994 quarter, compared to operating
income before income taxes, extraordinary item and cumulative effect of
change in accounting principle of $21.7 million in the prior corresponding
period. The increase in the March 1994 quarter was primarily attributable
to a decrease in the provision for loan losses and an increase in gain on
sales of credit card relationships, loans and mortgage-backed securities,
as discussed below. The positive effect of these items was offset in part
by an increase in operating expenses, a decrease in net interest income
before the provision for loan losses and a decrease in earnings on real
estate held for investment or sale. See "Results of Operations."
At March 31, 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 4.88%, 5.26%
and 11.41%, respectively, exceeded the requirements of 1.5%, 3.0% and 8.0%,
respectively. Additionally, at March 31, 1994, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios of 5.26%, 6.64% and 11.41%,
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 March 31, 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 March 1994 quarter, the Bank sold credit card relationships with
related receivable balances of $96.5 million and recognized a gain of $17.0
million. In addition, the Bank securitized and sold $200.0 million of
credit card receivables.
In accordance with 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 shareholders'
equity. During the March 1994 quarter, as a result of an increase in
market interest rates, net unrealized holding gains (losses) decreased
$8.3 million from an $6.6 million net unrealized holding gain at December
31, 1993 to a $1.7 million net unrealized holding loss at March 31, 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 tier 1 capital for regulatory capital purposes
pursuant to interim guidance issued by the OTS.
Asset Quality. The Bank's asset quality has improved in recent periods as
a result of actions taken by management to resolve problem real estate
assets and enhance risk management efforts. The Bank has committed
substantial resources to problem asset resolution and has reorganized its
staff in order to facilitate the resolution and workout of problem real
estate assets.
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>
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(Dollars in thousands)
March 31, December 31, September 30,
1994 1993 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential and home equity $ 8,165 $ 8,830 $ 9,108
Commercial and multifamily 3,029 3,066
Commercial construction and ground 11,956 11,942
-------------- -------------- --------------
Total non-accrual real estate loans 23,150 23,838 9,108
Credit card 18,656 21,657 20,557
Consumer and other 319 258 314
-------------- -------------- --------------
Total non-accrual loans (1) 42,125 45,753 29,979
-------------- -------------- --------------
Non-accrual real estate held for investment (1) 8,910 8,898 8,898
-------------- -------------- --------------
Real estate acquired in settlement of loans 397,828 414,507 434,616
Reserve for losses on real estate acquired in settlement
of loans (106,703) (101,275) (101,462)
-------------- -------------- --------------
Real estate acquired in settlement of loans, net 291,125 313,232 333,154
-------------- -------------- --------------
Total non-performing assets $ 342,160 $ 367,883 $ 372,031
============== ============== ==============
Reserve for losses on loans 58,545 66,940 68,040
Reserve for losses on real estate held for investment 10,119 10,188 10,182
Reserve for losses on real estate acquired in settlement
of loans 106,703 101,275 101,462
-------------- -------------- --------------
Total reserves for losses $ 175,367 $ 178,403 $ 179,684
============== ============== ==============
Ratios:
Non-performing assets to total assets (2) 7.07% 7.17% 7.63%
Reserve for losses on real estate loans to non-accrual
real estate loans (1) 78.42% 80.29% 219.29%
Reserve for losses on credit card loans to non-accrual
credit card loans (1) 212.29% 216.49% 228.08%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (1) 246.39% 354.65% 376.11%
Reserve for losses on loans to non-accrual loans (1) 138.98% 146.31% 226.96%
Reserve for losses on real estate held for investment
to non-accrual real estate held for investment (1) 113.57% 114.50% 114.43%
Reserve for losses on real estate held for investment
or sale to non-performing real estate held for
investment or sale (1) 28.72% 26.33% 25.17%
Reserve for losses on loans to total loans receivable (3) 2.17% 2.35% 2.83%
Reserve for losses on real estate held for investment to
real estate held for investment (1) 15.84% 15.90% 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>
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 totaled $342.2 million, after valuation allowances on
REO of $106.7 million, or 7.1% of total assets at March 31, 1994, compared
to $367.9 million, after valuation allowances on REO of $101.3 million, or
7.2% of total assets at December 31, 1993. In addition to the valuation
allowances on REO, the Bank maintained $5.5 million and $5.8 million of
valuation allowances on its non-accrual loans and non-accrual real estate
held for investment at March 31, 1994 and December 31, 1993, respectively.
The decrease in non-performing assets was attributable to declines in
non-accrual loans and REO of $3.6 million and $22.1 million, respectively,
during the quarter ended March 31, 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 $323.2 million at March 31, 1994 or 94.5% 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
$319.7 million at March 31, 1994, reflecting both additional write-downs on
non-performing assets during that period and, in more recent periods, asset
sales. During the six months ended March 31, 1994, the Bank sold various
REO properties with a book balance totaling $50.2 million.
Decline in Non-Performing Real Estate Assets
Total
Valuation
Allowances on
Non-accrual Cumulative
Total Non- Real Estate Total Non- Decline from
Performing Loans and Performing February 29, 1992
Real Estate Non-accrual Real Estate -----------------
Assets (1) REI (2) Assets, net Amount Percent
---------- ----------- ----------- --------- -------
(Dollars in thousands)
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%
(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 March 31, 1994, valuation allowances on non-accrual
real estate loans and non-accrual REI were $1.5 million and $2.0 million,
respectively.
<PAGE>
A larger portion of the affected properties financed by the Bank involves
residential rather than commercial properties. At March 31, 1994, $278.9
million or 86.3% 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 has been less significantly affected by the downturn in
recent years than the commercial real estate market.
Non-accrual Loans. The Bank's non-accrual loans totaled $42.1 million at
March 31, 1994, a decrease of $3.7 million from $45.8 million at
December 31, 1993. At March 31, 1994, non-accrual loans consisted
primarily of $23.1 million of non-accrual real estate loans and $18.7
million of non-accrual credit card loans. Non-accrual loans decreased
primarily as a result of the sale of $1.6 million of non-accrual credit
card loans (included in the $96.5 million of loan balances associated with
the credit card relationships sold in the March 1994 quarter), net
principal repayments and reductions of non-accrual residential loans of
$0.7 million, and net principal repayments and reductions of non-accrual
credit card loans of $1.4 million.
At March 31, 1994, the Bank had $18.7 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 $9.6 million of credit card loans classified for
regulatory purposes as substandard and $99.1 million of credit card loans
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 ($9.6
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 $9.6
million, $1.8 million was current, $0.5 million was 30-59 days past due and
$7.3 million was 60-89 days past due at March 31, 1994. The amount
classified as special mention ($99.1 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 $99.1 million reported as special
mention, $76.6 million was current, $13.5 million was 30-59 days past due
and $9.0 million was 60-89 days past due at March 31, 1994. All delinquent
amounts are included in the table of delinquent loans. See "Delinquent
Loans."
Non-accrual Real Estate Held for Investment. At March 31, 1994,
December 31, 1993 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. In the past, the Bank was an active lender on residential real estate
development projects and, to a lesser extent, commercial buildings and
land. The majority of the amount of loans originated were to developers
for the acquisition and development of residential planned unit
developments. The majority of the loans contained provisions that entitled
the Bank to a portion of the profits generated by the underlying
properties. Beginning in mid-1990 and extending through 1992, as a result
of the slowdown in the Washington, D.C. area economy, the Bank took active
control, either through foreclosure or deed-in-lieu of foreclosure, of most
of the properties securing these loans. The Bank decided that completing
the infrastructure of the properties, implementing an aggressive marketing
program, and then selling building lots to home builders represented the
most effective method of recovering the Bank's investment in these
properties.
<PAGE>
At March 31, 1994, the Bank's REO totaled $291.1 million, after valuation
allowances on such assets of $106.7 million. The principal component of
REO consists of the Communities, which had an aggregate book value of
$228.9 million at that date. Four of the Communities are under active
development.
During the three months ended March 31, 1994, REO decreased $22.1 million,
primarily due to sales of one office building with a book value of $2.7
million after valuation allowances, one residential construction property
with a book value of $1.2 million after valuation allowances and sales in
the Communities and other smaller residential properties. See "Disposition
of REO." The decrease also was attributable to an increase of $5.6 million
in REO reserves from $101.3 million at December 31, 1993, to $106.7 million
at March 31, 1994 related to three of the five Communities based upon
updated internal analyses and computations of the fair value of these
assets.
The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
ee "Disposition of REO." The Bank capitalized interest in the amount of
$2.3 million during the six months ended March 31, 1994, of which $2.2
million related to the Bank's four active Communities.
Disposition of REO. During the three months ended March 31, 1994, the Bank
received proceeds of approximately $31.4 million from the disposition of
REO consisting of one office building ($2.9 million), 254 residential lots
or units in the Communities and other smaller residential properties ($22.9
million), various single-family residential properties ($2.0 million) and
12.7 acres of land in one of the Communities ($3.6 million).
The Bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in an orderly manner which will best preserve
the value of the Bank's assets. The Bank's ability to achieve this
objective will depend on a number of factors, some of which are beyond its
control, including favorable general economic conditions in the Washington,
D.C. metropolitan area and availability of financing for the potential
purchasers of these properties. In addition, under its written agreement
with the OTS, the Bank is required to make every effort to reduce its
exposure in certain of its real estate development properties, including
the four active Communities. In accordance with this requirement,
management of the Bank is pursuing several strategies. First, the Bank has
focused its efforts on marketing building lots directly to home builders.
The Bank is proceeding with lot finishing to meet the requirements of
existing and new contracts with builders and is accelerating the record
plat process so that individual lots can be sold at the earliest possible
time. Second, the Bank continues to seek and negotiate with potential
purchasers of retail and commercial ground in the Communities. Finally,
the Bank continues to engage in discussions with potential investors
concerning the possibility of larger scale or bulk purchases of ground at
the Communities.
<PAGE>
The following table sets forth the Bank's REO at March 31, 1994.
Balance Balance
Before All After Percent
Valuation Valuation Valuation of
(In thousands) Allowances Allowances Allowances Total
---------- ---------- ---------- ------
Communities ............ $ 307,844 $ 78,991 $ 228,853 78.6%
Residential ground and
construction ......... 61,207 20,822 40,385 13.9
Retail centers ......... 2,823 611 2,212 0.7
Commercial land ........ 21,121 5,475 15,646 5.4
Office building ........ 3,295 728 2,567 0.9
Single-family residential
properties ........... 1,538 76 1,462 0.5
---------- ---------- ---------- ------
Total REO .............. $ 397,828 $106,703 $ 291,125 100.0%
========== ========== ========== ======
At March 31, 1994, the Bank had executed contracts to sell seven 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 March 31,
1994, 8,638 residential units (65.3%) had been sold to builders, consisting
of 6,315 units (47.8%) which had been settled and 2,323 units (17.5%) which
were under contract and pending settlement, and approximately 100.2 acres
(52.9%) of retail land had been sold to developers, including 19.7 acres
(10.4%) which were under contract and pending settlement. In addition, at
March 31, 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 at the Bank's four active Communities has increased
in recent periods. Home sales at these Communities increased slightly from
736 units during the six months ended March 31, 1993 to 744 units during
the six months ended March 31, 1994. In addition, home sales increased
from 1,061 units during fiscal 1992 to 1,522 units during fiscal 1993,
which represented a 43.5% increase. Management believes that the positive
trend in home sales activity indicates that the demand for the Bank's lots
remains strong and should continue at substantially the same rate as fiscal
1993, 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 Communities under active development.
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.
March 31, September 30,
(In thousands) 1994 1993 1992
---------- ---------- ----------
Residential construction loans.... $ 8,441 $ 10,386 $ 3,138
Single-family permanent loans (1). 61,588 79,104 98,856
---------- ---------- ----------
Total............................. $ 70,029 $ 89,490 $ 96,994
========== ========== ==========
(1) Includes $7.4 million, $8.8 million and $13.3 million of loans
classified as held for sale at March 31, 1994, September 30, 1993 and
1992, respectively, in the Condensed Consolidated Financial Statements in
this report.
<PAGE>
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 March 31,
1994, the Bank had originated $142.6 million and sold $135.2 million of
such loans with application dates subsequent to September 30, 1991. The
remaining $7.4 million of such loans are classified as held for sale and
generally are expected to be sold in the third 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 $2.1 million, or 1.5% of the $142.6
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.
Six Months
Ended
March 31, Year Ended September 30,
1994 1993 1992
--------- --------- ---------
(In thousands)
Sales proceeds............ $ 34,863 $ 66,291 $ 39,594
Development costs ........ 23,893 51,649 35,803
--------- --------- ---------
Net funds provided
by development.......... $ 10,970 $ 14,642 $ 3,791
========= ========= =========
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 March 31, 1994, this property had a
book value of $34.3 million, after valuation allowances. The Bank
continues to assess various strategies for the ultimate disposition of this
property.
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.
<PAGE>
The Bank will continue to monitor its major non-performing and potential
problem assets in light of current and anticipated market conditions. The
Bank's asset workout group focuses its efforts in resolving these problem
assets as expeditiously as possible. While the Bank does not anticipate
any significant increases in non-performing and potential problem assets,
additional charge-offs or reserves could be required absent a continued
recovery of the local real estate markets.
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 March 31, 1994, potential problem assets totaled $42.3 million before
valuation allowances of $12.4 million, as compared to $72.8 million, before
valuation allowances of $14.5 million at December 31, 1993. The $30.5
million decrease in potential problem assets from December 31, 1993 is
primarily attributable to $21.5 million of loans in which the borrowers'
financial condition is such that management no longer has serious doubts as
to the borrowers' ability to comply with present repayment terms. The
payoff of one commercial permanent loan with a principal balance of $4.0
million and other net paydowns of $5.0 million also contributed to the
decrease in potential problem assets.
Delinquent Loans. At March 31, 1994, delinquent loans totaled $47.8
million or 1.8% of gross loans, compared to $62.9 million or 2.2% of gross
loans at December 31, 1993. The following table sets forth information
regarding the Bank's delinquent loans at March 31, 1994.
Total as a
Principal Balance Percentage
Mortgage Non-Mortgage of Gross
Loans Loans Total Loans (1)
------- -------- -------- ---------
(Dollars in thousands)
Loans delinquent for:
30-59 days ........ $6,813 $22,757 $29,570 1.1%
60-89 days ........ 2,378 15,873 18,251 0.7%
------- -------- -------- -----
Total ............. $9,191 $38,630 $47,821 1.8%
======= ======== ======== =====
(1) Includes loans held for sale and/or securitization, before deduction
of reserves.
At March 31, 1994 mortgage loans classified as delinquent 30-89 days
consist entirely of single-family permanent residential mortgage loans and
home equity credit line loans. Total delinquent mortgage loans decreased
to $9.2 million at March 31, 1994 from $18.9 million at December 31, 1993.
The $9.7 million decrease was primarily attributable to the return to
current status of one residential construction loan with a principal
balance of $9.4 million at March 31, 1994.
<PAGE>
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
decreased to $38.6 million at March 31, 1994 from $44.0 million at
December 31, 1993, primarily as a result of an improvement in general
economic conditions. Non-mortgage loans delinquent 30-89 days as a
percentage of total non-mortgage loans outstanding decreased slightly to
3.7% at March 31, 1994 from 3.8% at December 31, 1993, primarily because
the securitization and sale of the $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 reduced the
Bank's portfolio of such loans. If the Bank had not engaged in these
transactions, the percentage of non-mortgage loans delinquent 30-89 days to
total non-mortgage loans outstanding would have been 3.2% as of March 31,
1994, compared to 3.8% at December 31, 1993.
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.
March 31, December 31, September 30,
(In thousands) 1994 1993 1993
--------- ------------ -------------
Troubled debt
restructurings..... $30,767 $36,238 $36,729
At March 31, 1994, loans accounted for as troubled debt restructurings
included two commercial permanent loans with principal balances totaling
$13.2 million, one residential construction loan with a principal balance
of $0.5 million and two residential ground loans with principal balances
totaling $17.1 million. The decrease in loans accounted for as troubled
debt restructurings from December 31, 1993 resulted from the payoff of one
commercial permanent loan with a principal balance of $4.0 million. Loans
accounted for as troubled debt restructurings with principal balances
totaling $30.3 million were classified as potential problem assets at March
31, 1994; the remaining $0.5 million represents the principal balance of
one residential construction loan which, except for its maturity date,
which was extended, was performing in accordance with its original terms.
At March 31, 1994, the Bank had commitments to lend $2.8 million of
additional funds on loans that have been restructured.
Real Estate Held for Investment. At March 31, 1994, real estate held for
investment consisted of seven properties with an aggregate book value of
$53.8 million, net of accumulated depreciation of $12.1 million and
valuation allowances of $10.1 million. This category includes one office
building (which was approximately 85.0% leased at such date) and two
apartment buildings (which were approximately 98.0% and 99.0% 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 March 31, 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>
<TABLE>
<CAPTION>
ANALYSIS OF RESERVE BALANCES ON AND CHARGE-OFFS OF LOANS
(Dollars in thousands)
Three
Six Months Ended Months
March 31, Ended
---------------------- March 31,
1994 1993 1994
--------- --------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 68,040 $ 78,818 $ 66,940
--------- --------- ----------
Provision for loan losses 15,899 42,961 3,804
--------- --------- ----------
Charge-offs:
Residential and home equity 902 40 242
Commercial and multifamily 766
Ground 4,274
Credit card 31,008 42,650 15,202
Consumer and other 330 3,084 196
--------- --------- ----------
Total charge-offs 32,240 50,814 15,640
--------- --------- ----------
Recoveries:
Residential and home equity 14 6
Credit card 6,689 6,630 3,365
Consumer and other 143 152 70
--------- --------- ----------
Total recoveries 6,846 6,782 3,441
--------- --------- ----------
Charge-offs, net of recoveries 25,394 44,032 12,199
--------- --------- ----------
Balance at end of year $ 58,545 $ 77,747 $ 58,545
========= ========= ==========
Provision for loan losses to average loans (1) (2) 1.21% 4.17% 0.55%
Net loan charge-offs to average loans (1) (2) 1.93% 4.28% 1.76%
Ending reserve for losses on loans to total
loans (2) (3) 2.17% 3.77% 2.17%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPONENTS OF RESERVE FOR LOSSES ON LOANS BY TYPE
(Dollars in thousands)
March 31, December 31, September 30,
1994 1993 1993
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loan(1) Amount Total Loan(1) Amount Total Loan(1)
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period allocated to:
Residential permanent $ 2,841 50.0 % $ 2,874 49.9 % $ 4,235 53.6 %
Home equity 460 5.3 377 3.8 250 2.5
Commercial and multifamily 9,098 3.6 9,812 3.5 9,606 3.9
Residential construction 1,526 0.9 3,452 1.2 4,125 1.5
Commercial construction 1,189 0.8 1,178 0.8 345 0.4
Ground 3,040 0.7 1,446 0.6 1,412 0.7
Credit card 39,605 29.7 46,886 33.5 46,886 31.4
Consumer and other 786 9.0 915 6.7 1,181 6.0
-------- -------- --------
Total $58,545 $66,940 $68,040
======== ======== ========
(1) Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF RESERVE BALANCES ON AND CHARGE-OFFS OF REAL ESTATE HELD FOR INVESTMENT OR SALE
(In thousands)
Six Months Ended Three Months
March 31, Ended
-------------------------- March 31,
1994 1993 1994
----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 10,182 $ 14,919 $ 10,188
Real estate held for sale 101,462 94,125 101,275
----------- ----------- ------------
Total 111,644 109,044 111,463
----------- ----------- ------------
Provision for real estate losses:
Real estate held for investment (63) 976 (69)
Real estate held for sale 10,931 24,692 7,070
----------- ----------- ------------
Total 10,868 25,668 7,001
----------- ----------- ------------
Charge-offs:
Real estate held for sale:
Residential construction 471 471
Commercial ground 73
Commercial permanent 5,219 761 1,171
Commercial construction 14,509
Total 5,690 15,343 1,642
----------- ----------- ------------
Total charge-offs on real estate
held for investment or sale 5,690 15,343 1,642
----------- ----------- ------------
Balance at end of period:
Real estate held for investment 10,119 15,895 10,119
Real estate held for sale 106,703 103,474 106,703
----------- ----------- ------------
Total $ 116,822 $ 119,369 $ 116,822
=========== =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPONENTS OF RESERVE FOR LOSSES ON REAL ESTATE HELD FOR INVESTMENT OR SALE
(In thousands)
March 31, December 31, September 30,
1994 1993 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 1,972 1,972
Other 200 271 265
----------- ----------- ------------
Total 10,119 10,188 10,182
----------- ----------- ------------
Reserve for losses on real estate
held for sale:
Residential 73 81 102
Home equity 4 52 53
Commercial and multifamily 728 1,424 4,678
Commercial construction 611 608 1,387
Residential construction 2,517 3,002 2,924
Ground 102,770 96,108 92,318
----------- ----------- ------------
Total 106,703 101,275 101,462
----------- ----------- ------------
Total reserve for losses on real
estate held for investment or sale $ 116,822 $ 111,463 $ 111,644
=========== =========== ============
</TABLE>
<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 decreased by $3.0 million from the level at December 31,
1993 to $175.4 million at March 31, 1994. The $3.0 million decrease was
primarily attributable to decreased reserves on credit card loans. This
decrease was partially offset by increased reserves on real estate held for
investment or sale. During the six months ended March 31, 1994, the Bank
recorded net charge-offs of $6.6 million on loans secured by real estate
and real estate held for investment or sale and provided an additional $9.9
million in valuation allowances on these assets.
The following table shows reserves for losses on performing and
non-performing assets at the dates indicated.
March 31, 1994:
Performing Non-performing Total
---------- -------------- --------
(In thousands)
Reserves for losses on:
Loans:
Real estate............. $ 16,641 $ 1,513 $ 18,154
Credit card............. 37,739 1,866 39,605
Consumer and other...... 600 186 786
-------- -------- --------
Total reserve for
losses on loans....... 54,980 3,565 58,545
-------- -------- --------
Real estate held for
investment............... 8,145 1,974 10,119
Real estate held for sale. - 106,703 106,703
-------- -------- --------
Total reserve for losses on
real estate held for
investment or sale...... 8,145 108,677 116,822
-------- -------- --------
Total reserves for losses..$ 63,125 $112,242 $175,367
======== ======== ========
September 30, 1993:
Performing Non-performing Total
---------- -------------- --------
(In thousands)
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
======== ========= ========
<PAGE>
Reserves for losses on loans secured by real estate and real estate held
for investment or sale totaled $135.0 million at March 31, 1994, which
constituted 31.4% of total non-performing real estate assets before
valuation allowances. This amount represented a $4.4 million increase from
the December 31, 1993 level of $130.6 million, or 29.2% of total
non-performing real estate assets, before valuation allowances, at that
date. The increase in these reserves was primarily attributable to an
increase of $5.6 million in the reserves on three of the five Communities
based upon updated internal analyses and computations of the fair value of
these assets.
Net charge-offs of credit card loans for the six months ended March 31,
1994 were $24.3 million, compared to $36.0 million for the six months ended
March 31, 1993. The decrease in net charge-offs 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 decreased to $39.6 million at
March 31, 1994 from $46.9 million at December 31, 1993 primarily 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 March 1994 reduced the amount of credit card loans
against which the Bank maintains the reserve. The ratios of the reserve
for such losses to non-performing credit card loans and to outstanding
credit card loans changed to 212.3% and 5.0%, respectively, at March 31,
1994 from 216.5% and 4.9%, respectively, at December 31, 1993.
The reserve for losses on consumer and other loans (other than credit card
loans) decreased to $0.8 million at March 31, 1994 from $0.9 million at
December 31, 1993. 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 246.4% and 0.3%, respectively, at
March 31, 1994 from 354.7% and 0.5%, respectively, at December 31, 1993.
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 it's 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 (other
than adjustable-rate). At March 31, 1994, ARMs and home equity credit line
loans with rates adjustable in one year or less accounted for 17.1% of
total loans, and credit card loans accounted for 29.7% of total loans.
<PAGE>
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.
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 investment 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 March 31, 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 six months or less.
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY TABLE (GAP)
(Dollars in thousands)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1994
Mortgage loans:
Adjustable-rate $ 361,939 $ 169,259 $ 327,476 $ 319,767 $ 8,037 $1,186,478
Fixed-rate 9,825 9,566 48,541 32,684 98,037 198,653
Loans held for sale 119,763 - - - - 119,763
Second mortgages 5,996 104 436 442 - 6,978
Credit card and other 193,452 24,613 93,289 77,182 4,228 392,764
Loans held for securitization and sale 792,794 - - - - 792,794
Mortgage-backed securities 395,661 234,753 423,006 150,251 - 1,203,671
Other investments 120,545 - 4,319 102 - 124,966
------------- ------------- ----------- ----------- ----------- -----------
Total interest-earning assets 1,999,975 438,295 897,067 580,428 110,302 4,026,067
Total non-interest earning assets - - - - 809,961 809,961
------------- ------------- ----------- ----------- ----------- -----------
Total assets $ 1,999,975 $ 438,295 $ 897,067 $ 580,428 $ 920,263 $4,836,028
============= ============= =========== =========== =========== ===========
Deposits:
Fixed maturity deposits $ 338,761 $ 149,290 $ 160,177 $ 93,151 $ - $ 741,379
NOW, statement and passbook accounts 1,627,100 39,174 130,475 88,805 189,253 2,074,807
Money market deposit accounts 1,139,975 - - - - 1,139,975
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 258,271 410 24,181 552 6,616 290,030
------------- ------------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 3,374,107 188,874 314,833 182,508 345,869 4,406,191
Total non-interest bearing liabilities - - - - 189,670 189,670
Stockholders' equity - - - - 240,167 240,167
------------- ------------- ----------- ----------- ----------- -----------
Total liabilities & stockholders' equity $ 3,374,107 $ 188,874 $ 314,833 $ 182,508 $ 775,706 $4,836,028
============= ============= =========== =========== =========== ===========
Gap ($1,374,132) $249,421 $582,234 $397,920 ($235,567)
Cumulative gap ($1,374,132) ($1,124,711) ($542,477) ($144,557) ($380,124)
Cumulative gap as a percentage
of total assets (28.4)% (23.3)% (11.2)% (3.0)% (7.9)%
</TABLE>
<PAGE>
The one-year gap, as a percentage of total assets, was a negative 23.3% at
March 31, 1994, compared to a negative 24.9% at December 31, 1993. 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.
On March 22, 1994 and April 18, 1994, the Federal Reserve Board (the "FRB")
took action that resulted in an increase in the targeted federal funds rate
from 3 1/4% to 3 1/2% per annum and from 3 1/2% to 3 3/4% per annum,
respectively. Management of the Bank does not anticipate that the FRB's
recent actions will have a material adverse effect on the Bank's operating
results or financial condition, although there can be no assurances that
the Bank will not be adversely affected if interest rates increase further
in the future.
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.
Effective January 1, 1994, the OTS's risk-based capital requirements were
amended to incorporate interest-rate risk measures to complement those
already established for credit risk. Under the amendments, 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 as
much as 200 basis points is required to maintain additional amounts of
risk-based capital. Additional capital will have to be maintained by
affected institutions beginning July 1, 1994 based on interest rate
exposure as of December 31, 1993. Based upon an OTS analysis of the Bank's
exposure at December 31, 1993, 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 will not be required to maintain additional amounts of
risk-based capital beginning July 1, 1994.
Tax Sharing Payments. Under the terms of the Bank's written agreement with
the OTS, the Bank has agreed not to make any payments to the Trust, the
holder of 80% of the Bank's common stock, pursuant to the Tax Sharing
Agreement between the Bank and the Trust unless such payments are approved
by the OTS. The OTS has further conditioned the approval of any such
payments on a pledge by the Trust of certain assets to secure certain of
the Trust's obligations under the Tax Sharing Agreement, which pledge was
executed in October 1993. During the first half of fiscal 1994, after
receiving OTS approval, the Bank made $9.6 million of tax sharing payments
to the Trust.
Capital. At March 31, 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 March 31, 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 March 31,
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>
<TABLE>
<CAPTION>
REGULATORY CAPITAL
(Dollars in thousands)
Actual Capital Required
------------------- -------------------
As a % As a % Excess
Amount of Assets Amount of Assets Capital
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Capital per financial statements $294,307
Adjustments for tangible and core capital:
Intangible assets (52,704)
Non-includable subsidiaries (1) (6,381)
---------
Total tangible capital 235,222 4.88% $ 72,260 1.50% $162,962
Supervisory goodwill 18,065 ========= ========= ========= =========
---------
Total core capital (2) 253,287 5.26% $144,520 3.00% $108,767
--------- ========= ========= ========= =========
Total tier 1 risk-based capital (2) 253,287 6.64% N/A N/A N/A
--------- ========= ========= ========= =========
Adjustments for risk-based capital:
Subordinated capital debentures 152,900
Reserve for general loan losses 50,752
---------
Total supplementary capital 203,652
Excess loan loss reserves (3,011)
---------
Adjusted supplementary capital 200,641
---------
Total available capital 453,928
Equity investments (1) (18,634)
---------
Total risk-based capital (2) $435,294 11.41% $305,302 8.00% $129,992
========= ========= ========= ========= =========
(1)Reflects an aggregate offset of $6.0 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%.
</TABLE>
<PAGE>
The Bank's stockholders' equity, and therefore its regulatory capital, was
adversely affected in the three months ended March 31, 1994 by a decrease
of $10.3 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. The Bank's
regulatory core capital also was reduced on January 1, 1994 by $19.2
million as a result of the continued phase-out from regulatory capital of
supervisory goodwill. The adverse effect of these developments was offset
in part by the $17.0 million pretax gain recognized from the sale of credit
card relationships during the quarter.
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. 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.
<PAGE>
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 March 31, 1994, the Bank met the
FIRREA-mandated fully phased-in capital requirements with tangible, core
(or leverage), and total risk-based capital ratios of 4.46%, 4.46% and
10.12%, respectively, which exceeded the requirements of 1.5%, 3.0% and
8.0%, respectively. At March 31, 1994, the Bank had $30.0 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 are currently subject
to a 25% phase-out from all three FIRREA capital requirements. This
phase-out will gradually increase to 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 March 31, 1994, the Bank also had one equity
investment with a balance, after subsequent valuation allowances, of $39.2
million which is currently subject to a 60% phase-out from total capital
for risk-based capital purposes. This phase-out will increase to 100% on
July 1, 1994. Pursuant to OTS guidelines, $6.0 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
that are permissible for national banks.
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 a 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 March 31, 1994,
after valuation allowances of $106.7 million, by the fiscal year in which
the property was acquired through foreclosure.
<PAGE>
Fiscal Year (In thousands)
----------- --------------
1990 (1) $137,065
1991 117,263
1992 19,547
1993 10,052
1994 7,198
-------------
Total REO $291,125
=============
(1) Includes one property with a net book value of $34.3 million, which
the Bank agreed in fiscal 1991 to treat as an equity investment for
regulatory capital purposes.
At March 31, 1994, the Bank had $50.3 million in supervisory goodwill, of
which $18.1 million was includable in core capital pursuant to statutory
provisions limiting the includable amount of supervisory goodwill to an
amount not to exceed 0.75% of tangible assets beginning January 1, 1993,
0.375% beginning January 1, 1994 and 0% beginning January 1, 1995.
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. 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 March 31,
1994, the Bank's leverage, tier 1 risk-based and total risk-based capital
ratios were 5.26%, 6.64% and 11.41%, 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 March
31, 1994, the Bank's regulatory capital ratios would meet the ratios
established for "adequately capitalized" institutions.
<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, the payment of capital improvement
costs, and certain operating 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, affiliate indebtedness
of $8.9 million (of which $5.0 million was repaid in April 1994), the Real
Estate Trust retained $83.2 million of the net proceeds of the offering for
application to general corporate purposes. Of this amount, approximately
$25.8 million was deposited with the Trustee for the Senior Secured Notes
to satisfy the initial liquidity requirement with respect to such
securities. This liquidity requirement, which will remain in effect for so
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.
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
first-priority perfected security interest in 80% of the issued and
outstanding common stock of the Bank, all of which is owned by the Trust.
The Indenture pursuant to which the Senior Secured Notes were issued
contains covenants 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.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at March
31, 1994 is set forth in the following table. Of the $193.9 million of
mortgage debt outstanding at March 31, 1994, $58.4 million was nonrecourse
to the Real Estate Trust. The Trust's 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 Notes Payable- Notes Payable-
Year Mortgage Notes Secured Unsecured Total
- ---------------------------------------------------------------------------
1994 (1) $ 8,715 $ -- $ 7,028 $ 15,743
1995 11,957 -- 7,070 19,027
1996 8,271 -- 5,641 13,912
1997 14,459 -- 4,189 18,648
1998 6,908 -- 5,897 12,805
Thereafter 143,582 175,000 11,439 330,021
--------- --------- --------- ---------
$ 193,892 $ 175,000 $ 41,264 $ 410,156
========= ========= ========= =========
(1) April 1, 1994 to September 30, 1994.
The Real Estate Trust anticipates that its capital improvement costs for
its existing portfolio in the next several fiscal years will be in the
range of $2.0 to $3.0 million per year.
The Real Estate Trust believes that the liquidity provided by the net
proceeds from the issuance of the Senior Secured Notes, 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 in 1994 and the next several years. 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.
The Real Estate Trust's current program of public Unsecured Note sales was
initiated in the 1970's as a vehicle for supplementing other external
funding sources. Unsecured Note sales were suspended in June 1990, but
resumed in November 1992. 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 Notes as they mature
(which was the case in fiscal 1993), it believes it will be able to finance
such repayments from other sources of funds. During the period from the
date of resumption of Unsecured Note sales through April 30, 1994, the Real
Estate Trust sold $22.9 million of Unsecured Notes.
<PAGE>
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 tax sharing payments and dividends from the Bank. Under
the terms of the Bank's written agreement with the OTS, any additional 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.
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.
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 October 1993, the Real Estate Trust received its
first cash distribution, which was for a partial period, in the amount of
$524,000, from the Partnership. In February and May 1994, the Real Estate
Trust received its second and third cash distributions, each in the amount
of $1,363,000.
<PAGE>
BANKING
Liquidity. 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 March 31, 1994 was 18.7%, compared to
24.1% for the month ended December 31, 1993. Additionally, the Bank met
the liquidity level requirements for each month of fiscal 1994. The
decline in the Bank's liquidity ratio was primarily attributable to two
factors: (i) the Bank's use as collateral of securities which would have
otherwise counted toward its liquidity ratio in order to take advantage of
attractive short-term borrowing rates from the FHLB of Atlanta, and (ii)
scheduled and unscheduled principal paydowns on unpledged securities, which
reduced the level of qualifying collateral.
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 March 31,
1994, the Bank's portfolio included mortgage loans, U.S. Government
securities and mortgage-backed securities with outstanding principal
balances of $732.6 million, $4.7 million and $1.2 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
March 31, 1994, after market-value and other adjustments.
In recent periods, the proceeds from sales of credit card relationships and
other assets and securitization and sale of credit card, home equity credit
line and automobile loan receivables have been significant sources of
liquidity for the Bank. 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 March 31, 1994, the Bank was considering the securitization
and sale of approximately $650.0 million of credit card receivables and
$200.0 million of home equity credit line receivables in the third and
fourth quarters of fiscal 1994. To the extent these receivables were
outstanding at March 31, 1994, such receivables are classified as held for
securitization and sale on the Consolidated Balance Sheets. 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.
<PAGE>
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
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 six months ended March 31, 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 $5.6 billion, repay borrowings of $3.4 billion, fund existing and
continuing loan commitments (including real estate held for investment or
sale) of $1.3 billion, purchase investments and loans of $315.6 million and
meet operating expenses, before depreciation and amortization, of $90.9
million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $5.8 billion,
proceeds from borrowings of $3.2 billion, proceeds from sales of loans,
securities and real estate of $1.2 billion, and principal and interest
collected on investments, loans, mortgage-backed securities and trading
securities of $633.9 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 $1.3 billion of outstanding trust
certificate balances at March 31, 1994, the primary recourse to the Bank
was approximately $78.5 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
March 31, 1994, recourse to the Bank under these arrangements was
approximately $6.0 million.
<PAGE>
The Bank's commitments at March 31, 1994 are set forth in the following
table:
(In thousands)
Commitments to originate loans $ 51,958
----------
Loans in process (collateralized loans):
Home equity ................................. 532,475
Real estate construction..................... 27,008
Commercial and multifamily ................... 3,954
Residential ground........................... 2,671
----------
566,108
----------
Loans in process (unsecured loans):
Credit cards................................. 3,523,232
Overdraft lines ............................. 37,598
----------
3,560,830
----------
Total commitments to extend credit....... 4,178,896
Letters of credit ............................. 70,974
Recourse arrangements on asset-backed
securitizations ............................. 78,468
Recourse arrangements on mortgage-backed
securities .................................. 5,976
----------
Total commitments ....................... $4,334,314
==========
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 93.6% of total commitments
at March 31, 1994.
At March 31, 1994, repayments of borrowed money scheduled to occur during
the next 12 months were $152.4 million. Certificates of deposit maturing
during the next 12 months amounted to $488.1 million, of which a
substantial portion is expected to remain with the Bank.
There were no material commitments for capital expenditures at March 31,
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>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1993
REAL ESTATE
The following table sets forth, for the three-month periods ended March 31,
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
property 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>
Three Months Ended
March 31,
----------------------
1994(1) 1993
-------- --------
SHOPPING CENTERS (In thousands)
Revenue
Base rent $ -- $5,625
Expense recoveries -- 1,270
Percentage rent -- 527
Other -- 222
-------- --------
Total revenues -- 7,644
-------- --------
Direct operating expenses
Real estate taxes -- 557
Repairs and maintenance -- 307
Utilities -- 270
Payroll -- 228
Insurance -- 76
Ground rent -- 139
Other -- 213
-------- --------
Total direct operating expenses -- $1,790
-------- --------
Income after direct operating expanses $ -- $5,854
======== ========
OFFICE PROPERTIES
Revenue
Base rent $3,791 $4,689
Expense recoveries 172 304
Other 91 106
-------- --------
Total revenues 4,054 5,099
-------- --------
Direct operating expenses
Real estate taxes 385 226
Repairs and maintenance 433 412
Utilities 581 543
Payroll 137 129
Insurance 64 66
Other 183 283
-------- --------
Total direct operating expenses 1,783 1,659
-------- --------
Income after direct operating expenses $2,271 $3,440
======== ========
- ------------------------------------------
(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>
Three Months Ended
March 31,
--------------------
1994(1) 1993
--------- --------
(In thousands)
COMMERCIAL PROPERTIES
(SHOPPING CENTERS AND OFFICE PROPERTIES)
Revenue
Base rent $3,791 $10,314
Expense recoveries 172 1,574
Percentage rent -- 527
Other 91 328
-------- --------
Total revenues 4,054 12,743
-------- --------
Direct operating expenses
Real estate taxes 385 783
Repairs and maintenance 433 719
Utilities 581 813
Payroll 137 357
Insurance 64 142
Ground rent -- 139
Other 183 496
-------- --------
Total direct operating expenses 1,783 $3,449
-------- --------
Income after direct operating expenses $2,271 $9,294
======== ========
HOTELS
Revenue
Room sales $6,487 $6,620
Food sales 1,854 1,997
Beverage sales 584 672
Other 714 647
-------- --------
Total revenue 9,639 9,936
-------- --------
Direct Operating expenses
Payroll 3,533 3,476
Cost of sales 963 1,034
Utilities 949 769
Repairs and maintenance 577 518
Advertising and promotion 507 520
Property taxes 282 308
Insurance 147 141
Other 1,126 921
-------- --------
Total direct operating expenses 8,084 7,687
-------- --------
Income after direct operating expenses $1,555 $2,249
======== ========
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization
of $6.7 million and an operating loss of $9.3 million for the three-month
period ended March 31, 1994, compared to a loss before depreciation,
amortization and non-cash charges of $3.4 million and an operating loss of
$7.4 million for the corresponding period in fiscal 1993. The increase in
the loss was largely attributable to the effects of the Saul Centers
Transaction and, to a lesser extent, to a decrease in operating income from
hotels during the current period.
Income after direct operating expenses in the March 1994 quarter from
commercial properties, which includes only office properties, decreased
$7.0 million (75.6%), compared to such income in the three months ended
March 31, 1993, which includes 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 $712,000 (23.9%). The performance of the office portfolio
was adversely affected by a reduction in the leasing rate to 83% at March
31, 1994 from 87% at March 31, 1993. The lower leasing rate generally
reflected recessionary economic conditions in the markets in which these
properties are located, including the effects of the termination on March
31, 1993 of a lease for 134,000 square feet of space in one of the Trust's
office buildings located in Atlanta.
Income after direct operating expenses from hotel properties decreased
$694,000 (30.9%) in the March 1994 quarter, Room sales decreased by
$133,000 (2.0%) and food and beverage sales declined by $231,000 (8.7%).
Total revenues declined by $297,000 (3.0%), while total expenses increased
by $397,000 (5.2%), chiefly due to higher utility costs.
Interest expense decreased by $2.9 million (23.1%) 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 $323.3 million in the three months ended March 31,
1994 from $475.8 million in the prior corresponding period.
Depreciation declined $1.1 million (34.3%), primarily as a result of the
transfer of properties in the Saul Centers Transaction.
Advisory, management and leasing fees-related parties declined $375,000
(20.0%) from the level in the March 1993 quarter. The monthly advisory fee
in the March 1994 quarter was $250,000, compared to $157,000 in the prior
period. The effect of this expense increase was offset by decreases in
management and leasing fees, primarily because of the transfer of
properties in the Saul Centers Transaction and, to a lesser extent,
reductions in rental and sales income on which these fees are based.
Lower legal expense in the current quarter contributed to an decrease of
$88,000 (15.9%) in general and administrative expenses.
In connection with the issuance of the Senior Secured Notes, the Real
Estate Trust recorded a loss on early extinguishment of debt, net of taxes,
in the amount of $5.0 million.
<PAGE>
BANKING
General. The Bank recorded operating income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
of $24.6 million during the three months ended March 31, 1994, compared to
operating income before income taxes, extraordinary item and cumulative
effect of change in accounting principle of $21.7 million for the three
months ended March 31, 1993. The increase in the March 1994 quarter was
attributable to an $11.4 million decrease in the provision for loan losses
and a $9.7 million increase in other (non-interest) income resulting
primarily from a $17.0 million gain recognized on the sale of credit card
relationships with related receivable balances of $96.5 million. The
positive effect of these items was offset in part by a $16.2 million
increase in operating expenses, a $1.9 million decrease in net interest
income before provision for loan losses and a $3.3 million decrease in
earnings on real estate held for investment or sale. 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 March
31, 1994, the Bank had $1.7 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").
Net Interest Income. Net interest income, before the provision for loan
losses, decreased $1.9 million (or 4.1%) in the three months ended March
31, 1994, 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 $2.0 million for the three
months ended March 31, 1994 if non-accrual assets and restructured loans
had been current in accordance with their original terms. Interest income
of $0.6 million was actually recorded on non-accrual assets and
restructured loans for the three months ended March 31, 1994. 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>
<TABLE>
<CAPTION>
NET INTEREST MARGIN ANALYSIS
(Dollars in thousands)
Three Months Ended March 31,
------------------------------------------------------------------
1994 1993
------------------------------ -----------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
----------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $2,773,338 $67,083 9.68 % $2,004,260 $59,568 11.89 %
Mortgage-backed securities 1,278,220 17,939 5.61 1,489,359 24,113 6.48
Trading securities 19,961 303 6.07 - - -
Federal funds sold 14,684 119 3.24 14,187 106 2.99
Investment securities 4,692 72 6.14 173,202 2,761 6.38
Other interest-earning assets 166,989 1,278 3.06 163,768 1,197 2.92
----------- -------- ----------- --------
Total 4,257,884 86,794 8.15 3,844,776 87,745 9.13
-------- ------ -------- ------
Non-interest earning assets:
Cash 112,600 98,240
Real estate held for investment or sale 364,566 479,231
Property and equipment, net 137,912 142,716
Cost in excess of net assets acquired, net 8,543 11,482
Other assets 159,530 170,985
----------- -----------
Total assets $5,041,035 $4,747,430
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 840,310 5,824 2.77 $ 736,063 4,355 2.37
Savings deposits 1,171,008 9,983 3.41 818,219 6,561 3.21
Time deposits 752,738 7,563 4.02 992,446 10,748 4.33
Money market deposits 1,154,233 9,360 3.24 1,246,999 9,757 3.13
----------- -------- ----------- --------
Total deposits 3,918,289 32,730 3.34 3,793,727 31,421 3.31
Borrowings 767,725 9,406 4.90 733,494 9,767 5.33
----------- -------- ----------- --------
Total liabilities 4,686,014 42,136 3.60 4,527,221 41,188 3.64
-------- ------ -------- ------
Non interest-bearing items:
Non-interest bearing deposits 59,390 39,990
Other liabilities 32,543 28,637
Stockholders' equity 263,088 151,582
----------- -----------
Total liabilities and stockholders' equity $5,041,035 $4,747,430
=========== ===========
Net interest income $44,658 $46,557
======== ========
Net interest spread (2) 4.55 % 5.49 %
====== ======
Net yield on interest-earning assets (3) 4.20 % 4.84 %
====== ======
Interest-earning assets to interest-bearing liabilities 90.86 % 84.93 %
====== ======
(1) Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to
the extent reflected in the Condensed 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>
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>
<TABLE>
<CAPTION>
VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(In thousands)
Three Months Ended March 31, 1994
Compared to
Three Months Ended March 31, 1993
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 64,743 $ (57,228) $ 7,515
Mortgage-backed securities (3,171) (3,003) (6,174)
Trading securities 303 - 303
Federal funds sold 4 9 13
Investment securities (2,589) (100) (2,689)
Other interest-earning assets 24 57 81
------------ ------------ ------------
Total interest income 59,314 (60,265) (951)
------------ ------------ ------------
Interest expense:
Deposit accounts 1,026 283 1,309
Borrowings 2,179 (2,540) (361)
------------ ------------ ------------
Total interest expense 3,205 (2,257) 948
------------ ------------ ------------
Increase (decrease) in
net interest income $ 56,109 $ (58,008) $ (1,899)
============ ============ ============
(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.
(3) Includes mortgage-backed securities held for sale for the three months ended March 31, 1993.
</TABLE>
<PAGE>
Interest income for the three months ended March 31, 1994 decreased $1.0
million (or 1.1%) 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 certain interest-earning assets, principally loans
receivable.
The Bank's net interest spread declined to 4.55% in the March 1994 quarter
from 5.49% in the March 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, previous declines in market interest rates.
Interest income on loans, the largest category of interest-earning assets,
increased by $7.5 million (or 12.6%) from the March 1993 quarter. The
increase in interest income was attributable to higher average balances of
the loan portfolio. Average balances of single-family residential
permanent loans increased $454.0 million (or 51.6%) as a result of
increased origination of such loans during the March 1994 quarter.
Interest income on these loans increased $6.1 million (or 37.2%) from the
prior period. Average balances of home equity credit line loans increased
$32.5 million (or 34.5%) for the three months ended March 31, 1994,
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 $0.4 million (or 27.9%) from the prior period. An increase of
$2.2 million (or 116.3%) 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 $126.5 million (or
160.2%) in the average balances of consumer loans. Average balances of
commercial permanent loans increased $21.6 million (or 28.6%), 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." Average balances of credit card loans
increased $109.5 million (or 12.3%) during the quarter, largely as a result
of new account originations in connection with the Bank's resumption of
active national solicitation of credit card accounts.
Lower average yields on the loan portfolio partially offset the effect of
higher average balances. The average yield on the portfolio in the current
quarter decreased by 221 basis points (to 9.68% from 11.89%) from the
average yield in the three months ended March 31, 1993. 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 15.12% from 17.76% and a decline of $1.8 million in interest income on
these loans. The average yield on home equity credit line loans decreased
to 6.46% from 6.80%, 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 6.75% from 7.45% 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 the credit card and home equity credit line
receivables are initially invested in lower-yielding short-term assets
pending investment into additional receivables.
<PAGE>
Interest income on mortgage-backed securities decreased $6.2 million
because of lower average balances, which resulted primarily from the sale
of $127.8 million of mortgage-backed securities in March 1993, and, to a
lesser extent, because of lower average interest rates. Average interest
rates declined to 5.61% from 6.48% 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 $2.7 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 increased $0.9 million (or 2.3%) for the three months
ended March 31, 1994 primarily because of an increase of $1.3 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 $124.6 million in average deposit balances, and,
to a lesser extent, an increase in average rates (to 3.34% from 3.31%).
Interest expense on borrowings decreased $0.4 million in the March 1994
quarter primarily because of a $0.8 million and a $1.0 million decrease in
interest expense on repurchase agreement transactions and on the Bank's
subordinated debentures, respectively. Interest expense on the
subordinated debentures declined because of the refinance of such
debentures in the first quarter of fiscal 1994 which reduced the Bank's
cost from 13.55% to 9.20%.
Provision for Loan Losses. The Bank's provision for loan losses decreased
to $3.8 million in the March 1994 quarter from $15.2 million in the prior
period. The provision for losses on credit card loans decreased $6.7
million primarily as a result of a decline in net charge-offs of credit
card loans in fiscal 1994. Also contributing to the decrease in this
provision was 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. These transactions reduced the
amount of such receivables against which the Bank maintains the reserve.
The provision for losses on real estate loans decreased $4.7 million from
the prior period, primarily because of a $3.0 million increase in the
specific reserve of one commercial permanent loan during the March 1993
quarter. See "Financial Condition - Reserves for Losses."
Other Income. The increase in other income (to $42.4 million in the March
1994 quarter from $32.8 million in the March 1993 quarter) was primarily
attributable to an increase in gain on sales of credit card relationships,
loans and mortgage-backed securities and an increase in credit card fees.
These increases were partially offset by a decrease in earnings on real
estate held for investment or sale and a decrease in loan and deposit
servicing fees.
<PAGE>
Gain on sales of credit card relationships, loans and mortgage-backed
securities in the three months ended March 31, 1994 totaled $19.0 million,
which represented an increase of $13.1 million from the prior corresponding
period. The increase resulted primarily from a gain of $17.0 million
recognized from the sale in the March 1994 quarter of credit card
relationships (or accounts) with related receivable balances of $96.5
million. The Bank sold these relationships in order to take advantage of
what management believes to be attractive prices currently being offered by
prospective purchasers of such relationships. None of the customers whose
accounts were sold have addresses in the Bank's primary market area of
Maryland, Virginia and the District of Columbia. The accounts sold were
seasoned (i.e., more than one year old) and had credit characteristics
similar to those of other accounts in the Bank's portfolio of a similar
age. The Bank may sell additional credit card relationships in the future
if it believes that such sales are in the best interests of the Bank.
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $1.7 million (or 26.0%) in the
March 1994 quarter from the prior period level. The decrease was primarily
attributable to a $2.4 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 the increased number of accounts in the portfolio. 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 $3.3 million decrease in earnings on real estate held for investment or
sale was primarily attributable to an increase of $4.0 million in the
provision for losses on such assets. See "Financial Condition - Reserves
for Losses." A decrease of $0.6 million in the operating income generated
by the Bank's REO properties also contributed to the decrease in such
earnings. This decrease was partially offset by a $1.0 million increase in
the gain recorded on the sales of the Bank's REO properties.
An increase of $2.3 million (or 34.0%) in excess servicing fees earned by
the Bank in servicing its portfolios of securitized credit card loans
contributed to an increase of $1.8 million (or 11.2%) 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 have
increased in recent periods as a result of greater securitization activity
by the Bank. The higher level of securitized credit card receivables in
the current quarter also resulted in increased credit card servicing fees
of $0.5 million. 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. The positive effect of these items on loan and
deposit servicing fees in the March 1994 quarter was offset in part by a
$1.0 million increase in the amortization of the excess servicing asset
related to home equity credit line securitizations. The increase was
primarily attributable to the securitization and sale of $146.2 million of
home equity credit line receivables in September 1993.
<PAGE>
Operating Expenses. Operating expenses in the quarter ended March 31, 1994
increased $16.2 million, primarily as a result of increases in marketing
expenses, salaries and employee benefits and loan expenses. The $6.1
million increase in marketing expenses, the $4.1 million increase in
salaries and employee benefits and the $3.0 million increase in loan
expenses was primarily attributable to the active national solicitation of
credit card accounts, which the Bank resumed in June 1993. In addition, an
increase in the amortization of purchased mortgage servicing rights, which
resulted from increased prepayments of the underlying loans and from
acquisitions of residential single-family mortgage servicing rights during
the latter half of fiscal 1993, also contributed to the increase in loan
expenses.
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>
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1994 COMPARED TO
SIX MONTHS ENDED MARCH 31, 1993
REAL ESTATE
The following table sets forth, for the six-month periods ended March 31,
1994 and 1993, 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. 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. As a result of the Saul Centers Transaction,
the operating results of commercial properties for the six months ended
March 31, 1994 are not entirely comparable to the prior period's results,
which included the operations of the transferred properties.
<PAGE>
Six Months Ended
March 31,
--------------------
1994(1) 1993
-------- ---------
SHOPPING CENTERS (In thousands)
Revenue
Base rent $ -- $11,127
Expense recoveries -- 2,556
Percentage rent -- 1,355
Other -- 426
--------- ---------
Total revenues -- 15,464
--------- ---------
Direct operating expenses
Real estate taxes -- 1,084
Repairs and maintenance -- 552
Utilities -- 522
Payroll -- 485
Insurance -- 166
Ground rent -- 278
Other -- 463
--------- ---------
Total direct operating expenses -- $ 3,550
--------- ---------
Income after direct operating expanses $ -- $11,914
========= =========
OFFICE PROPERTIES
Revenue
Base rent $ 7,269 $ 9,347
Expense recoveries 323 721
Other 185 208
--------- ---------
Total revenues 7,777 10,276
--------- ---------
Direct operating expenses
Real estate taxes 760 709
Repairs and maintenance 818 823
Utilities 1,159 1,112
Payroll 274 272
Insurance 129 142
Other 348 492
--------- ---------
Total direct operating expenses 3,488 3,550
--------- ---------
Income after direct operating expenses $ 4,289 $ 6,726
========= =========
- -------------------------------------------
(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>
Six Months Ended
March 31,
---------------------
1994(1) 1993
--------- ---------
(In thousands)
COMMERCIAL PROPERTIES
(SHOPPING CENTERS AND OFFICE PROPERTIES)
Revenue
Base rent $ 7,269 $20,474
Expense recoveries 323 3,277
Percentage rent -- 1,355
Other 185 634
--------- ---------
Total revenues 7,777 25,740
--------- ---------
Direct operating expenses
Real estate taxes 760 1,793
Repairs and maintenance 818 1,375
Utilities 1,159 1,634
Payroll 274 757
Insurance 129 308
Ground rent -- 278
Other 348 955
--------- ---------
Total direct operating expenses 3,488 7,100
--------- ---------
Income after direct operating expenses $ 4,289 $18,640
========= =========
HOTELS
Revenue
Room sales $13,281 $13,335
Food sales 4,108 4,382
Beverage sales 1,350 1,570
Other 1,582 1,430
--------- ---------
Total revenue 20,321 20,717
--------- ---------
Direct Operating expenses
Payroll 7,088 7,032
Cost of sales 2,032 2,256
Utilities 1,626 1,458
Repairs and maintenance 1,141 1,068
Advertising and promotion 1,039 1,113
Property taxes 512 597
Insurance 287 280
Other 2,264 1,911
--------- ---------
Total direct operating expenses 15,989 15,715
--------- ---------
Income after direct operating expenses $ 4,332 $ 5,002
========= =========
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization
of $14.3 million and an operating loss of $19.4 million for the six-month
period ended March 31, 1994, compared to a loss before depreciation,
amortization and non-cash charges of $6.6 million and an operating loss of
$14.4 million for the corresponding period in fiscal 1993. The increase in
the loss was largely attributable to the effects of the Saul Centers
Transaction and, to a lesser extent, to a decrease in operating income from
hotels. The 1993 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, decreased $14.4 million (77.0%), compared
to such income in the six months ended March 31, 1993, which includes
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 $1,537,000 (26.4%). The performance of the
office portfolio was adversely affected by a reduction in the leasing rate,
to 83% at March 31, 1994 from 87% March 31, 1993. The lower leasing rate
generally reflected recessionary economic conditions in the markets in
which these properties are located, including the effects of the
termination on March 31, 1993 of a lease for 134,000 square feet of space
in one of the Trust's office buildings located in Atlanta.
Income after direct operating expenses from hotel properties decreased
$670,000 (13.4%) in the fiscal 1994 period. Room sales decreased by
$54,000 (0.4%) and food and beverage sales declined by $494,000 (8.3%).
Total revenues decreased by $396,000 (1.9%), while expenses were higher by
$274,000 (1.7%), chiefly due to higher costs caused by the severe winter.
Interest expense decreased by $6.1 million (24.0%) 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 $313.5 million in the six months ended March 31,
1994 from $476.8 million in the prior corresponding period.
Depreciation declined $2.1 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 $526,000
(14.8%) from the level in the prior fiscal period. The monthly advisory
fee in the fiscal 1994 period was $250,000, compared to $97,000 per month
during the period October through December 1992 and $157,000 per month
during the period January through March 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 rental and sales income on
which these fees are based.
Higher legal expense in the current period contributed to an increase of
$79,000 (8.9%) 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>
BANKING
General. The Bank recorded operating income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
of $30.6 million during the six months ended March 31, 1994, compared to
operating income before income taxes, extraordinary item and cumulative
effect of change in accounting principle of $22.9 million for the six
months ended March 31, 1993. The increase for the six months ended
March 31, 1994 was attributable to a $27.1 million decrease in the
provision for loan losses and a $23.4 million increase in other
(non-interest) income. The positive effect of these items was offset in
part by a $33.2 million increase in operating expenses and by a $9.6
million decrease in net interest income before 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 March 31, 1994, the Bank had $1.7
billion of managed credit card receivables.
The Bank's income for the six months ended March 31, 1994 reflected a $6.3
million extraordinary loss, net of related income taxes, resulting from the
Bank's redemption of $128.5 million principal amount of subordinated
capital debentures in December 1993.
Net Interest Income. Net interest income, before the provision for loan
losses, decreased $9.6 million (or 10.3%) in the six months ended March
31, 1994, 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 $5.3 million for the six
months ended March 31, 1994 if non-accrual assets and restructured loans
had been current in accordance with their original terms. Interest income
of $1.2 million was actually recorded on non-accrual assets and
restructured loans for the six months ended March 31, 1994. 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>
<TABLE>
<CAPTION>
NET INTEREST MARGIN ANALYSIS
(Dollars in thousands)
Six Months Ended March 31,
-------------------------------------------------------------------
1994 1993
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
----------- --------- ------ ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $2,628,206 $126,247 9.61 % $2,058,699 $121,703 11.82 %
Mortgage-backed securities 1,354,649 38,296 5.65 1,539,754 50,019 6.50
Trading securities 23,213 715 6.16 - -
Federal funds sold 16,086 250 3.11 16,360 245 3.00
Investment securities 4,690 153 6.52 173,267 5,550 6.41
Other interest-earning assets 187,816 2,789 2.97 163,052 2,372 2.91
----------- --------- ----------- ---------
Total 4,214,660 168,450 7.99 3,951,132 179,889 9.11
--------- ------ --------- ------
Non-interest earning assets:
Cash 112,951 99,665
Real estate held for investment or sale 378,274 501,893
Property and equipment, net 136,962 143,752
Cost in excess of net assets acquired, net 8,938 11,853
Other assets 161,434 164,871
----------- -----------
Total assets $5,013,219 $4,873,166
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 820,270 11,200 2.73 $ 727,894 8,732 2.40
Savings deposits 1,112,501 18,693 3.36 794,136 12,873 3.24
Time deposits 778,519 15,604 4.01 1,035,078 23,277 4.50
Money market deposits 1,167,627 18,616 3.19 1,267,183 20,121 3.18
----------- --------- ----------- ---------
Total deposits 3,878,917 64,113 3.31 3,824,291 65,003 3.40
Borrowings 779,881 20,243 5.19 826,400 21,173 5.12
----------- --------- ----------- ---------
Total liabilities 4,658,798 84,356 3.62 4,650,691 86,176 3.71
--------- ------ --------- ------
Non interest-bearing items:
Non-interest bearing deposits 57,566 37,182
Other liabilities 34,865 33,486
Stockholders' equity 261,990 151,807
----------- -----------
Total liabilities and stockholders' equity $5,013,219 $4,873,166
=========== ===========
Net interest income $ 84,094 $ 93,713
========= =========
Net interest spread (2) 4.37 % 5.40 %
====== ======
Net yield on interest-earning assets (3) 3.99 % 4.74 %
====== ======
Interest-earning assets to interest-bearing liabilities 90.47 % 84.96 %
====== ======
(1) Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to
the extent reflected in the Condensed 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>
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>
<TABLE>
<CAPTION>
VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(In thousands)
Six Months Ended March 31, 1994
Compared to
Six Months Ended March 31, 1993
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 57,008 $ (52,464) $ 4,544
Mortgage-backed securities (5,615) (6,108) (11,723)
Trading securities 715 - 715
Federal funds sold (10) 15 5
Investment securities (5,678) 281 (5,397)
Other interest-earning assets 367 50 417
------------ ------------ ------------
Total interest income 46,787 (58,226) (11,439)
------------ ------------ ------------
Interest expense:
Deposit accounts 2,101 (2,991) (890)
Borrowings (1,679) 749 (930)
------------ ------------ ------------
Total interest expense 422 (2,242) (1,820)
------------ ------------ ------------
Increase (decrease) in
net interest income $ 46,365 $ (55,984) $ (9,619)
============ ============ ============
(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.
(3) Includes mortgage-backed securities held for sale for the six months ended
March 31, 1993.
</TABLE>
<PAGE>
Interest income for the six months ended March 31, 1994 decreased $11.4
million (or 6.4%) 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 4.37% in the six months ended
March 31, 1994 from 5.40% in the six months ended March 31, 1993. The
decline reflected changes in the pricing of certain loan products,
including 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, previous declines in market interest rates.
Interest income on loans, the largest category of interest-earning assets,
increased by $4.5 million (or 3.7%) from the six-month period in fiscal
1993. 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 $430.7 million (or 48.1%) as a result
of increased origination of such loans during the six months ended
March 31, 1994. Interest income on these loans increased $11.0 million (or
32.4%) from the prior period. An increase of $4.0 million (or 112.3%) 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 (from $71.6
million to $184.2 million.) Average balances of commercial permanent loans
increased $27.3 million (or 40.5%), 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
$39.6 million (or 4.5%) 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 six-month 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 $51.0 million (or 32.5%) in average balances of home equity
credit line receivables, which contributed to a $2.1 million decline in
interest income. Average loan balances in the construction and ground loan
categories decreased $7.4 million (or 10.2%) from the level in the prior
corresponding period primarily as a result of loan principal repayments and
the acquisition of the underlying collateral through foreclosure.
Lower average yields on the loan portfolio partially offset the effect of
higher average balances. The average yield on the loan portfolio in the
six months ended March 31, 1994 decreased by 221 basis points (to 9.61%
from 11.82%) from the average yield in the six months ended March 31, 1993.
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 15.12% from 17.98% and a decline of $9.5 million in interest
income on these loans. The average yield on home equity credit line loans
decreased to 6.52% from 7.11% primarily due to introductory rates on new
home equity credit line loans. The average yield on single-family
residential loans declined to 6.79% from 7.59%, 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 32 basis points (from
6.45% to 6.77%).
<PAGE>
Interest income on mortgage-backed securities decreased $11.7 million
because of lower average interest rates and, to a lesser extent, lower
average balances, which resulted from the sale of $127.8 million of
mortgage-backed securities during the six months ended March 31, 1993.
Average interest rates declined to 5.65% from 6.50% 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 $5.4 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 $1.8 million (or 2.1%) for the six months ended
March 31, 1994, in part because of a decline of $0.9 million in interest
expense on deposits, the largest category of interest-bearing liabilities.
Interest expense on deposits decreased principally as a result of a
decrease in average rates (to 3.31% from 3.40%), which reflected a decline
in market interest rates. An increase of $54.6 million in average deposit
balances partially offset the decrease in average rates.
Interest on borrowings decreased $0.9 million for the six months ended
March 31, 1994 primarily because of a $3.4 million decrease in interest
expense on repurchase agreement transactions. The decrease was offset in
part by increased interest expense on FHLB of Atlanta advances.
Provision for Loan Losses. The Bank's provision for loan losses decreased
to $15.9 million for the six months ended March 31, 1994 from $43.0 million
in the prior period. The provision for losses on credit card loans
decreased $18.4 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 reduced the amount of such receivables against which the Bank
maintains the reserve. The provision for losses on real estate loans
decreased $8.5 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 $77.8 million for the six
months ended March 31, 1994 from $54.3 million for the six months ended
March 31, 1993) was attributable to an increase in earnings on real estate
held for investment or sale, an increase in gain on sales of credit card
relationships, loans and mortgage-backed securities and an increase in loan
and deposit servicing fees.
The $16.0 million increase in earnings on real estate held for investment
or sale was primarily attributable to a decrease of $14.8 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 $2.9 million in the gain recorded on sales of
the Bank's REO properties. These results were partially offset by a $1.7
million decrease in the operating income generated by the Bank's REO
properties.
<PAGE>
An increase of $6.3 million in excess servicing fees earned by the Bank in
servicing its portfolios of securitized credit card loans contributed to an
increase of $5.8 million (or 17.5%) in loan and deposit servicing fees.
The $6.3 million increase in excess servicing fees resulted from increased
securitization activity by the Bank in recent periods. The higher level of
securitized credit card receivables also resulted in increased credit card
servicing fees of $1.2 million. The positive effect of these items on loan
and deposit servicing fees was offset in part by a $2.7 million increase in
the amortization of the excess servicing assets related to home equity
credit line securitizations completed during the six months ended March 31,
1994. This increase was primarily attributable to 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.
Gain on sales of credit card relationships, loans and mortgage-backed
securities in the six months ended March 31, 1994 totaled $21.5 million,
which represented an increase of $3.0 million from the prior corresponding
period. The gain of $17.0 million recognized on the March 1994 sale of
credit card relationships with related receivable balances of $96.5 million
contributed to the increase in this other income category. See "Three
Months Ended March 31, 1994 Compared to Three Months Ended March 31, 1993."
Operating Expenses. Operating expenses for the six months ended March 31,
1994 increased $33.2 million primarily as a result of increases in
marketing expenses, salaries and employee benefits and loan expenses. The
$12.0 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 $9.2 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 $6.8 million increase in loan expenses was
primarily attributable to an increase in the amortization of purchased
mortgage servicing rights, which resulted from increased prepayments of the
underlying loans and from acquisitions of residential single-family
mortgage servicing rights in the latter half of fiscal 1993. Also
contributing to the increase in loan expenses was a $2.7 million increase
in credit card credit report and prescreening expenses as a result of new
account originations.
