<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated February 15, 1995
to Prospectus Dated January 26, 1995
----------------------------
B.F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
DECEMBER 31, 1994
----------------------------
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<PAGE>
TABLE OF CONTENTS
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at December 31, 1994 and
September 30, 1994
(b) Consolidated Statements of Operations for the
three-month periods ended December 31, 1994
and 1993
(c) Consolidated Statements of Cash Flows for the
three-month periods ended December 31, 1994 and 1993
(d) Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three Months Ended December 31, 1994 Compared to
Three Months Ended December 31, 1993
Real Estate
Banking
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<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST
<CAPTION>
December 31 September 30
(In thousands) 1994 1994
------------ ------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Commercial $111,180 $110,895
Hotel 122,744 112,160
Other 4,585 4,585
------------ ------------
238,509 227,640
Accumulated depreciation (70,440) (68,111)
------------ ------------
168,069 159,529
Land parcels 38,524 38,455
Cash and cash equivalents 17,434 30,445
Other assets 98,091 99,310
------------ ------------
Total real estate assets 322,118 327,739
------------ ------------
Banking
Cash and due from banks 176,247 166,752
Interest-bearing deposits 4,397 14,345
Federal funds sold and securities purchased under agreements to resell 30,000 191,000
Loans held for sale 29,852 33,598
Loans held for securitization and sale 375,000 115,000
Investment securities (market value $4,224 and $4,364, respectively) 4,224 4,364
Mortgage-backed securities (market value $979,761 and $1,025,525, respectively) 983,435 1,025,525
Loans receivable (net of reserve for losses of $49,741 and $50,205, respectively) 2,382,372 2,357,598
Federal Home Loan Bank stock 31,940 31,940
Real estate held for investment or sale (net of reserve for losses of $124,555 and $118,973, respectively) 318,333 330,655
Property and equipment, net 147,146 144,408
Cost in excess of net assets acquired, net 5,956 6,582
Excess servicing assets, net 21,036 25,198
Purchased mortgage servicing rights, net 15,143 15,304
Other assets 230,352 204,029
------------ ------------
Total banking assets 4,755,433 4,666,298
------------ ------------
TOTAL ASSETS $5,077,551 $4,994,037
============ ============
LIABILITIES
Real Estate
Mortgage notes payable $191,209 $185,730
Notes payable - secured 175,000 175,000
Notes payable - unsecured 40,033 40,288
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 38,041 44,208
------------ ------------
Total real estate liabilities 557,166 558,109
------------ ------------
Banking
Deposit accounts 4,065,699 4,008,761
Securities sold under repurchase agreements and other short-term borrowings 52,019 8,907
Bonds payable 23,725 24,030
Notes payable 7,677 7,729
Federal Home Loan Bank advances 103,000 100,000
Custodial accounts 21,627 19,523
Amounts due to banks 31,405 30,373
Other liabilities 47,076 54,509
Capital notes -- subordinated 160,000 160,000
------------ ------------
Total banking liabilities 4,512,228 4,413,832
------------ ------------
Minority interest held by affiliates 33,780 35,632
Minority interest -- other 74,307 74,307
------------ ------------
TOTAL LIABILITIES 5,177,481 5,081,880
------------ ------------
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 (138,273) (134,793)
Net unrealized holding loss (19,910) (11,303)
------------ ------------
(58,082) (45,995)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (99,930) (87,843)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $5,077,551 $4,994,037
============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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<TABLE>
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST
<CAPTION>
For the Three Months
Ended December 31
(In thousands, except per share amounts) 1994 1993
------------ ------------
<S> <C> <C>
REAL ESTATE
Income
Commercial properties $4,639 $3,723
Hotels 11,689 10,682
Other 996 449
------------ ------------
Total income 17,324 14,854
------------ ------------
Expenses
Direct operating expenses:
Commercial properties 1,822 1,705
Hotels 8,435 7,905
Land parcels and other 350 329
Interest expense 10,140 9,764
Amortization of debt expense 106 479
Depreciation 2,329 2,075
Advisory, management and leasing fees - related parties 1,759 1,533
General and administrative 428 501
Write-down of real estate to net realizable value -- 1,380
------------ ------------
Total expenses 25,369 25,671
------------ ------------
Equity in earnings (losses) of unconsolidated entities 828 725
------------ ------------
REAL ESTATE OPERATING LOSS (7,217) (10,092)
------------ ------------
BANKING
Interest income
Loans 63,628 59,164
Mortgage-backed securities 15,606 20,357
Trading securities 84 412
Investment securities 89 81
Other 2,376 1,642
------------ ------------
Total interest income 81,783 81,656
------------ ------------
Interest expense
Deposit accounts 35,941 31,383
Short-term borrowings 2,324 3,218
Long-term borrowings 4,376 7,619
------------ ------------
Total interest expense 42,641 42,220
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Net interest income 39,142 39,436
Provision for loan losses (8,607) (11,683)
------------ ------------
Net interest income after provision for loan losses 30,535 27,753
------------ ------------
Other income
Credit card fees 4,082 6,403
Loan servicing fees 33,153 16,109
Deposit servicing fees 5,827 4,893
Gain (loss) on sales of trading securities, net (111) 808
Loss on real estate held for investment or sale, net (3,529) (284)
Gain on sales of credit card relationships and loans 210 2,490
Gain on sales of mortgage servicing rights, net 406 2,572
Other 3,069 2,338
------------ ------------
Total other income 43,107 35,329
------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
<CAPTION>
For the Three Months
Ended December 31
(In thousands, except per share amounts) 1994 1993
------------ ------------
<C> <C>
<S>
Operating expenses
Salaries and employee benefits $23,766 $21,406
Loan 2,977 6,474
Property and equipment 6,730 6,331
Marketing 12,118 7,305
Data processing 9,359 6,334
Deposit insurance premiums 2,931 2,958
Amortization of cost in excess of net assets acquired 625 516
Other 9,102 5,763
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Total operating expenses 67,608 57,087
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BANKING OPERATING INCOME 6,034 5,995
------------ ------------
TOTAL COMPANY
Operating loss before income taxes, extraordinary items,
cumulative effect of change in accounting principle,
and minority interest (1,183) (4,097)
Income tax benefit (441) (708)
------------ ------------
Loss before extraordinary items, cumulative effect
of change in accounting principle and minority interest (742) (3,389)
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (6,333)
------------ ------------
Loss before cumulative effect of change in accounting
principle and minority interest (742) (9,722)
Cumulative effect of change in accounting principle -- 36,260
------------ ------------
Income (loss) before minority interest (742) 26,538
Minority interest held by affiliates (300) (505)
Minority interest -- other (2,438) (2,438)
------------ ------------
TOTAL COMPANY NET INCOME (LOSS) (3,480) 23,595
DEFICIT
Beginning of period (134,793) (157,882)
------------ ------------
End of period ($138,273) ($134,287)
============ ============
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS ($4,835) $22,240
NET INCOME (LOSS) PER COMMON SHARE
Loss before extraordinary items, cumulative effect
of change in accounting principle and minority interest ($0.43) ($0.98)
Extraordinary items:
Loss on early extinguishment of debt, net of taxes -- (1.31)
------------ ------------
Loss before cumulative effect of change in accounting
principle and minority interest (0.43) (2.29)
Cumulative effect of change in accounting principle -- 7.51
------------ ------------
Income (loss) before minority interest (0.43) 5.22
Minority interest held by affiliates (0.06) (0.10)
Minority interest -- other (0.51) (0.51)
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE ($1.00) $4.61
============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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<TABLE>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST
<CAPTION>
For the Three Months
Ended December 31
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
Real Estate
Net income (loss) ($4,678) $21,574
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 2,329 2,075
Write-down of real estate to net realizable value -- 1,380
(Increase) decrease in accounts receivable and accrued income 498 (858)
Increase in deferred tax asset (2,555) (37,186)
Decrease in accounts payable and accrued expenses (6,411) (1,319)
Decrease in tax sharing receivable 5,000 5,512
Amortization of debt expense 106 479
Equity in earnings of unconsolidated entities (828) (725)
Other 1,616 3,273
------------ ------------
(4,923) (5,795)
------------ ------------
Banking
Net income 1,198 2,021
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Accretion of premiums, discounts and net deferred loan fees (500) (614)
Depreciation and amortization 5,144 4,208
Amortization of cost in excess of net assets acquired and purchased mortgage
servicing rights 786 8,873
Loss on extinguishment of debt -- 10,476
Provision for loan losses 8,607 11,683
Net fundings of loans held for sale and/or securitization (77,742) (370,761)
Proceeds from sales of trading securities 56,735 205,109
Proceeds from sales of loans held for sale and/or securitization 627,787 181,650
Earnings on real estate (3,519) (2,309)
Provision for losses on real estate held for investment or sale 7,467 3,867
(Gain) loss on sales of trading securities, net 111 (808)
Gain on sales of credit card relationships and loans, net (210) (2,490)
Gain on sales of mortgage servicing rights, net (406) (2,572)
Minority interest held by affiliates 300 505
Minority interest - other 2,438 2,438
Decrease in excess servicing assets 4,163 --
(Increase) decrease in other assets (14,280) 40,538
Decrease in other liabilities and accrued expenses (6,401) (6,599)
Decrease in tax sharing payable (5,000) (5,512)
Other, net 5,905 (1,206)
------------ ------------
612,583 78,497
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Net cash provided by operating activities 607,660 72,702
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (745) (1,037)
Property acquisitions (10,170) --
Equity investment in unconsolidated entities (2,311) 112
Other investing activities 1 6
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(13,225) (919)
------------ ------------
Banking
Proceeds from maturities of investment securities 100 --
Net proceeds from sales of real estate 22,999 22,448
Net proceeds from sales of mortgage servicing rights 406 2,572
Net fundings of loans receivable (841,293) (302,692)
Principal collected on mortgage-backed securities 46,597 162,319
Purchases of mortgage-backed securities (27,894) (48,636)
Purchases of loans receivable (54,806) (97,505)
Purchases of property and equipment (7,102) (4,297)
Purchases of mortgage servicing rights -- (876)
Disbursements for real estate held for investment or sale (15,509) (23,736)
Other investing activities, net 107 708
------------ ------------
(876,395) (289,695)
------------ ------------
Net cash used in investing activities (889,620) (290,614)
------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
<CAPTION>
For the Three Months
Ended December 31
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
Real Estate
Proceeds from mortgage financing $7,500 $461
Principal curtailments and repayments of mortgages (1,967) (323)
Proceeds from sales of unsecured notes 838 3,005
Repayments of unsecured notes (1,093) (1,779)
Costs of obtaining financings -- (277)
Other financing activities, net (107) --
------------ ------------
5,171 1,087
------------ ------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 3,413,260 2,903,083
Customer withdrawals of deposits and payments for maturing certificates of deposit (3,356,322) (2,826,834)
Net increase in securities sold under repurchase agreements 41,670 106,006
Advances from Federal Home Loan Bank 85,000 283,000
Repayments of advances from Federal Home Loan Bank (82,000) (220,500)
Proceeds from other borrowings 141,556 18,163
Repayments of other borrowings (140,471) (18,579)
Cash dividends paid on preferred stock (2,438) (2,438)
Repayment of capital notes - subordinated -- (134,153)
Net proceeds received from capital notes - subordinated -- 143,603
Other financing activities, net 2,104 (2,068)
------------ ------------
102,359 249,283
------------ ------------
Net cash provided by financing activities 107,530 250,370
------------ ------------
Net increase (decrease) in cash and cash equivalents (174,430) 32,458
Cash and cash equivalents at beginning of period 402,508 185,909
------------ ------------
Cash and cash equivalents at end of period $228,078 $218,367
============ ============
Cash paid during the period for:
Interest (net of amount capitalized) $49,779 $56,625
Income taxes 4,462 220
Supplemental schedule of noncash investing and financing activities:
Rollovers of notes payable - unsecured 975 1,198
Loans held for sale exchanged for mortgage-backed securities held for sale 29,179 155,475
Mortgage-backed securities transferred to mortgage-backed securities available-for-sale -- 1,501,192
Loans receivable transferred to loans held for sale and/or securitization 835,000 --
Investment securities transferred to investment securities available-for-sale -- 4,789
Loans made in connection with the sale of real estate 610 5,993
Loans receivable transferred to real estate acquired in settlement of loans 648 1,200
Loans classified as in-substance foreclosed transferred to loans receivable -- 15,008
Loans receivable exchanged for mortgage-backed securities held-to-maturity 23,155 --
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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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, 1994. The results of operations for the three months ended
December 31, 1994 are not necessarily indicative of results to be expected
for the year.
2. The accompanying financial statements include the accounts of B.F.Saul
Real Estate Investment Trust and its wholly owned subsidiaries (the "Real
Estate Trust"), which are involved in the ownership and development of
income-producing properties. The accounts of the Trust's 80%-owned banking
subsidiary, Chevy Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase"
or the "Bank") have also been consolidated. Accordingly, the accompanying
financial statements reflect the assets, liabilities, operating results,
and cash flows for two business segments: Real Estate and Banking. All
significant intercompany balances and transactions have been eliminated.
3. The Real Estate Trust voluntarily terminated its qualification as a
real estate investment trust under the Internal Revenue code during fiscal
1978. As a result of the Trust's acquisition of an additional 20% equity
interest in the Bank in June 1990, the Bank became a member of the Trust's
affiliated group filing consolidated federal income tax returns. The
current effect of the Trust's consolidation of the Bank's operations into
its federal income tax return results in the use of the Trust's net
operating losses and net operating loss carryforwards to reduce the federal
income taxes the Bank would otherwise owe.
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Account Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Effective October 1, 1993, the Trust adopted SFAS
109, which changes the manner in which companies record deferred tax
liabilities or assets and requires ongoing adjustments for enacted changes
in tax rates and regulations. The adoption was recorded as a cumulative
effect of a change in accounting principle of approximately $36.3 million
and had the effect of increasing the Trust's net deferred tax asset by
approximately $33.5 million.
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4. BANKING:
LOANS HELD FOR SALE:
At December 31, 1994 and September 30, 1994, loans held for sale is
composed of single-family residential loans.
LOANS HELD FOR SECURITIZATION AND SALE:
At December 31, 1994 and September 30, 1994, loans held for securitization
and sale are composed of credit card receivables.
SECURITIES:
Investment Securities and Mortgage-Backed Securities:
At December 31, 1994, all investment securities held by the Bank are
classified as available-for-sale and recorded at fair value. At December
31, 1994, $960.3 million of mortgage-backed securities held by the Bank are
classified as available-for-sale and recorded at fair value and $23.1
million of mortgage-backed securities held by the Bank are classified as
held-to-maturity and reported at amortized cost. At December 31, 1994, net
unrealized holding losses on available-for-sale securities in the amount of
$24.9 million, net of the related income tax effect, are included in a
separate component of stockholders' equity.
Gross unrealized holding gains and losses on the Bank's investment
securities at December 31, 1994 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
U.S. Government
securities
Maturing after
one year, but
within five years $ 4,401 $ - $ (177) $ 4,224
========= ========== ========== =========
Gross unrealized holding gains and losses on the Bank's mortgage-backed
securities classified as available-for-sale at December 31, 1994 are as
follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
FNMA $ 33,387 $ 7 $ (731) $ 32,663
FHLMC 799,586 143 (38,079) 761,650
Private label, AA-rated 168,306 339 (2,672) 165,973
---------- ---------- ---------- ---------
Total $1,001,279 $ 489 $ (41,482) $ 960,286
========== ========== ========== =========
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<PAGE>
Gross unrealized holding gains and losses on the Bank's mortgage-backed
securities classified as held-to-maturity at December 31, 1994 are as
follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
FHLMC $ 23,149 $ - $ (3,674) $ 19,475
========= ========== ========== =========
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 generally in the month of issuance. In
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), these mortgage-backed securities are classified as trading
securities. The Bank realized net losses on sales of trading securities of
$0.1 million for the three months ended December 31, 1994 and realized net
gains on sales of trading securities of $0.8 million for the three months
ended December 31, 1993. There were no unrealized gains or losses during
the three months ended December 31, 1994.
LOANS RECEIVABLE:
Loans receivable is composed of the following:
December 31, September 30,
1994 1994
------------- -------------
(In thousands)
Single-family residential $ 1,371,375 $ 1,335,645
Home equity 75,671 34,708
Commercial and multifamily 84,326 84,639
Real estate construction 61,023 66,909
Ground 17,950 18,935
Credit card 446,449 535,199
Automobile 314,264 289,346
Other 81,758 68,463
------------- -------------
2,452,816 2,433,844
------------- -------------
Less:
Undisbursed portion of loans 32,078 35,535
Unearned discounts 1,327 1,438
Net deferred loan origination
costs (12,702) (10,932)
Reserve for loan losses 49,741 50,205
------------ -------------
70,444 76,246
------------ -------------
Total $ 2,382,372 $ 2,357,598
============ =============
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<PAGE>
IMPAIRED LOANS:
The Bank treats a loan as 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. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate, 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 is recorded through a
valuation allowance. The Bank also classifies as impaired, certain credit
card loans for which customers have agreed to modified payment terms.
The Bank evaluates each impaired real estate loan individually to determine
the income recognition policy. Generally, payments received are applied in
accordance with the contractual terms of the note or as a reduction of
principal.
The Bank recognizes interest income on impaired credit card loans using the
current interest rate of the loan and the accrual method. When loans
become 90 days past due, all accrued interest is reserved and the loan is
placed on non-accrual status. Interest income on non-accrual credit card
loans is recognized when received by the Bank.
During the three months ended December 31, 1994, the Bank had no impaired
real estate loans. At December 31, 1994, the Bank had impaired credit card
loans with a carrying value of $32.5 million, before reserves for losses of
$3.3 million on all such impaired credit card loans. The Bank calculates
its reserves for losses on all credit card loans based upon historical
charge-offs and repayment experience and the age of the portfolio. The
average recorded investment in impaired credit card loans for the quarter
ended December 31, 1994 was $33.3 million. The Bank recognized interest
income of $0.9 million on its impaired credit card loans for the three
months ended December 31, 1994.
REAL ESTATE HELD FOR INVESTMENT OR SALE:
The Bank's real estate held for investment is carried at the lower of
aggregate cost or net realizable value. The Bank's real estate acquired in
settlement of loans is considered to be held for sale and is carried at the
lower of cost or fair value (less estimated selling costs).
<PAGE>
<PAGE>
Real estate held for investment or sale is composed of the following:
December 31, September 30,
1994 1994
--------- ---------
(In thousands)
Land, development, construction
and rental properties $ 69,786 $ 69,767
Investments in limited partnerships (2,488) (2,478)
Investment in real estate ventures 9,079 8,915
--------- ---------
Total real estate held for
investment 76,377 76,204
--------- ---------
Real estate held for sale 380,926 387,024
--------- ---------
Less:
Reserve for losses on real estate
held for investment 10,064 9,899
Reserve for losses on real estate
held for sale 114,491 109,074
Accumulated depreciation and
amortization 14,415 13,600
--------- ---------
138,970 132,573
--------- ---------
Total real estate held for
investment or sale $318,333 $330,655
========= =========
<PAGE>
<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 December 31, 1994,
the Bank's assets accounted for approximately 94% of the Trust's
consolidated assets.
The Trust has prepared its financial statements and other disclosures
on a fully consolidated basis. The term "Trust" used in the text and the
financial statements included herein refers to the combined entity, which
includes B.F. Saul Real Estate Investment and its subsidiaries, including
Chevy Chase and Chevy Chase's subsidiaries. "Real Estate Trust" refers to
B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding
Chevy Chase and Chevy Chase's subsidiaries. The business conducted by the
Bank and its subsidiaries is identified by the term "Banking," while the
operations conducted by the Real Estate Trust are designated as "Real
Estate."
The financial data on Banking reflect certain purchase accounting
adjustments made by the Trust in connection with its acquisition of the
Bank and therefore differ in certain respects from the comparable financial
data set forth in the unconsolidated financial statements of the Bank.
FINANCIAL CONDITION
REAL ESTATE
The Real Estate Trust's investment portfolio at December 31, 1994, which
consisted primarily of office and industrial projects, hotels and
undeveloped land parcels, was relatively unchanged from September 30, 1994.
On November 30, 1994, the Real Estate Trust acquired a 192-room Holiday Inn
located in Auburn Hills, Michigan, thereby increasing the size of its hotel
portfolio by 8%.
The Real Estate Trust's office and industrial property portfolio was 93%
leased at December 31, 1994, compared to leasing rates of 93% and 80% at
September 30, 1994 and December 31, 1993, respectively. The improved
leasing rate during fiscal 1994 was primarily attributable to additional
space leased in two of the office properties located in Atlanta. At
December 31, 1994, the Real Estate Trust's office and industrial property
portfolio had a total gross leasable area of 1,363,000 square feet, of
which 392,000 square feet (28.7%) and 220,000 square feet (16.2%) are
subject to leases whose terms expire in the balance of fiscal 1995 and
1996, respectively. Based on discussions with current and propective
tenants of space for which leases are scheduled to expire in fiscal 1995,
management expects that substantially all such space will be leased at
rates that are at least as high as the rates of the expiring leases.
For the three months ended December 31, 1994, the nine hotel properties
owned by the Real Estate Trust throughout the period experienced an
average occupancy rate of 58% and an average room rate of $57.93, compared
to an average occupancy rate of 57% and an average room rate of $53.95 in
the first three months of fiscal 1994. Compared to the fiscal 1994
period, seven of the hotels showed improved occupancies and eight showed
higher average room rates in the current period. Adjusted for the
inclusion of the new hotel acquired on November 30, 1994, the hotel
portfolio experienced an average room rate of $58.42 during the three-
month period ended December 31, 1994.
<PAGE>
<PAGE>
BANKING
General. The Bank recorded operating income of $6.0 million during the
December 1994 quarter and the December 1993 quarter. See "Results of
Operations."
At December 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
and risk-based regulatory capital ratios were 5.19%, 5.57% and 11.46%,
respectively, compared to the FIRREA requirements of 1.5%, 3.0% and
8.0%, respectively. At December 31, 1994, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios of 5.57%, 6.76% and 11.46%,
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 December 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. See
"Capital."
In the December 1994 quarter, the Bank securitized and sold $575.0 million
of credit card receivables pursuant to its portfolio funding strategy.
Asset Quality.
Non-Performing Assets. The Bank's level of non-performing assets continued
to decline during the first quarter of fiscal 1995. 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, all valuation allowances.
<PAGE>
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)
December 31, September 30, December 31,
1994 1994 1993
------------- -------------- -------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 7,747 $ 8,306 $ 8,830
Commercial and multifamily 114 -- 3,066
Commercial construction and ground -- -- 11,942
------------- -------------- -------------
Total non-accrual real estate loans 7,861 8,306 23,838
Credit card 14,634 16,229 21,657
Consumer and other 1,036 498 258
------------- -------------- -------------
Total non-accrual loans (1) 23,531 25,033 45,753
------------- -------------- -------------
Non-accrual real estate held for investment (1) 9,079 8,915 8,898
------------- -------------- -------------
Real estate acquired in settlement of loans 380,926 387,024 414,507
Reserve for losses on real estate acquired in settlement
of loans (114,491) (109,074) (101,275)
------------- -------------- -------------
Real estate acquired in settlement of loans, net 266,435 277,950 313,232
------------- -------------- -------------
Total non-performing assets $ 299,045 $ 311,898 $ 367,883
============= ============== =============
Reserve for losses on loans $ 49,741 $ 50,205 $ 66,940
Reserve for losses on real estate held for investment 10,064 9,899 10,188
Reserve for losses on real estate acquired in settlement
of loans 114,491 109,074 101,275
------------- -------------- -------------
Total reserves for losses $ 174,296 $ 169,178 $ 178,403
============= ============== =============
Ratios:
Non-performing assets, net to total assets (2) 5.03% 5.40% 5.67%
Reserve for losses on real estate loans to non-accrual
real estate loans (1) 175.79% 169.58% 80.29%
Reserve for losses on credit card loans to non-accrual
credit card loans (1) 235.96% 212.77% 216.49%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (1) 134.36% 319.28% 354.65%
Reserve for losses on loans to non-accrual loans (1) 211.38% 200.56% 146.31%
Reserve for losses on loans to total loans receivable (3) 1.76% 1.97% 2.35%
(1) Before deduction of reserves for losses.
(2) Non-performing assets is presented after all reserves for losses on loans and real estate held for
investment or sale.
(3) Includes loans receivable and loans held for sale and/or securitization, before deduction of reserve
for losses.
</TABLE>
<PAGE>
<PAGE>
Non-performing assets include non-accrual loans (loans contractually past
due 90 days or more or with respect to which other factors indicate that
full payment of principal and interest is unlikely), non-accrual real
estate held for investment ("non-accrual REI"), and real estate acquired in
settlement of loans, either through foreclosure or deed-in-lieu of
foreclosure.
Non-performing assets totaled $299.0 million, after valuation allowances on
real estate held for sale or real estate owned ("REO") of $114.5 million,
at December 31, 1994, compared to $311.9 million, after valuation
allowances on REO of $109.1 million, at September 30, 1994. In addition to
the valuation allowances on REO, the Bank maintained $3.9 million and $4.0
million of valuation allowances on its non-accrual loans and non-accrual
real estate held for investment at December 31, 1994 and September 30,
1994, respectively. The decrease in non-performing assets was attributable
to declines in non-accrual loans and REO of $1.5 million and $11.5 million,
respectively, during the quarter ended December 31, 1994.
The Bank's non-performing real estate assets, which include non-accrual
real estate loans, non-accrual REI and REO, totaled $283.4 million at
December 31, 1994 or 94.8% 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 $281.0 million at December 31, 1994,
reflecting both additional write-downs on non-performing assets during that
period and, in more recent periods, asset sales.
Decline in Non-Performing
Real Estate Assets
Total
Valuation
Allowances
on
Total Non- Non-Accrual Total Non- Cumulative
Performing Real Estate Performing Decline from
Real Loans and Real February 29, 1992
Estate Non-Accrual Estate -----------------
(Dollars in thousands) Assets (1) REI (2) Assets,net Amount Percent
---------- ------------ ---------- -------- --------
December 31, 1991 ..... $559,665 $ 6,692 $552,973 - -
February 29, 1992 ..... 574,321 6,712 567,609 - -
March 31, 1992 ........ 551,960 5,490 546,470 ($21,139) -3.7%
June 30, 1992 ......... 512,729 10,224 502,505 (65,104) -11.5%
September 30, 1992 .... 487,287 7,147 480,140 (87,469) -15.4%
December 31, 1992 ..... 427,113 2,332 424,781 (142,828) -25.2%
March 31, 1993 ........ 394,672 2,635 392,037 (175,572) -30.9%
June 30, 1993 ......... 382,657 2,634 380,023 (187,586) -33.1%
September 30, 1993 .... 351,160 2,427 348,733 (218,876) -38.6%
December 31, 1993 ..... 345,968 3,493 342,475 (225,134) -39.7%
March 31, 1994 ........ 323,185 3,487 319,698 (247,911) -43.7%
June 30, 1994 ........ 310,506 3,620 306,886 (260,723) -45.9%
September 30, 1994 .... 295,171 2,390 292,781 (274,828) -48.4%
December 31, 1994...... 283,375 2,388 280,987 (286,622) -50.5%
- -----------------------
(1) Represents total non-accrual real estate loans and non-accrual REI
before deduction of valuation allowances and REO, after valuation
allowances.
(2) Represents valuation allowances on non-accrual real estate loans and
non-accrual REI. At December 31, 1994, valuation allowances on non-
accrual real estate loans and non-accrual REI were $0.4 million and
$2.0 million, respectively.
<PAGE>
<PAGE>
At December 31, 1994, $245.6 million or 86.7% 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"). The Bank has disposed of the majority of its commercial
REO and is continuing to effect the orderly disposition of the remainder of
its REO. See "REO" and "Disposition of REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $23.5 million at
December 31, 1994, which represented a decrease of $1.5 million from $25.0
million at September 30, 1994. At December 31, 1994, non-accrual loans
consisted primarily of $7.9 million of non-accrual real estate loans and
$14.6 million of non-accrual credit card loans. Non-accrual loans
decreased primarily because of net principal repayments and reductions of
non-accrual credit card loans of $1.6 million.
At December 31, 1994, the Bank had $14.6 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 $18.9 million of credit card loans classified for
regulatory purposes as substandard 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 ($18.9 million) primarily related to
accounts for which the customers have agreed to modified payment terms, but
which were 30-89 days past due. Of the $18.9 million, $4.4 million was
current, $8.6 million was 30-59 days past due and $5.9 million was 60-89
days past due at December 31, 1994. All delinquent amounts are included in
the table of delinquent loans. See "Delinquent Loans."
Non-accrual REI. At December 31, 1994 and September 30, 1994, a
participating loan to a developer with a balance of $9.1 million and $8.9
million, respectively, 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 made 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 rroperties 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.
At December 31, 1994, the Bank's REO totaled $266.4 million, after
valuation allowances on such assets of $114.5 million. The principal
component of REO consists of the Communities, which had an aggregate book
value of $201.4 million at that date. Four of the Communities are under
active development.
During the three months ended December 31, 1994, REO decreased $11.5
million. This decrease was primarily attributable to sales in the
Communities and other smaller residential properties and the sale of three
properties with an aggregate book value of $1.1 million, after valuation
allowances. See "Disposition of REO."
<PAGE>
<PAGE>
The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
See "Disposition of REO" and "Reserves for Losses." The Bank capitalized
interest in the amount of $1.1 million in the three months ended December
31, 1994, of which $1.0 million was related to the Bank's four active
Communities.
Disposition of REO. During the three months ended December 31, 1994, the
Bank received proceeds of approximately $23.8 million upon the disposition
of REO consisting of 495 residential lots or units in the Communities and
other smaller residential properties ($22.5 million), approximately one
acre of land in two of the Communities ($0.6 million) and various single-
family residential properties ($0.7 million).
The Bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in an orderly manner which will best preserve
the value of the Bank's assets. The Bank's ability to achieve this
objective will depend on a number of factors, some of which are beyond its
control, such as the general economic conditions in the Washington, D.C.
metropolitan area. In addition, under its written agreement with OTS, the
Bank is required to make every effort to reduce its exposure in certain of
its real estate development properties, including the four active
Communities. In accordance with this requirement, management of the Bank
is pursuing several strategies. First, the Bank has focused its efforts on
marketing building lots directly to homebuilders. The Bank is proceeding
with lot development to meet the requirements of existing and new contracts
with builders. Second, the Bank continues to seek and negotiate with
potential purchasers of retail and commercial ground in the Communities.
Third, the Bank continues to seek potential investors concerning the
possibility of larger scale or bulk purchases of ground at the Communities.
The following table sets forth information about the Bank's REO at December
31, 1994.
Balance Balance
Before All After Percent
Valuation Valuation Valuation of
Allowances Allowances Allowances Total
----------- ---------- ---------- -------
(Dollars in thousands)
Communities ..............$ 287,400 $ 85,960 $ 201,440 75.6%
Residential ground and
construction ........... 54,738 19,523 35,215 13.2
Retail center ............ 16,177 2,187 13,990 5.3
Commercial ground ........ 21,304 6,756 14,548 5.4
Single-family residential
properties ............. 1,307 65 1,242 0.5
----------- ---------- ---------- -------
Total REO .............$ 380,926 $ 114,491 $ 266,435 100.0%
=========== ========== ========== =======
At December 31, 1994, the Bank had executed contracts to sell six of these
properties at their aggregate book value of $18.1 million at that date.
<PAGE>
<PAGE>
The four active Communities originally consisted of 12,936 residential lots
or units and 196.6 acres of land designated for retail use. At December
31, 1994, 9,258 residential units (71.6%) had been sold to builders,
consisting of 7,351 units (56.9%) which had been settled and 1,907 units
(14.7%) which were under contract and pending settlement. At the same
date, approximately 89 acres (45.3%) of retail land had been sold to
developers, including 1.8 acres which were under contract and pending
settlement. In addition, at December 31, 1994, the Bank was engaged in
discussions with potential purchasers regarding the sale of additional
residential units and retail land.
The rate of residential lot sales in the Bank's four active Communities
increased 120.0% to 495 lots during the December 1994 quarter from 225 lots
during the December 1993 quarter. The rate of home sales in the Bank's
four active Communities declined to 188 units during the three months ended
December 31, 1994 from 318 units during the three months ended December 31,
1993. The decline in home sales is consistent with changes in general
economic conditions, including increasing mortgage interest rates.
The Bank will continue to make financing available to homebuilders and home
purchasers 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.
December 31, September 30,
1994 1994 1993
--------- -------- --------
(In thousands)
Residential construction loans ..... $ 13,431 $ 13,367 $ 10,386
Single-family permanent loans (1) .. 55,224 54,642 79,104
--------- -------- --------
Total ............................ $ 68,655 $ 68,009 $ 89,490
========= ======== ========
- ------------------------------------
(1) Includes $5.7 million, $4.4 million and $8.8 million of loans
classified as held for sale at December 31, 1994, September 30, 1994
and September 30, 1993, respectively, in the Consolidated Financial
Statements in this report.
The Bank anticipates that it will provide construction financing for
approximately 20% of the remaining unsold lot inventory in the Communities.
The Bank also expects that it will provide permanent financing for
approximately 25% of the homes to be sold in the Communities. The Bank's
policy is to sell all such single-family loans for which it provides
permanent financing. Through December 31, 1994, the Bank had originated
$182.7 million and sold $177.0 million of loans in which the date of
initial application is subsequent to September 30, 1991. At December 31,
1994, the remaining $5.7 million of such loans are classified as held for
sale and generally are expected to be sold in the second quarter of fiscal
1995.
<PAGE>
<PAGE>
In furtherance of its objective of facilitating sales, the Bank has
continued to develop some of the Communities. The following table presents
the net decrease in the balances of the five Communities for the periods
indicated.
Three Months
Ended
December 31, Year Ended September 30,
1994 1994 1993
----------- ------------ -----------
(In thousands)
Sales proceeds ................. $ 18,702 $ 78,057 $ 66,291
Development costs .............. 11,643 44,264 52,118
----------- ------------ -----------
Net cash flow ................ 7,059 33,793 14,173
Increase (decrease) in reserves
and other non-cash items .... 2,944 (4,337) 7,899
---------- ------------ -----------
Net decrease in balances of
the Communities ............. $ 10,003 $ 29,456 $ 22,072
========== ============ ===========
The Bank currently anticipates that sales proceeds will continue to exceed
development costs 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 December 31, 1994, this property had a
book value of $29.1 million, after valuation allowances.
Under its written agreement with the OTS, the Bank may not increase its
investments in certain of its large REO properties beyond levels existing
at September 30, 1991 without OTS approval. The OTS has not objected to
the implementation of the Bank's budgets for additional investments in
these properties through September 30, 1994.
The Bank will continue to monitor closely 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. The Bank does
not anticipate any significant increases in non-performing and potential
problem assets.
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.
<PAGE>
<PAGE>
At December 31, 1994, potential problem assets totaled $19.6 million,
before valuation allowances of $3.6 million, as compared to $34.1 million,
before valuation allowances of $11.2 million, at September 30, 1994. The
$14.5 million decrease in potential problem assets was primarily
attributable to $11.7 million of loans incurred by borrowers whose
financial condition is such that management no longer has serious doubts as
to such borrowers' ability to comply with present repayment terms. The
repayment of one commercial collateralized loan with a principal balance of
$1.7 million and other net pay-downs of $1.1 million also contributed to
the decrease in potential problem assets.
Delinquent Loans. At December 31, 1994, delinquent loans totaled $39.6
million (or 1.4% of gross loans) compared to $31.8 million (or 1.2% of
gross loans) at September 30, 1994. The following table sets forth
information regarding the Bank's delinquent loans at December 31, 1994.
Principal Balance Total as a
------------------------------------- Percentage
Mortgage Non-Mortgage of Gross
Loans Loans Total Loans (1)
--------- --------- ---------- -----------
(Dollars in thousands)
Loans delinquent for:
30-59 days ..........$ 4,165 $ 21,992 $ 26,157 0.9%
60-89 days .......... 2,215 11,237 13,452 0.5%
--------- --------- ---------- -----
Total .............$ 6,380 $ 33,229 $ 39,609 1.4%
========= ========= ========== =====
- ---------------------
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity credit
line loans. Total delinquent mortgage loans increased to $6.4 million at
December 31, 1994 from $4.3 million at September 30, 1994.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $33.2 million at December 31, 1994 from $27.5 million at
September 30, 1994, but remained constant as a percentage of total non-
mortgage loans outstanding at 2.7%.
Troubled Debt Restructurings. A troubled debt restructuring occurs when
the Bank agrees to modify significant terms of a loan in favor of the
borrower when the borrower is experiencing financial difficulties. The
following table sets forth loans accounted for as troubled debt
restructurings, before deduction of valuation allowances, at the dates
indicated.
December 31, September 30,
1994 1994
-------------- -------------
(In thousands)
Troubled debt
restructurings..... $ 28,432 $ 29,141
============== =============
<PAGE>
<PAGE>
At December 31, 1994, loans accounted for as troubled debt restructurings
included two commercial permanent loans with principal balances totaling
$13.2 million and two residential ground loans with principal balances
totaling $15.2 million. The decrease in loans accounted for as troubled
debt restructurings from September 30, 1994 resulted from net pay-downs of
$0.7 million. At December 31, 1994, the Bank had commitments to lend $2.2
million of additional funds on loans that have been restructured.
Real Estate Held for Investment. At December 31, 1994, real estate held
for investment consisted of seven properties with an aggregate book value
of $51.9 million, net of accumulated depreciation of $14.4 million and
valuation allowances of $10.1 million. This category includes one office
building (which was approximately 83% leased at such date) and two
apartment buildings (which were fully leased at such date and are financed
with bonds issued through 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 $9.1 million at
December 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 years indicated and may include
charge-offs taken against assets which the Bank disposed of during such
years.
<PAGE>
<PAGE>
<TABLE>
Analysis of Reserve Balances on and Charge-offs of Loans
(Dollars in thousands)
Three Months Ended
December 31, Year Ended
---------------------- September 30,
1994 1993 1994
--------- --------- -------------
<S> <C> <C> <C>
Balance at beginning of period $ 50,205 $ 68,040 $ 68,040
--------- --------- -------------
Provision for loan losses 8,607 11,683 29,222
--------- --------- -------------
Charge-offs:
Residential 112 660 1,641
Commercial and multifamily -- -- 112
Ground -- -- 2,027
Commercial construction -- -- 447
Credit card 11,216 15,382 55,754
Other 627 134 1,058
--------- --------- -------------
Total charge-offs 11,955 16,176 61,039
--------- --------- -------------
Recoveries:
Residential 1 8 --
Credit card 2,766 3,312 13,525
Other 117 73 457
--------- --------- -------------
Total recoveries 2,884 3,393 13,982
--------- --------- -------------
Charge-offs, net of recoveries 9,071 12,783 47,057
--------- --------- -------------
Balance at end of period $ 49,741 $ 66,940 $ 50,205
========= ========= =============
Provision for loan losses to average loans (1) (2) 1.71% 1.95% 1.23%
Net loan charge-offs to average loans (1) (2) 1.78% 2.13% 1.89%
Ending reserve for losses on loans to total
loans (2) (3) 1.76% 2.35% 1.97%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Components of Reserve for Losses on Loans by Type
(Dollars in thousands)
December 31,
--------------------------------------------------- September 30,
1994 1993 1994
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period allocated to:
Residential permanent $ 1,348 49.6 % $ 2,874 49.9 % $ 1,384 53.8 %
Home equity 262 2.7 377 3.8 133 1.4
Commercial and multifamily 8,502 3.0 9,812 3.5 8,506 3.3
Residential construction 1,392 1.0 3,452 1.2 1,455 1.2
Commercial construction 58 0.2 1,178 0.8 245 0.2
Ground 2,257 0.5 1,446 0.6 2,362 0.6
Credit card 34,530 29.1 46,886 33.5 34,530 25.5
Consumer and other 1,392 13.9 915 6.7 1,590 14.0
-------- -------- --------
Total $49,741 $66,940 $50,205
======== ======== ========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Analysis of Reserve Balances on and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Three Months Ended
December 31, Year Ended
-------------------------- September 30
1994 1993 1994
----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 9,899 $ 10,182 $ 10,182
Real estate held for sale 109,074 101,462 101,462
----------- ----------- ------------
Total 118,973 111,644 111,644
----------- ----------- ------------
Provision for real estate losses:
Real estate held for investment 165 6 (283)
Real estate held for sale 7,302 3,861 14,335
----------- ----------- ------------
Total 7,467 3,867 14,052
----------- ----------- ------------
Charge-offs:
Real estate held for sale:
Residential construction 1,782 - 911
Residential ground 103 - -
Commercial permanent - 4,048 5,812
----------- ----------- ------------
Total 1,885 4,048 6,723
----------- ----------- ------------
Total charge-offs on real estate
held for investment or sale 1,885 4,048 6,723
----------- ----------- ------------
Balance at end of period:
Real estate held for investment 10,064 10,188 9,899
Real estate held for sale 114,491 101,275 109,074
----------- ----------- ------------
Total $ 124,555 $ 111,463 $ 118,973
=========== =========== ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Components of Reserve for Losses
on Real Estate Held for Investment or Sale
(In thousands)
December 31,
-------------------------- September 30
1994 1993 1994
----------- ----------- ------------
<S> <C> <C> <C>
Reserve for losses on real estate
held for investment:
Commercial and multifamily $ 7,793 $ 7,945 $ 7,793
Ground 1,999 1,972 1,975
Other 272 271 131
----------- ----------- ------------
Total 10,064 10,188 9,899
----------- ----------- ------------
Reserve for losses on real estate
held for sale:
Residential 57 81 66
Home equity 8 52 4
Commercial and multifamily 143 1,424 142
Commercial construction 2,044 608 1,216
Residential construction 253 3,002 1,942
Ground 111,986 96,108 105,704
----------- ----------- ------------
Total 114,491 101,275 109,074
----------- ----------- ------------
Total reserve for losses on real
estate held for investment or sale $ 124,555 $ 111,463 $ 118,973
=========== =========== ============
</TABLE>
<PAGE>
<PAGE>
The Bank maintains reserves for estimated losses on loans and real estate.
The Bank's total reserves for losses on loans and real estate held for
investment or sale increased by $5.1 million from the level at September
30, 1994 to $174.3 million at December 31, 1994. The $5.1 million net
increase was primarily attributable to increased reserves established on
the Communities. During the three months ended December 31, 1994, the Bank
recorded net charge-offs of $2.0 million on loans secured by real estate
and real estate held for investment or sale and provided an additional $7.3
million in valuation allowances on these assets.
The following table shows reserves for losses on performing and non-
performing assets at the dates indicated.
December 31, 1994
------------------------------
Non-
(In thousands) Performing performing Total
---------- --------- ---------
Reserves for losses on:
Loans:
Real estate ................. $13,430 $ 389 $ 13,819
Credit card ................. 33,067 1,463 34,530
Consumer and other .......... 1,392 - 1,392
--------- --------- ---------
Total reserve for
losses on loans ........... 47,889 1,852 49,741
--------- --------- ---------
Real estate held for
investment .................. 8,065 1,999 10,064
Real estate held for sale .... - 114,491 114,491
--------- --------- ---------
Total reserve for losses on
real estate held for
investment or sale ......... 8,065 116,490 124,555
--------- --------- ---------
Total reserves for losses ..... $55,954 $118,342 $174,296
========= ========= =========
September 30, 1994
------------------------------
Non-
(In thousands) Performing performing Total
---------- --------- ---------
Reserves for losses on:
Loans:
Real estate ................. $ 13,670 $ 415 $ 14,085
Credit card ................. 32,907 1,623 34,530
Consumer and other .......... 1,590 - 1,590
--------- --------- ---------
Total reserve for
losses on loans ........... 48,167 2,038 50,205
--------- --------- ---------
Real estate held for
investment .................. 7,924 1,975 9,899
Real estate held for sale .... - 109,074 109,074
--------- --------- ---------
Total reserve for losses on
real estate held for
investment or sale ......... 7,924 111,049 118,973
--------- --------- ---------
Total reserves for losses .... $56,091 $113,087 $169,178
========= ========= =========
<PAGE>
<PAGE>
Reserves for losses on loans secured by real estate and real estate held
for investment or sale totaled $138.4 million at December 31, 1994, which
constituted 34.8% of total non-performing real estate assets, before
valuation allowances. This amount represented a $5.3 million increase over
the September 30, 1994 level of $133.1 million, or 32.9% of total non-
performing real estate assets, before valuation allowances at that date.
Effective October 1, 1994, the Bank provides additional general valuation
allowances which are equal to, or exceed, the amount of the net earnings
generated by the development and sale of land in the Communities. During
the December 1994 quarter, the Bank provided an additional $3.4 million in
general valuation allowances against its Communities. The effect of such
accounting treatment was to reduce the Bank's net income.
When real estate collateral securing an extension of credit is initially
recorded as REO, it is written down to fair value on the basis of an
appraisal. Such initial write-downs represent management's best estimate
of exposure to the Bank at the time that the collateral becomes REO and in
effect substitutes for reserves that would otherwise be recorded if the
collateral had not become REO. As circumstances change, it may be
necessary to provide additional reserves based on new information.
Depending on the nature of the information, these new reserves may be
valuation allowances, which reflect additional impairment with respect to a
specific asset, or may be unallocated reserves, which provide protection
against changes in management's perception of overall economic factors.
Reserves for losses on real estate held for sale at December 31, 1994 are
in addition to approximately $62.7 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at
December 31, 1994.
The Bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans. As a result of such updated appraisals,
the Bank could be required to increase its reserves.
Net charge-offs of credit card loans for the three months ended December
31, 1994 were $8.5 million, compared to $12.1 million for the three months
ended December 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, the cardholder
may enter into transactions (such as retail purchases and cash advances)
subsequent to a balance sheet date which increase 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 remained constant at $34.5
million from September 30, 1994 to December 31, 1994. The ratios of the
reserve for such losses to non-performing credit card loans and to
outstanding credit card loans changed to 236.0% and 4.2%, respectively, at
December 31, 1994 from 212.8% and 5.3%, respectively, at September 30,
1994.
The reserve for losses on consumer and other loans decreased to $1.4
million at December 31, 1994 from $1.6 million at September 30, 1994,
primarily because of the repayment of one commercial collateralized loan.
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 changed to 134.4% and 0.4%, respectively, at December 31, 1994 from
319.3% and 0.4%, respectively, at September 30, 1994.
<PAGE>
<PAGE>
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 yield 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
interest-sensitive loans for its portfolio. In furtherance of this
strategy, the Bank emphasizes the origination and retention of adjustable-
rate residential permanent loans ("ARMs"), adjustable-rate home equity
credit line loans and adjustable-rate credit card loans. At December 31,
1994, adjustable-rate loans accounted for 81.5% of total loans. ARMs and
home equity credit line loans with rates adjustable in one year or less
accounted for 11.8% of total loans, and credit card loans accounted for
29.1% of total loans at December 31, 1994.
In recent periods, the Bank's policy has generally been to sell all of its
long-term fixed-rate mortgage production, thereby reducing its exposure to
market interest rate fluctuations typically associated with long-term
fixed-rate lending.
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, a
negative gap implies that the differential effect on the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities will 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 assumes a parallel shift in
interest rates for instruments of different maturities and does not reflect
the possibility that retail deposit pricing changes may lag those of
wholesale market funds which, in a period of rising interest rates, might
serve to mitigate the decline in net interest spread. Since January 1994,
before interest rates began their recent rise, short-term market rates have
increased over 200 basis points while the Bank's overall deposit costs have
increased less than 50 basis points. Conversely, retail deposit pricing
may change more rapidly than changes in wholesale market rates.
The Bank views control over interest rate sensitivity as a key element in
its financial planning process and monitors its interest rate sensitivity
through its forecasting system. The Bank manages its interest rate
exposure and will narrow or widen its gap, depending on its perception of
interest rate movements and the composition of its balance sheet. For the
reasons discussed above, the Bank might take action to narrow its gap if it
believes that market interest rates will experience a significant prolonged
increase, and might widen its gap if it believes that market interest rates
will decline or remain relatively stable. A number of asset and liability
management strategies are available to the Bank in structuring its balance
sheet. These include selling or retaining certain portions of the Bank's
current residential mortgage loan production; altering the Bank's pricing
on certain deposit products to emphasize or de-emphasize particular
maturity categories; altering the type and maturity of securities acquired
for the Bank's available-for-sale portfolio when replacing securities
following normal portfolio maturation and turnover; lengthening or
<PAGE>
<PAGE>
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 interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at December 31,
1994, which reflects management's estimate of mortgage loan 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 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>
<PAGE>
<TABLE>
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 December 31, 1994
Mortgage loans:
Adjustable-rate $ 318,973 $ 188,573 $ 425,970 $ 364,202 $ 18,470 $1,316,188
Fixed-rate 8,881 8,441 38,200 30,715 103,844 190,081
Loans held for sale 29,852 - - - - 29,852
Home equity credit lines and
second mortgages 66,610 15,290 - 107 - 82,007
Credit card and other 503,514 42,883 162,026 118,624 17,382 844,429
Loans held for securitization
and sale 375,000 - - - - 375,000
Mortgage-backed securities 209,913 188,899 564,624 8,166 11,833 983,435
Other investments 119,919 - 4,401 100 - 124,420
------------- ------------- ------------ ------------ ----------- -----------
Total interest-earning assets 1,632,662 444,086 1,195,221 521,914 151,529 3,945,412
Total non-interest earning assets - - - - 810,021 810,021
------------- ------------- ------------ ------------ ----------- -----------
Total assets $ 1,632,662 $ 444,086 $ 1,195,221 $ 521,914 $ 961,550 $4,755,433
============= ============= ============ ============ =========== ===========
Deposits:
Fixed maturity deposits $ 378,573 $ 196,956 $ 162,924 $ 104,076 $ - $ 842,529
NOW, statement and passbook
accounts 1,502,288 41,004 136,569 92,952 198,092 1,970,905
Money market deposit accounts 1,143,615 - - - - 1,143,615
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 152,121 108 27,214 592 6,386 186,421
------------- ------------- ------------ ------------ ----------- -----------
Total interest-bearing liabilities 3,186,597 238,068 326,707 197,620 354,478 4,303,470
Total non-interest bearing liabilities - - - - 208,758 208,758
Stockholders' equity - - - - 243,205 243,205
------------- ------------- ------------ ------------ ----------- -----------
Total liabilities & stockholders'
equity $ 3,186,597 $ 238,068 $ 326,707 $ 197,620 $ 806,441 $4,755,433
============= ============= ============ ============ =========== ===========
Gap ($1,553,935) $206,018 $868,514 $324,294 ($202,949)
Cumulative gap ($1,553,935) ($1,347,917) ($479,403) ($155,109) ($358,058)
Cumulative gap as a percentage
of total assets (32.7)% (28.3)% (10.1)% (3.3)% (7.5)%
</TABLE>
<PAGE>
<PAGE>
The one-year gap, as a percentage of total assets, was a negative 28.3% at
December 31, 1994, compared to a negative 27.1% at September 30, 1994. As
noted above, the Bank's negative one-year gap might adversely affect the
Bank's net interest spread and earnings if interest rates rise and the Bank
is unable to take steps to reduce its gap.
In addition to gap measurements, the Bank measures and manages interest-
rate risk with the extensive use of computer simulation. This simulation
includes calculations of Market Value of Portfolio Equity and Net Interest
Margin as promulgated by the OTS's Thrift Bulletin 13.
At December 31, 1994, the Bank would not have been required to maintain
additional amounts of risk-based capital under the interest-rate risk
component of the OTS capital regulations.
Tax Sharing Payments. During the three months ended December 31, 1994,
after receiving OTS approval, the Bank made $5.0 million of tax sharing
payments to B. F. Saul Real Estate Investment Trust, which owns 80% of the
Bank's Common Stock.
Capital. At December 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 December 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 December
31, 1994 in relation to the regulatory requirements under FIRREA and OTS
prompt corrective action regulations in effect at that date. The
information below is based upon the Bank's understanding of the regulations
and interpretations currently in effect and may be subject to change.
<PAGE>
<PAGE>
<TABLE>
Regulatory Capital
(Dollars in thousands)
Minimum
Actual Capital Requirement Excess Capital
----------------------- ----------------------- -----------------------
As a % As a % As a %
Amount of Assets (3) Amount of Assets Amount of Assets
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $280,327
Net unrealized holding losses (1) 24,887
---------
Adjusted capital 305,214
Adjustments for tangible and core capital:
Intangible assets (49,327)
Non-includable subsidiaries (2) (9,735)
---------
Total tangible capital 246,152 5.19% $ 71,107 1.50% $175,045 3.69%
Supervisory goodwill (4) 17,777 ============= ========= ============= ========= =============
---------
Total core capital (3) (4) 263,929 5.57% $189,620 4.00% $ 74,309 1.57%
--------- ============= ========= ============= ========= =============
Total tier 1 risk-based capital (3) 263,929 6.76% $156,128 4.00% $107,801 2.76%
--------- ============= ========= ============= ========= =============
Adjustments for risk-based capital:
Subordinated capital debentures 152,900
Reserve for general loan losses 42,508
---------
Total supplementary capital 195,408
---------
Total available capital 459,337
Equity investments (2) (31,818)
---------
Total risk-based capital (3) $427,519 11.46% $312,256 8.00% $115,263 3.46%
========= ============= ========= ============= ========= =============
(1)Beginning December 31, 1994, the Bank adopted the OTS revised policy to exclude net unrealized holding gains
(losses) from regulatory capital.
(2)Reflects an aggregate offset of $5.3 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.
(3)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%.
(4)Effective January 1, 1995, the amount of supervisory goodwill includable as core capital under OTS regulations
decreased from 0.375% to 0% of tangible assets. If the 0% limit had been in effect on December 31, 1994, the
Bank's core capital ratio would have been 5.19% or $56.5 million above the regulatory requirement.
</TABLE>
<PAGE>
<PAGE>
In November 1994, the OTS revised its prior policy and announced that,
beginning as early as December 1994, savings associations may exclude net
unrealized holding gains (losses) on debt securities classified as
available-for-sale from regulatory capital for purposes of computing
regulatory capital ratios. The Bank adopted the revised policy in December
1994.
Regulatory Action and Requirements. The Bank is subject to a written
agreement with the OTS, as 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 such quarter without prior written
approval from the OTS. On December 29, 1994, the OTS notified the Bank
that it would not object to an increase in the Bank's total assets of
approximately $75.0 million for the period October 1, 1994 through December
31, 1994.
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 December 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 4.89%, 4.89% and 10.61%,
respectively, which exceeded the FIRREA requirements of 1.5%, 3.0% and
8.0%, respectively. At December 31, 1994, the Bank had $26.9 million,
after subsequent valuation allowances, of extensions of credit to, and
investment in, subsidiaries engaged in activities impermissible for
national banks ("non-includable subsidiaries") which were subject at
December 31, 1994 to a 40% phase-out from all three FIRREA capital
requirements. This phase-out will increase to 60% on July 1, 1995 and 100%
on July 1, 1996, in accordance with a delayed phase-in period approved by
the OTS pursuant to legislation enacted in October 1992. At December 31,
1994, the Bank also had two equity investments with an aggregate balance,
after subsequent valuation allowances, of $36.1 million which were subject
to a 100% phase-out from total capital for risk-based capital purposes.
Pursuant to OTS guidelines, $5.3 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.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception
from treatment as an equity investment. If an REO property is considered
an equity investment, its then-current book value is deducted from total
risk-based capital. Accordingly, if the Bank is unable to dispose of any
REO property (through bulk sales or otherwise) prior to the end of its
applicable five-year holding period and is unable to obtain an extension of
such five-year holding period from the OTS, the Bank could be required to
deduct the then-current book value of such REO property from risk-based
capital. Although there can be no assurances in this regard, management
believes it will be able to obtain the necessary extensions. The following
table sets forth the Bank's REO at December 31, 1994, after valuation
allowances of $114.5 million, by the fiscal year in which the property was
acquired through foreclosure.
<PAGE>
<PAGE>
Fiscal Year (In thousands)
1990 (1) .......... $ 119,045
1991 .............. 106,012
1992 .............. 15,646
1993 .............. 6,630
1994 .............. 18,509
1995 .............. 593
---------
Total REO $ 266,435
=========
- -----------------------
(1) Includes REO with an aggregate net book value of $31.8 million, which
the Bank agreed to treat as equity investments for regulatory capital
purposes.
At December 31, 1994, the Bank had $47.3 million in supervisory goodwill,
of which $17.8 million was includable in core capital pursuant to statutory
provisions limiting the includable amount of supervisory goodwill to an
amount not to exceed 0.375% of tangible assets. Beginning January 1, 1995,
supervisory goodwill must be completely excluded from core capital.
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.
Prompt Corrective Action. Under the OTS prompt corrective action
regulations, 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 December 31, 1994, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios were 5.57%, 6.76% and
11.46%, 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 nonperforming 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 regulatory capital requirements, the Bank is required to
phase out from regulatory capital supervisory goodwill and certain
investments in subsidiaries. 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 December 31, 1994, the Bank's regulatory capital ratios would meet
the ratios established for "adequately capitalized" institutions.
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements fall into
four categories: operating expenses (exclusive of interest on outstanding
debt), capital improvements, interest on outstanding debt and repayment of
outstanding debt.
Historically, the Real Estate Trust's total cash requirements have exceeded
the cash generated by its operations. 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,
commencing in fiscal 1994, the payment of interest on $175.0 million
aggregate principal amount of 11 5/8% Senior Secured Notes due 2002 (the
"Senior Secured Notes") sold on March 30, 1994. In the past, the Real
Estate Trust had 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.
The Real Estate Trust's current program of public Unsecured Notes sales was
initiated in the 1970's as a vehicle for supplementing other external
funding sources. The table under "Recent Liquidity Trends" below provides
information at December 31, 1994 with respect to the maturities of
Unsecured Notes outstanding at such date.
As the owner, directly and through two wholly-owned subsidiaries, of a
21.5% limited partnership interest in Saul Holdings Limited Partnership
("Saul Holdings"), the Real Estate Trust shares in cash distributions from
operations and from capital transactions involving the sale or refinancing
of the properties of Saul Holdings. The partnership agreement of Saul
Holdings provides for quarterly cash distributions to the partners out of
net cash flow. In fiscal 1994 and the three-month period ended December
31, 1994, the Real Estate Trust received total cash distributions of $4.6
and $1.4 million, respectively, from Saul Holdings.
Recent Liquidity Trends. The Real Estate Trust's liquidity position was
positively affected by the sale of the Senior Secured Notes in the second
quarter of fiscal 1994. The Real Estate Trust deposited approximately
$25.8 million of the net proceeds of this issue with the Trustee for the
Senior Secured Notes to satisfy one of the initial collateral requirements
with respect to these securities. This collateral requirement, which will
remain in effect as long as any Senior Secured Notes are outstanding, will
be recalculated each calendar quarter based on one year's interest
payments on then outstanding Senior Secured Notes and Unsecured Notes.
During fiscal 1994 and the first quarter of fiscal 1995, the Trust
purchased 811,500 shares of common stock of Saul Centers, Inc.
(representing 6.8% of such company's outstanding common stock) for
approximately $13.9 million. These shares have been deposited with the
Trustee to satisfy in part the collateral requirements for the Senior
Secured Notes, thereby permitting release to the Trust of a portion of the
cash on deposit with the Trustee.
<PAGE>
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at
December 31, 1994 is set forth in the following table. Of the $191.2
million of mortgage debt outstanding at December 31, 1994, $138.8 million
was nonrecourse to the Real Estate Trust and $176.3 million was fixed-rate
debt. The Senior Secured Notes are designated "Notes Payable-Secured" in
the table and in the Consolidated Financial Statements included in this
report.
Debt Maturity Schedule
(In thousands)
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- --------------------------------------------------------------------------
1995 (1) $ 11,344 $ -- $ 5,174 $ 16,518
1996 8,489 -- 5,771 14,260
1997 19,138 -- 5,373 24,511
1998 7,112 -- 6,310 13,422
1999 16,793 -- 12,880 29,673
Thereafter 128,333 175,000 4,525 307,858
-------- -------- -------- --------
$191,209 $175,000 $ 40,033 $406,242
======== ======== ======== ========
(1) January 1, 1995 to September 30, 1995.
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 $4.0 million per year.
The Real Estate Trust had negative cash flow from operating activities of
$10.9 million in fiscal 1994 and $4.9 million during the three-month period
ended December 31, 1994 before tax sharing payments from the Bank of $9.6
million and $5.0 million respectively. The Real Estate Trust's ability to
meet its liquidity needs, including debt service payments, in the balance
of fiscal 1995 and in subsequent years, will depend in significant part on
its receipt of dividends from the Bank and tax sharing payments from the
Bank pursuant to the tax sharing agreement among the Trust, the Bank and
their subsidiaries. The availability and amount of tax sharing payments
and dividends in future periods is dependent upon, among other things, the
Bank's operating performance and income, regulatory restrictions on such
payments and (in the case of tax sharing payments) the continued
consolidation of the Bank and the Bank's subsidiaries with the Trust for
federal income tax purposes.
The Real Estate Trust believes that the improved financial condition and
operating results of the Bank in recent periods should enhance the
prospects of the Real Estate Trust to receive tax sharing payments and
dividends from the Bank, although there can be no assurance as to the
amount or timing of any payments from such sources. As of December 31,
1994, $7.0 million in tax sharing payments were due to the Real Estate
Trust. The Real Estate Trust to date has not received any cash dividends
from the Bank. 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. OTS regulations tie the Bank's ability to pay dividends to specific
levels of regulatory capital and earnings.
<PAGE>
<PAGE>
BANKING
Liquidity. The standard measure of liquidity in the savings industry is
the ratio of cash and 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 December 31, 1994 was 19.1%, compared
to 18.6% for the month ended September 30, 1994. Additionally, the Bank met
the liquidity level requirements for each month of the December 1994
quarter.
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 and trading 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 December 31, 1994, the Bank's portfolio
included mortgage loans, U.S. Government securities and mortgage-backed
securities with outstanding principal balances of $917.5 million, $4.4
million and $1.0 billion, respectively. The estimated borrowing capacity
of available mortgage loans, U.S. Government securities and mortgage-backed
securities that could be pledged to the FHLB of Atlanta and various
security dealers totaled $1.3 billion at December 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 and home equity
credit line receivables have been significant sources of liquidity for the
Bank. During the first quarter of fiscal 1995, the Bank securitized and
sold $575.0 million of credit card receivables. At December 31, 1994, the
Bank was considering the securitization and sale of approximately $1.0
billion of credit card receivables, including $375.0 million of receivables
outstanding at December 31, 1994 and $650.0 million of receivables which
the Bank expects to become available, either through additional fundings or
amortization of existing trusts, during the six months ending June 30,
1995. As part of its operating strategy, the Bank will continue to explore
opportunities to sell assets and to securitize and sell credit card and
home equity credit line receivables to meet liquidity and other balance
sheet objectives.
The ability of the Bank to securitize and sell assets in the future will
depend on a number of factors, including conditions in the market for
asset-backed securities and competitive pressures in the credit card
industry. The Bank does not currently anticipate relying upon
securitization 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 securitization. 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
origination of new accounts.
<PAGE>
<PAGE>
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 three months ended December 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 $3.4 billion, repay borrowings of $636.8 million, fund
existing and continuing loan commitments (including real estate held for
investment or sale) of $959.1 million, purchase investments and loans of
$82.7 million and meet operating expenses, before depreciation and
amortization, of $61.7 million. These commitments were funded primarily
through proceeds from customer deposits and sales of certificates of
deposit of $3.4 billion, proceeds from borrowings of $682.6 million,
proceeds from sales of loans, securities and real estate of $707.5 million,
and principal and interest collected on investments, loans, mortgage-backed
securities and trading securities of $166.0 million.
The Bank is obligated under various recourse provisions related to the
securitization and sale of credit card and home equity credit line
receivables. Of the $2.9 billion of outstanding trust certificate balances
at December 31, 1994, the primary recourse to the Bank was approximately
$77.2 million.
The Bank also is obligated under various recourse provisions related to the
swap of single-family residential loans for participation certificates
issued to the Bank by FHLMC. At December 31, 1994, recourse to the Bank
under these arrangements was approximately $4.4 million.
The Bank's commitments at December 31, 1994 are set forth in the following
table:
(In thousands)
Commitments to originate loans $ 33,291
-----------
Loans in process (collateralized loans):
Home equity .......................... 543,377
Real estate construction ............. 28,466
Commercial and multifamily ........... 370
-----------
572,213
-----------
Loans in process (unsecured loans):
Credit cards ......................... 8,078,246
Overdraft lines ...................... 43,996
Commercial ........................... 3,242
-----------
8,125,484
-----------
Total commitments to extend credit . 8,730,988
Letters of credit ....................... 54,766
Recourse arrangements on asset-backed
securitizations ...................... 77,227
Recourse arrangements on mortgage-backed
securities ........................... 4,427
-----------
Total commitments .................. $ 8,867,408
===========
<PAGE>
<PAGE>
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 97.2% of commitments at
December 31, 1994.
At December 31, 1994, repayments of borrowed money scheduled to occur
during the next 12 months were $44.2 million. Certificates of deposit
maturing during the next 12 months amounted to $575.5 million, of which a
substantial portion is expected to remain with the Bank.
There were no material commitments for capital expenditures at December 31,
1994.
The Bank's liquidity requirements in fiscal 1995 and for years subsequent
to fiscal 1995 will continue to be affected both by the asset size of the
Bank, the growth of which will be constrained by capital and other
regulatory requirements, and the composition of the asset portfolio.
Management believes that the Bank's primary sources of funds, described
above, will be sufficient to meet the Bank's foreseeable long-term
liquidity needs. The mix of funding sources utilized from time to time will
be determined by a number of factors, including capital planning
objectives, lending and investment strategies and market conditions.
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1993
REAL ESTATE
The following table sets forth, for the three-month period ended December
31, 1994 (the "1995 quarter") and the three-month period ended December 31,
1993 (the "1994 quarter") direct operating results for the Real Estate
Trust's (i) commercial properties (consisting of office and industrial
properties), and (ii) hotel properties. On November 30, 1994, the Real
Estate Trust acquired a 192-room hotel in Auburn Hills, Michigan. The
operating results of that hotel for the 32-day period of Real Estate
Trust's ownership are included in the portfolio's results for the 1995
quarter.<PAGE>
<PAGE>
Three Months Ended
December 31
--------------------
1994 1993
---------- ---------
COMMERCIAL PROPERTIES (In thousands)
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $4,315 $3,478
Expense recoveries 221 151
Other 103 94
------- -------
Total revenues 4,639 3,723
------- -------
Direct operating expenses
Utilities 575 578
Repairs and maintenance 498 385
Real estate taxes 342 375
Payroll 142 137
Insurance 64 65
Other 201 165
------- -------
Total direct operating expenses 1,822 1,705
------- -------
Income after direct operating expenses $2,817 $2,018
======= =======
HOTELS (1)
Room sales $7,735 $6,794
Food sales 2,497 2,254
Beverage sales 745 766
Other 712 868
------- -------
Total revenues 11,689 10,682
------- -------
Direct operating expenses
Payroll 3,738 3,555
Cost of sales 1,147 1,069
Utilities 680 677
Repairs and mainenance 611 564
Adverting and promotion 560 532
Property taxes 306 230
Insurance 140 140
Other 1,253 1,138
------- -------
Total direct operating expenses 8,435 7,905
------- -------
Income after direct operating expenses $3,254 $2,777
======= =======
(1) Includes the results of the Real Estate Trust's acquisition of a 192-
room hotel on November 30, 1994.
<PAGE>
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization
of $4.8 million and an operating loss of $7.2 million in the 1995 quarter
compared to a loss before depreciation and amortization of $7.5 million
and an operating loss of $10.1 million in the corresponding prior period.
The reduction in the operating loss was largely attributable to a $1.4
million writedown of real estate included in the results for the 1994
quarter and an improvement in the operations of income-producing properties
in the current period.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $799,000 (39.6%)in
the 1995 quarter compared to such income in the 1994 quarter. Almost all
of the growth in gross income, which amounted to $916,000 (24.6%), resulted
from higher base rents. Expenses increased by $117,000 (6.9%).
Income after direct operating expenses from hotel properties increased
$477,000 (17.2%) in the 1995 quarter over the level achieved in the 1994
quarter. In the current period, room sales increased by $941,000 (13.9%),
while food and beverage sales increased by $222,000 (7.4%). Total revenue
increased by $1,007,000 (9.4%), while total expenses increased by $530,000
(6.7%). The increase in revenue was due to improved market conditions,
which permitted management to raise average room rates by 7% while
maintaining occupancy.
Interest expense increased by $376,000 (3.9%) in the 1995 quarter,
primarily because of the higher level of borrowings in the current period.
Average balances of the Real Estate Trust's outstanding borrowings
increased to $403.9 million for 1995 quarter from $304.0 million for the
prior period. This increase in average borrowings occurred as a result of
the sale of $175.0 million principal amount of Senior Secured Notes in the
second quarter of fiscal 1994.
Depreciation increased $254,000 (12.2%) in the current period as a result
of new tenant improvements and the newly acquired hotel property.
Amortization of debt expense declined $373,000 (77.9%) in the 1995 quarter.
The decline was largely attributable the amortization of a credit arising
from a lender's forgiveness of debt. There was no similar item in the
prior corresponding period.
Advisory, management and leasing fees paid to related parties increased
$226,000 (14.7%) in 1995 quarter from the expense level in the 1994
quarter. The monthly advisory fee in the 1995 quarter was $292,000,
compared to $250,000 in the prior period, which represented a cumulative
increase of $125,000. The balance of the increase in this expense item
reflected higher management fees resulting from higher revenues.
General and administrative expense decreased $73,000 (14.6%) in the current
period principally as a result of lower legal and accounting costs.
<PAGE>
<PAGE>
BANKING
Overview. The Bank recorded operating of $6.0 million for the three months
ended December 31, 1994, (the "1995 quarter"), compared to operating income
of $6.0 million for the three months ended December 31, 1993 (the "1994
quarter").
Net Interest Income. Net interest income, before the provision for loan
losses, decreased $0.3 million (or 0.7%) in the 1995 quarter. The Bank
would have recorded interest income of $1.8 million for the 1995 quarter if
the Bank's non-accrual assets and restructured loans had been current in
accordance with their original terms. Interest income of $0.3 million was
actually recorded on non-accrual assets and restructured loans for the 1995
quarter. The Bank's net interest income in future periods will continue to
be adversely affected by the Bank's non-performing assets. See "Financial
Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resulting yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread
and net yield on interest-earning assets.
<PAGE>
<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)
Three Months Ended December 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) $2,724,241 $63,628 9.34 % $2,483,114 $59,164 9.53 %
Mortgage-backed securities 1,031,726 15,606 6.05 1,431,079 20,357 5.69
Trading securities 4,101 84 8.19 26,465 412 6.23
Federal funds sold 50,335 659 5.24 17,487 131 3.00
Investment securities 4,400 89 8.09 4,688 81 6.91
Other interest-earning assets 150,534 1,717 4.56 208,643 1,511 2.90
----------- -------- ----------- --------
Total 3,965,337 81,783 8.25 4,171,476 81,656 7.83
-------- ------- -------- -------
Noninterest-earning assets:
Cash 127,061 113,301
Real estate held for investment or sale 327,492 391,983
Property and equipment, net 143,552 136,011
Cost in excess of net assets acquired, net 6,653 9,333
Other assets 129,457 163,340
----------- -----------
Total assets $4,699,552 $4,985,444
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 870,984 5,980 2.75 $ 800,230 5,376 2.69
Savings deposits 1,186,409 9,939 3.35 1,053,995 8,710 3.31
Time deposits 790,826 8,654 4.38 804,299 8,041 4.00
Money market deposits 1,133,372 11,368 4.01 1,181,021 9,256 3.13
----------- -------- ----------- --------
Total deposits 3,981,591 35,941 3.61 3,839,545 31,383 3.27
Borrowings 368,719 6,700 7.27 792,038 10,837 5.47
----------- -------- ----------- --------
Total liabilities 4,350,310 42,641 3.92 4,631,583 42,220 3.65
-------- ------- -------- -------
Noninterest-bearing items:
Noninterest-bearing deposits 65,348 55,742
Other liabilities 33,549 37,186
Stockholders' equity 250,345 260,933
----------- -----------
Total liabilities and stockholders' equity $4,699,552 $4,985,444
=========== ===========
Net interest income $39,142 $39,436
======== ========
Net interest spread (2) 4.33 % 4.18 %
======= =======
Net yield on interest-earning assets (3) 3.95 % 3.78 %
======= =======
Interest-earning assets to interest-bearing liabilities 91.15 % 90.07 %
======= =======
(1)Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the
extent reflected in the Consolidated Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of loans.
(2)Equals weighted average yield on total interest-earning assets less weighted average rate on total interest-bearing
liabilities.
(3)Equals annualized net interest income divided by the average balances of total interest-earning assets.
</TABLE>
<PAGE>
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Bank during the periods
indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to
changes in volume (change in volume multiplied by old rate); changes in
rate (change in rate multiplied by old volume); and changes in rate and
volume.
<PAGE>
<PAGE>
<TABLE>
Volume and Rate Changes in Net Interest Income
(In thousands)
Three Months Ended December 31, 1994
Compared to
Three Months Ended December 31, 1993
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 11,532 $ (7,068) $ 4,464
Mortgage-backed securities (12,272) 7,521 (4,751)
Trading securities (995) 667 (328)
Federal funds sold 378 150 528
Investment securities (27) 35 8
Other interest-earning assets (2,200) 2,406 206
------------ ------------ ------------
Total interest income (3,584) 3,711 127
------------ ------------ ------------
Interest expense:
Deposit accounts 1,196 3,362 4,558
Borrowings (20,208) 16,071 (4,137)
------------ ------------ ------------
Total interest expense (19,012) 19,433 421
------------ ------------ ------------
Increase (decrease) in
net interest income $ 15,428 $ (15,722) $ (294)
============ ============ ============
(1) The net change attributable to the combined impact of volume and rate has been
allocated in proportion to the absolute value of the change due to volume
and the change due to rate.
(2) Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
<PAGE>
Interest income in the 1995 quarter increased $0.1 million from the level
in the 1994 quarter primarily as a result of higher average balances of
loans receivable and, to a lesser extent, federal funds sold. Higher
average yields earned by the Bank on certain categories of its interest-
earning assets also contributed to the increase in interest income. The
effect on interest income of higher average balances and higher average
yields was offset in part by lower average balances of mortgage-backed
securities and, to a lesser extent, lower average yields on loans
receivable.
The Bank's net interest spread increased to 4.33% in the 1995 quarter from
4.18% in the 1993 quarter. The increase primarily reflected the upward
adjustment of interest rates on certain of the Bank's adjustable-rate
products to reflect recent increases in market interest rates to which
rates on such products are indexed.
Interest income on loans, the largest category of interest-earning assets,
increased by $4.5 million (or 7.5%) from the 1994 quarter. The increase in
interest income on loans was attributable to higher average balances of the
loan portfolio. Average balances of consumer loans increased $208.4
million (or 127.9%) in the 1995 quarter, as a result of increased
originations of automobile loans, which were largely responsible for the
increase of $4.4 million (or 128.7%) in interest income on consumer loans.
Average balances of single-family residential permanent loans increased
$63.9 million (or 4.8%) as a result of increased originations of such loans
during the current quarter. Interest income on these loans increased $1.9
million (or 8.5%) from the 1994 quarter. Average balances of credit card
and home equity credit line loans declined in the 1995 quarter, largely as
a result of the Bank's securitization and sale activity. The
securitization and sale of $1.4 billion and $575.0 million of credit card
receivables during fiscal 1994 and the 1995 quarter, respectively,
contributed to a decline of $10.6 million (or 1.3%) in average balances of
credit card receivables. The securitization and sale of $181.9 million of
home equity credit line receivables in September 1994 contributed to a
decline of $28.0 million (or 33.0%) in average balances of home equity
credit line receivables, which resulted in a $0.3 million decline in
interest income from these assets.
Lower average yields on the loan portfolio partially offset the effect of
higher average balances. The average yield on the loan portfolio in the
1995 quarter decreased by 19 basis points (to 9.34% from 9.53%) from the
average yield in the 1994 quarter. Special introductory and promotional
interest rates to new and existing credit card holders contributed to a
decline in the average yield on credit card loans to 13.84% from 15.12%.
This decrease was largely responsible for a $3.0 million decline in
interest income on credit card loans. The effect of the lower yield on
credit card loans was offset by increases in the average yields on single-
family residential permanent and home equity credit line loans to 7.06%
from 6.83% and to 7.91% from 6.59%, respectively. The increase in the
average yields on these loans reflects the upward adjustment of interest
rates on such loans to reflect increases in market interest rates to which
rates on such products are indexed.Interest income on mortgage-backed
securities decreased $4.8 million (or 23.3%) primarily because of lower
average balances. The reduced mortgage-backed security balances in the
1995 quarter reflected the effects of scheduled principal paydowns and
unscheduled principal prepayments. The negative effect of the lower
average balances was offset in part by an increase in the average interest
rates on these securities to 6.05% from 5.69%, primarily as a result of
rate adjustments to reflect current market interest rates on securities
that are repricing.
<PAGE>
<PAGE>
Other interest income increased by $0.7 million (or 43.1%) in the 1995
quarter as a result of higher average yields and higher average balances of
federal funds sold.
Interest expense increased $0.4 million for the 1995 quarter because of an
increase of $4.5 million in interest expense on deposits, the largest
category of interest-bearing liabilities. Interest expense on deposits
increased as a result of an increase in average rates (to 3.61% from
3.27%), which reflected the recent increase in market interest rates, and,
to a lesser extent, an increase in average deposit balances of $142.0
million. See "Financial Condition - Asset and Liability Management."
The increase in interest expense on deposits was partially offset by a $4.1
million decrease in interest expense on borrowings. The decrease in
interest paid on borrowings was primarily attributable to a $2.3 million
decrease in interest expense on FHLB of Atlanta advances and a $2.1 million
decrease in interest expense on the Bank's subordinated debentures. A
decrease of $323.8 million (or 75.9%) in the average balance of FHLB of
Atlanta advances contributed to the reduced interest expense on such
borrowings. Such decrease was offset in part by an increase in the average
cost of FHLB of Atlanta advances to 5.30% from 3.43%, which reflected the
recent increase in market interest rates. The decline in interest expense
on the Bank's subordinated debentures reflected the effects of the
refinancing of two outstanding debenture issues in the first quarter of
fiscal 1994 with the proceeds of a new, lower-rate debenture issue. As a
result of such refinancing, the annual interest rate paid by the Bank on
its debentures decreased to 9.23% in the 1995 quarter from 12.15% in the
1994 quarter.
Provision for Loan Losses. The Bank's provision for loan losses decreased
to $8.6 million in the 1995 quarter from $11.7 million in the 1994 quarter.
The decrease was primarily attributable to a decrease of $4.2 million in
the provision for losses on credit card loans. The lower provision resulted
in part from a decline in net charge-offs of credit card loans in the 1995
quarter. In addition, the securitization and sale of $1.4 billion of
credit card receivables during fiscal 1994 and of $575.0 million of credit
card receivables in the December 1994 quarter, respectively, reduced the
amount of such receivables against which the Bank maintains the reserve.
See "Financial Condition - Asset Quality - Reserves for Losses."
Other Income. The increase in other (non-interest) income to $43.1 million
in the 1995 quarter from $35.3 million in the 1994 quarter was primarily
attributable to an increase in loan and deposit servicing fees. The
positive effect of this item on other income was partially offset by a
decrease in credit card fees, a decrease in earnings on real estate held
for investment of sale, a decrease in the gain on sales of credit card
relationships and loans, and a decrease in the gain on sales of mortgage
servicing rights.
An increase of $10.0 million in excess servicing fees and $6.0 million of
servicing fees earned by the Bank for servicing its portfolios of
securitized credit card loans contributed to an increase of $18.0 million
(or 85.6%) in loan and deposit servicing fees. Such excess servicing fees
and servicing fees have increased in recent periods as a result of greater
securitization activity by the Bank. The increase in loan and deposit
servicing fees also reflected a $0.4 million increase in excess servicing
fees related to home equity credit line securitizations.
<PAGE>
<PAGE>
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $2.3 million (36.3%) in the 1995
quarter from the level in the 1994 quarter. The decrease was primarily
attributable to a $1.5 million increase in rebates on credit card retail
purchases, which the Bank incurred in connection with promotional
activities undertaken beginning in 1993. Also contributing to the decrease
was a $1.3 million decrease in late charges recorded. The decrease was
partially offset by an increase in interchange fees and cash advance
charges as a result of increased account activity. The increased number of
accounts reflected the increase in new account originations in connection
with the Bank's resumption in June 1993 of active national solicitation of
new credit card accounts.
The $3.2 million decrease in earnings on real estate held for investment or
sale was primarily attributable to an increase of $3.6 million in the
provision for losses on such assets. See "Financial Condition - Asset
Quality - Reserves for Losses." A decrease of $0.5 million in the
operating income generated by the Bank's REO properties and a decrease of
$0.5 million in partnership earnings recorded on real estate held for
investment, also contributed to the decline in earnings on real estate held
for investment or sale. The negative effect of these items was partially
offset by a $0.6 million increase in the gain recorded on sales of the
Bank's REO properties.
Gain on sales of credit card relationships and loans decreased by $2.3
million as a result of a decline in loan sales to third parties during the
1995 quarter.
Gain on sales of mortgage servicing rights decreased by $2.2 million as a
result of a decline in sales of mortgage servicing rights during the
current period. During the 1995 and 1994 quarters, the Bank sold the
rights to service mortgage loans with principal balances of approximately
$32.1 million and $150.6 million, respectively.
Operating Expenses. Operating expenses for the 1995 quarter increased $7.9
million (13.9%) from the level in the 1994 quarter. The main components of
the higher operating expenses were increases in marketing expenses,
salaries and employee benefits, and data processing expenses. The $3.3
million increase in marketing expenses was primarily incurred in connection
with the Bank's continued expansion of it's marketing program for its
credit card products and services which began in June 1993 with the
resumption of active national solicitation of new credit card accounts.
The $2.4 million increase in salaries and employee benefits resulted
primarily from the addition of staff to the Bank's credit card operations.
The $3.0 million increase in data processing expense was principally
attributable to an increase in the number of credit card accounts
outstanding and the activity generated by such accounts during the 1995
quarter.
