<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated August 14, 1995
to Prospectus Dated January 26, 1995
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
JUNE 30, 1995
----------------------------
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TABLE OF CONTENTS
Page
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at June 30, 1995 and
September 30, 1994 3
(b) Consolidated Statements of Operations for the
three-month and nine-month periods ended
June 30, 1995 and 1994 4
(c) Consolidated Statements of Cash Flows for the
nine-month periods ended June 30, 1995 and 1994 6
(d) Notes to Consolidated Financial Statements 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) Financial Condition
Real Estate 14
Banking 16
(b) Liquidity and Capital Resources
Real Estate 43
Banking 45
(c) Results of Operations
Three Months Ended June 30, 1995 Compared to
Three Months Ended June 30, 1994 48
Nine Months Ended June 30, 1995 Compared to
Nine Months Ended June 30, 1994 58
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<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
June 30 September 30
(In thousands) 1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Commercial $112,891 $110,895
Hotel 124,637 112,160
Other 4,625 4,585
------------ ------------
242,153 227,640
Accumulated depreciation (75,171) (68,111)
------------ ------------
166,982 159,529
Land parcels 38,451 38,455
Cash and cash equivalents 7,680 30,445
Other assets 95,605 99,310
------------ ------------
Total real estate assets 308,718 327,739
------------ ------------
Banking
Cash and due from banks 127,461 166,752
Interest-bearing deposits 225,204 14,345
Federal funds sold and securities purchased under agreements to resell 0 191,000
Loans held for sale 52,390 33,598
Loans held for securitization and sale 665,000 115,000
Investment securities (market value $4,354 and $4,364, respectively) 4,354 4,364
Mortgage-backed securities (market value $940,456 and $1,025,525, respectively) 942,085 1,025,525
Loans receivable (net of reserve for losses of $57,075 and $50,205, respectively) 2,158,967 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 $130,338 and $118,973, respectively) 236,510 330,655
Property and equipment, net 176,125 144,408
Cost in excess of net assets acquired, net 4,654 6,582
Excess servicing assets, net 23,620 25,198
Purchased mortgage servicing rights, net 14,387 15,304
Other assets 253,244 204,029
------------ ------------
Total banking assets 4,915,941 4,666,298
------------ ------------
TOTAL ASSETS $5,224,659 $4,994,037
============ ============
LIABILITIES
Real Estate
Mortgage notes payable $186,725 $185,730
Notes payable - secured 175,000 175,000
Notes payable - unsecured 40,119 40,288
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 36,322 44,208
------------ ------------
Total real estate liabilities 551,049 558,109
------------ ------------
Banking
Deposit accounts 4,117,663 4,008,761
Securities sold under repurchase agreements and other short-term borrowings 142,526 8,907
Bonds payable 0 24,030
Notes payable 7,569 7,729
Federal Home Loan Bank advances 134,208 100,000
Custodial accounts 15,333 19,523
Amounts due to banks 28,028 30,373
Other liabilities 26,251 54,509
Capital notes -- subordinated 160,000 160,000
------------ ------------
Total banking liabilities 4,631,578 4,413,832
------------ ------------
Minority interest held by affiliates 42,012 35,632
Minority interest -- other 74,307 74,307
------------ ------------
TOTAL LIABILITIES 5,298,946 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 (129,759) (134,793)
Net unrealized holding loss (2,781) (11,303)
------------ ------------
(32,439) (45,995)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (74,287) (87,843)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $5,224,659 $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 (Unaudited)
For the Three Months For the Nine Months
Ended June 30 Ended June 30
(In thousands, except per share amounts) 1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REAL ESTATE
Income
Commercial properties $4,719 $4,584 $14,178 $12,361
Hotels 15,984 13,256 39,184 33,577
Other 1,051 1,170 3,257 2,109
------------ ------------ ------------ ------------
Total income 21,754 19,010 56,619 48,047
------------ ------------ ------------ ------------
Expenses
Direct operating expenses:
Commercial properties 1,775 1,702 5,466 5,190
Hotels 10,172 8,802 27,580 24,791
Land parcels and other 321 397 1,009 1,047
Interest expense 10,134 9,615 30,449 29,040
Amortization of debt expense 109 395 346 1,351
Depreciation 2,422 2,049 7,085 6,174
Advisory, management and leasing fees - related parties 1,964 1,870 5,478 4,904
General and administrative 428 491 1,984 1,458
Write-down of real estate to net realizable value 0 0 0 1,380
------------ ------------ ------------ ------------
Total expenses 27,325 25,321 79,397 75,335
------------ ------------ ------------ ------------
Equity in earnings of unconsolidated entities 979 843 2,742 2,467
Gain on sale of property 11 0 1,664 0
------------ ------------ ------------ ------------
REAL ESTATE OPERATING LOSS (4,581) (5,468) (18,372) (24,821)
------------ ------------ ------------ ------------
BANKING
Interest income
Loans 79,833 64,273 216,734 190,520
Mortgage-backed securities 15,217 16,671 46,257 54,967
Trading securities 76 202 220 917
Investment securities 49 49 146 149
Other 1,972 1,996 6,883 5,088
------------ ------------ ------------ ------------
Total interest income 97,147 83,191 270,240 251,641
------------ ------------ ------------ ------------
Interest expense
Deposit accounts 39,654 33,075 112,257 97,188
Short-term borrowings 7,587 2,068 15,636 8,823
Long-term borrowings 4,036 5,061 12,844 18,549
------------ ------------ ------------ ------------
Total interest expense 51,277 40,204 140,737 124,560
------------ ------------ ------------ ------------
Net interest income 45,870 42,987 129,503 127,081
Provision for loan losses (13,604) (10,349) (35,829) (25,248)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 32,266 32,638 93,674 101,833
------------ ------------ ------------ ------------
Other income
Credit card fees 2,599 4,691 9,197 16,644
Loan servicing fees 51,796 17,219 127,226 45,431
Deposit servicing fees 6,241 5,112 17,818 14,726
Gain (loss) on sales of trading securities, net (250) 1,604 (579) 2,037
Earnings (loss) on real estate held for investment or sale, net 5,048 2,566 2,476 (75)
Gain (loss) on sales of credit card relationships and loans, net 4,483 (684) 4,721 20,774
Gain on sales of mortgage servicing rights, net 456 1,020 1,270 5,150
Other (2,423) 2,395 4,232 6,990
------------ ------------ ------------ ------------
Total other income 67,950 33,923 166,361 111,677
------------ ------------ ------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Three Months For the Nine Months
Ended June 30 Ended June 30
(In thousands, except per share amounts) 1995 1994 1995 1994
------------ ------------ ------------ ------------
<C> <C> <C> <C>
<S>
Operating expenses
Salaries and employee benefits $28,156 $22,934 $78,739 $65,579
Loan 3,468 2,757 10,310 11,449
Property and equipment 7,207 6,243 21,028 18,922
Marketing 11,656 13,712 34,835 33,049
Data processing 11,365 8,162 31,525 21,619
Deposit insurance premiums 2,298 2,819 8,136 8,596
Amortization of cost in excess of net assets acquired 677 699 1,929 2,174
Other 11,797 6,590 31,536 18,865
------------ ------------ ------------ ------------
Total operating expenses 76,624 63,916 218,038 180,253
------------ ------------ ------------ ------------
BANKING OPERATING INCOME 23,592 2,645 41,997 33,257
------------ ------------ ------------ ------------
TOTAL COMPANY
Operating income (loss) before income taxes, extraordinary item,
cumulative effect of change in accounting principle,
and minority interest 19,011 (2,823) 23,625 8,436
Income tax provision 6,596 0 7,029 6,195
------------ ------------ ------------ ------------
Income (loss) before extraordinary item, cumulative effect
of change in accounting principle and minority interest 12,415 (2,823) 16,596 2,241
Extraordinary item:
Loss on early extinguishment of debt, net of taxes 0 0 0 (11,315)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest 12,415 (2,823) 16,596 (9,074)
Cumulative effect of change in accounting principle 0 0 0 36,260
------------ ------------ ------------ ------------
Income (loss) before minority interest 12,415 (2,823) 16,596 27,186
Minority interest held by affiliates (2,598) 208 (4,249) (2,673)
Minority interest -- other (2,438) (2,437) (7,313) (7,312)
------------ ------------ ------------ ------------
TOTAL COMPANY NET INCOME (LOSS) 7,379 (5,052) 5,034 17,201
DEFICIT
Beginning of period (137,138) (135,629) (134,793) (157,882)
------------ ------------ ------------ ------------
End of period ($129,759) ($140,681) ($129,759) ($140,681)
============ ============ ============ ============
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $6,024 ($6,407) $969 $13,136
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item, cumulative effect
of change in accounting principle and minority interest $2.30 ($0.87) $2.60 ($0.39)
Extraordinary item:
Loss on early extinguishment of debt, net of taxes 0.00 0.00 0.00 (2.34)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest 2.30 (0.87) 2.60 (2.73)
Cumulative effect of change in accounting principle 0.00 0.00 0.00 7.51
------------ ------------ ------------ ------------
Income (loss) before minority interest 2.30 (0.87) 2.60 4.78
Minority interest held by affiliates (0.54) 0.04 (0.88) (0.55)
Minority interest -- other (0.51) (0.50) (1.52) (1.51)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE 1.25 (1.33) 0.20 2.72
============ ============ ============ ============
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 (Unaudited)
For the Nine Months
Ended June 30
(In thousands) 1995 1994
------------ ------------
<S> <C> <C>
Real Estate
Net income (loss) ($11,962) $5,243
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 7,085 6,174
Write-down of real estate to net realizable value 0 1,380
Increase in accounts receivable and accrued income (429) (15,288)
Increase in deferred tax asset (6,426) (38,409)
Decrease in accounts payable and accrued expenses (4,904) (11,854)
Decrease in tax sharing receivable 12,000 40
Amortization of debt expense 346 1,351
Equity in earnings of unconsolidated entities (2,742) (2,643)
Gain on sale of property (1,654) 0
Other 2,287 (10,532)
------------ ------------
(6,399) (64,538)
------------ ------------
Banking
Net income 16,996 10,695
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Accretion of premiums, discounts and net deferred loan fees (1,160) (1,035)
Depreciation and amortization 16,085 13,167
Amortization of cost in excess of net assets acquired and purchased mortgage
servicing rights 2,847 7,166
Loss on extinguishment of debt 0 10,476
Provision for loan losses 35,829 25,248
Net fundings of loans held for sale and/or securitization (251,804) (773,915)
Proceeds from sales of trading securities 139,972 604,265
Proceeds from sales of loans held for sale and/or securitization 1,810,474 1,152,715
Earnings on real estate (6,946) (8,631)
Provision for losses on real estate held for investment or sale 16,000 11,682
(Gain) loss on sales of trading securities, net 579 (2,037)
Gain on sales of credit card relationships and loans, net (4,721) (20,774)
Gain on sales of mortgage servicing rights, net (1,270) (5,150)
Minority interest held by affiliates 4,249 2,673
Minority interest - other 7,313 7,312
Decrease in excess servicing assets 1,578 11,045
(Increase) decrease in other assets (13,900) 44,693
Increase (decrease) in other liabilities and accrued expenses (30,604) 11,790
Decrease in tax sharing payable (12,000) (40)
Other, net 8,732 8,073
------------ ------------
1,738,249 1,109,418
------------ ------------
Net cash provided by operating activities 1,731,850 1,044,880
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (4,257) (3,767)
Property acquisitions (10,193) 0
Equity investment in unconsolidated entities (2,600) 1,230
Other investing activities 52 (8,535)
------------ ------------
(16,998) (11,072)
------------ ------------
Banking
Proceeds from maturities of investment securities 100 300
Net proceeds from sales of real estate 110,131 70,267
Net proceeds from sales of mortgage servicing rights 1,270 5,150
Net fundings of loans receivable (2,021,848) (921,414)
Principal collected on mortgage-backed securities 121,659 385,376
Purchases of mortgage-backed securities (61,649) (243,153)
Purchases of loans receivable (73,183) (186,232)
Purchases of property and equipment (45,546) (15,400)
Purchases of mortgage servicing rights 0 (888)
Disbursements for real estate held for investment or sale (30,202) (45,395)
Other investing activities, net 552 911
------------ ------------
(1,998,716) (950,478)
------------ ------------
Net cash used in investing activities (2,015,714) (961,550)
------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
For the Nine Months
Ended June 30
(In thousands) 1995 1994
------------ ------------
<S> <C> <C>
Real Estate
Proceeds from mortgage financing $11,400 $461
Principal curtailments and repayments of mortgages (10,289) (75,944)
Proceeds from sales of secured notes 0 175,000
Proceeds from sales of unsecured notes 3,221 8,144
Repayments of unsecured notes (3,390) (6,903)
Costs of obtaining financings (310) (9,243)
------------ ------------
632 91,515
------------ ------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 10,575,028 9,059,664
Customer withdrawals of deposits and payments for maturing certificates of deposit (10,466,126) (8,848,047)
Net increase (decrease) in securities sold under repurchase agreements 90,037 (81,517)
Advances from the Federal Home Loan Bank 851,213 736,300
Repayments of advances from the Federal Home Loan Bank (817,005) (1,016,300)
Proceeds from other borrowings 487,277 328,282
Repayments of other borrowings (467,885) (333,703)
Cash dividends paid on preferred stock (7,313) (7,313)
Repayment of capital notes - subordinated 0 (134,153)
Net proceeds received from capital notes - subordinated 0 143,603
Other financing activities, net (4,191) 5,677
------------ ------------
241,035 (147,507)
------------ ------------
Net cash provided by (used in) financing activities 241,667 (55,992)
------------ ------------
Net increase (decrease) in cash and cash equivalents (42,197) 27,338
Cash and cash equivalents at beginning of period 402,542 185,909
------------ ------------
Cash and cash equivalents at end of period $360,345 $213,247
============ ============
Cash paid during the period for:
Interest (net of amount capitalized) $179,615 $170,926
Income taxes 23 535
Supplemental schedule of noncash investing and financing activities:
Rollovers of notes payable - unsecured 3,275 5,166
Loans held for sale exchanged for mortgage-backed securities held for sale 79,253 359,139
Mortgage-backed securities available-for-sale transferred to mortgage-backed securities held-to-maturit 942,085 0
Mortgage-backed securities transferred to mortgage-backed securities available-for-sale 0 1,501,192
Loans receivable transferred to loans held for sale and/or securitization 2,202,235 962,000
Investment securities transferred to investment securities available-for-sale 0 4,789
Investment securities available-for-sale transferred to investment securities held-to-maturity 4,354 0
Real estate held for investment transferred to real estate held for sale 9,273 0
Loans made in connection with the sale of real estate 8,337 14,214
Loans receivable transferred to real estate acquired in settlement of loans 6,320 3,321
Loans classified as in-substance foreclosed transferred to loans receivable 0 15,008
Loans receivable exchanged for mortgage-backed securities held-to-maturity 23,154 0
Loans held for sale and/or securitization transferred to loans receivable 0 3,507
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 interim periods 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 June 30, 1995 and September 30, 1994, loans held for sale is composed of
single-family residential loans.
LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale are composed of the following:
June 30, September 30,
1995 1994
----------- ------------
(In thousands)
Credit card receivables $ 500,000 $ 115,000
Automobile loan
receivables 30,000 -
Home equity credit line
receivables 135,000 -
----------- ------------
Total $ 665,000 $ 115,000
=========== ============
SECURITIES:
Investment Securities and Mortgage-Backed Securities:
On June 30, 1995, the Bank transferred all of its investment securities and
mortgage-backed securities then classified as available-for-sale to held-
to-maturity and, as a result, all investment securities and mortgage-backed
securities are classified as held-to-maturity as of that date. These
securities were transferred at their fair value. Net unrealized holding
losses, net of the related income tax effect, amounting to $3.5 million as
of the date of the transfer continue to be reported as a separate component
of stockholders' equity and will be amortized to income over the remaining
lives of the securities using the level-yield method.
Gross unrealized holding gains and losses on the Bank's investment
securities at June 30, 1995 are as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In thousands)
U.S. Government securities
Maturing after one year,
but within five years $ 4,354 $ - $ - $ 4,354
========== ========== =========== =========
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<PAGE>
Gross unrealized holding gains and losses on the Bank's mortgage-backed
securities at June 30, 1995 are as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In thousands)
FHLMC $ 762,856 $ - $ (1,629) $ 761,227
FNMA 30,358 - - 30,358
Private label, AA-rated 148,871 - - 148,871
---------- ---------- ---------- ----------
Total $ 942,085 $ - $ (1,629) $ 940,456
========== ========== =========== =========
Trading Securities:
As part of its mortgage banking activities, the Bank exchanges certain
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. Such mortgage-backed securities are classified as trading
securities. The Bank realized net losses on sales of trading securities of
$0.3 million for the three months ended June 30, 1995 and net gains on
sales of trading securities of $1.6 million for the three months ended June
30, 1994. The Bank realized net losses on sales of trading securities of
$0.6 million for the nine months ended June 30, 1995 and net gains on sales
of trading securities of $2.0 million for the nine months ended June 30,
1994. There were no unrealized gains or losses as of June 30, 1995.
<PAGE>
<PAGE>
LOANS RECEIVABLE:
Loans receivable is composed of the following:
June 30, September 30,
1995 1994
------------- -------------
(In thousands)
Single-family residential $ 1,352,781 $ 1,335,645
Home equity 14,764 34,708
Commercial and multifamily 85,175 84,639
Real estate construction 56,619 66,909
Ground 15,145 18,935
Credit card 461,041 535,199
Automobile 124,551 289,346
Other 127,180 68,463
------------- ------------
2,237,256 2,433,844
------------- ------------
Less:
Undisbursed portion of loans 33,756 35,535
Unearned discounts 1,167 1,438
Net deferred loan origination costs (13,709) (10,932)
Allowance for loan losses 57,075 50,205
------------- ------------
78,289 76,246
------------- ------------
Total $ 2,158,967 $ 2,357,598
============= ============
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.
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<PAGE>
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 nine months ended June 30, 1995, the Bank had no impaired real
estate loans. At June 30, 1995, the Bank had impaired credit card loans
with a carrying value of $13.8 million, before the allowance for losses of
$1.4 million on all such impaired credit card loans. The Bank calculates
its allowance 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 three
months and nine months ended June 30, 1995 was $11.5 million and $16.5
million, respectively. The Bank recognized interest income of $0.5 million
and $1.5 million on its impaired credit card loans for the three months and
nine months ended June 30, 1995, respectively.
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:
June 30, September 30,
1995 1994
---------- ------------
(In thousands)
Land, development, construction
and rental properties $ 3,818 $ 69,767
Investments in limited partnerships - (2,478)
Investment in real estate ventures - 8,915
---------- ------------
Total real estate held for
investment 3,818 76,204
---------- ------------
Real estate held for sale 363,030 387,024
---------- ------------
Less:
Allowance for losses on real estate
held for investment 593 9,899
Allowance for losses on real estate
held for sale 129,745 109,074
Accumulated depreciation and
amortization - 13,600
---------- ------------
130,338 132,573
---------- ------------
Total real estate held for
investment or sale $ 236,510 $ 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 June 30, 1995, the
Bank's assets accounted for approximately 94% of the Trust's consolidated
assets. The Trust recorded net income of $7.4 million for the three-month
period ended June 30, 1995, compared to a net loss of $5.1 million for the
three-month period ended June 30, 1994.
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 June 30, 1995, 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 number of rooms
in its hotel portfolio by 8%.
The Real Estate Trust's office and industrial property portfolio was
92% leased at June 30, 1995, compared to leasing rates of 93% and 89% at
September 30, 1994 and June 30, 1994, 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 June 30,
1995, the Real Estate Trust's office and industrial property portfolio had
a total gross leasable area of 1,368,000 square feet, of which 213,000
square feet (16.9%) and 247,000 square feet (19.6%) are subject to leases
whose terms expire in the balance of fiscal 1995 and in fiscal 1996,
respectively. Based on discussions with current and propective tenants for
space on which leases are scheduled to expire in the balance of 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.
<PAGE>
<PAGE>
For the nine months ended June 30, 1995, the nine hotel properties
owned by the Real Estate Trust throughout the period experienced an
average occupancy rate of 65% and an average room rate of $58.33 compared
to an average occupancy rate of 60% and an average room rate of $57.62 in
the comparable nine-month period of fiscal 1994. Compared to the fiscal
1994 period, seven of the hotels registered improved occupancies and
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 occupancy of 66% and an average room rate of $59.45
during the nine-month period ended June 30, 1995.
<PAGE>
<PAGE>
BANKING
General. The Bank recorded operating income of $23.6 million during the
June 1995 quarter, compared to $2.6 million in the prior corresponding
period. The $21.0 million increase in operating income for the current
quarter was primarily a result of the Bank's continued expansion of its
credit card program and other loan products and services, which contributed
to the $35.7 million increase in loan and deposit servicing fees over the
June 1994 quarter. Partially offsetting the positive effect this item had
on income was a $12.7 million increase in operating expenses and a $3.3
million increase in the provision for loan losses resulting from increased
consumer and credit card loan originations. See "Results of Operations."
At June 30, 1995, 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 5.63%, 5.63% and 11.76%,
respectively, compared to the FIRREA requirements of 1.5%, 3.0% and 8.0%,
respectively. Under the Office of Thrift Supervision (the "OTS") "prompt
corrective action" regulations, the Bank must maintain minimum leverage,
tier 1 risk-based and total risk-based capital ratios of 4.0%, 4.0% and
8.0%, respectively, to meet the ratios established for "adequately
capitalized" institutions. At June 30, 1995, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios of 5.63%, 6.79% and 11.76%,
respectively, exceeded the corresponding ratios of 5.0%, 6.0% and 10.0% for
"well capitalized" institutions established under the prompt corrective
action regulations. On the basis of its balance sheet at June 30, 1995,
the Bank met the FIRREA-mandated fully phased-in capital requirements and,
on a fully phased-in basis, met the capital standards established for "well
capitalized" institutions under the prompt corrective action regulations.
See "Capital."
In the June 1995 quarter, the Bank securitized and sold $412.0 million of
credit card receivables pursuant to its portfolio funding strategy. The
Bank also securitized and sold $252.2 million of automobile loan
receivables in the current quarter, which sale resulted in a gain of $4.0
million. See "Liquidity."
On June 30, 1995, the Bank transferred all of its investment securities and
mortgage-backed securities then classified as available-for-sale to held-
to-maturity. Net unrealized holding losses, net of related income taxes,
in the amount of $3.5 million continue to be reported as a separate
component of stockholders' equity and will be amortized over the remaining
life of the securities using the level-yield method.
<PAGE>
<PAGE>
Asset Quality.
Non-Performing Assets. The Bank's level of non-performing assets continued
to decline during the third quarter of fiscal 1995 from the level at
September 30, 1994. 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, after all valuation allowances.
<PAGE>
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)
June 30, March 31, September 30,
1995 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential real estate $ 6,958 $ 8,085 $ 8,306
Credit card 16,482 14,778 16,229
Consumer and other 970 903 498
-------------- -------------- --------------
Total non-accrual loans (1) 24,410 23,766 25,033
-------------- -------------- --------------
Non-accrual real estate held for investment (1) - 9,088 8,915
Real estate acquired in settlement of loans 363,030 374,936 387,024
Allowance for losses on real estate acquired in settlement
of loans (129,745) (121,562) (109,074)
-------------- -------------- --------------
Real estate acquired in settlement of loans, net 233,285 253,374 277,950
-------------- -------------- --------------
Total non-performing assets $ 257,695 $ 286,228 $ 311,898
============== ============== ==============
Allowance for losses on loans $ 57,075 $ 54,137 $ 50,205
Allowance for losses on real estate held for investment 593 9,193 9,899
Allowance for losses on real estate acquired in settlement
of loans 129,745 121,562 109,074
-------------- -------------- --------------
Total allowances for losses $ 187,413 $ 184,892 $ 169,178
============== ============== ==============
Ratios:
Non-performing assets, net to total assets (2) 4.07% 4.57% 5.40%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 193.19% 167.01% 169.58%
Allowance for losses on credit card loans to non-accrual
credit card loans (1) 252.15% 260.71% 212.77%
Allowance for losses on consumer and other loans to
non-accrual consumer and other loans (1) 213.71% 233.33% 319.28%
Allowance for losses on loans to non-accrual loans (1) 233.82% 227.79% 200.56%
Allowance for losses on loans to total loans receivable (3) 1.95% 1.79% 1.97%
(1) Before deduction of allowance for losses.
(2) Non-performing assets is presented after the allowance for losses on loans and the allowance for losses
on real estate held for investment or sale.
(3) Includes loans receivable and loans held for sale and/or securitization, before deduction of allowance
for losses on loans.
</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 $257.7 million, after valuation allowances on
real estate held for sale or real estate owned ("REO") of $129.7 million,
at June 30, 1995, compared to $286.2 million, after valuation allowances on
REO of $121.6 million, at March 31, 1995. In addition to the valuation
allowances on REO, the Bank maintained $2.0 million of valuation allowances
on its non-accrual loans at June 30, 1995 compared to $3.9 million of
valuation allowances on its non-accrual loans and non-accrual real estate
held for investment at March 31, 1995. The decrease in non-performing
assets for the current quarter was primarily attributable to a net decrease
in REO of $20.1 million. During the June 1995 quarter, non-accrual REI
with a balance of $9.3 million, before valuation allowances, was
transferred to REO. See "Real Estate Held for Investment."
The Bank's non-performing real estate assets, which include non-accrual
real estate loans, REO and non-accrual REI, totaled $240.2 million at June
30, 1995, or 93.2% 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 $239.9 million at June 30, 1995,
reflecting both additional write-downs on non-performing assets during that
period and, in more recent periods, asset sales.
<PAGE>
<PAGE>
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 -----------------
Assets (1) REI(2) Assets, net Amount Percent
---------- ----------- ----------- -------- --------
(Dollars in thousands)
December 31, 1991 $559,665 $ 6,692 $552,973 - -
February 29, 1992 574,321 6,712 567,609 - -
March 31, 1992 551,960 5,490 546,470 ($21,139) -3.7%
June 30, 1992 512,729 10,224 502,505 (65,104) -11.5%
September 30, 1992 487,287 7,147 480,140 (87,469) -15.4%
December 31, 1992 427,113 2,332 424,781 (142,828) -25.2%
March 31, 1993 394,672 2,635 392,037 (175,572) -30.9%
June 30, 1993 382,657 2,634 380,023 (187,586) -33.1%
September 30, 1993 351,160 2,427 348,733 (218,876) -38.6%
December 31, 1993 345,968 3,493 342,475 (225,134) -39.7%
March 31, 1994 323,185 3,487 319,698 (247,911) -43.7%
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%
March 31, 1995 270,546 2,407 268,139 (299,470) -52.8%
June 30, 1995 240,243(3) 348(3) 239,895 (327,714) -57.7%
----------------------
(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.
(3) At June 30, 1995, the Bank had no non-accrual REI.
At June 30, 1995, $218.8 million or 91.1% 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 $24.4 million at
June 30, 1995, which represented a slight increase of $0.6 million from
$23.8 million at March 31, 1995. At June 30, 1995, non-accrual loans
consisted primarily of $7.0 million of non-accrual real estate loans and
$16.5 million of non-accrual credit card loans.
<PAGE>
<PAGE>
At June 30, 1995, the $16.5 million of non-accrual credit card loans 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 $16.0 million of credit card loans classified for
regulatory purposes as substandard which were not 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
non-performing assets ($16.0 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 $16.0 million, $4.7 million was current, $6.8
million was 30-59 days past due and $4.5 million was 60-89 days past due at
June 30, 1995. All delinquent amounts are included in the table of
delinquent loans. See "Delinquent Loans."
Non-accrual REI. At June 30, 1995, the Bank had no non-accrual REI. At
September 30, 1994, a participating loan to a developer with a balance of
$8.9 million, before valuation allowances of $2.0 million, was non-
performing. During the June 1995 quarter, this loan with a balance of $9.3
million, before valuation allowances of $2.0 million, was transferred to
REO. See "Real Estate Held for Investment."
REO. At June 30, 1995, the Bank's REO totaled $233.3 million, after
valuation allowances on such assets of $129.7 million. The principal
component of REO consists of the Communities, which had an aggregate book
value of $174.4 million at that date. Four of the Communities are under
active development.
During the three months ended June 30, 1995, REO decreased $20.1 million.
This decrease was primarily attributable to the sale of two retail center
properties and one commercial ground property and sales in the Communities
and other smaller residential properties. This decrease was partially
offset by the transfer of the participating loan to a developer mentioned
above from REI to REO resulting from the Bank acquiring title to the
property. See "Disposition of REO."
The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
See "Disposition of REO" and "Allowances for Losses." The Bank capitalized
interest in the amount of $3.4 million during the nine months ended June
30, 1995, of which $3.3 million was related to the Bank's four active
Communities.<PAGE>
<PAGE>
Disposition of REO. During the three months ended June 30, 1995, the Bank
received proceeds of approximately $30.4 million upon the disposition of
REO, which consisted of two retail centers ($8.4 million), one commercial
ground property ($0.6 million), 456 residential lots or units in the
Communities and other smaller residential properties ($19.9 million) and
various single-family residential properties ($1.5 million).
The Bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in a 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 June 30,
1995.
Balance Balance
Before All After Percent
Valuation Valuation Valuation of
Allowances Allowances Allowances Total
----------- -------------- ------------- ------
(Dollars in thousands)
Communities $ 273,473 $ 99,052 $ 174,421 74.8%
Residential ground
and construction 53,744 20,298 33,446 14.3
Retail center 3,187 1,620 1,567 0.7
Commercial ground 28,457 8,567 19,890 8.5
Single-family
residential
properties 4,169 208 3,961 1.7
----------- -------------- ------------- ------
Total REO $ 363,030 $ 129,745 $ 233,285 100.0%
=========== ============== ============= ======
At June 30, 1995, the Bank had executed contracts to sell five of these
properties at their aggregate book value of $12.7 million at that date.
<PAGE>
<PAGE>
The four active Communities consists of 12,928 residential lots or units
and 197.6 acres of land designated for retail use. At June 30, 1995, 9,240
residential units (71.5%) had been sold to builders, consisting of 8,014
units (62.0%) which had been settled and 1,226 units (9.5%) which were
under contract and pending settlement. At the same date, approximately
114.7 acres (58.0%) of retail land had been sold to developers, including
27.4 acres which were under contract and pending settlement. In addition,
at June 30, 1995, 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 60.4% to 1,142 lots during the first nine months of fiscal 1995
from 712 lots during the prior corresponding period. The rate of home
sales in the Bank's four active Communities declined to 764 units during
the nine months ended June 30, 1995 from 1,089 units during the nine months
ended June 30, 1994. The decline in home sales in the four active
Communities reflected the negative effect of increasing mortgage interest
rates and other general economic conditions.
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.
June 30, September 30,
1995 1994 1993
-------- -------- --------
(In thousands)
Residential construction loans $ 11,180 $ 13,367 $ 10,386
Single-family permanent loans (1) 51,067 54,642 79,104
-------- -------- --------
Total $ 62,247 $ 68,009 $ 89,490
======== ======== ========
---------------------------------
(1) Includes $2.3 million, $4.4 million and $8.8 million of loans
classified as held for sale at June 30, 1995, September 30, 1994 and
September 30, 1993, respectively.
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
current policy is to sell all such single-family loans for which it
provides permanent financing. At June 30, 1995, $2.3 million of such loans
are classified as held for sale and generally are expected to be sold in
the fourth 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.
Nine Months
Ended
June 30, Year Ended September 30,
1995 1994 1993
--------- --------- ---------
(In thousands)
Sales proceeds $ 52,900 $ 78,057 $ 66,291
Development costs 25,665 44,264 52,118
--------- --------- ---------
Net cash flow 27,235 33,793 14,173
Increase (decrease) in reserves
and other non-cash items 9,787 (4,337) 7,899
--------- --------- ---------
Net decrease in balances of
the Communities $ 37,022 $ 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 2,400 acres in Loudoun County, Virginia, which
is in the pre-development stage. At June 30, 1995, this property had a
book value of $25.6 million, after valuation allowances.
Under its written agreement with the OTS, the Bank may not increase its
investments in certain of its large REO properties beyond levels existing
at September 30, 1991 without OTS approval. The OTS has not objected to
the implementation of the Bank's budgets for additional investments in
these properties through September 30, 1994. The Bank has submitted
project budgets for fiscal 1995 to the OTS.
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.
<PAGE>
<PAGE>
At June 30, 1995, potential problem assets totaled $17.5 million, before
valuation allowances of $3.3 million, as compared to $18.4 million, before
valuation allowances of $3.5 million, at March 31, 1995. The $0.9 million
decrease in potential problem assets was primarily attributable to net
principal reductions. Subsequent to June 30, 1995, a residential ground
loan with a principal balance of $8.8 million that was classified as a
potential problem asset was paid off.
Delinquent Loans. At June 30, 1995, delinquent loans totaled $54.4
million (or 1.8% of loans) compared to $36.5 million (or 1.2% of loans) at
March 31, 1995. The following table sets forth information regarding the
Bank's delinquent loans at June 30, 1995.
Principal Balance
-------------------------------------- Total as a
Mortgage Non-Mortgage Percentage
Loans Loans Total of Loans (1)
--------- -------------- --------- ------------
(Dollars in thousands)
Loans delinquent for:
30-59 days $ 6,459 $ 20,987 $ 27,446 0.9%
60-89 days 14,889 12,071 26,960 0.9%
--------- -------------- --------- -----
Total $ 21,348 $ 33,058 $ 54,406 1.8%
========= ============== ========= =====
----------------------
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
Mortgage loans classified as delinquent 30-59 days includes one commercial
permanent loan with a book balance of $0.2 million and two residential
construction loans with an aggregate book balance of $1.9 million.
Mortgage loans classified as delinquent 60-89 days includes one commercial
permanent loan with a book balance of $0.1 million and two residential
ground loans and one residential construction loan with an aggregate book
balance of $12.7 million for the three loans. The remaining balance of
loans delinquent 30-89 days consists of single-family permanent residential
mortgage loans and home equity credit line loans. The increase in total
delinquent mortgage loans, from $7.4 million at March 31, 1995 to $21.3
million at June 30, 1995, was primarily attributable to three loans,
secured by a single residential construction property, with an aggregate
book balance of $12.7 million. One of these loans, with a balance of $8.8
million, previously had been accounted for as a troubled debt restructuring
and classified as a potential problem asset. All of these loans were paid
off subsequent to June 30, 1995.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $33.1 million at June 30, 1995 from $29.1 million at March 31,
1995, and increased as a percentage of total non-mortgage loans to 2.7% at
June 30, 1995 from 2.1% at March 31, 1995.
<PAGE>
<PAGE>
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.
June 30, March 31, September 30,
1995 1995 1994
----------- ----------- -----------
(In thousands)
Troubled debt
restructurings $ 26,395 $ 28,134 $ 29,141
=========== =========== ===========
At June 30, 1995, 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 $13.2 million. The $1.7 million decrease in loans accounted for
as troubled debt restructurings from March 31, 1995 resulted from net
principal reductions. At June 30, 1995, the Bank had commitments to lend
$1.5 million of additional funds on loans that have been restructured.
Subsequent to June 30, 1995, one residential ground loan with a principal
balance of $8.8 million, which was accounted for as a troubled-debt
restructuring and classified as a potential problem asset at June 30, 1995,
paid off.
Real Estate Held for Investment. At June 30, 1995, real estate held for
investment consisted of two properties with an aggregate book value of $3.2
million, net of valuation allowances of $0.6 million as compared to six
properties with an aggregate book value of $54.8 million, net of
accumulated depreciation of $16.0 million and valuation allowances of $9.2
million at March 31, 1995. During the three months ended June 30, 1995,
the Bank sold two apartment buildings previously classified as real estate
held for investment which had an aggregate net book value of $25.5 million
and recognized a net gain of $5.3 million. Also during the current period,
a loan to a developer with a profit participation feature was transferred
to REO and an office building was transferred to property, plant and
equipment and will be used as bank premises reflecting management's
decision to use a significant portion of the building to satisfy the Bank's
current and anticipated need for additional office space.
Allowances for Losses. The following tables show loss experience by asset
type and the components of the allowance for losses on loans and the
allowance 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 Allowance for and Charge-offs of Loans
(Dollars in thousands)
Nine Months Ended Three Months
June 30, Ended
------------------------------ June 30,
1995 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period $ 50,205 $ 68,040 $ 54,137
------------- ------------- -------------
Provision for loan losses 35,829 25,248 13,604
------------- ------------- -------------
Charge-offs:
Residential 866 1,400 267
Credit card 34,617 43,207 12,548
Other 2,369 577 866
------------- ------------- -------------
Total charge-offs 37,852 45,184 13,681
------------- ------------- -------------
Recoveries:
Residential 14 75 12
Credit card 8,388 10,108 2,834
Other 491 257 169
------------- ------------- -------------
Total recoveries 8,893 10,440 3,015
------------- ------------- -------------
Charge-offs, net of recoveries 28,959 34,744 10,666
------------- ------------- -------------
Balance at end of period $ 57,075 $ 58,544 $ 57,075
============= ============= =============
Provision for loan losses to average loans (1) (2) 1.60% 1.26% 1.67%
Net loan charge-offs to average loans (1) (2) 1.29% 1.74% 1.31%
Ending allowance for losses on loans to total
loans (2) (3) 1.95% 2.10% 1.95%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
/TABLE
<PAGE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans by Type
(Dollars in thousands)
June 30, March 31, September 30,
1995 1995 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 $ 1,289 48.1 % $ 1,382 46.3 % $ 1,384 53.8 %
Home equity 504 5.1 323 3.7 133 1.4
Commercial and multifamily 8,509 2.9 8,488 2.7 8,506 3.3
Residential construction 1,267 0.9 1,336 0.9 1,455 1.2
Commercial construction 57 0.2 57 0.2 245 0.2
Ground 1,816 0.5 1,917 0.5 2,362 0.6
Credit card 41,560 32.9 38,527 31.2 34,530 25.5
Consumer and other 2,073 9.4 2,107 14.5 1,590 14.0
-------- -------- --------
Total $57,075 $54,137 $50,205
======== ======== ========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Nine Months Ended Three Months
June 30, Ended
-------------------------- June 30,
1995 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 9,899 $ 10,182 $ 9,193
Real estate held for sale 109,074 101,462 121,562
----------- ----------- ------------
Total 118,973 111,644 130,755
----------- ----------- ------------
Provision for real estate losses:
Real estate held for investment (8,556) (93) (7,850)
Real estate held for sale 24,556 11,775 10,041
----------- ----------- ------------
Total 16,000 11,682 2,191
----------- ----------- ------------
Charge-offs:
Real estate held for investment:
Commercial ground 750 - 750
----------- ----------- ------------
Total 750 - 750
----------- ----------- ------------
Real estate held for sale:
Residential construction 1,924 676 -
Commercial construction 933 - 933
Commercial ground 925 - 925
Residential ground 103 - -
Commercial permanent - 5,812 -
----------- ----------- ------------
Total 3,885 6,488 1,858
----------- ----------- ------------
Total charge-offs on real estate
held for investment or sale 4,635 6,488 2,608
----------- ----------- ------------
Balance at end of period:
Real estate held for investment 593 10,089 593
Real estate held for sale 129,745 106,749 129,745
----------- ----------- ------------
Total $ 130,338 $ 116,838 $ 130,338
=========== =========== ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
June 30, March 31, September 30,
1995 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment:
Commercial and multifamily $ - $ 6,870 $ 7,793
Ground - 2,000 1,975
Other 593 323 131
-------------- -------------- --------------
Total 593 9,193 9,899
-------------- -------------- --------------
Allowance for losses on real estate
held for sale:
Residential 208 154 66
Home equity 1 11 4
Commercial and multifamily - 147 142
Commercial construction 1,621 2,415 1,216
Residential construction 20 43 1,942
Ground 127,895 118,792 105,704
-------------- -------------- --------------
Total 129,745 121,562 109,074
-------------- -------------- --------------
Total allowance for losses on real
estate held for investment or sale $ 130,338 $ 130,755 $ 118,973
============== ============== ==============
</TABLE>
<PAGE>
<PAGE>
The Bank maintains valuation allowances for estimated losses on loans and
real estate. The Bank's total valuation allowances for losses on loans and
real estate held for investment or sale increased by $2.5 million from the
level at March 31, 1995 to $187.4 million at June 30, 1995. The $2.5
million increase was primarily attributable to increased valuation
allowances on the Communities and credit card loans. During the nine
months ended June 30, 1995, the Bank recorded net charge-offs of $5.5
million on loans secured by real estate and real estate held for investment
or sale and provided an additional $16.2 million of valuation allowances on
these assets.
<PAGE>
<PAGE>
The following table shows valuation allowances for losses on performing and
non-performing assets at the dates indicated.
June 30, 1995
---------------------------------
Non-
Performing performing Total
--------- --------- ---------
(In thousands)
Allowance for losses on:
Loans:
Real estate $ 13,094 $ 348 $ 13,442
Credit card 39,912 1,648 41,560
Consumer and other 2,066 7 2,073
--------- --------- ---------
Total allowance for
losses on loans 55,072 2,003 57,075
--------- --------- ---------
Real estate held for
investment 593 - 593
Real estate held for sale - 129,745 129,745
--------- --------- ---------
Total allowance for losses on
real estate held for
investment or sale 593 129,745 130,338
--------- --------- ---------
Total allowance for losses $ 55,665 $ 131,748 $ 187,413
========= ========= =========
September 30, 1994
---------------------------------
Non-
Performing performing Total
--------- --------- ---------
(In thousands)
Allowance for losses on:
Loans:
Real estate $ 13,670 $ 415 $ 14,085
Credit card 32,907 1,623 34,530
Consumer and other 1,588 2 1,590
--------- --------- ---------
Total allowance for
losses on loans 48,165 2,040 50,205
--------- --------- ---------
Real estate held for
investment 7,924 1,975 9,899
Real estate held for sale - 109,074 109,074
--------- --------- ---------
Total allowance for losses on
real estate held for
investment or sale 7,924 111,049 118,973
--------- --------- ---------
Total allowance for losses $ 56,089 $ 113,089 $ 169,178
========= ========= =========
<PAGE>
<PAGE>
The allowance for losses on loans secured by real estate and real estate
held for investment or sale totaled $143.8 million at June 30, 1995, which
constituted 38.9% of total non-performing real estate assets, before
valuation allowances. This amount represented a $0.5 million decrease from
the March 31, 1995 level of $144.3 million, or 36.8% 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 June 1995 quarter, the Bank provided an additional $6.6 million of
general valuation allowances against its Communities pursuant to this
policy. The effect of such additional general valuation allowances was a
reduction of 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 valuation allowances 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.
The allowance for losses on real estate held for sale at June 30, 1995 is
in addition to approximately $57.0 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at June
30, 1995.
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 valuation allowances.
Net charge-offs of credit card loans for the nine months ended June 30,
1995 were $26.2 million, compared to $33.1 million for the nine months
ended June 30, 1994. 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 valuation
allowances established at the beginning of the fiscal period.
The allowance for losses on credit card loans increased to $41.6 million at
June 30, 1995 from $38.5 million at March 31, 1995, primarily because of
the increased volume of credit card loans. The ratios of the allowance for
such losses to non-performing credit card loans and to outstanding credit
card loans changed to 252.2% and 4.3%, respectively, at June 30, 1995 from
260.7% and 4.1%, respectively, at March 31, 1995.
<PAGE>
<PAGE>
The allowance for losses on consumer and other loans remained constant at
$2.1 million from March 31, 1995 to June 30, 1995. The ratios of the
allowances for losses on consumer and other loans to non-performing
consumer and other loans and to outstanding consumer and other loans
changed to 213.7% and 0.8%, respectively, at June 30, 1995 from 233.3% and
0.5%, respectively, at March 31, 1995.
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 June 30, 1995,
adjustable-rate loans accounted for 86.5% of total loans. At June 30,
1995, ARMs and home equity credit line loans with rates adjustable in one
year or less accounted for 13.4% of total loans, while credit card loans
accounted for 32.9% of total loans.
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. For example, between
January 1994 and June 1995, short-term market rates increased over 300
basis points while the Bank's overall deposit costs increased less than 70
basis points.
<PAGE>
<PAGE>
The Bank views control over interest rate sensitivity as a key element in
its financial planning process and monitors its interest rate sensitivity
through its forecasting system. The Bank manages its interest rate
exposure and will narrow or widen its gap, depending on its perception of
interest rate movements and the composition of its balance sheet. For the
reasons discussed above, the Bank might take action to narrow its gap if it
believes that market interest rates will experience a significant prolonged
increase, and might widen its gap if it believes that market interest rates
will decline or remain relatively stable. A number of asset and liability
management strategies are available to the Bank in structuring its balance
sheet. These include selling or retaining certain portions of the Bank's
current residential mortgage loan production; altering the Bank's pricing
on certain deposit products to emphasize or de-emphasize particular
maturity categories; altering the type and maturity of securities acquired
for the Bank's investment portfolio when replacing securities following
normal portfolio maturation and turnover; lengthening or shortening the
maturity or repricing terms for any current period asset securitizations;
and altering the maturity or interest rate reset profile of borrowed funds,
if any, including funds borrowed from the Federal Home Loan Bank ("FHLB")
of Atlanta.
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 1995,
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 prepayment rates are assumed for
the Bank's loans based on recent actual experience. 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 June 30, 1995
Mortgage loans:
Adjustable-rate $ 336,606 $ 204,281 $ 438,621 $ 298,895 $ 18,012 $1,296,415
Fixed-rate 8,762 10,314 37,907 42,653 88,259 187,895
Loans held for sale 52,390 - - - - 52,390
Home equity credit lines and second
mortgages 21,217 28 32 - - 21,277
Credit card and other 503,572 26,684 83,090 58,836 38,273 710,455
Loans held for securitization and sale 665,000 - - - - 665,000
Mortgage-backed securities 171,303 177,915 472,217 105,183 15,467 942,085
Other investments 344,927 - 4,353 - - 349,280
----------- ----------- ------------ ------------ ----------- -----------
Total interest-earning assets 2,103,777 419,222 1,036,220 505,567 160,011 4,224,797
Total non-interest earning assets - - - - 691,144 691,144
----------- ----------- ------------ ------------ ----------- -----------
Total assets $2,103,777 $ 419,222 $ 1,036,220 $ 505,567 $ 851,155 $4,915,941
=========== =========== ============ ============ =========== ===========
Deposits:
Fixed maturity deposits $ 490,142 $ 325,143 $ 294,781 $ 112,880 $ - $1,222,946
NOW, statement and passbook accounts 1,312,901 40,527 134,980 91,871 195,787 1,776,066
Money market deposit accounts 1,000,551 - - - - 1,000,551
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 272,637 118 3,532 1,790 6,226 284,303
----------- ----------- ------------ ------------ ----------- -----------
Total interest-bearing liabilities 3,086,231 365,788 433,293 206,541 352,013 4,443,866
Total non-interest bearing liabilities - - - - 187,712 187,712
Stockholders' equity - - - - 284,363 284,363
Total liabilities & stockholders'
----------- ----------- ------------ ------------ ----------- -----------
equity $3,086,231 $ 365,788 $ 433,293 $ 206,541 $ 824,088 $4,915,941
=========== =========== ============ ============ =========== ===========
Gap ($982,454) $53,434 $602,927 $299,026 ($192,002)
Cumulative gap ($982,454) ($929,020) ($326,093) ($27,067) ($219,069)
Cumulative gap as a percentage
of total assets (20.0)% (18.9)% (6.6)% (0.6)% (4.5)%
</TABLE>
<PAGE>
<PAGE>
The one-year gap, as a percentage of total assets, was a negative 18.9% at
June 30, 1995, compared to a negative 23.8% at March 31, 1995. 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. The improvement in the Bank's one-
year gap was primarily due to an increase in short-term assets at June 30,
1995 resulting from the securitization and sale of credit card and
automobile loan receivables.
During the March 1995 quarter, the Bank purchased a series of interest rate
caps which management believes will limit significantly its exposure to
rising short-term interest rates during a four-year period beginning July
1, 1995 and ending June 30, 1999. The initial level of the protection is a
notional principal amount of $600 million and such protection will decline
to $200 million by March 31, 1998. The remaining $200 million of
protection will expire on June 30, 1999. In the event that the one-month
London Inter-Bank Offered Rate ("LIBOR") exceeds 7.00% on certain
predetermined dates, the Bank is entitled to receive compensatory payments
from the cap provider, which is a AAA-rated (by Standard & Poor's)
counterparty. Such payments would be equal to the product of (a) the
amount by which the one-month LIBOR rate exceeds 7.00% and (b) the then
outstanding notional principal amount for a predetermined period of time.
The Bank has no obligation to make payments to the provider of the cap or
any other party.
Management believes that the purchase of the caps has significantly reduced
the Bank's exposure to rising interest rates. If the caps had been in
effect at June 30, 1995, the Bank's one-year funding gap figure shown in
the foregoing table would have been reduced by $600 million, thereby
reducing this measured exposure by approximately two-thirds.
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 June 30, 1995, 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 first nine months of fiscal 1995, after
receiving OTS approval, the Bank made tax sharing payments totaling $12.0
million to the Real Estate Trust, which owns 80% of the Bank's Common
Stock. The Bank made an additional tax sharing payment of $8.5 million
subsequent to June 30, 1995.
<PAGE>
<PAGE>
Capital. At June 30, 1995, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios
exceeded the ratios established for "well capitalized" institutions under
OTS prompt corrective action regulations. On the basis of its June 30,
1995 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 "well capitalized" institutions under the
prompt corrective action regulations.
The following table shows the Bank's regulatory capital levels at June 30,
1995 in relation to the regulatory requirements in effect at that date.
The information below is based upon the Bank's understanding of the
regulations and interpretations currently in effect and may be subject to
change.
<PAGE>
<PAGE>
<TABLE>
Regulatory Capital
(Dollars in thousands)
Minimum Excess
Actual Capital Requirement 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 $321,244
Net unrealized holding losses (1) 3,476
---------
Adjusted capital 324,720
Adjustments for tangible and core capital:
Intangible assets (46,862)
Non-includable subsidiaries (2) (5) (2,188)
---------
Total tangible capital 275,670 5.63% $ 73,413 1.50% $202,257 4.13%
Supervisory goodwill (4) - ============= ========= ========= ========= =========
---------
Total core capital (3) (4) (5) 275,670 5.63% $195,769 4.00% $ 79,901 1.63%
--------- ============= ========= ========= ========= =========
Total tier 1 risk-based capital (3) 275,670 6.79% $162,495 4.00% $113,175 2.79%
--------- ============= ========= ========= ========= =========
Adjustments for risk-based capital:
Subordinated capital debentures 151,400
Allowance for general loan losses 49,842
---------
Total supplementary capital 201,242
Excess allowance for loan losses -
---------
Adjusted supplementary capital 201,242
---------
Total available capital 476,912
Equity investments (2) (28,703)
---------
Total risk-based capital (3) $448,209 11.76% $324,918 8.00% $123,291 3.76%
========= ============= ========= ========= ========= =========
(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 $4.4 million representing the allowance for general loan losses 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.
(5)Effective July 1, 1995, the percentage of non-includable subsidiaries required to be phased out from core capital
increased from 40% to 60%. If this phase-out had been in effect on June 30, 1995, the Bank's tangible, core and
risk-based regulatory capital ratios would have been 5.61%, 5.61% and 11.73%.
</TABLE>
<PAGE>
<PAGE>
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. During the period April 1, 1995 through June 30,
1995, the Bank's total assets increased by $36.3 million, which is $3.4
million less than the net interest credited on deposit liabilities for such
period.
Capital Maintenance Strategies. The regulatory capital requirements
applicable to the Bank will continue to increase over time as a result of
the gradual phase-out of various assets from regulatory capital. On the
basis of its balance sheet at June 30, 1995, the Bank met the FIRREA-
mandated fully phased-in capital requirements with tangible, core (or
leverage), and total risk-based capital ratios of 5.57%, 5.57% and 11.69%,
respectively, which exceeded the FIRREA requirements of 1.5%, 3.0% and
8.0%, respectively. At June 30, 1995, the Bank had $7.0 million, after
subsequent valuation allowances, of extensions of credit to, and
investments in, subsidiaries engaged in activities impermissible for
national banks ("non-includable subsidiaries") which were subject at June
30, 1995 to a 40% phase-out from all three FIRREA capital requirements.
This phase-out increased to 60% on July 1, 1995 and will increase to 100%
on July 1, 1996, in accordance with a delayed phase-in period approved by
the OTS pursuant to legislation enacted in October 1992. At June 30, 1995,
the Bank also had three equity investments with an aggregate balance, after
subsequent valuation allowances, of $32.5 million which were subject to a
100% phase-out from total capital for risk-based capital purposes.
Pursuant to OTS guidelines, $4.4 million of general valuation allowances
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 total risk-
based capital. The Bank has submitted to the OTS a request for extensions
of the five-year periods for certain of these projects and, 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 June 30, 1995, after valuation allowances of $129.7 million, by the
fiscal year in which the property was acquired through foreclosure.
<PAGE>
<PAGE>
Fiscal Year (In thousands)
1990 (1) $ 99,109
1991 95,104
1992 15,080
1993 4,897
1994 8,128
1995 10,967
----------
Total REO $ 233,285
==========
-----------------------
(1) Includes REO with an aggregate net book value of $28.7 million, which
the Bank treats as equity investments for regulatory capital purposes.
At June 30, 1995, the Bank had $45.2 million of supervisory goodwill, all
of which was excluded from core capital pursuant to statutory provisions.
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 allowances 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 June 30, 1995, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios were 5.63%, 6.79% and
11.76%, 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 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." However, on a fully phased-in basis at June 30, 1995,
the Bank's regulatory capital ratios would meet the ratios established for
"well capitalized" institutions.
<PAGE>
<PAGE>
Deposit Insurance Premiums. The Treasury Department and the federal
banking agencies, in testimony given before Congress on August 2, 1995,
presented a joint proposal to capitalize the Savings Association Insurance
Fund ("SAIF") and to either reduce or eliminate the anticipated disparity
between the Bank Insurance Fund ("BIF") and SAIF insurance rates. Under
the proposal: (i) on January 1, 1996, thrift institutions would pay a one-
time assessment of 85 to 90 basis points on their SAIF-insured deposits to
increase the SAIF's reserve ratio to 1.25%; and (ii) effective January 1,
1996, the assessment base for interest payments on Financing Corporation
bonds, which were issued in the late 1980's to resolve troubled thrifts,
would be expanded to cover all FDIC-insured institutions, including members
of both the BIF and SAIF. The joint proposal also recommends that the BIF
and SAIF be merged by the beginning of 1998. There can be no assurances
whether, or in what form, the joint proposal will eventually be enacted.
<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. 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. As the owner, directly and through two wholly-owned
subsidiaries, of a 21.5% limited partnership interest in Saul Holdings
Limited Partnership, the Real Estate Trust shares in cash distributions
from operations.
The maturity schedule for the Real Estate Trust's outstanding debt at
June 30, 1995 is set forth in the following table. Of the $186.7 million
of mortgage debt outstanding at June 30, 1995, $142.7 million was
nonrecourse to the Real Estate Trust and $173.0 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) $ 2,245 $ -- $ 582 $ 2,827
1996 9,679 -- 6,116 15,795
1997 19,438 -- 5,539 24,977
1998 7,412 -- 6,968 14,380
1999 17,093 -- 12,984 30,077
Thereafter 130,858 175,000 7,9303 13,788
-------- -------- -------- --------
$186,725 $175,000 $40,119 $401,844
======== ======== ======== ========
--------------------------------------------------------------------
(1) July 1, 1995 to September 30, 1995.
<PAGE>
<PAGE>
The Real Estate Trust anticipates that its capital improvement costs
for its existing portfolio will be in the range of $4.0 to $5.0 million
per year during the next several fiscal years.
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 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. During the first nine months of fiscal 1995,
after receiving OTS approval, the Bank made tax sharing payments totalling
$12.0 million to the Real Estate Trust. The Bank made an additional tax
sharing payment of $8.5 million subsequent to June 30, 1995. The
availability and amount of tax sharing payments and dividends in future
periods are 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.
<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
liquidity ratio for the month ended June 30, 1995 was 11.5%, compared to
11.1% for the month ended March 31, 1995. Additionally, the Bank met the
liquidity level requirements for each month of the first nine months of
fiscal 1995.
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 June 30, 1995, the Bank's portfolio
included mortgage loans, U.S. Government securities and mortgage-backed
securities with outstanding principal balances of $1.0 billion, $4.4
million and $939.1 million, respectively. The estimated borrowing capacity
against mortgage loans, U.S. Government securities and mortgage-backed
securities that are available to be pledged to the FHLB of Atlanta and
various security dealers totaled $1.3 billion at June 30, 1995, after
market-value and other adjustments.
In recent periods, the proceeds from sales of credit card relationships and
other assets and securitization and sale of credit card, home equity credit
line and automobile loan receivables have been significant sources of
liquidity for the Bank. During the June 1995 quarter, the Bank securitized
and sold $412.0 million of credit card receivables and $252.2 million of
automobile loan receivables. Additionally, during the second quarter of
fiscal 1995, the Bank securitized and sold $413.0 million of credit card
receivables and $59.2 million of amounts on deposit in certain spread
accounts established in connection with certain of the Bank's outstanding
credit card securitizations. The Bank also securitized and sold
$575.0 million of credit card receivables during the first quarter of
fiscal 1995. At June 30, 1995, the Bank was considering the securitization
and sale of approximately $700.0 million of credit card receivables,
including $500.0 million of receivables outstanding at June 30, 1995 and
$200.0 million of receivables which the Bank expects to become available,
either through additional fundings or amortization of existing trusts,
during the six months ending December 31, 1995. In addition, the Bank was
considering the securitization and sale of approximately $200.0 million of
automobile loan receivables and $150.0 million of home equity credit line
receivables during the six months ending December 31, 1995. As part of its
operating strategy, the Bank will continue to explore opportunities to sell
assets and to securitize and sell credit card, home equity credit line and
automobile loan receivables to meet liquidity and other balance sheet
objectives.
<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 nine months ended June 30, 1995, 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 $10.5 billion, repay borrowings of $2.6 billion, fund existing and
continuing loan commitments (including real estate held for investment or
sale) of $2.4 billion, purchase investments and loans of $134.8 million and
meet operating expenses, before depreciation and amortization, of $199.1
million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $10.6 billion,
proceeds from borrowings of $2.8 billion, proceeds from sales of loans,
trading securities and real estate of $2.1 billion, and principal and
interest collected on investments, loans, mortgage-backed securities and
securities of $519.1 million.
The Bank is obligated under various recourse provisions related to the
securitization and sale of credit card, home equity credit line and
automobile loan receivables. Of the $3.7 billion of outstanding trust
certificate balances at June 30, 1995, the primary recourse to the Bank was
approximately $76.5 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 June 30, 1995, recourse to the Bank under
these arrangements was approximately $4.4 million.
<PAGE>
<PAGE>
The Bank's commitments at June 30, 1995 are set forth in the following
table:
(In thousands)
Commitments to originate loans $ 28,071
------------
Loans in process (collateralized loans):
Home equity 546,067
Real estate construction 26,639
Commercial and multifamily 227
------------
572,933
------------
Loans in process (unsecured loans):
Credit cards 9,929,321
Overdraft lines 48,511
Commercial 6,891
-----------
9,984,723
------------
Total commitments to extend credit 10,585,727
Letters of credit 44,639
Recourse arrangements on asset-backed
securitizations 76,512
Recourse arrangements on mortgage-backed
securities 4,389
------------
Total commitments $ 10,711,267
============
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 97.8% of commitments at June
30, 1995.
At June 30, 1995, repayments of borrowed money scheduled to occur during
the next 12 months were $121.9 million. Certificates of deposit maturing
during the next 12 months amounted to $815.3 million, of which a
substantial portion is expected to remain with the Bank.
There were no material commitments for capital expenditures at June 30,
1995.
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 JUNE 30,1995 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1994
REAL ESTATE
The following table sets forth for the three-month period ended June 30,
1995 (the "1995 quarter") and the three-month period ended June 30, 1994
(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.
Three Months Ended
June 30,
---------------------
1995 1994
-------- --------
COMMERCIAL PROPERTIES (In thousands)
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $ 4,376 $ 3,896
Expense recoveries 241 470
Other 102 218
-------- --------
Total revenues 4,719 4,584
-------- --------
Direct operating expenses
Utilities 559 529
Repairs and maintenance 447 476
Real estate taxes 349 364
Payroll 138 162
Insurance 66 63
Other 216 108
-------- --------
Total direct operating expenses 1,775 1,702
-------- --------
Income after direct operating expenses $ 2,944 $ 2,882
======== ========
<PAGE>
<PAGE>
Three Months Ended
June 30,
---------------------
1995 1994
-------- --------
HOTELS (1) (In thousands)
Revenue
Room sales $ 11,442 $ 9,419
Food sales 2,977 2,477
Beverage sales 704 674
Other 861 686
-------- --------
Total revenue 15,984 13,256
-------- --------
Direct operating expenses
Payroll 4,465 3,926
Cost of sales 1,296 1,139
Utilities 712 648
Repairs and maintenance 795 665
Advertising and promotion 706 648
Property taxes 349 280
Insurance 160 147
Other 1,689 1,349
-------- --------
Total direct operating expenses 10,172 8,802
-------- --------
Income after direct operating expenses $ 5,812 $ 4,454
======== ========
(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 $2.1 million and an operating loss of $4.6 million in the
1995 quarter compared to a loss before depreciation and amortization of
$3.0 million and an operating loss of $5.5 million in the corresponding
prior period. The reduction in the operating loss was largely attributable
to an improvement in the operations of hotels.
Income after direct operating expenses from commercial properties,
which consists of office and industrial properties, increased $62,000
(2.2%) in the 1995 quarter compared to such income in the 1994 quarter.
The growth in gross income, which aggregated $135,000 (2.9%), resulted from
higher base rents of $480,000 (12.3%), partially reduced by lower expense
recoveries of $229,000 (48.7%) and other income of $116,000. Typically, as
higher base rent is achieved on new leases, expense reimbursement
thresholds are also raised, resulting in lower expense reimbursement income
in subsequent periods. Expenses increased by $73,000(4.3%)in the 1995
quarter compared to the 1994 quarter.
Income after direct operating expenses from hotel properties increased
$1,358,000 (30.5%) in the 1995 quarter over the level achieved in the 1994
quarter. In the current period, room sales increased $2,023,000 (21.5%),
while food and beverage sales increased $530,000 (16.8%). The increase in
total revenue of $2,728,000 (20.6%) exceeded the increase of $1,370,000
(15.6%) in direct operating expenses. The increase in revenue was due to
improved market conditions, which permitted management to raise average
room rates while maintaining occupancy levels.
Interest expense increased $519,000 (5.4%) in the 1995 quarter,
primarily because of an interest credit posted in last year's quarter and
secondarily to higher average interest rates in the current quarter.
Average balances of the Real Estate Trust's outstanding borrowings
decreased slightly to $403.5 million for the 1995 quarter from $403.6
million for the 1994 quarter.
Depreciation increased $373,000 (18.2%) in the 1995 quarter as a
result of new tenant improvements and the newly acquired hotel property.
Amortization of debt expense declined $286,000 (72.4%) 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 $94,000 (5.0%) in 1995 quarter from their expense level in the
1994 quarter. The monthly advisory fee in both the 1995 quarter and in the
1994 quarter was $292,000. The increase in this expense item reflected
higher management fees resulting from higher revenues.
General and administrative expense decreased $63,000 (12.8%) in the
1995 quarter, principally as a result of lower legal costs.
<PAGE>
<PAGE>
BANKING
Overview. The Bank recorded operating income of $23.6 million for the
three months ended June 30, 1995 (the "1995 quarter"), compared to
operating income of $2.6 million for the three months ended June 30, 1994
(the "1994 quarter"). The increase in income for the 1995 quarter was
primarily attributable to a $34.0 million increase in other (non-interest
income) resulting primarily from an increase in loan and deposit servicing
fees. This increase was partially offset by a $12.7 million increase in
operating expenses and a $3.3 million increase in the provision for loan
losses.
Net Interest Income. Net interest income, before the provision for loan
losses, increased $2.9 million (or 6.7%) in the 1995 quarter. The Bank
would have recorded interest income of $1.7 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 $0.7 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 June 30,
--------------------------------------------------------------------
1995 1994
------------------------------- -------------------------------
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) $3,261,828 $ 79,833 9.79 % $2,751,452 $ 64,273 9.34 %
Mortgage-backed securities 969,236 15,217 6.28 1,154,226 16,671 5.78
Trading securities 3,842 76 7.91 12,629 202 6.40
Federal funds sold 32,832 490 5.97 39,787 379 3.81
Investment securities 4,403 49 4.45 4,599 49 4.26
Other interest-earning assets 129,895 1,482 4.56 176,445 1,617 3.67
----------- --------- ----------- ---------
Total 4,402,036 97,147 8.83 4,139,138 83,191 8.04
--------- ------- --------- -------
Noninterest-earning assets:
Cash 132,938 118,430
Real estate held for investment or sale 287,847 340,481
Property and equipment, net 157,291 138,790
Cost in excess of net assets acquired, net 4,680 7,608
Other assets 154,910 144,986
----------- -----------
Total assets $5,139,702 $4,889,433
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 875,599 5,902 2.70 $ 869,352 5,923 2.73
Savings deposits 986,373 8,276 3.36 1,293,344 10,890 3.37
Time deposits 1,122,574 15,293 5.45 729,152 7,029 3.86
Money market deposits 1,034,252 10,183 3.94 1,154,965 9,233 3.20
----------- --------- ----------- ---------
Total deposits 4,018,798 39,654 3.95 4,046,813 33,075 3.27
Borrowings 685,410 11,623 6.78 481,514 7,129 5.92
----------- --------- ----------- ---------
Total liabilities 4,704,208 51,277 4.36 4,528,327 40,204 3.55
Noninterest-bearing items: --------- ------- --------- -------
Noninterest-bearing deposits 78,517 67,389
Other liabilities 85,951 37,070
Stockholders' equity 271,026 256,647
----------- -----------
Total liabilities and stockholders' equity $5,139,702 $4,889,433
=========== ===========
Net interest income $ 45,870 $ 42,987
========= =========
Net interest spread (2) 4.47 % 4.49 %
======= =======
Net yield on interest-earning assets (3) 4.17 % 4.15 %
======= =======
Interest-earning assets to interest-bearing liabilities 93.58 % 91.41 %
======= =======
(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 June 30, 1995
Compared to
Three Months Ended June 30, 1994
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 12,352 $ 3,208 $ 15,560
Mortgage-backed securities (8,441) 6,987 (1,454)
Trading securities (379) 253 (126)
Federal funds sold (379) 490 111
Investment securities (9) 9 0
Other interest-earning assets (1,707) 1,572 (135)
------------ ------------ ------------
Total interest income 1,437 12,519 13,956
------------ ------------ ------------
Interest expense:
Deposit accounts (1,561) 8,140 6,579
Borrowings 3,346 1,148 4,494
------------ ------------ ------------
Total interest expense 1,785 9,288 11,073
------------ ------------ ------------
Increase (decrease) in
net interest income $ (348) $ 3,231 $ 2,883
============ ============ ============
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due
to volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
(3) Includes mortgage-backed securities held for sale for the three months ended
March 31, 1993.
</TABLE>
<PAGE>
<PAGE>
Interest income in the 1995 quarter increased $14.0 million from the level
in the 1994 quarter primarily as a result of higher average yields earned
by the Bank on all categories of its interest-earning assets. Higher
average balances of loans receivable also contributed to the increase in
interest income. The effect on interest income of higher average yields
and higher average balances of loans was offset in part by lower average
balances of mortgage-backed securities.
The Bank's net yield on interest-earning assets increased to 4.17% in the
1995 quarter from 4.15% in the 1994 quarter. The slight increase primarily
reflected the upward adjustment of interest rates on certain of the Bank's
adjustable-rate products to reflect increases in market interest rates to
which rates on such products are indexed, offset by the increase of
interest rates on interest-bearing liabilities.
Interest income on loans, the largest category of interest-earning assets,
increased by $15.6 million (or 24.2%) from the 1994 quarter. The increase
in interest income on loans was primarily attributable to higher average
balances. Average balances of consumer loans, principally automobile
loans, increased $192.3 million (or 73.6%) in the 1995 quarter. The higher
balances were largely responsible for the increase of $4.0 million (or
75.0%) in interest income on consumer loans. Average balances of single-
family residential permanent loans increased $143.4 million (or 11.1%) as a
result of the origination of such loans during the last year. Interest
income on these loans increased $3.3 million (or 15.3%) from the 1994
quarter. Average balances of credit card loans increased $226.0 million
(or 24.4%) during the period, largely as a result of new account
originations in connection with the Bank's prior resumption of active
national solicitation of credit card accounts. This increase was largely
responsible for a $10.8 million increase in interest income on credit card
loans. Average balances of 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 $181.9 million of home equity
credit line receivables in September 1994 contributed to a decline of $28.7
million (or 18.1%) in average balances of home equity credit line loans.
The negative effect on income resulting from the decrease in home equity
credit line loans was offset by an increase in the average yield on home
equity credit line loans, which contributed to the $0.2 million increase in
income earned on these assets.
Higher average yields on the loan portfolio also contributed to the
increase in interest income on loans. The average yield on the loan
portfolio in the 1995 quarter increased by 45 basis points (to 9.79% from
9.34%) from the average yield in the 1994 quarter. Average yields on
single-family residential permanent and home equity credit line loans
increased to 7.02% from 6.77% and to 8.85% from 6.83%, respectively.
Average yields on construction loans and commercial permanent loans
increased to 10.75% from 6.93% and to 6.78% from 6.16%, respectively.
Average yield increases on credit card loans and consumer loans to 15.41%
from 14.53% and to 8.13% from 8.07%, respectively, also contributed to the
higher average yields on the loan portfolio. The increase in the average
yields on these loan categories reflects higher market interest rates in
the 1995 quarter as compared to the 1994 quarter.
<PAGE>
<PAGE>
Interest income on mortgage-backed securities decreased $1.5 million (or
8.7%) primarily because of lower average balances. The reduced mortgage-
backed securities 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 6.28% from
5.78%, reflecting higher market interest rates in the 1995 quarter as
compared to the 1994 quarter.
Interest expense increased $11.1 million for the 1995 quarter primarily
because of an increase of $6.6 million (or 19.9%) 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 3.95% from 3.27%), which reflected increases in market interest rates.
See "Financial Condition - Asset and Liability Management."
Also contributing to the increase in total interest expense was a $4.5
million increase in interest expense on borrowings. The increase in
interest paid on borrowings was primarily attributable to a $4.2 million
increase in interest expense on repurchase agreement transactions. The
increased expense associated with repurchase agreement transactions was due
to an increase of $270.1 million (or 760.3%) in the average amount of
repurchase agreement transactions and an increase in the average cost of
these borrowings (to 5.90% from 3.65%), which reflected higher market
interest rates in the 1995 quarter as compared to the 1994 quarter.
Provision for Loan Losses. The Bank's provision for loan losses increased
to $13.6 million in the 1995 quarter from $10.3 million in the 1994
quarter. The $3.3 million increase was primarily attributable to an
increase of $3.0 million in the provision for losses on credit card loans
and an increase of $0.7 million in the provision for losses on consumer
loans. The higher provisions resulted from increased origination volume of
such loans. Partially offsetting the increase was a $0.4 million decrease
in the provision for losses on real estate loans. See "Financial Condition
- Asset Quality - Allowances for Losses."
Other Income. The increase in other (non-interest) income to $68.0 million
in the 1995 quarter from $33.9 million in the 1994 quarter was primarily
attributable to increases in loan and deposit servicing fees, gain on sales
of credit card relationships and loans and earnings on real estate held for
investment or sale. The positive effect of these items on other income was
partially offset by a decrease in credit card fees and a decrease in other
income.
An increase of $23.7 million in excess servicing fees and $9.3 million of
servicing fees earned by the Bank for servicing its portfolios of
securitized credit card loans contributed to an increase of $35.7 million
(or 159.9%) 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.
Gain on sales of credit card relationships and loans increased by $5.2
million primarily as a result of a $4.0 million gain on the securitization
and sale of $252.2 million of automobile loan receivables during the 1995
quarter.
<PAGE>
<PAGE>
The $2.5 million increase in earnings on real estate held for investment or
sale was primarily attributable to an increase of $4.5 million in the gain
recorded on sales of the Bank's REO properties. Partially offsetting this
increase was an increase of $1.4 million in the provision for losses on
such assets and a decrease of $0.6 million in the operating income
generated by the REO properties. See "Financial Condition - Asset Quality
- Allowance for Losses".
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $2.1 million (44.6%) in the 1995
quarter from the level in the 1994 quarter. The decrease was primarily
attributable to a $2.7 million decrease in interchange fees and a $0.4
million decrease in late charges. The decrease was partially offset by an
increase in cash advance charges as a result of increased account activity,
which reflects 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 $4.8 million decline in other income was primarily a result of the
establishment of a reserve on a fixed asset. A $6.2 million reserve,
previously established as a reserve against an REI property, was
transferred with such property to property, plant and equipment. See
"Financial Condition - Real Estate Held for Investment."
Operating Expenses. Operating expenses for the 1995 quarter increased
$12.7 million (19.9%) from the level in the 1994 quarter, largely as a
result of the continued expansion of the Bank's credit card lending
program. The main components of the higher operating expenses were
increases in salaries and employee benefits, data processing and other
operating expenses. The $5.2 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card operations. The $3.2 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. The $5.2 million increase in other operating expenses
resulted primarily because of an increase in credit card fraud losses
recorded during the current period.
<PAGE>
<PAGE>
NINE MONTHS ENDED JUNE 30,1995 COMPARED TO
NINE MONTHS ENDED JUNE 30, 1994
REAL ESTATE
The following table sets forth, for the nine-month period ended June 30,
1995 (the "1995 period") and the nine-month period ended June 30, 1994 (the
"1994 period") direct operating results for the Real Estate Trust's (i)
commercial properties (consisting of office and industrial properties), and
(ii) hotel properties.
Nine Months Ended
June 30,
---------------------
1995 1994
-------- --------
COMMERCIAL PROPERTIES (In thousands)
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $ 13,177 $ 11,165
Expense recoveries 696 793
Other 305 403
-------- --------
Total revenues 14,178 12,361
-------- --------
Direct operating expenses
Utilities 1,740 1,688
Repairs and maintenance 1,433 1,294
Real estate taxes 1,034 1,124
Payroll 439 436
Insurance 197 192
Other 623 456
-------- --------
Total direct operating expenses 5,466 5,190
-------- --------
Income after direct operating expenses $ 8,712 $ 7,171
======== =======
<PAGE>
<PAGE>
Nine Months Ended
June 30,
---------------------
1995 1994
-------- --------
HOTELS (1) (In thousands)
Revenue
Room sales $ 27,225 $ 22,700
Food sales 7,607 6,585
Beverage sales 2,067 2,024
Other 2,285 2,268
-------- --------
Total revenue 39,184 33,577
-------- --------
Direct operating expenses
Payroll 12,195 11,014
Cost of sales 3,425 3,171
Utilities 2,307 2,274
Repairs and maintenance 2,044 1,806
Advertising and promotion 1,860 1,687
Property taxes 997 792
Insurance 451 434
Other 4,301 3,613
-------- --------
Total direct operating expenses 27,580 24,791
-------- --------
Income after direct operating expenses $ 11,604 $ 8,786
======== =======
(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 record a loss before depreciation and
amortization of $10.9 million and an operating loss of $18.4 million in
the 1995 period compared to a loss before depreciation and amortization of
$17.3 million and operating loss of $24.8 million in the 1994 period. The
reduction in the operating loss was largely attributable to an improvement
in the operations of income-producing properties, recognition of gain on
the condemnation of a portion of a land parcel, and the writedown in the
1994 period of real estate to net realizable value.
Income after direct operating expenses from commercial properties,
which consists of office and industrial properties, increased $1,541,000
(21.5%) in the 1995 period compared to such income in the 1994 period. The
growth in gross income, which aggregated $1,817,000 (14.7%), resulted from
higher base rents of $2,012,000 (18.0%), partially reduced by lower
expense recoveries of $97,000 (12.2%) and other income of $98,000.
Typically, as higher base rent is achieved on new leases, expense
reimbursement thresholds are also raised, resulting in lower expense
reimbursement income in subsequent periods. Expenses increased by $276,000
(5.3%)in the 1995 period.
Income after direct operating expenses from hotel properties increased
$2,818,000 (32.1%) in the 1995 period over the level achieved in the 1994
period. In the current period, room sales increased $4,525,000 (19.9%),
while food and beverage sales increased $1,065,000 (12.4%). The increase
in total revenue of $5,607,000 (16.7%) exceeded the increase of $2,789,000
(11.3%) in direct operating expenses. The increase in revenue was due to
improved market conditions, which permitted management to raise average
room rates while maintaining occupancy.
Interest expense increased $1,409,000 (4.9%) in the 1995 period,
primarily because of the higher level of borrowings in the current period.
Average balances of the Real Estate Trust's outstanding borrowings
increased to $404.4 million for the 1995 period from $343.6 million for the
prior period. This increase in average borrowings largely 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 $911,000 (14.8%) in the 1995 period as a result
of new tenant improvements and the newly acquired hotel property.
Amortization of debt expense declined $1,005,000 (74.4%) in the 1995
period. 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 $574,000 (11.7%) in 1995 period from their expense level in the
1994 period. The monthly advisory fee in the 1995 period was $292,000
compared to $250,000 for six months and $292,000 for three months in the
1994 period, which represented an aggregate increase of $250,000. The
balance of the increase in this expense item reflected higher management
fees resulting from higher revenues.
General and administrative expense increased $526,000 (36.1%) in the
1995 period principally as a result of higher legal costs incurred in
litigation with a tenant.
<PAGE>
<PAGE>
BANKING
Overview. The Bank recorded operating income of $42.0 million during the
nine months ended June 30, 1995 (the "1995 period"), compared to operating
income of $33.3 million for the nine months ended June 30, 1994 (the "1994
period"). The increase in income for the 1995 period was primarily
attributable to a $54.7 million increase in other (non-interest) income
resulting primarily from an increase in loan and deposit servicing fees.
This increase in income was partially offset by a $37.8 million increase in
operating expenses and a $10.6 million increase in the provision for loan
losses.
Net Interest Income. Net interest income, before the provision for loan
losses, increased $2.4 million (or 1.9%) in the 1995 period. The Bank
would have recorded interest income of $5.4 million for the 1995 period if
the Bank's non-accrual assets and restructured loans had been current in
accordance with their original terms. Interest income of $1.5 million was
actually recorded on non-accrual assets and restructured loans for the 1995
period. The Bank's net interest income in future periods will continue to
be adversely affected by the Bank's non-performing assets. See "Financial
Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resulting yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread
and net yield on interest-earning assets.
<PAGE>
<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)
Nine Months Ended June 30,
--------------------------------------------------------------------
1995 1994
------------------------------ -------------------------------
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) $2,992,374 $216,734 9.66 % $2,669,288 $190,520 9.52 %
Mortgage-backed securities 1,002,104 46,257 6.15 1,280,323 54,967 5.72
Trading securities 3,597 220 8.15 19,685 917 6.21
Federal funds sold 39,073 1,658 5.66 23,986 629 3.50
Investment securities 4,401 146 4.42 4,660 149 4.26
Other interest-earning assets 145,631 5,225 4.78 184,023 4,459 3.23
----------- --------- ----------- ---------
Total 4,187,180 270,240 8.61 4,181,965 251,641 8.02
--------- ------- --------- -------
Noninterest-earning assets:
Cash 128,581 114,777
Real estate held for investment or sale 311,142 365,676
Property and equipment, net 150,130 137,571
Cost in excess of net assets acquired, net 5,672 8,495
Other assets 146,436 169,451
----------- -----------
Total assets $4,929,141 $4,977,935
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 874,404 17,756 2.71 $ 836,631 17,123 2.73
Savings deposits 1,081,504 27,063 3.34 1,172,782 29,582 3.36
Time deposits 942,173 34,920 4.94 762,063 22,634 3.96
Money market deposits 1,095,108 32,518 3.96 1,163,406 27,849 3.19
----------- --------- ----------- ---------
Total deposits 3,993,189 112,257 3.75 3,934,882 97,188 3.29
Borrowings 548,146 28,480 6.93 680,426 27,372 5.36
----------- --------- ----------- ---------
Total liabilities 4,541,335 140,737 4.13 4,615,308 124,560 3.60
--------- ------- --------- -------
Noninterest-bearing items:
Noninterest-bearing deposits 70,973 60,840
Other liabilities 60,620 35,600
Stockholders' equity 256,213 266,187
----------- -----------
Total liabilities and stockholders' equity $4,929,141 $4,977,935
=========== ===========
Net interest income $129,503 $127,081
========= =========
Net interest spread (2) 4.48 % 4.42 %
======= =======
Net yield on interest-earning assets (3) 4.12 % 4.05 %
======= =======
Interest-earning assets to interest-bearing liabilities 92.20 % 90.61 %
======= =======
(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)
Nine Months Ended June 30, 1995
Compared to
Nine Months Ended June 30, 1994
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 23,374 $ 2,840 $ 26,214
Mortgage-backed securities (14,652) 5,942 (8,710)
Trading securities (1,057) 360 (697)
Federal funds sold 519 510 1,029
Investment securities (11) 8 (3)
Other interest-earning assets (1,497) 2,263 766
------------ ------------ ------------
Total interest income 6,676 11,923 18,599
------------ ------------ ------------
Interest expense:
Deposit accounts 1,444 13,625 15,069
Borrowings (8,081) 9,189 1,108
------------ ------------ ------------
Total interest expense (6,637) 22,814 16,177
------------ ------------ ------------
Increase (decrease) in
net interest income $ 13,313 $ (10,891) $ 2,422
============ ============ ============
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
(3) Includes mortgage-backed securities held for sale for the three months ended
March 31, 1993.
</TABLE>
<PAGE>
<PAGE>
Interest income in the 1995 period increased $18.6 million from the level
in the 1994 period primarily as a result of higher average yields earned by
the Bank on certain categories of its interest-earning assets. Higher
average balances of loans receivable and, to a lesser extent, federal funds
sold also contributed to the increase in interest income. The effect on
interest income of higher average yields and higher average balances of
loans and federal funds sold was offset in part by lower average balances
of mortgage-backed securities.
The Bank's net yield on interest-earning assets increased to 4.12% in the
1995 period from 4.05% in the 1994 period. The increase primarily
reflected the upward adjustment of interest rates on certain of the Bank's
adjustable-rate products to reflect increases in market interest rates to
which rates on such products are indexed, offset by the increase of
interest rates on interest-bearing liabilities.
Interest income on loans, the largest category of interest-earning assets,
increased by $26.2 million (or 13.8%) from the 1994 period. The increase
in interest income on loans was primarily attributable to higher average
balances. Average balances of consumer loans, principally automobile
loans, increased $200.7 million (or 95.6%) in the 1995 period. The higher
balances were largely responsible for the increase of $13.2 million (or
102.0%) in interest income on consumer loans. Average balances of single-
family residential permanent loans increased $86.7 million (or 6.6%) as a
result of the origination of such loans during the last year. Interest
income on these loans increased $7.7 million (or 11.5%) from the 1994
period. Average balances of credit card loans increased $73.5 million (or
8.0%) during the 1995 period, largely as a result of new account
originations in connection with the Bank's prior resumption of active
national solicitation of credit card accounts. The increase in balances of
such loans contributed to a $7.4 million (or 7.2%) increase in interest
income from these assets. Average balances of home equity credit line
loans declined in the 1995 period, largely as a result of the Bank's
securitization and sale activity. The securitization and sale of $181.9
million of home equity credit line receivables in September 1994 more than
offset the originations of $92.5 million of such loans during the 1995
period, and resulted in a decline of $29.7 million (or 24.0%) in average
balances of home equity credit line receivables. The lower average
balances were primarily responsible for the $0.2 million decline in
interest income from these assets during the 1995 period.
Higher average yields on the loan portfolio also contributed to the
increase in interest income on loans. The average yield on the loan
portfolio in the 1995 period increased by 14 basis points (to 9.66% from
9.52%) from the average yield in the 1994 period. Increases in the average
yields on single-family residential permanent and home equity credit line
loans to 7.09% from 6.78% and to 8.45% from 6.65%, respectively, and
increases in the average yields on commercial permanent and construction
loans to 6.75% from 6.35% and to 10.43% from 6.82%, respectively,
contributed to the increase in interest income on the loan portfolio. An
increase in the average yield on consumer loans to 8.46% from 8.20% also
contributed to the increased average yields. 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. Special introductory and promotional interest
rates offered to new and existing credit card holders contributed to a
<PAGE>
<PAGE>
decline in the average yield on credit card loans to 14.81% from 14.92%,
which partially offset the positive effect of the increases in certain loan
average yields on interest income.
Interest income on mortgage-backed securities decreased $8.7 million (or
15.8%) primarily because of lower average balances. The reduced mortgage-
backed security balances in the 1995 period 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 6.15% from
5.72%, primarily as a result of higher market interest rates in the 1995
period as compared to the 1994 period.
Other interest income increased by $1.8 million (or 35.3%) in the 1995
period primarily as a result of higher average yields and higher average
balances of federal funds sold, and, to a lesser extent, higher average
yields on Federal Home Loan Bank stock.
Interest expense increased $16.2 million for the 1995 period primarily
because of an increase of $15.1 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 3.75%
from 3.29%), which reflected higher market interest rates in the 1995
period as compared to the 1994 period, and, to a lesser extent, an increase
in average deposit balances of $58.3 million. See "Financial Condition -
Asset and Liability Management."
The increase in interest expense paid on borrowings was primarily
attributable to an increase in the average cost of these borrowings (to
6.93% from 5.36%), which reflected higher market interest rates in the 1995
period as compared to the 1994 period. The increase in interest expense
resulting from higher interest rates was partially offset by a $132.3
million decrease in the average balances of borrowings from $680.4 million
for the 1994 period to $548.1 million for the 1995 period.
Provision for Loan Losses. The Bank's provision for loan losses increased
to $35.8 million in the 1995 period from $25.2 million in the 1994 period.
The $10.6 million increase over the prior period was attributable to
increases of $7.4 million in the provision for losses on credit card loans,
$2.6 million in the provision for losses on consumer loans and $0.6 million
in the provision for losses on real estate loans. The higher provisions on
credit card and consumer loans resulted from increased origination volume
of such loans. See "Financial Condition - Asset Quality - Allowances for
Losses."
<PAGE>
<PAGE>
Other Income. The increase in other (non-interest) income to $166.4
million in the 1995 period from $111.7 million in the 1994 period 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
decreases in credit card fees, gain on sales of credit card relationships
and loans and gain on sales of mortgage servicing rights.
An increase of $53.5 million in excess servicing fees and $24.0 million of
servicing fees earned by the Bank for servicing its portfolios of
securitized credit card loans contributed to an increase of $84.9 million
(or 141.1%) 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 $1.4 million and a $1.1 million increase in
excess servicing fees related to home equity credit line and automobile
loan receivable securitizations, respectively.
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $7.4 million (44.7%) in the 1995
period from the level in the 1994 period. The decrease was primarily
attributable to a $3.0 million and $4.5 million decrease in late charges
and interchange fees, respectively. Also contributing to the decrease in
credit card fees was a $1.6 million increase in rebates paid on credit
card retail purchases, which the Bank incurred in connection with
promotional activities undertaken beginning in 1993. The decrease was
partially offset by an increase in cash advance charges as a result of
increased account activity, which reflects 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.
Gain on sales of credit card relationships and loans decreased by $16.1
million primarily because the Bank realized a significant gain from the
sale of credit card relationships (or accounts) in the 1994 period, but did
not consummate any such sale in the 1995 period. Partially offsetting this
decrease was a $4.0 million gain which the Bank recognized in the 1995
quarter from the securitization and sale of $252.2 million of automobile
loan receivables.
Gain on sales of mortgage servicing rights decreased by $3.9 million as a
result of a decline in the volume of mortgage servicing rights sold during
the current period. During the 1995 and 1994 periods, the Bank sold the
rights to service mortgage loans with principal balances of approximately
$92.0 million and $344.2 million, respectively.
Operating Expenses. Operating expenses for the 1995 period increased $37.8
million (21.0%) from the level in the 1994 period. The main components of
the higher operating expenses were increases in salaries and employee
benefits, data processing and other expenses. The $13.2 million increase
in salaries and employee benefits resulted primarily from the addition of
staff to the Bank's credit card operations. The $9.9 million increase in
data processing expenses was principally attributable to an increase in the
number of credit card accounts outstanding and the activity generated by
such accounts during the 1995 period. The $12.7 million increase in other
operating expenses was primarily a result of increased credit card fraud
losses during the current period.
