<PAGE>
Supplement Dated May 16, 1995
to Prospectus Dated January 26, 1995
_______________________________
B.F. Saul
Real Estate Investment Trust
Quarterly Report
For Quarter Ended
March 31, 1995
_______________________________
<PAGE>
<PAGE>
TABLE OF CONTENTS
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at March 31, 1995 and
September 30, 1994
(b) Consolidated Statements of Operations for the
three-month and six-month periods ended
March 31, 1995 and 1994
(c) Consolidated Statements of Cash Flows for the
six-month periods ended March 31, 1995 and 1994
(d) Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three Months Ended March 31, 1995 Compared to
Three Months Ended March 31, 1994
Six Months Ended March 31, 1995 Compared to
Six Months Ended March 31, 1994
<PAGE>
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<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
<CAPTION>
March 31 September 30
(In thousands) 1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Commercial $112,144 $110,895
Hotel 123,834 112,160
Other 4,619 4,585
------------ ------------
240,597 227,640
Accumulated depreciation (72,752) (68,111)
------------ ------------
167,845 159,529
Land parcels 38,501 38,455
Cash and cash equivalents 16,633 30,445
Other assets 96,727 99,310
------------ ------------
Total real estate assets 319,706 327,739
------------ ------------
Banking
Cash and due from banks 129,438 166,752
Interest-bearing deposits 45,040 14,345
Federal funds sold and securities purchased under agreements to resell 0 191,000
Loans held for sale 29,521 33,598
Loans held for securitization and sale 865,000 115,000
Investment securities (market value $4,300 and $4,364, respectively) 4,300 4,364
Mortgage-backed securities (market value $964,196 and $1,025,525, respectively) 967,147 1,025,525
Loans receivable (net of reserve for losses of $54,137 and $50,205, respectively) 2,084,041 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 $130,755 and $118,973, respectively) 308,152 330,655
Property and equipment, net 153,327 144,408
Cost in excess of net assets acquired, net 5,332 6,582
Excess servicing assets, net 18,904 25,198
Purchased mortgage servicing rights, net 14,952 15,304
Other assets 222,801 204,029
------------ ------------
Total banking assets 4,879,895 4,666,298
------------ ------------
TOTAL ASSETS $5,199,601 $4,994,037
============ ============
LIABILITIES
Real Estate
Mortgage notes payable $188,903 $185,730
Notes payable - secured 175,000 175,000
Notes payable - unsecured 40,534 40,288
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 41,702 44,208
------------ ------------
Total real estate liabilities 559,022 558,109
------------ ------------
Banking
Deposit accounts 4,039,339 4,008,761
Securities sold under repurchase agreements and other short-term borrowings 124,466 8,907
Bonds payable 23,725 24,030
Notes payable 7,614 7,729
Federal Home Loan Bank advances 165,690 100,000
Custodial accounts 30,622 19,523
Amounts due to banks 28,091 30,373
Other liabilities 38,523 54,509
Capital notes -- subordinated 160,000 160,000
------------ ------------
Total banking liabilities 4,618,070 4,413,832
------------ ------------
Minority interest held by affiliates 37,504 35,632
Minority interest -- other 74,307 74,307
------------ ------------
TOTAL LIABILITIES 5,288,903 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 (137,138) (134,793)
Net unrealized holding loss (10,417) (11,303)
------------ ------------
(47,454) (45,995)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (89,302) (87,843)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $5,199,601 $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)
<CAPTION>
For the Three Months For the Six Months
Ended March 31 Ended March 31
(In thousands, except per share amounts) 1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REAL ESTATE
Income
Commercial properties $4,820 $4,054 $9,459 $7,777
Hotels 11,511 9,639 23,200 20,321
Other 1,210 490 2,206 939
------------ ------------ ------------ ------------
Total income 17,541 14,183 34,865 29,037
------------ ------------ ------------ ------------
Expenses
Direct operating expenses:
Commercial properties 1,869 1,783 3,691 3,488
Hotels 8,973 8,084 17,408 15,989
Land parcels and other 338 321 688 650
Interest expense 10,175 9,661 20,315 19,425
Amortization of debt expense 131 477 237 956
Depreciation 2,334 2,050 4,663 4,125
Advisory, management and leasing fees - related parties 1,755 1,501 3,514 3,034
General and administrative 1,128 466 1,556 967
Write-down of real estate to net realizable value 0 0 0 1,380
------------ ------------ ------------ ------------
Total expenses 26,703 24,343 52,072 50,014
------------ ------------ ------------ ------------
Equity in earnings of unconsolidated entities 935 899 1,763 1,624
Gain on sale of property 1,653 0 1,653 0
------------ ------------ ------------ ------------
REAL ESTATE OPERATING LOSS (6,574) (9,261) (13,791) (19,353)
------------ ------------ ------------ ------------
BANKING
Interest income
Loans 73,273 67,083 136,901 126,247
Mortgage-backed securities 15,434 17,939 31,040 38,296
Trading securities 60 303 144 715
Investment securities 51 50 97 100
Other 2,492 1,419 4,911 3,092
------------ ------------ ------------ ------------
Total interest income 91,310 86,794 173,093 168,450
------------ ------------ ------------ ------------
Interest expense
Deposit accounts 36,662 32,730 72,603 64,113
Short-term borrowings 5,725 3,537 8,049 6,755
Long-term borrowings 4,432 5,869 8,808 13,488
------------ ------------ ------------ ------------
Total interest expense 46,819 42,136 89,460 84,356
------------ ------------ ------------ ------------
Net interest income 44,491 44,658 83,633 84,094
Provision for loan losses (13,618) (3,216) (22,225) (14,899)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 30,873 41,442 61,408 69,195
------------ ------------ ------------ ------------
Other income
Credit card fees 2,516 5,550 6,598 11,953
Loan servicing fees 42,277 12,103 75,430 28,212
Deposit servicing fees 5,750 4,721 11,577 9,614
Gain (loss) on sales of trading securities, net (218) (375) (329) 433
Earnings (loss) on real estate held for investment or sale, net 957 (2,357) (2,572) (2,641)
Gain on sales of credit card relationships and loans, net 28 18,968 238 21,458
Gain on sales of mortgage servicing rights, net 408 1,558 814 4,130
Other 3,586 2,257 6,655 4,595
------------ ------------ ------------ ------------
Total other income 55,304 42,425 98,411 77,754
------------ ------------ ------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
<CAPTION>
For the Three Months For the Six Months
Ended March 31 Ended March 31
(In thousands, except per share amounts) 1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating expenses
Salaries and employee benefits $26,817 $21,239 $50,583 $42,645
Loan 3,865 2,218 6,842 8,692
Property and equipment 7,091 6,348 13,821 12,679
Marketing 11,061 12,032 23,179 19,337
Data processing 10,801 7,123 20,160 13,457
Deposit insurance premiums 2,907 2,819 5,838 5,777
Amortization of cost in excess of net assets acquired 627 959 1,252 1,475
Other 10,637 6,512 19,739 12,275
------------ ------------ ------------ ------------
Total operating expenses 73,806 59,250 141,414 116,337
------------ ------------ ------------ ------------
BANKING OPERATING INCOME 12,371 24,617 18,405 30,612
------------ ------------ ------------ ------------
TOTAL COMPANY
Operating income before income taxes, extraordinary items,
cumulative effect of change in accounting principle,
and minority interest 5,797 15,356 4,614 11,259
Income tax benefit 874 6,903 433 6,195
------------ ------------ ------------ ------------
Income before extraordinary items, cumulative effect
of change in accounting principle and minority interest 4,923 8,453 4,181 5,064
Extraordinary item:
Loss on early extinguishment of debt, net of taxes 0 (4,982) 0 (11,315)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest 4,923 3,471 4,181 (6,251)
Cumulative effect of change in accounting principle 0 0 0 36,260
------------ ------------ ------------ ------------
Income before minority interest 4,923 3,471 4,181 30,009
Minority interest held by affiliates (1,351) (2,376) (1,651) (2,881)
Minority interest -- other (2,437) (2,437) (4,875) (4,875)
------------ ------------ ------------ ------------
TOTAL COMPANY NET INCOME (LOSS) 1,135 (1,342) (2,345) 22,253
DEFICIT
Beginning of period (138,273) (134,287) (134,793) (157,882)
------------ ------------ ------------ ------------
End of period ($137,138) ($135,629) ($137,138) ($135,629)
============ ============ ============ ============
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS ($220) ($2,697) ($5,055) $19,543
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary items, cumulative effect
of change in accounting principle and minority interest $0.73 $1.46 $0.30 $0.49
Extraordinary items:
Loss on early extinguishment of debt, net of taxes 0.00 (1.03) 0.00 (2.34)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest 0.73 0.43 0.30 (1.85)
Cumulative effect of change in accounting principle 0.00 0.00 0.00 7.51
------------ ------------ ------------ ------------
Income (loss) before minority interest 0.73 0.43 0.30 5.66
Minority interest held by affiliates (0.28) (0.49) (0.34) (0.60)
Minority interest -- other (0.50) (0.50) (1.01) (1.01)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE (0.05) (0.56) (1.05) 4.05
============ ============ ============ ============
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)
<CAPTION>
For the Six Months
Ended March 31
(In thousands) 1995 1994
------------ ------------
<S> <C> <C>
Real Estate
Net income (loss) ($8,947) $10,727
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 4,663 4,125
Write-down of real estate to net realizable value 0 1,380
(Increase) decrease in accounts receivable and accrued income (6,992) (971)
Increase in deferred tax asset (4,860) (38,409)
Decrease in accounts payable and accrued expenses 137 (14,146)
Decrease in tax sharing receivable 10,000 1,310
Amortization of debt expense 230 956
Equity in earnings of unconsolidated entities (1,869) (1,657)
Gain on sale of property (1,653) 0
Other 8,127 (11,318)
------------ ------------
(1,164) (48,003)
------------ ------------
Banking
Net income 6,602 11,526
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Accretion of premiums, discounts and net deferred loan fees (928) (782)
Depreciation and amortization 10,616 8,544
Amortization of cost in excess of net assets acquired and purchased mortgage
servicing rights 1,604 6,193
Loss on extinguishment of debt 0 10,476
Provision for loan losses 22,225 14,899
Net fundings of loans held for sale and/or securitization (141,979) (599,508)
Proceeds from sales of trading securities 95,112 446,537
Proceeds from sales of loans held for sale and/or securitization 1,083,992 693,790
Earnings on real estate (1,895) (5,936)
Provision for losses on real estate held for investment or sale 13,809 10,868
(Gain) loss on sales of trading securities, net 329 (433)
Gain on sales of credit card relationships and loans, net (238) (21,458)
Gain on sales of mortgage servicing rights, net (814) (4,130)
Minority interest held by affiliates 1,651 2,881
Minority interest - other 4,875 4,875
Decrease in excess servicing assets 6,294 9,719
(Increase) decrease in other assets (9,297) 47,377
Decrease in other liabilities and accrued expenses (18,270) 6,628
Decrease in tax sharing payable (10,000) (1,310)
Other, net 5,421 3,724
------------ ------------
1,069,109 644,480
------------ ------------
Net cash provided by operating activities 1,067,945 596,477
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (2,786) (1,926)
Property acquisitions (10,159) 0
Equity investment in unconsolidated entities (2,960) (42)
Other investing activities 51 8
------------ ------------
(15,854) (1,960)
------------ ------------
Banking
Proceeds from maturities of investment securities 100 0
Net proceeds from sales of real estate 34,005 49,841
Net proceeds from sales of mortgage servicing rights 814 4,130
Net fundings of loans receivable (1,452,497) (496,979)
Principal collected on mortgage-backed securities 81,633 291,360
Purchases of mortgage-backed securities (45,958) (167,542)
Purchases of loans receivable (61,708) (148,047)
Purchases of property and equipment (17,932) (8,449)
Purchases of mortgage servicing rights 0 (888)
Disbursements for real estate held for investment or sale (23,129) (36,119)
Other investing activities, net 313 575
------------ ------------
(1,484,359) (512,118)
------------ ------------
Net cash used in investing activities (1,500,213) (514,078)
------------ ------------
Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
<CAPTION>
For the Six Months
Ended March 31
(In thousands) 1995 1994
------------ ------------
<S> <C> <C>
Real Estate
Proceeds from mortgage financing $11,400 $461
Principal curtailments and repayments of mortgages (8,173) (69,318)
Proceeds from sales of secured notes 0 175,000
Proceeds from sales of unsecured notes 2,254 6,836
Repayments of unsecured notes (2,008) (4,233)
Costs of obtaining financings (267) (8,761)
Other financing activities, net 0 0
------------ ------------
3,206 99,985
------------ ------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 6,881,059 5,770,386
Customer withdrawals of deposits and payments for maturing certificates of deposit (6,850,481) (5,600,353)
Net increase (decrease) in securities sold under repurchase agreements 116,181 (81,533)
Advances from the Federal Home Loan Bank 315,690 589,300
Repayments of advances from the Federal Home Loan Bank (250,000) (751,300)
Proceeds from other borrowings 331,625 156,597
Repayments of other borrowings (332,667) (155,830)
Cash dividends paid on preferred stock (4,875) (4,875)
Repayment of capital notes - subordinated 0 (134,153)
Net proceeds received from capital notes - subordinated 0 143,603
Other financing activities, net 11,099 6,465
------------ ------------
217,631 (61,693)
------------ ------------
Net cash provided by financing activities 220,837 38,292
------------ ------------
Net increase (decrease) in cash and cash equivalents (211,431) 120,691
Cash and cash equivalents at beginning of period 402,542 185,909
------------ ------------
Cash and cash equivalents at end of period $191,111 $306,600
============ ============
Cash paid during the period for:
Interest (net of amount capitalized) $112,524 $87,520
Income taxes (163) 356
Supplemental schedule of noncash investing and financing activities:
Rollovers of notes payable - unsecured 2,045 2,793
Loans held for sale exchanged for mortgage-backed securities held for sale 49,735 278,440
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 1,738,000 792,794
Investment securities transferred to investment securities available-for-sale 0 4,789
Loans made in connection with the sale of real estate 1,389 10,045
Loans receivable transferred to real estate acquired in settlement of loans 3,832 2,164
Loans classified as in-substance foreclosed transferred to loans receivable 0 15,008
Loans receivable exchanged for mortgage-backed securities held-to-maturity 23,155 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.
<PAGE>
<PAGE>
4. BANKING:
LOANS HELD FOR SALE:
At March 31, 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:
March 31, September 30,
1995 1994
----------- ------------
(In thousands)
Credit card receivables $ 565,000 $ 115,000
Automobile loan receivables 200,000 -
Home equity credit line receivables 100,000 -
----------- ------------
Total $ 865,000 $ 115,000
=========== ============
SECURITIES:
Investment Securities and Mortgage-Backed Securities:
At March 31, 1995, all investment securities held by the Bank are
classified as available-for-sale and recorded at fair value. At March 31,
1995, $944.1 million of mortgage-backed securities held by the Bank are
classified as available- for-sale and recorded at fair value and $23.1
million of mortgage-backed securities held by the Bank are classified as
held-to-maturity and reported at amortized cost. At March 31, 1995, net
unrealized holding losses on available-for-sale securities in the amount of
$13.0 million, net of the related income tax effect, are included in a
separate component of stockholders' equity.
Gross unrealized holding gains and losses on the Bank's investment
securities at March 31, 1995 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ----------- ---------- ----------
(In thousands)
U.S. Government securities
Maturing after one year,
but within five years $ 4,402 $ - $ (102) $ 4,300
=========== =========== ======== ==========
<PAGE>
<PAGE>
Gross unrealized holding gains and losses on the Bank's mortgage-backed
securities classified as available-for-sale at March 31, 1995 are as
follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ----------- ---------- ----------
(In thousands)
FHLMC $ 773,307 $ 734 $ (22,094) $ 751,947
FNMA 32,046 57 (302) 31,801
Private label, AA-rated 160,157 656 (489) 160,324
----------- ----------- ---------- ----------
Total $ 965,510 $ 1,447 $ (22,885) $ 944,072
=========== =========== ========== ==========
Gross unrealized holding gains and losses on the Bank's mortgage-backed
securities classified as held-to-maturity at March 31, 1995 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ----------- ---------- ----------
(In thousands)
FHLMC $ 23,075 $ - $ (2,951) $ 20,124
=========== =========== ========== ==========
Trading Securities:
As part of its mortgage banking activities, the Bank exchanges loans held
for sale for mortgage-backed securities and then sells the mortgage-backed
securities to third-party investors generally in the month of issuance. In
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), these mortgage-backed securities are classified as trading
securities. The Bank realized net losses on sales of trading securities of
$0.2 million and $0.4 million for the three months ended March 31, 1995 and
1994, respectively. The Bank realized net losses on sales of trading
securities of $0.3 million for the six months ended March 31, 1995 and net
gains on sales of trading securities of $0.4 million for the six months
ended March 31, 1994. There were no unrealized gains or losses during the
three months and six months ended March 31, 1995.
<PAGE>
<PAGE>
LOANS RECEIVABLE:
Loans receivable is composed of the following:
March 31, September 30,
1995 1994
------------- -------------
(In thousands)
Single-family residential $ 1,367,596 $ 1,335,645
Home equity 10,303 34,708
Commercial and multifamily 82,934 84,639
Real estate construction 62,873 66,909
Ground 16,880 18,935
Credit card 376,685 535,199
Automobile 141,849 289,346
Other 101,285 68,463
------------- -------------
2,160,405 2,433,844
------------- -------------
Less:
Undisbursed portion of loans 35,350 35,535
Unearned discounts 1,270 1,438
Net deferred loan origination
costs (14,393) (10,932)
Allowance for loan losses 54,137 50,205
------------- -------------
76,364 76,246
------------- -------------
Total $ 2,084,041 $ 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.
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.
<PAGE>
<PAGE>
During the six months ended March 31, 1995, the Bank had no impaired real
estate loans. At March 31, 1995, the Bank had impaired credit card loans
with a carrying value of $6.4 million, before the allowance for losses of
$0.6 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 six months ended March 31, 1995 was $4.6 million and $19.0
million, respectively. The Bank recognized interest income of $0.2 million
and $1.0 million on its impaired credit card loans for the three months and
six months ended March 31, 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).
Real estate held for investment or sale is composed of the following:
March 31, September 30,
1995 1994
------------- -------------
(In thousands)
Land, development, construction
and rental properties $ 70,919 $ 69,767
Investments in limited partnerships - (2,478)
Investment in real estate ventures 9,088 8,915
------------- -------------
Total real estate held for
investment 80,007 76,204
------------- -------------
Real estate held for sale 374,936 387,024
------------- -------------
Less:
Allowance for losses on real estate
held for investment 9,193 9,899
Allowance for losses on real estate
held for sale 121,562 109,074
Accumulated depreciation and
amortization 16,036 13,600
------------- -------------
146,791 132,573
------------- -------------
Total real estate held for
investment or sale $ 307,152 $ 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 March 31, 1995, the
Bank's assets accounted for approximately 94% of the Trust's consolidated
assets.
The Trust has prepared its financial statements and other disclosures
on a fully consolidated basis. The term "Trust" used in the text and the
financial statements included herein refers to the combined entity, which
includes B.F. Saul Real Estate Investment and its subsidiaries, including
Chevy Chase and Chevy Chase's subsidiaries. "Real Estate Trust" refers to
B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding
Chevy Chase and Chevy Chase's subsidiaries. The business conducted by the
Bank and its subsidiaries is identified by the term "Banking," while the
operations conducted by the Real Estate Trust are designated as "Real
Estate."
The financial data on Banking reflect certain purchase accounting
adjustments made by the Trust in connection with its acquisition of the
Bank and therefore differ in certain respects from the comparable financial
data set forth in the unconsolidated financial statements of the Bank.
FINANCIAL CONDITION
REAL ESTATE
The Real Estate Trust's investment portfolio at March 31, 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 95%
leased at March 31, 1995, compared to leasing rates of 93% and 83% at
September 30, 1994 and March 31, 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 March 31,
1995, the Real Estate Trust's office and industrial property portfolio had
a total gross leasable area of 1,363,000 square feet, of which 367,000
square feet (28.2%) and 228,000 square feet (17.5%) 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.
For the six months ended March 31, 1995, the nine hotel properties owned
by the Real Estate Trust throughout the period experienced an average
occupancy rate of 58% and an average room rate of $57.16, compared to an
average occupancy rate of 55% and an average room rate of $54.66 in the
first six months of fiscal 1994. Compared to the fiscal 1994 period, six
of the hotels showed improved occupancies and seven showed higher average
room rates in the current period. Adjusted for the inclusion of the new
hotel acquired on November 30, 1994, the hotel portfolio experienced an
average room rate of $58.28 during the six-month period ended March 31,
1995.
<PAGE>
<PAGE>
BANKING
General. The Bank recorded operating income of $12.6 million during the
March 1995 quarter, compared to $24.6 million in the prior corresponding
period. As a result of the continued expansion of its credit card program
and other loan products and services, the Bank realized a $30.2 million
increase in loan servicing fees over the March 1994 quarter. The Bank's
operating income for the March 1995 quarter declined primarily because
results in the March 1994 quarter included a $16.9 million gain from the
sale of credit card relationships (or accounts), while the Bank did not
consummate any such sale in the March 1995 quarter. The March 1995
quarterly results also reflected a $14.6 million increase in operating
expenses and a $10.4 million increase in the provision for loan losses.
See "Results of Operations."
At March 31, 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 5.21%, 5.21% and 11.59%,
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 March 31, 1995, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios of 5.21%, 6.76% and 11.59%,
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 March 31, 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
"adequately capitalized" institutions under the prompt corrective action
regulations. See "Capital."
In the March 1995 quarter, the Bank securitized and sold $413.0 million of
credit card receivables pursuant to its portfolio funding strategy. See
"Liquidity." During the March 1995 quarter, the Bank also securitized and
sold $59.2 million of amounts on deposit in certain spread accounts
established in connection with certain of the Bank's outstanding credit
card securitizations. See "Capital."
Asset Quality.
Non-Performing Assets. The Bank's level of non-performing assets continued
to decline during the first half 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)
<CAPTION>
March 31, December 31, September 30,
1995 1994 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 8,085 $ 7,747 $ 8,306
Commercial and multifamily - 114 -
-------------- -------------- --------------
Total non-accrual real estate loans 8,085 7,861 8,306
Credit card 14,778 14,634 16,229
Consumer and other 903 1,036 498
-------------- -------------- --------------
Total non-accrual loans (1) 23,766 23,531 25,033
-------------- -------------- --------------
Non-accrual real estate held for investment (1) 9,088 9,079 8,915
-------------- -------------- --------------
Real estate acquired in settlement of loans 374,936 380,926 387,024
Allowance for losses on real estate acquired in settlement
of loans (121,562) (114,491) (109,074)
-------------- -------------- --------------
Real estate acquired in settlement of loans, net 253,374 266,435 277,950
-------------- -------------- --------------
Total non-performing assets $ 286,228 $ 299,045 $ 311,898
============== ============== ==============
Allowance for losses on loans $ 54,137 $ 49,741 $ 50,205
Allowance for losses on real estate held for investment 9,193 10,064 9,899
Allowance for losses on real estate acquired in settlement
of loans 121,562 114,491 109,074
-------------- -------------- --------------
Total allowances for losses $ 184,892 $ 174,296 $ 169,178
============== ============== ==============
Ratios:
Non-performing assets, net to total assets (2) 4.57% 5.03% 5.40%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 167.01% 175.79% 169.58%
Allowance for losses on credit card loans to non-accrual
credit card loans (1) 260.71% 235.96% 212.77%
Allowance for losses on consumer and other loans to
non-accrual consumer and other loans (1) 233.33% 134.36% 319.28%
Allowance for losses on loans to non-accrual loans (1) 227.79% 211.38% 200.56%
Allowance for losses on loans to total loans receivable (3) 1.79% 1.76% 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 $286.2 million, after valuation allowances on
real estate held for sale or real estate owned ("REO") of $121.6 million,
at March 31, 1995, compared to $299.0 million, after valuation allowances
on REO of $114.5 million, at December 31, 1994. In addition to the
valuation allowances on REO, the Bank maintained $3.9 million of valuation
allowances on its non-accrual loans and non-accrual real estate held for
investment at March 31, 1995 and December 31, 1994. The decrease in non-
performing assets was primarily attributable to a decline in REO of $13.1
million during the quarter ended March 31, 1995.
The Bank's non-performing real estate assets, which include non-accrual
real estate loans, non-accrual REI and REO, totaled $270.5 million at March
31, 1995, or 94.5% of total non-performing assets at that date. As shown
in the following table, the Bank's non-performing real estate assets, after
valuation allowances on such assets, have declined from their peak of
$567.6 million in February 1992 to $268.1 million at March 31, 1995,
reflecting both additional write-downs on non-performing assets during that
period and, in more recent periods, asset sales.
Decline in Non-Performing Real Estate Assets
Total
Valuation
Allowances
On
Total Non- Non-Accrual Total Non- Cumulative
Performing Real Estate Performing Decline from
Real Loans and Real February 29, 1992
Estate Non-Accrual Estate -----------------
(Dollars in thousands)Assets (1) REI (2) Assets, net Amount Percent
---------- ------------ ----------- -------- --------
December 31, 1991 .... $559,665 $ 6,692 $552,973 - -
February 29, 1992 .... 574,321 6,712 567,609 - -
March 31, 1992 ....... 551,960 5,490 546,470 ($21,139) -3.7%
June 30, 1992 ........ 512,729 10,224 502,505 (65,104) -11.5%
September 30, 1992 ... 487,287 7,147 480,140 (87,469) -15.4%
December 31, 1992 .... 427,113 2,332 424,781 (142,828) -25.2%
March 31, 1993 ....... 394,672 2,635 392,037 (175,572) -30.9%
June 30, 1993 ........ 382,657 2,634 380,023 (187,586) -33.1%
September 30, 1993 ... 351,160 2,427 348,733 (218,876) -38.6%
December 31, 1993 .... 345,968 3,493 342,475 (225,134) -39.7%
March 31, 1994 ....... 323,185 3,487 319,698 (247,911) -43.7%
June 30, 1994 ........ 310,506 3,620 306,886 (260,723) -45.9%
September 30, 1994 ... 295,171 2,390 292,781 (274,828) -48.4%
December 31, 1994 .... 283,375 2,388 280,987 (286,622) -50.5%
March 31, 1995 ....... 270,546 2,407 268,139 (299,470) -52.8%
- ----------------------
(1) Represents total non-accrual real estate loans and non-accrual REI
before deduction of valuation allowances and REO, after valuation
allowances.
(2) Represents valuation allowances on non-accrual real estate loans and
non-accrual REI. At March 31, 1995, valuation allowances on non-accrual
real estate loans and non-accrual REI were $0.4 million and $2.0 million,
respectively.
<PAGE>
<PAGE>
At March 31, 1995, $234.1 million or 86.5% of the Bank's total non-
performing real estate assets related to residential real estate
properties, including the Bank's five planned unit developments (the
"Communities"). The Bank has disposed of the majority of its commercial
REO and is continuing to effect the orderly disposition of the remainder of
its REO. See "REO" and "Disposition of REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $23.8 million at
March 31, 1995, which represented a slight increase of $0.3 million from
$23.5 million at December 31, 1994. At March 31, 1995, non-accrual loans
consisted primarily of $8.1 million of non-accrual real estate loans and
$14.8 million of non-accrual credit card loans.
At March 31, 1995, the Bank had $14.8 million of credit card loans which
were classified for regulatory purposes as substandard and disclosed as
non-performing assets because they were 90 days or more past due. At that
date, the Bank also had $21.8 million of credit card loans classified for
regulatory purposes as substandard which were not disclosed as either non-
performing assets (i.e., credit card loans which are 90 days or more past
due) or potential problem assets. The amount classified as substandard but
not disclosed as non-performing assets ($21.8 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 $21.8 million, $9.5 million was
current, $6.8 million was 30-59 days past due and $5.5 million was 60-89
days past due at March 31, 1995. All delinquent amounts are included in
the table of delinquent loans. See "Delinquent Loans."
Non-accrual REI. At March 31, 1995 and September 30, 1994, a participating
loan to a developer with a balance of $9.1 million and $8.9 million,
respectively, before valuation allowances of $2.0 million, was non-
performing.
REO. In the past, the Bank was an active lender on residential real estate
development projects and, to a lesser extent, commercial buildings and
land. The majority of the amount of loans originated were made to
developers for the acquisition and development of residential planned unit
developments. The majority of the loans contained provisions that entitled
the Bank to a portion of the profits generated by the underlying
properties. Beginning in mid-1990 and extending through 1992, as a result
of the slowdown in the Washington, D.C. area economy, the Bank took active
control, either through foreclosure or deed-in-lieu of foreclosure, of most
of the properties securing these loans. The Bank decided that completing
the infrastructure of the properties, implementing an aggressive marketing
program, and then selling building lots to home builders represented the
most effective method of recovering the Bank's investment in these
properties.
At March 31, 1995, the Bank's REO totaled $253.4 million, after valuation
allowances on such assets of $121.6 million. The principal component of
REO consists of the Communities, which had an aggregate book value of
$190.9 million at that date. Four of the Communities are under active
development.
During the three months ended March 31, 1995, REO decreased $13.1 million.
This decrease was primarily attributable to sales in the Communities and
other smaller residential properties and the sale of one residential
construction property with a book value of $0.6 million, after valuation
allowances. See "Disposition of REO."
<PAGE>
<PAGE>
The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
See "Disposition of REO" and "Allowances for Losses." The Bank capitalized
interest in the amount of $2.2 million during the six months ended March
31, 1995, of which $2.1 million was related to the Bank's four active
Communities.
Disposition of REO. During the three months ended March 31, 1995, the Bank
received proceeds of approximately $18.7 million upon the disposition of
REO, which consisted of 239 residential lots or units in the Communities
and other smaller residential properties ($17.8 million), approximately 1.0
acre of land in one of the Communities ($0.2 million) and various single-
family residential properties ($0.7 million).
The Bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in 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 March
31, 1995.
Balance Balance
Before All After Percent
Valuation Valuation Valuation of
Allowances Allowances Allowances Total
----------- ---------- ----------- ------
(Dollars in thousands)
Communities .............. $ 282,881 $ 91,959 $ 190,922 75.4%
Residential ground and
construction ........... 51,924 19,945 31,979 12.6
Retail center ............ 15,487 2,562 12,925 5.1
Commercial ground ........ 21,389 6,931 14,458 5.7
Single-family residential
properties ............. 3,255 165 3,090 1.2
----------- ---------- ----------- ------
Total REO ............. $ 374,936 $ 121,562 $ 253,374 100.0%
=========== ========== =========== ======
At March 31, 1995, the Bank had executed contracts to sell five of these
properties at their aggregate book value of $13.6 million at that date.
<PAGE>
<PAGE>
The four active Communities originally consisted of 12,936 residential lots
or units and 196 acres of land designated for retail use. At March 31,
1995, 9,504 residential units (73.5%) had been sold to builders, consisting
of 7,559 units (58.4%) which had been settled and 1,945 units (15.1%) which
were under contract and pending settlement. At the same date,
approximately 98.4 acres (50.2%) of retail land had been sold to
developers, including 11.1 acres which were under contract and pending
settlement. In addition, at March 31, 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 53.2% to 734 lots during the first half of fiscal 1995 from 479
lots during the prior corresponding period. The rate of home sales in the
Bank's four active Communities declined to 487 units during the six months
ended March 31, 1995 from 744 units during the six months ended March 31,
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.
March 31, September 30,
1995 1994 1993
--------- --------- ---------
(In thousands)
Residential construction loans ..... $ 12,034 $ 13,367 $ 10,386
Single-family permanent loans (1) .. 51,858 54,642 79,104
--------- --------- ---------
Total ............................ $ 63,892 $ 68,009 $ 89,490
========= ========= =========
- ------------------------------------
(1) Includes $2.7 million, $4.4 million and $8.8 million of loans
classified as held for sale at March 31, 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 March 31, 1995, $2.7 million of such
loans are classified as held for sale and gen erally are expected to be
sold in the third 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.
Six Months
Ended Year Ended
March 31, September 30,
1995 1994 1993
--------- --------- ---------
(In thousands)
Sales proceeds ....................... $ 32,859 $ 78,057 $ 66,291
Development costs .................... 18,572 44,264 52,118
--------- --------- ---------
Net cash flow ...................... 14,287 33,793 14,173
Increase (decrease) in reserves
and other non-cash items .......... 6,235 (4,337) 7,899
--------- --------- ---------
Net decrease in balances of
the Communities ................... $ 20,522 $ 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 March 31, 1995, this property had a
book value of $27.3 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.
At March 31, 1995, potential problem assets totaled $18.4 million, before
valuation allowances of $3.5 million, as compared to $19.6 million, before
valuation allowances of $3.6 million, at December 31, 1994. The $1.2
million decrease in potential problem assets was attributable to net
principal reductions of $0.4 million and the reclassification of one
residential ground loan with a principal balance of $0.8 million because
management no longer has serious doubts as to the borrower's ability to
comply with present repayment terms.
<PAGE>
<PAGE>
Delinquent Loans. At March 31, 1995, delinquent loans totaled $36.5
million (or 1.2% of loans) compared to $39.6 million (or 1.4% of loans) at
December 31, 1994. The following table sets forth information regarding
the Bank's delinquent loans at March 31, 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 .......... $ 5,544 $ 17,655 $ 23,199 0.8%
60-89 days .......... 1,839 11,491 13,330 0.4%
---------- ------------ --------- -----
Total ............. $ 7,383 $ 29,146 $ 36,529 1.2%
========== ============ ========= =====
- ---------------------
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity credit
line loans. Total delinquent mortgage loans increased to $7.4 million at
March 31, 1995 from $6.4 million at December 31, 1994.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
decreased to $29.1 million at March 31, 1995 from $33.2 million at December
31, 1994, primarily as a result of an improvement in general economic
conditions. Non- mortgage loans delinquent 30-89 days as a percentage of
total non-mortgage loans outstanding decreased to 2.1% at March 31, 1995
from 2.7% at December 31, 1994.
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.
March 31, December 31, September 30,
1995 1994 1994
------------- ------------- -------------
(In thousands)
Troubled debt
restructurings..... $ 28,134 $ 28,432 $ 29,141
============= ============= =============
At March 31, 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 $14.9 million. The decrease in loans accounted for as troubled
debt restructurings from December 31, 1994 resulted from net principal
reductions of $0.3 million. At March 31, 1995, the Bank had commitments to
lend $1.5 million of additional funds on loans that have been restructured.
<PAGE>
<PAGE>
Real Estate Held for Investment. At March 31, 1995, real estate held for
investment consisted of six properties with an aggregate book value of
$54.6 million, net of accumulated depreciation of $16.0 million and
valuation allowances of $9.2 million. This category includes one office
building (which was approximately 83.0% leased at such date) and a loan to
a developer with a book value of $9.1 million at March 31, 1995, before
valuation allowances of $2.0 million, which has a profit participation
feature. The loan, which is secured by commercial land, is included in
non-performing assets. Also included are two apartment buildings (which
were approximately 95.0% and 94.0% leased, respectively, at such date and
are financed with bonds issued through a local housing finance agency).
These properties are owned and operated by subsidiaries of the Bank.
During the quarter ended March 31, 1995, the Bank sold its limited
partnership interest in an office building and recognized a net gain on the
sale. Subsequent to March 31, 1995, the Bank sold the two apartment
buildings with a net book value of $25.4 million and recognized a net gain
on the transaction.
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)
<CAPTION>
Three
Six Months Ended Months
March 31, Ended
---------------------- March 31,
1995 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Balance at beginning of period $ 50,205 $ 68,040 $ 49,741
--------- --------- ----------
Provision for loan losses 22,225 14,899 13,618
--------- --------- ----------
Charge-offs:
Residential 599 902 487
Credit card 22,069 29,977 10,853
Other 1,503 330 876
--------- --------- ----------
Total charge-offs 24,171 31,209 12,216
--------- --------- ----------
Recoveries:
Residential 2 14 1
Credit card 5,554 6,658 2,788
Other 322 143 205
--------- --------- ----------
Total recoveries 5,878 6,815 2,994
--------- --------- ----------
Charge-offs, net of recoveries 18,293 24,394 9,222
--------- --------- ----------
Balance at end of period $ 54,137 $ 58,545 $ 54,137
========= ========= ==========
Provision for loan losses to average loans (1) (2) 1.56% 1.13% 1.82%
Net loan charge-offs to average loans (1) (2) 1.28% 1.86% 1.23%
Ending allowance for losses on loans to total
loans (2) (3) 1.79% 2.18% 1.79%
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans by Type
(Dollars in thousands)
<CAPTION>
March 31, December 31, September 30,
1995 1994 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 $ 1,382 46.3 % $ 1,348 49.6 % $ 1,384 53.8 %
Home equity 323 3.7 262 2.7 133 1.4
Commercial and multifamily 8,488 2.7 8,502 3.0 8,506 3.3
Residential construction 1,336 0.9 1,392 1.0 1,455 1.2
Commercial construction 57 0.2 58 0.2 245 0.2
Ground 1,917 0.5 2,257 0.5 2,362 0.6
Credit card 38,527 31.2 34,530 29.1 34,530 25.5
Consumer and other 2,107 14.5 1,392 13.9 1,590 14.0
--------- --------- ---------
Total $ 54,137 $ 49,741 $ 50,205
========= ========= =========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
<CAPTION>
Six Months Ended Three Months
March 31, Ended
-------------------------- March 31,
1995 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 9,899 $ 10,182 $ 10,064
Real estate held for sale 109,074 101,462 114,491
----------- ----------- ------------
Total 118,973 111,644 124,555
----------- ----------- ------------
Provision for real estate losses:
Real estate held for investment (706) (63) (871)
Real estate held for sale 14,515 10,931 7,213
----------- ----------- ------------
Total 13,809 10,868 6,342
----------- ----------- ------------
Charge-offs:
Real estate held for sale:
Residential construction 1,924 471 142
Residential ground 103 - -
Commercial permanent - 5,219 -
----------- ----------- ------------
Total 2,027 5,690 142
----------- ----------- ------------
Total charge-offs on real estate
held for investment or sale 2,027 5,690 142
----------- ----------- ------------
Balance at end of period:
Real estate held for investment 9,193 10,119 9,193
Real estate held for sale 121,562 106,703 121,562
----------- ----------- ------------
Total $ 130,755 $ 116,822 $ 130,755
=========== =========== ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
<CAPTION>
March 31, December 31, September 30
1995 1994 1994
----------- ----------- ------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment:
Commercial and multifamily $ 6,870 $ 7,793 $ 7,793
Ground 2,000 1,999 1,975
Other 323 272 131
----------- ----------- ------------
Total 9,193 10,064 9,899
----------- ----------- ------------
Allowance for losses on real estate
held for sale:
Residential 154 57 66
Home equity 11 8 4
Commercial and multifamily 147 143 142
Commercial construction 2,415 2,044 1,216
Residential construction 43 253 1,942
Ground 118,792 111,986 105,704
----------- ----------- ------------
Total 121,562 114,491 109,074
----------- ----------- ------------
Total allowance for losses on real
estate held for investment or sale $ 130,755 $ 124,555 $ 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 $10.6 million from the
level at December 31, 1994 to $184.9 million at March 31, 1995. The $10.6
million increase was primarily attributable to increased valuation
allowances on the Communities. During the six months ended March 31, 1995,
the Bank recorded net charge-offs of $2.6 million on loans secured by real
estate and real estate held for investment or sale and provided an
additional $13.8 million of valuation allowances on these assets.
The following table shows valuation allowances for losses on performing and
non-performing assets at the dates indicated.
March 31, 1995
--------------------------------
Non-
Performing performing Total
---------- ---------- ---------
(In thousands)
Allowance for losses on:
Loans:
Real estate ........................ $ 13,096 $ 407 $ 13,503
Credit card ........................ 37,049 1,478 38,527
Consumer and other ................. 2,102 5 2,107
--------- --------- ---------
Total allowance for
losses on loans .................. 52,247 1,890 54,137
--------- --------- ---------
Real estate held for
investment ......................... 7,193 2,000 9,193
Real estate held for sale ........... - 121,562 121,562
--------- --------- ---------
Total allowance for losses on
real estate held for
investment or sale ................ 7,193 123,562 130,755
--------- --------- ---------
Total allowance for losses ........... $ 59,440 $ 125,452 $ 184,892
========= ========= =========
<PAGE>
<PAGE>
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
========= ========= =========
The allowance for losses on loans secured by real estate and real estate
held for investment or sale totaled $144.3 million at March 31, 1995, which
constituted 36.8% of total non-performing real estate assets, before
valuation allowances. This amount represented a $5.9 million increase over
the December 31, 1994 level of $138.4 million, or 34.8% 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 March 1995 quarter, the Bank provided an additional $3.3 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 March 31, 1995 is
in addition to approximately $59.7 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at March
31, 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.
<PAGE>
<PAGE>
Net charge-offs of credit card loans for the six months ended March 31,
1995 were $16.5 million, compared to $23.3 million for the six months ended
March 31, 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 $38.5 million at
March 31, 1995 from $34.5 million at December 31, 1994, 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 260.7% and 4.1%, respectively, at March 31,
1995 from 236.0% and 4.2%, respectively, at December 31, 1994.
The allowance for losses on consumer and other loans increased to $2.1
million at March 31, 1995 from $1.4 million at December 31, 1994, primarily
because of the higher volume of such loans. 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 increased to 233.3% and
0.5%, respectively, at March 31, 1995 from 134.4% and 0.4%, respectively,
at December 31, 1994.
Asset and Liability Management. A key element of banking is the monitoring
and management of liquidity risk and interest-rate risk. The process of
planning and controlling asset and liability mixes, volumes and maturities
to stabilize the net interest spread is referred to as asset and liability
management. The objective of asset and liability management is to maximize
the net interest 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 March 31,
1995, adjustable-rate loans accounted for 81.3% of total loans. At March
31, 1995, ARMs and home equity credit line loans with rates adjustable in
one year or less accounted for 12.0% of total loans, while credit card
loans accounted for 31.2% 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 lend ing.
<PAGE>
<PAGE>
A traditional measure of interest-rate risk within the banking industry is
the interest sensitivity "gap," which is the sum of all interest-earning
assets minus all interest-bearing liabilities subject to repricing within
the same period. A negative gap like that shown below for the Bank implies
that, if market interest rates rise, the Bank's average cost of funds will
increase more rapidly than the concurrent increase in the average yield on
interest-earning assets. In a period of rising market interest rates, a
negative gap implies that the differential effect on the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities will decrease the Bank's net interest spread and thereby
adversely affect the Bank's operating results. Conversely, in a period of
declining interest rates, a negative gap may result in an increase in the
Bank's net interest spread. This analysis assumes a parallel shift in
interest rates for instruments of different maturities and does not reflect
the possibility that retail deposit pricing changes may lag those of
wholesale market funds which, in a period of rising interest rates, might
serve to mitigate the decline in net interest spread. Since January 1994,
before interest rates began their recent rise, short-term market rates have
increased over 300 basis points while the Bank's overall deposit costs have
increased less than 50 basis points.
The Bank views control over interest rate sensitivity as a key element in
its financial planning process and monitors its interest rate sensitivity
through its forecasting system. The Bank manages its interest rate
exposure and will narrow or widen its gap, depending on its perception of
interest rate movements and the composition of its balance sheet. For the
reasons discussed above, the Bank might take action to narrow its gap if it
believes that market interest rates will experience a significant prolonged
increase, and might widen its gap if it believes that market interest rates
will decline or remain relatively stable. A number of asset and liability
management strategies are available to the Bank in structuring its balance
sheet. These include selling or retaining certain portions of the Bank's
current residential mortgage loan production; altering the Bank's pricing
on certain deposit products to emphasize or de-emphasize particular
maturity categories; altering the type and maturity of securities acquired
for the Bank's available-for-sale portfolio when replacing securities
following normal portfolio maturation and turnover; lengthening or
shortening the maturity or repricing terms for any current period asset
securitizations; and altering the maturity or interest rate reset profile
of borrowed funds, if any, including funds borrowed from the Federal Home
Loan Bank ("FHLB") of Atlanta.
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at March 31, 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)
<CAPTION>
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1995
Mortgage loans:
Adjustable-rate $ 301,212 $ 214,312 $ 436,869 $ 339,743 $ 18,353 $ 1,310,489
Fixed-rate 8,724 10,244 37,481 31,738 101,438 189,625
Loans held for sale 29,521 - - - - 29,521
Home equity credit lines and second
mortgages 16,463 - - 95 - 16,558
Credit card and other 400,553 13,740 95,840 84,668 26,705 621,506
Loans held for securitization and sale 865,000 - - - - 865,000
Mortgage-backed securities 226,149 120,210 404,864 200,384 15,540 967,147
Other investments 135,336 - 4,402 - - 139,738
------------- ------------- ------------- ------------- ------------- ------------
Total interest-earning assets 1,982,958 358,506 979,456 656,628 162,036 4,139,584
Total non-interest earning assets - - - - 740,311 740,311
------------- ------------- ------------- ------------- ------------- ------------
Total assets $ 1,982,958 $ 358,506 $ 979,456 $ 656,628 $ 902,347 $ 4,879,895
============= ============= ============= ============= ============= ============
Deposits:
Fixed maturity deposits $ 424,651 $ 260,676 $ 195,909 $ 130,602 $ - $ 1,011,838
NOW, statement and passbook accounts 1,377,742 40,493 134,865 91,793 195,621 1,840,514
Money market deposit accounts 1,078,002 - - - - 1,078,002
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 310,292 115 3,519 1,299 6,270 321,495
------------- ------------- ------------- ------------- ------------- ------------
Total interest-bearing liabilities 3,200,687 301,284 334,293 223,694 351,891 4,411,849
Total non-interest bearing liabilities - - - - 206,221 206,221
Stockholders' equity - - - - 261,825 261,825
------------- ------------- ------------- ------------- ------------- ------------
Total liabilities & stockholders'
equity $ 3,200,687 $ 301,284 $ 334,293 $ 223,694 $ 819,937 $ 4,879,895
============= ============= ============= ============= ============= ============
Gap ($1,217,729) $57,222 $645,163 $432,934 ($189,855)
Cumulative gap ($1,217,729) ($1,160,507) ($515,344) ($82,410) ($272,265)
Cumulative gap as a percentage
of total assets (25.0)% (23.8)% (10.6)% (1.7)% (5.6)%
</TABLE>
<PAGE>
<PAGE>
The one-year gap, as a percentage of total assets, was a negative 23.8% at
March 31, 1995, compared to a negative 28.3% at December 31, 1994. As
noted above, the Bank's negative one-year gap might adversely affect the
Bank's net interest spread and earnings if interest rates rise and the Bank
is unable to take steps to reduce its gap.
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 further obligation to make additional 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 March 31, 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 one-half.
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 March 31, 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 half of fiscal 1995, after
receiving OTS approval, the Bank made tax sharing payments totaling $10.0
million to B. F. Saul Real Estate Investment Trust (the "Trust"), which
owns 80% of the Bank's Common Stock. The Bank made an additional tax
sharing payment of $2.0 million subsequent to March 31, 1995.
<PAGE>
<PAGE>
Capital. At March 31, 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 March 31,
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 "adequately capitalized" institutions under
the prompt corrective action regulations.
The following table shows the Bank's regulatory capital levels at March 31,
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)
<CAPTION>
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 $298,927
Net unrealized holding losses (1) 13,021
---------
Adjusted capital 311,948
Adjustments for tangible and core capital:
Intangible assets (48,139)
Non-includable subsidiaries (2) (11,018)
---------
Total tangible capital 252,791 5.21% $ 72,795 1.50% $179,996 3.71%
Supervisory goodwill (4) - ============= ========= ========= ========= =========
---------
Total core capital (3) (4) 252,791 5.21% $194,120 4.00% $ 58,671 1.21%
--------- ============= ========= ========= ========= =========
Total tier 1 risk-based capital (3) 252,791 6.76% $149,493 4.00% $103,298 2.76%
--------- ============= ========= ========= ========= =========
Adjustments for risk-based capital:
Subordinated capital debentures 151,400
Allowance for general loan losses 46,904
---------
Total supplementary capital 198,304
Excess allowance for loan losses (185)
---------
Adjusted supplementary capital 198,119
---------
Total available capital 450,910
Equity investments (2) (29,822)
---------
Total risk-based capital (3) $421,088 11.59% $298,986 8.00% $122,102 3.59%
========= ============= ========= ========= ========= =========
(1)Beginning December 31, 1994, the Bank adopted the OTS revised policy to exclude net unrealized holding gains (losses)
from regulatory capital.
(2)Reflects an aggregate offset of $5.1 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.
</TABLE>
<PAGE>
<PAGE>
In November 1994, the OTS revised its prior policy and announced that,
beginning as early as December 1994, savings associations could exclude net
unrealized holding gains (losses) on debt securities classified as
available-for-sale from regulatory capital for purposes of computing
regulatory capital ratios. The Bank adopted the revised policy in December
1994.
Regulatory Action and Requirements. The Bank is subject to a written
agreement with the OTS, as amended in October 1993, which imposes certain
restrictions on the Bank's operations and requires certain affirmative
actions by the Bank. Primarily because of its level of non-performing
assets, the Bank is also subject to restrictions on asset growth. Under
the applicable OTS requirements, the Bank may not increase its total assets
during any calendar quarter in excess of an amount equal to net interest
credited on deposit liabilities during such quarter without prior written
approval from the OTS. On March 21, 1995, the OTS notified the Bank that
it would not object to an increase in the Bank's total assets of
approximately $125.0 million for the period January 1, 1995 through March
31, 1995. The actual increase in the Bank's total assets during that
period was $124.6 million.
Capital Maintenance Strategies. The regulatory capital requirements
applicable to the Bank will continue to increase over time as a result of
the gradual phase-out of various assets from regulatory capital. On the
basis of its balance sheet at March 31, 1995, the Bank met the FIRREA-
mandated fully phased-in capital requirements with tangible, core (or
leverage), and total risk-based capital ratios of 4.87%, 4.87% and 11.17%,
respectively, which exceeded the FIRREA requirements of 1.5%, 3.0% and
8.0%, respectively. At March 31, 1995, the Bank had $30.1 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 March
31, 1995 to a 40% phase-out from all three FIRREA capital requirements.
This phase-out will increase to 60% on July 1, 1995 and 100% on July 1,
1996, in accordance with a delayed phase-in period approved by the OTS
pursuant to legislation enacted in October 1992. At March 31, 1995, the
Bank also had two equity investments with an aggregate balance, after
subsequent valuation allow ances, of $33.9 million which were subject to a
100% phase-out from total capital for risk-based capital purposes.
Pursuant to OTS guidelines, $5.1 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.
On March 31, 1995, the Bank securitized and sold $59.2 million of amounts
on deposit in certain spread accounts associated with certain of the Bank's
outstanding credit card securitizations. The effect of the transaction was
to transfer $59.2 million of existing recourse liability from the Bank to
investors in exchange for a cash payment to the Bank, remove certain
amounts of the securitized spread accounts from the Bank's GAAP balance
sheet, and reduce the Bank's risk-based capital requirement by $59.2
million.
<PAGE>
<PAGE>
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception
from treatment as an equity investment. If an REO property is considered
an equity investment, its then-current book value is deducted from total
risk-based capital. Accordingly, if the Bank is unable to dispose of any
REO property (through bulk sales or otherwise) prior to the end of its
applicable five-year holding period and is unable to obtain an extension of
such five-year holding period from the OTS, the Bank could be required to
deduct the then-current book value of such REO property from risk-based
capital. Although there can be no assurances in this regard, management
believes it will be able to obtain the necessary extensions. The following
table sets forth the Bank's REO at March 31, 1995, after valuation
allowances of $121.6 million, by the fiscal year in which the property was
acquired through foreclosure.
Fiscal Year (In thousands)
1990 (1) ................ $ 113,057
1991 .................... 99,464
1992 .................... 15,630
1993 .................... 5,337
1994 .................... 17,034
1995 .................... 2,852
---------
Total REO ........ $ 253,374
=========
- ------------------------------
(1) Includes REO with an aggregate net book value of $29.8 million, which
the Bank agreed to treat as equity investments for regulatory capital
purposes
At March 31, 1995, the Bank had $46.3 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.
<PAGE>
<PAGE>
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 March 31, 1995, the Bank's leverage, tier 1
risk-based and total risk-based capital ratios were 5.21%, 6.76% and
11.59%, 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." On a fully phased-in basis at March 31, 1995, the
Bank's regulatory capital ratios would meet the ratios established for
"adequately capitalized" institutions.
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
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, total cash requirements of the Real Estate Trust, like those
of many real estate operating companies, have exceeded the cash generated
by its operating activities. 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 has funded such shortfalls
through a combination of external funding sources, primarily new financings
(including the sale of Unsecured Notes), refinancings of maturing mortgage
debt, asset sales and tax sharing payments from the Bank. 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 and from capital
transactions involving the sale or refinancing of the properties of the
partnership.
The maturity schedule for the Real Estate Trust's outstanding debt at March
31, 1995 is set forth in the following table. Of the $188.9 million of
mortgage debt outstanding at March 31, 1995, $143.7 million was nonrecourse
to the Real Estate Trust and $174.5 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) $ 4,459 $ -- $ 3,194 $ 7,653
1996 9,679 -- 6,006 15,685
1997 19,438 -- 5,446 24,884
1998 7,412 -- 6,648 14,060
1999 17,093 -- 12,964 30,057
Thereafter 130,822 175,000 6,276 312,098
-------- -------- ------- --------
$188,903 $175,000 $40,534 $404,437
======== ======== ======= ========
- -------------------------------------------------------------------
(1) April 1, 1995 to September 30, 1995.
The Real Estate Trust anticipates that its capital improvement costs for
its existing portfolio in the next several fiscal years will be in the
range of $4.0 to $5.0 million per year.
<PAGE>
<PAGE>
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. As of March 31, 1995, $2.0 million in tax
sharing payments were due to the Real Estate Trust which were received by
the Real Estate Trust in May 1995. The availability and amount of tax
sharing payments and dividends in future periods is dependent upon, among
other things, the Bank's operating performance and income, regulatory
restrictions on such payments and (in the case of tax sharing payments) the
continued consolidation of the Bank and the Bank's subsidiaries with the
Trust for federal income tax purposes.
<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 March 31, 1995 was 11.1%, compared to
19.1% for the month ended December 31, 1994. Additionally, the Bank met the
liquidity level requirements for each month of the first half of fiscal
1995. The decline in the Bank's liquidity ratio was primarily attributable
to two factors: (i) the Bank's use as collateral of securities which would
have otherwise counted toward its liquidity ratio and (ii) scheduled and
unscheduled principal paydowns on unpledged securities, which reduced the
level of qualifying collateral.
The Bank's primary sources of funds historically have consisted of (i)
principal and interest payments on loans and mortgage-backed securities,
(ii) savings deposits, (iii) sales of loans 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 March 31, 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 $979.1 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 $1.2 billion at March 31, 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 and home equity
credit line receivables have been significant sources of liquidity for the
Bank. 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. During the
first quarter of fiscal 1995, the Bank securitized and sold $575.0 million
of credit card receivables. At March 31, 1995, the Bank was considering
the securitization and sale of approximately $1.2 billion of credit card
receivables, including $565.0 million of receivables outstanding at March
31, 1995 and $635.0 million of receivables which the Bank expects to become
available, either through additional fundings or amortization of existing
trusts, during the six months ending September 30, 1995. In addition, the
Bank was considering the securitization and sale of approximately $270.0
million of home equity credit line receivables and $200.0 million of
automobile loan receivables during the six months ending September 30,
1995. To the extent these receivables were outstanding at March 31, 1995,
such receivables are classified as held for securitization and sale in the
Consolidated Balance Sheets. As part of its operating strategy, the Bank
will continue to explore opportunities to sell assets and to securitize and
sell credit card, 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 six months ended March 31, 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 $6.9 billion, repay borrowings of $1.5 billion, fund existing and
continuing loan commitments (including real estate held for investment or
sale) of $1.8 billion, purchase investments and loans of $107.7 million and
meet operating expenses, before depreciation and amortization, of $129.2
million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $6.9 billion,
proceeds from borrowings of $1.7 billion, proceeds from sales of loans,
trading securities and real estate of $1.2 billion, and principal and
interest collected on investments, loans, mortgage-backed securities and
securities of $330.8 million.
The Bank is obligated under various recourse provisions related to the
securitization and sale of credit card and home equity credit line
receivables. Of the $3.2 billion of outstanding trust certificate balances
at March 31, 1995, the primary recourse to the Bank was approximately $48.3
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 March 31, 1995, recourse to the Bank under
these arrangements was approximately $4.4 million.
The Bank's commitments at March 31, 1995 are set forth in the following
table:
(In thousands)
Commitments to originate loans $ 25,791
------------
Loans in process (collateralized loans):
Home equity .......................... 548,841
Real estate construction ............. 31,149
Commercial and multifamily ........... 273
------------
580,263
------------
Loans in process (unsecured loans):
Credit cards ......................... 9,496,868
Overdraft lines ...................... 46,072
Commercial ........................... 3,928
------------
9,546,868
------------
Total commitments to extend credit . 10,152,921
Letters of credit ...................... 52,494
Recourse arrangements on asset-backed
securitizations ...................... 48,293
Recourse arrangements on mortgage-backed
securities ........................... 4,413
------------
Total commitments .................. $ 10,258,122
============
<PAGE>
<PAGE>
Based on historical experience, the Bank expects to fund substantially less
than the total amount of its outstanding credit card and home equity credit
line commitments, which together accounted for 97.9% of commitments at
March 31, 1995.
At March 31, 1995, repayments of borrowed money scheduled to occur during
the next 12 months were $180.7 million. Certificates of deposit maturing
during the next 12 months amounted to $685.3 million, of which a
substantial portion is expected to remain with the Bank.
There were no material commitments for capital expenditures at March 31,
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 MARCH 31,1995 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1994
REAL ESTATE
The following table sets forth, for the three-month period ended March 31,
1995 (the "1995 quarter") and the three-month period ended March 31, 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. On November 30, 1994, the Real Estate Trust
acquired a 192-room hotel in Auburn Hills, Michigan. Operating results of
the hotel are included in the 1995 quarter.
<PAGE>
<PAGE>
Three Months Ended
March 31
---------------------
1995 1994
---------- ----------
COMMERCIAL PROPERTIES (In thousands)
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $4,486 $3,791
Expense recoveries 234 172
Other 100 91
---------- ----------
Total revenues 4,820 4,054
---------- ----------
Direct operating expenses
Utilities 606 581
Repairs and maintenance 488 433
Real estate taxes 343 385
Payroll 159 137
Insurance 67 64
Other 206 183
---------- ----------
Total direct operating expenses 1,869 1,783
---------- ----------
Income after direct operating expenses $2,951 $2,271
========== ==========
HOTELS (1)
Room sales $8,048 $6,487
Food sales 2,133 1,854
Beverage sales 618 584
Other 712 714
---------- ----------
Total revenues 11,511 9,639
---------- ----------
Direct operating expenses
Payroll 3,992 3,533
Cost of sales 982 963
Utilities 915 949
Repairs and mainenance 638 577
Adverting and promotion 594 507
Property taxes 342 282
Insurance 151 147
Other 1,359 1,126
---------- ----------
Total direct operating expenses 8,973 8,084
---------- ----------
Income after direct operating expenses $2,538 $1,555
========== ==========
(1) Includes the operating results of a 192-room hotel
acquired by the Real Estate Trust on November 30, 1994.
<PAGE>
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization
of $4.1 million and an operating loss of $6.6 million in the 1995 quarter
compared to a loss before depreciation and amortization of $6.7 million and
an operating loss of $9.3 million in the corresponding prior period. The
reduction in the operating loss was largely attributable to an improvement
in the operations of income-producing properties and the recognition of
gain on the condemnation of a portion of a land parcel.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $680,000 (29.9%) in
the 1995 quarter compared to such income in the 1994 quarter. Almost all
of the growth in gross income, which amounted to $766,000 (18.9%), resulted
from higher base rents. Expenses increased by $86,000 (4.8%).
Income after direct operating expenses from hotel properties increased
$983,000 (63.2%) in the 1995 quarter over the level achieved in the 1994
quarter. In the current period, room sales increased $1,561,000 (24.1%),
while food and beverage sales increased $313,000 (12.8%). The increase in
total revenue of $1,872,000 (19.4%) exceeded the increase of $889,000
(11.0%)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 $514,000 (5.3%) in the 1995 quarter, primarily
because of the higher level of borrowings in the current quarter. Average
balances of the Real Estate Trust's outstanding borrowings increased to
$404.8 million for the 1995 quarter from $323.3 million for the 1994
quarter. 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 $284,000 (13.9%) in the 1995 quarter as a result of
new tenant improvements and the newly acquired hotel property.
Amortization of debt expense declined $346,000 (72.5%) 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
$254,000 (16.9%) in 1995 quarter from their expense level in the 1994
quarter. The monthly advisory fee in the 1995 quarter was $292,000
compared to $250,000 in the 1994 quarter, which represented an aggregate
increase of $125,000. The balance of the increase in this expense item
reflected higher management fees resulting from higher revenues.
General and administrative expense increased $663,000 (142.3%) in the 1995
quarter principally as a result of higher legal costs incurred in
litigation with a tenant.
<PAGE>
<PAGE>
BANKING
Overview. The Bank recorded operating income of $12.6 million the three
months ended March 31, 1995, (the "1995 quarter"), compared to operating
income of $24.6 million for the three months ended March 31, 1994 (the
"1994 quarter"). The decline in income for the 1995 quarter was primarily
attributable to a $14.6 million increase in operating expenses and a $10.4
million increase in the provision for loan losses. This decline was
partially offset by a $12.9 million increase in other (non-interest) income
resulting primarily from an increase in loan and deposit servicing fees.
Net Interest Income. Net interest income, before the provision for loan
losses, decreased $0.2 million (or 0.4%) in the 1995 quarter. The Bank
would have recorded interest income of $1.9 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 $0.5 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)
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------
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) $ 2,991,028 $73,273 9.80 % $ 2,773,338 $67,083 9.68 %
Mortgage-backed securities 1,005,351 15,434 6.14 1,278,220 17,939 5.61
Trading securities 2,849 60 8.42 19,961 303 6.07
Federal funds sold 34,053 509 5.98 14,684 119 3.24
Investment securities 4,401 51 4.64 4,692 50 4.26
Other interest-earning assets 156,459 1,983 5.07 166,989 1,300 3.11
------------ -------- ------------ --------
Total 4,194,141 91,310 8.71 4,257,884 86,794 8.15
-------- ------- -------- -------
Noninterest-earning assets:
Cash 125,744 112,600
Real estate held for investment or sale 318,086 364,566
Property and equipment, net 149,516 137,912
Cost in excess of net assets acquired, net 5,704 8,543
Other assets 154,917 159,530
------------ ------------
Total assets $ 4,948,108 $ 5,041,035
============ ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 876,627 5,875 2.68 $ 840,310 5,824 2.77
Savings deposits 1,071,728 8,847 3.30 1,171,008 9,983 3.41
Time deposits 913,120 10,972 4.81 752,738 7,563 4.02
Money market deposits 1,117,701 10,968 3.93 1,154,233 9,360 3.24
------------ -------- ------------ --------
Total deposits 3,979,176 36,662 3.69 3,918,289 32,730 3.34
Borrowings 590,310 10,157 6.88 767,725 9,406 4.90
------------ -------- ------------ --------
Total liabilities 4,569,486 46,819 4.10 4,686,014 42,136 3.60
-------- ------- -------- -------
Noninterest-bearing items:
Noninterest-bearing deposits 69,055 59,390
Other liabilities 62,337 32,543
Stockholders' equity 247,230 263,088
------------ ------------
Total liabilities and stockholders' equity $ 4,948,108 $ 5,041,035
============ ============
Net interest income $44,491 $44,658
======== ========
Net interest spread (2) 4.61 % 4.55 %
======= =======
Net yield on interest-earning assets (3) 4.24 % 4.20 %
======= =======
Interest-earning assets to interest-bearing liabilities 91.79 % 90.86 %
======= =======
(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)
<CAPTION>
Three Months Ended March 31, 1995
Compared to
Three Months Ended March 31, 1994
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 5,346 $ 844 $ 6,190
Mortgage-backed securities (11,129) 8,624 (2,505)
Trading securities (814) 571 (243)
Federal funds sold 238 152 390
Investment securities (14) 15 1
Other interest-earning assets (533) 1,216 683
------------ ------------ ------------
Total interest income (6,906) 11,422 4,516
------------ ------------ ------------
Interest expense:
Deposit accounts 508 3,424 3,932
Borrowings (10,788) 11,539 751
------------ ------------ ------------
Total interest expense (10,280) 14,963 4,683
------------ ------------ ------------
Increase (decrease) in
net interest income $ 3,374 $ (3,541) $ (167)
============ ============ ============
(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 $4.5 million from the level
in the 1994 quarter primarily as a result of higher average balances of
loans receivable and, to a lesser extent, federal funds sold. Higher
average yields earned by the Bank on certain categories of its interest-
earning assets also contributed to the increase in interest income. The
effect on interest income of higher average balances and higher average
yields was offset in part by lower average balances of mortgage-backed
securities.
The Bank's net yield on interest-earning assets increased to 4.24% in the
1995 quarter from 4.20% in the 1994 quarter. 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.
Interest income on loans, the largest category of interest-earning assets,
increased by $6.2 million (or 9.2%) 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 $201.4 million (or 98.0%) in the 1995 quarter. The higher
balances were largely responsible for the increase of $4.8 million (or
113.9%) in interest income on consumer loans. Average balances of single-
family residential permanent loans increased $52.8 million (or 4.0%) as a
result of increased originations of such loans during the current quarter.
Interest income on these loans increased $2.4 million (or 20.5%) from the
1994 quarter. Average balances of credit card loans remained relatively
stable, while 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 origination of $1.0 billion and $1.1 billion of credit card
loans during fiscal 1994 and the first half of fiscal 1995, respectively,
partially offset the securitization and sale of $1.4 billion and $988.0
million of credit card receivables during fiscal 1994 and the first half of
fiscal 1995, respectively, contributing to the slight increase of $5.0
million (or 0.5%) in average balances of credit card receivables for the
three months ended March 31, 1995. The securitization and sale of $181.9
million of home equity credit line receivables in September 1994
contributed to a decline of $32.3 million (or 25.5%) in average balances of
home equity credit line receivables, which resulted in a $0.1 million
decline in interest income from 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 12 basis points (to 9.80% from
9.68%) from the average yield in the 1994 quarter. Average yields on
single-family residential permanent and home equity credit line loans
increased to 7.19% from 6.75% and to 8.21% from 6.46%, respectively.
Average yield increases on construction loans and consumer loans to 10.95%
from 5.96% and to 8.78% from 8.13%, respectively, also contributed to the
higher average yields on the loan portfolio. The increase in the average
yields on these loan categories reflects the recent increases in market
interest rates. The effect of the higher yields on such loans was
partially offset by a decrease in the average yield on credit card loans.
Special introductory and promotional interest rates to new and existing
credit card holders contributed to the decline in the average yield on
credit card loans to 14.89% from 15.12%. This decrease was largely
responsible for a $0.4 million decline in interest income on credit card
loans.
<PAGE>
<PAGE>
Interest income on mortgage-backed securities decreased $2.5 million (or
14.0%) primarily because of lower average balances. The reduced mortgage-
backed security balances in the 1995 quarter reflected the effects of
scheduled principal paydowns and unscheduled principal prepayments. The
negative effect of the lower average balances was offset in part by an
increase in the average interest rates on these securities to 6.14% from
5.61%, primarily as a result of rate adjustments to reflect current market
interest rates on securities that are repricing.
Other interest income increased by $1.1 million (or 75.6%) in the 1995
quarter as a result of higher average yields and higher average balances of
federal funds sold and higher average yields on other interest-earning
assets.
Interest expense increased $4.7 million for the 1995 quarter primarily
because of an increase of $3.9 million (or 12.0%) 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 3.69% from 3.34%), which reflected the recent increases in market
interest rates, and, to a lesser extent, an increase in average deposit
balances of $60.9 million. See "Financial Condition - Asset and Liability
Management."
Also contributing to the increase in total interest expense was a $0.8
million increase in interest expense on borrowings. The increase in
interest paid on borrowings was primarily attributable to a $2.3 million
increase in interest expense on repurchase agreement transactions. The
increased expense associated with repurchase agreement transactions was due
to an increase of $103.9 million (or 79.4%) in the average amount of
repurchase agreement transactions and an increase in the average cost of
these borrowings (to 5.75% from 3.29), which reflected the recent increases
in market interest rates. The increased expense was offset in part by a
$1.5 million decrease in interest expense on FHLB of Atlanta advances
resulting in part from a decline of $279.2 million (or 65.4%) in the
average balance of such borrowings.
Provision for Loan Losses. The Bank's provision for loan losses increased
to $13.6 million in the 1995 quarter from $3.2 million in the 1994 quarter.
The $10.4 million increase was primarily attributable to an increase of
$8.1 million in the provision for losses on credit card loans and an
increase of $1.4 million in the provision for losses on consumer loans.
The higher provisions resulted from increased origination volume of such
loans. See "Financial Condition - Asset Quality - Allowances for Losses."
Other Income. The increase in other (non-interest) income to $55.3 million
in the 1995 quarter from $42.4 million in the 1994 quarter was primarily
attributable to increases in loan and deposit servicing fees and earnings
on real estate held for investment or sale. The positive effect of these
items on other income was partially offset by a slight decrease in credit
card fees, a decrease in the gain on sales of credit card relationships and
loans, and a decrease in the gain on sales of mortgage servicing rights.
An increase of $19.3 million in excess servicing fees and $8.6 million of
servicing fees earned by the Bank for servicing its portfolios of
securitized credit card loans contributed to an increase of $31.2 million
(or 185.5%) 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 $1.6 million increase in excess servicing
fees related to home equity credit line securitizations.
<PAGE>
<PAGE>
The $3.3 million increase in earnings on real estate held for investment or
sale was primarily attributable to a decrease of $0.7 million in the
provision for losses on such assets and a $3.9 million increase in
partnership earnings recorded on real estate held for investment. See
"Financial Condition - Asset Quality - Allowances for Losses." The
positive effect of these items was partially offset by a $1.0 million
decrease in the gain recorded on sales of the Bank's REO properties and a
$0.3 million decrease in the operating income generated by the REO
properties.
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $3.0 million (54.7%) in the 1995
quarter from the level in the 1994 quarter. The decrease was primarily
attributable to a $2.2 million decrease in interchange fees and a $1.4
million decrease in late charges. Also contributing to the decrease was a
$0.2 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 $18.9
million primarily because the Bank realized a significant gain from the
sale of credit card relationships (or accounts) in the 1994 quarter, but
did not consummate any such sale in the 1995 quarter.
Gain on sales of mortgage servicing rights decreased by $1.2 million as a
result of a decline in the volume of mortgage servicing rights sold during
the current period. During the 1995 and 1994 quarters, the Bank sold the
rights to service mortgage loans with principal balances of approximately
$27.4 million and $119.3 million, respectively.
Operating Expenses. Operating expenses for the 1995 quarter increased
$14.6 million (24.6%) 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 $5.6 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card operations. The $3.7 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 $4.1 million increase in other operating expenses
resulted primarily because of an increase in credit card fraud losses
recorded during the current period.
<PAGE>
<PAGE>
SIX MONTHS ENDED MARCH 31, 1995 COMPARED TO
SIX MONTHS ENDED MARCH 31, 1994
REAL ESTATE
The following table sets forth, for the six-month period ended March 31,
1995 (the "1995 period") and the six-month period ended March 31, 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. On November 30, 1994, the Real Estate Trust
acquired a 192-room hotel in Auburn Hills, Michigan. Operating results of
the hotel are included in the 1995 period.
<PAGE>
<PAGE>
Six Months Ended
March 31
---------------------
1995 1994
---------- ----------
COMMERCIAL PROPERTIES (In thousands)
Revenue
Base rent $8,801 $7,269
Expense recoveries 455 323
Other 203 185
---------- ----------
Total revenues 9,459 7,777
---------- ----------
Direct operating expenses
Utilities 1,181 1,159
Repairs and maintenance 986 818
Real estate taxes 685 760
Payroll 301 274
Insurance 131 129
Other 407 348
---------- ----------
Total direct operating expenses 3,691 3,488
---------- ----------
Income after direct operating expenses $5,768 $4,289
========== ==========
HOTELS (1)
Room sales $15,783 $13,281
Food sales 4,630 4,108
Beverage sales 1,363 1,350
Other 1,424 1,582
---------- ----------
Total revenues 23,200 20,321
---------- ----------
Direct operating expenses
Payroll 7,730 7,088
Cost of sales 2,129 2,032
Utilities 1,595 1,626
Repairs and mainenance 1,249 1,141
Adverting and promotion 1,154 1,039
Property taxes 648 512
Insurance 291 287
Other 2,612 2,264
---------- ----------
Total direct operating expenses 17,408 15,989
---------- ----------
Income after direct operating expenses 5,792 4,332
========== ==========
(1) Includes the operating results of a 192-room hotel
acquired by the Real Estate Trust on November 30, 1994.
<PAGE>
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization
of $8.9 million and an operating loss of $13.8 million in the 1995 period
compared to a loss before depreciation and amortization of $14.3 million
and an operating loss of $19.4 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 $1,479,000
(34.5%)in the 1995 period compared to such income in the 1994 period.
Almost all of the growth in gross income, which amounted to $1,682,000
(21.6%), resulted from higher base rents. Expenses increased by $203,000
(5.8%).
Income after direct operating expenses from hotel properties increased
$1,460,000 (33.7%) in the 1995 period over the level achieved in the 1994
period. In the current period, room sales increased $2,502,000 (18.8%),
while food and beverage sales increased $535,000 (9.8%). The increase in
total revenue of $2,879,000 (14.2%), exceeded the increase of $1,419,000
(8.9%)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 $890,000 (4.6%) 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
$405.7 million for the 1995 period from $313.5 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 $538,000 (13.0%) in the 1995 period as a result of
new tenant improvements and the newly acquired hotel property.
Amortization of debt expense declined $719,000 (75.2%) 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
$480,000 (15.8%) 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 in the prior 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 $590,000 (61.0%) 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 $18.4 million during the
six months ended March 31, 1995 (the "1995 period"), compared to operating
income of $30.6 million for the six months ended March 31, 1994 (the "1994
period"). The decline in income for the 1995 period was primarily
attributable to a $25.1 million increase in operating expenses and a $7.3
million increase in the provision for loan losses. This decrease in income
was partially offset by a $20.7 million increase in other (non-interest)
income resulting primarily from an increase in loan and deposit servicing
fees.
Net Interest Income. Net interest income, before the provision for loan
losses, decreased $0.5 million (or 0.5%) in the 1995 period. The Bank
would have recorded interest income of $3.8 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 $0.8 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)
<CAPTION>
Six Months Ended March 31,
----------------------------------------------------------------------
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) $ 2,857,635 $136,901 9.58 % $ 2,628,206 $126,247 9.61 %
Mortgage-backed securities 1,018,538 31,040 6.10 1,354,649 38,296 5.65
Trading securities 3,475 144 8.29 23,213 715 6.16
Federal funds sold 42,194 1,169 5.54 16,086 250 3.11
Investment securities 4,401 97 4.41 4,690 100 4.26
Other interest-earning assets 153,497 3,742 4.88 187,816 2,842 3.03
------------ --------- ------------ ---------
Total 4,079,740 173,093 8.49 4,214,660 168,450 7.99
--------- ------- --------- -------
Noninterest-earning assets:
Cash 126,403 112,951
Real estate held for investment or sale 322,789 378,274
Property and equipment, net 146,534 136,962
Cost in excess of net assets acquired, net 6,178 8,938
Other assets 142,198 161,434
------------ ------------
Total assets $ 4,823,842 $ 5,013,219
============ ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 873,806 11,855 2.71 $ 820,270 11,200 2.73
Savings deposits 1,129,069 18,787 3.33 1,112,501 18,693 3.36
Time deposits 851,973 19,626 4.61 778,519 15,604 4.01
Money market deposits 1,125,536 22,335 3.97 1,167,627 18,616 3.19
------------ --------- ------------ ---------
Total deposits 3,980,384 72,603 3.65 3,878,917 64,113 3.31
Borrowings 479,514 16,857 7.03 779,881 20,243 5.19
------------ --------- ------------ ---------
Total liabilities 4,459,898 89,460 4.01 4,658,798 84,356 3.62
--------- ------- --------- -------
Noninterest-bearing items:
Noninterest-bearing deposits 67,201 57,566
Other liabilities 47,955 34,865
Stockholders' equity 248,788 261,990
------------ ------------
Total liabilities and stockholders' equity $ 4,823,842 $ 5,013,219
============ ============
Net interest income $ 83,633 $ 84,094
========= =========
Net interest spread (2) 4.47 % 4.37 %
======= =======
Net yield on interest-earning assets (3) 4.10 % 3.99 %
======= =======
Interest-earning assets to interest-bearing liabilities 91.48 % 90.47 %
======= =======
(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)
<CAPTION>
Six Months Ended March 31, 1995
Compared to
Six Months Ended March 31, 1994
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 11,809 $ (1,155) $ 10,654
Mortgage-backed securities (14,722) 7,466 (7,256)
Trading securities (1,109) 538 (571)
Federal funds sold 620 299 919
Investment securities (11) 8 (3)
Other interest-earning assets (1,393) 2,293 900
------------ ------------ ------------
Total interest income (4,806) 9,449 4,643
------------ ------------ ------------
Interest expense:
Deposit accounts 1,723 6,767 8,490
Borrowings (16,707) 13,321 (3,386)
------------ ------------ ------------
Total interest expense (14,984) 20,088 5,104
------------ ------------ ------------
Increase (decrease) in
net interest income $ 10,178 $ (10,639) $ (461)
============ ============ ============
(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 $4.6 million from the level in
the 1994 period primarily as a result of higher average balances of loans
receivable and, to a lesser extent, federal funds sold. Higher average
yields earned by the Bank on certain categories of its interest-earning
assets also contributed to the increase in interest income. The effect on
interest income of higher average balances and higher average yields was
offset in part by lower average balances of mortgage-backed securities and,
to a lesser extent, lower average yields on loans receivable.
The Bank's net yield on interest-earning assets increased to 4.10% in the
1995 period from 3.99% 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 recent increases in market interest
rates to which rates on such products are indexed.
Interest income on loans, the largest category of interest-earning assets,
increased by $10.7 million (or 8.4%) from the 1994 period. The increase in
interest income on loans was attributable to higher average balances.
Average balances of consumer loans, principally automobile loans, increased
$204.9 million (or 111.3%) in the 1995 period. The higher balances were
largely responsible for the increase of $9.2 million (or 120.6%) in
interest income on consumer loans. Average balances of single-family
residential permanent loans increased $58.3 million (or 4.4%) as a result
of increased originations of such loans during the current period.
Interest income on these loans increased $4.3 million (or 9.6%) from the
1994 period. Average balances of credit card and 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 $1.4
billion and $988.0 million of credit card receivables during fiscal 1994
and the 1995 period, respectively, which was mostly offset by the increased
origination of credit card loans, resulted in a decline of $2.8 million (or
0.3%) in average balances of credit card receivables for the six months
ended March 31, 1995. The securitization and sale of $181.9 million of
home equity credit line receivables in September 1994 more than offset the
originations of $54.9 million of such loans during the 1995 period, and
resulted in a decline of $30.1 million (or 28.5%) in average balances of
home equity credit line receivables, which resulted in a $0.4 million
decline in interest income from these assets.
Lower average yields on the loan portfolio partially offset the effect of
higher average balances. The average yield on the loan portfolio in the
1995 period decreased by three basis points (to 9.58% from 9.61%) from the
average yield in the 1994 period. Special introductory and promotional
interest rates offered to new and existing credit card holders contributed
to a decline in the average yield on credit card loans to 14.42% from
15.12%. This decrease was largely responsible for a $3.4 million decline
in interest income on credit card loans. The effect of the lower yield on
credit card loans was offset by increases in the average yields on single-
family residential permanent and home equity credit line loans to 7.13%
from 6.79% and to 8.10% from 6.52%, respectively, and increases in the
average yields on commercial permanent and construction loans to 6.74% from
6.44% and to 10.28% from 6.77%, respectively. The increase in the average
yields on these loans reflects the upward adjustment of interest rates on
such loans to reflect increases in market interest rates to which rates on
such products are indexed.
<PAGE>
<PAGE>
Interest income on mortgage-backed securities decreased $7.3 million (or
19.0%) 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 6.10% from
5.65%, primarily as a result of rate adjustments to reflect current market
interest rates on securities that are repricing.
Other interest income increased by $1.8 million (or 58.8%) in the 1995
period primarily as a result of higher average yields and higher average
balances of federal funds sold.
Interest expense increased $5.1 million for the 1995 period because of an
increase of $8.5 million in interest expense on deposits, the largest
category of interest-bearing liabilities. Interest expense on deposits
increased as a result of an increase in average rates (to 3.65% from
3.31%), which reflected the recent increase in market interest rates, and,
to a lesser extent, an increase in average deposit balances of $101.5
million. See "Financial Condition - Asset and Liability Management."
The increase in interest expense on deposits was partially offset by a $3.4
million decrease in interest expense on borrowings. The decrease in
interest paid on borrowings was primarily attributable to a $3.8 million
decrease in interest expense on FHLB of Atlanta advances and a $2.1 million
decrease in interest expense on the Bank's subordinated debentures. A
decrease of $301.5 million (or 70.7%) in the average balance of FHLB of
Atlanta advances contributed to the reduced interest expense on such
borrowings. Such decrease was offset in part by an increase in the average
cost of FHLB of Atlanta advances to 5.68% from 3.44%, which reflected the
recent increase in market interest rates. The decline in interest expense
on the Bank's subordinated debentures reflected the effects of the
refinancing of two outstanding debenture issues in the first quarter of
fiscal 1994 with the proceeds of a new, lower-rate debenture issue. As a
result of such refinancing, the annual interest rate paid by the Bank on
its debentures decreased to 9.24% in the 1995 period from 10.80% in the
1994 period.
Provision for Loan Losses. The Bank's provision for loan losses increased
to $22.2 million in the 1995 period from $14.9 million in the 1994 period.
The increase was primarily attributable to an increase of $4.5 million in
the provision for losses on credit card loans and an increase of $1.9
million in the provision for losses on consumer loans. The higher
provisions resulted from increased origination volume of such loans. See
"Financial Condition - Asset Quality - Allowances for Losses."
Other Income. The increase in other (non-interest) income to $98.4 million
in the 1995 period from $77.8 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 $29.9 million in excess servicing fees and $14.6 million of
servicing fees earned by the Bank for servicing its portfolios of
securitized credit card loans contributed to an increase of $49.2 million
(or 130.0%) in loan and deposit servicing fees. Such excess servicing fees
and servicing fees have increased in recent periods as a result of greater
securitization activity by the Bank. The increase in loan and deposit
servicing fees also reflected a $2.0 million increase in excess servicing
fees related to home equity credit line securitizations.
<PAGE>
<PAGE>
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $5.4 million (44.80%) in the 1995
period from the level in the 1994 period. The decrease was primarily
attributable to a $2.6 million and $1.8 million decrease in late charges
and interchange fees, respectively. Also contributing to the decrease in
credit card fees was a $1.7 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 $21.2
million primarily because the Bank realized a significant gain from the
sale of credit card relationships (or accounts) in the 1994 quarter, but
did not consummate any such sale in the 1995 quarter.
Gain on sales of mortgage servicing rights decreased by $3.3 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
$59.4 million and $269.9 million, respectively.
Operating Expenses. Operating expenses for the 1995 period increased $25.1
million (21.6%) from the level in the 1994 period. The main components of
the higher operating expenses were increases in salaries and employee
benefits, marketing, data processing and other expenses. The $7.9 million
increase in salaries and employee benefits resulted primarily from the
addition of staff to the Bank's credit card operations. The $3.8 million
increase in marketing expenses was primarily incurred in connection with
the Bank's continued expansion of its marketing program for its credit card
products and services which began in June 1993 with the resumption of
active national solicitation of new credit card accounts. The $6.7 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 $7.5 million
increase in other operating expenses was primarily a result of increased
credit card fraud losses during the current period.
