Indigestion for Chevy Chase

WASHINGTON - With a crown-jewel credit card operation and an attractive home-loan portfolio, Chevy Chase Savings Bank has one of this metropolitan area's best consumer franchises. But the $5 billion-asset thrift's involvement with real estate development has turned into a noose around its neck.

The region's realty bust forced Chevy Chase to take over four huge tracts in Maryland and Virginia this year. Valued at $200 million, the seized parcels include a planned community that recreates the look and feel of a 19th-century town.

With its rapid run-up in problem assets, regulators are now demanding that the thrift raise $15 million in capital or find a merger partner by next June. And they have ordered it to either limit its exposure in the projects or get rid of them completely.

The turn of events demonstrates that the region's economy is taking a toll on even well-regarded institutions. And it raises questions about how Chevy Chase's valuable franchise will be able to weather the tough times.

Back-Breaking Recession

An advertising blitz plus low-rate financing are enabling the thrift to sell some of the homes that builders were unable to move. But many experts say the recession could break the back of the S&L, run by real estate magnate B. Francis Saul 2d.

"I think there is no one who can work it out better than Mr. Saul, but the only question is whether Mr. Saul is bigger than the real estate market," said Celia Martin, a research analyst with Friedman, Billings, Ramsey & Co., a Washington-based brokerage firm.

Mr. Saul made a fortune in real estate by building the company founded by his grandfather in the late 1800s. Mr. Saul's private B.F. Saul Real Estate Investment Trust owns 80% of the thrift, which in turn owns the B.F. Saul Mortgage Co.

During the past three years, when other big area S&Ls such as Trustbank Federal Savings of Falls Church, Va., and Perpetual Savings Bank of Vienna, Va., were sunk or badly damaged by declines in commercial real estate, Chevy Chase, with its emphasis on traditional housing-related and consumer fare, managed to keep its head above water. It owns a total of $266.6 million of foreclosed properties, in addition to the four big parcels it seized recently.

Other Consumer Loans

In addition to its credit card business, the largest among the nation's thrifts, Chevy Chase boasts of $778.4 million in home equity loans and $1.2 billion in home mortgages.

But as the recession drags on, few bank loans remain immune from its impact. As a result, Chevy Chase lost $16 million in its third fiscal quarter, which ended June 30, against a $20.3 million profit a year ago.

It was in the red for $3.7 million pretax for the first nine months of its fiscal year, compared with a $36 million profit for the period a year ago.

No Sign of Surrender

Chevy Chase isn't close to throwing in the towel, even after last week's regulatory agreement.

Alexander R.M. Boyle, vice chairman of Chevy Chase, says that the "period of greatest risk" is behind the thrift with respect to at least two of the projects. He said it costs the thrift $10 million to $12 million a year to carry all four.

"We can handle that," he says, projecting that it will take Chevy Chase only three to five years to complete the sale of the homes. In the meantime, he says the thrift will build back capital by sticking to its bread and butter - residential real estate loans and credit cards.

"The bank has substantial core earnings from home equity lines and credit cards," Mr. Boyle said.

But even these businesses are under pressure. Credit card chargeoffs rose 32%, $63.2 million, for the nine months ended June 30, and on an annualized basis represent about 8% of the average portfolio. The average chargeoffs for the industry are about 4.5%.

Durability Is Noted

Patrick Forte, president of the Washington-based Association of Thrift Holding Companies, of which Chevy Chase is a member, contends that the thrift's credit card and consumer business is so strong it can carry them through this tough period.

"They may end up being the only survivor in the Washington area," he says.

He says Mr. Saul deliberately maintains the least amount of capital required so that he can obtain maximum leverage for his investments.

The bank has tangible capital of 1.85% compared with a minimum requirement of 1.50%. Its core capital is 3.07%, compared with a minimum requirement of 3%.

More Properties Taken Over

Chevy Chase repossessed the first project, a 2,500-acre community in northern Virginia called the Cascades, a year ago. About the same time, it took over Brambleton, about 2,500 acres not yet under development.

Brambleton became an even stickier problem because federal regulators forced the thrift to consider the $61.3 million project as an equity investment subject to the phase-out from regulatory investments.

As a result, the bank's total risk-based capital requirement increased by about $1.3 million as of June 30, according to the real estate trust's June 30 10-Q, filed with the Securities and Exchange Commission.

Then, in February, Chevy Chase took over a 1,600-acre planned community in Virginia called Ashburn Village, complete with bike paths, an Olympic-size swimming pool, ball fields, tennis courts, and an elementary school under construction.

Maryland Property Seized

In July, it seized the 350-acre Kentlands in Gaithersburg, Md., valued at $30 million, because the original developer couldn't make loan payments.

"We felt the most advantageous approach was to arrange a friendly and cooperative transfer of ownership," Mr. Boyle said.

In each case, Chevy Chase received the deed on the project instead of foreclosing, and hired the original developers as consultants, Mr. Boyle said.

A Tough Competitor

Competitors say Chevy Chase has teamed up with the builders to offer below-market-rate financing and is conducting a newspaper advertising blitz. At the Kentlands and Cascades, for example, the interest rate on a loan above $191,250 is 8.5%, and 8% for a loan below $191,250.

Chevy Chase will even buy the customer's existing house if it isn't sold by the time of settlement. The strategy seems to be working.

"They are taking market share," said Spencer Stouffer, an owner of Miller & Smith Inc., a McLean, Va.-based home builder, whose parent company also owns a thrift. "It is extremely difficult to get people to focus on your project with that kind of competition."

PHOTO : FOR SALE: House in development owned by Chevy Chase Savings.

PHOTO : DEALS AVAILABLE: Chevy Chase has turned to heavy advertising and special mortgage rates to sell houses like this one.

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