<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated February 15, 1996
to Prospectus Dated January 26, 1996
----------------------------
B.F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
DECEMBER 31, 1995
----------------------------
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<PAGE>
TABLE OF CONTENTS
Page
------
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at December 31, 1995 and
September 30, 1995 3
(b) Consolidated Statements of Operations for the three-month periods
ended December 31, 1995 and 1994 4
(c) Consolidated Statements of Cash Flows for the three-month periods
ended December 31, 1995 and 1994 6
(d) Notes to Consolidated Financial Statements 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) Financial Condition
Real Estate 11
Banking 12
(b) Liquidity and Capital Resources
Real Estate 28
Banking 30
(c) Results of Operations
Three Months Ended December 31, 1995 Compared to
Three Months Ended December 31, 1994 30
<PAGE>
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<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
<CAPTION>
December 31 September 30
(In thousands) 1995 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotels $118,016 $122,649
Commercial 107,758 111,646
Other 4,671 4,632
------------- -------------
230,445 238,927
Accumulated depreciation (73,210) (75,140)
------------- -------------
157,235 163,787
Land parcels 41,494 38,458
Cash and cash equivalents 8,409 17,355
Other assets 90,195 93,812
------------- -------------
Total real estate assets 297,333 313,412
- ------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks 235,684 198,096
Interest-bearing deposits 91,447 51,186
Securities purchased under agreements to resell 425,000 110,000
Loans held for sale 66,240 68,679
Loans held for securitization and sale 375,000 500,000
Investment securities (market value $4,393 and $4,371, respectively) 4,386 4,370
Mortgage-backed securities (market value $827,072 and $879,720, respectively) 822,983 880,208
Loans receivable (net of reserve for losses of $55,879 and $60,496, respectively) 2,182,279 2,327,222
Federal Home Loan Bank stock 31,940 31,940
Real estate held for investment or sale (net of reserve for losses of $123,981 and $135,236, 166,618 222,860
Property and equipment, net 187,198 180,438
Cost in excess of net assets acquired, net 3,693 4,173
Excess servicing assets, net 28,472 25,640
Mortgage servicing rights, net 26,756 28,573
Other assets 301,128 278,151
------------- -------------
Total banking assets 4,948,824 4,911,536
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TOTAL ASSETS $5,246,157 $5,224,948
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LIABILITIES
Real Estate
Mortgage notes payable $180,976 $184,502
Notes payable - secured 175,500 175,500
Notes payable - unsecured 40,979 41,057
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 33,972 41,872
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Total real estate liabilities 544,310 555,814
- ------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 4,212,091 4,159,252
Securities sold under repurchase agreements and other short-term borrowings 7,733 10,435
Notes payable 7,457 7,514
Federal Home Loan Bank advances 155,062 155,052
Custodial accounts 7,840 7,413
Amounts due to banks 28,654 32,240
Other liabilities 70,234 87,545
Capital notes -- subordinated 160,000 160,000
------------- -------------
Total banking liabilities 4,649,071 4,619,451
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Commitments and contingencies
Minority interest held by affiliates 45,089 43,556
Minority interest -- other 74,307 74,307
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,312,777 5,293,128
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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 (122,649) (123,943)
Net unrealized holding loss (2,224) (2,490)
------------- -------------
(24,772) (26,332)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------- -------------
TOTAL SHAREHOLDERS' DEFICIT (66,620) (68,180)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $5,246,157 $5,224,948
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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 Ended
December 31
---------------------------
(In thousands, except per share amounts) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE
Income
Hotels $12,705 $11,689
Commercial properties 4,514 4,639
Other 940 996
------------- -------------
Total income 18,159 17,324
- ------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
Hotels 8,703 8,435
Commercial properties 1,722 1,822
Land parcels and other 368 350
Interest expense 10,048 10,140
Amortization of debt expense 142 106
Depreciation 2,413 2,329
Advisory, management and leasing fees - related parties 1,789 1,759
General and administrative 420 428
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Total expenses 25,605 25,369
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Equity in earnings of unconsolidated entities 471 828
Loss on sale of property (57) 0
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REAL ESTATE OPERATING LOSS ($7,032) ($7,217)
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BANKING
Interest income
Loans $76,484 $63,628
Mortgage-backed securities 13,212 15,606
Trading securities 155 84
Investment securities 49 49
Other 3,689 2,416
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Total interest income 93,589 81,783
- ------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 41,979 35,941
Short-term borrowings 2,403 2,324
Long-term borrowings 3,887 4,376
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Total interest expense 48,269 42,641
------------- -------------
Net interest income 45,320 39,142
Provision for loan losses (11,913) (8,607)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 33,407 30,535
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Other income
Credit card fees 4,285 4,112
Loan servicing fees 54,040 33,153
Deposit servicing fees 6,714 5,827
Gain (loss) on sales of trading securities, net 253 (111)
Loss on real estate held for investment or sale, net (8,445) (3,529)
Gain on sales of loans, net 4,957 210
Gain on sales of mortgage servicing rights, net 0 406
Other 4,408 3,039
------------- -------------
Total other income 66,212 43,107
- ------------------------------------------------------------------------------------------------------------------------
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 Ended
December 31
--------------------------
(In thousands, except per share amounts) 1995 1994
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<S> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $29,330 $23,766
Loan 5,600 2,977
Property and equipment 7,725 6,730
Marketing 10,425 12,118
Data processing 11,845 9,359
Deposit insurance premiums 2,657 2,931
Amortization of cost in excess of net assets acquired 482 625
Other 15,571 9,102
------------- -------------
Total operating expenses 83,635 67,608
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BANKING OPERATING INCOME $15,984 $6,034
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TOTAL COMPANY
Operating income (loss) before income taxes and minority interest $8,952 ($1,183)
Income tax provision 3,753 (441)
------------- -------------
Income (loss) before minority interest 5,199 (742)
Minority interest held by affiliates (1,467) (300)
Minority interest -- other (2,438) (2,438)
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TOTAL COMPANY NET INCOME (LOSS) $1,294 ($3,480)
DEFICIT
Beginning of period (123,943) (134,793)
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End of period ($122,649) ($138,273)
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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ($61) ($4,835)
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before minority interest 0.80 (0.43)
Minority interest held by affiliates (0.30) (0.06)
Minority interest -- other (0.51) (0.51)
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE ($0.01) ($1.00)
- ------------------------------------------------------------------------------------------------------------------------
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 Three Months Ended
December 31
--------------------------
(In thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss) ($4,575) ($4,678)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 2,413 2,329
Loss on sale of property 57 0
(Increase) decrease in accounts receivable and accrued income (3,778) 498
Increase in deferred tax asset (2,510) (2,555)
Increase in accounts payable and accrued expenses (8,610) (6,411)
Decrease in tax sharing receivable 10,000 5,000
Amortization of debt expense 142 106
Equity in earnings of unconsolidated entities (471) (828)
Other 2,048 1,616
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(5,284) (4,923)
------------- -------------
Banking
Net income 5,869 1,198
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Accretion of premiums, discounts and net deferred loan fees 590 (500)
Depreciation and amortization 5,753 5,144
Amortization of cost in excess of net assets acquired and mortgage
servicing rights 2,297 786
Provision for loan losses 11,913 8,607
Net fundings of loans held for sale and/or securitization (137,895) (77,742)
Proceeds from sales of trading securities 58,993 28,841
Proceeds from sales of loans held for sale and/or securitization 883,711 627,787
Earnings on real estate (1,258) (3,171)
Provision for losses on real estate held for investment or sale 9,456 7,467
(Gain) loss on sales of trading securities, net (253) 111
Gain on sales of loans, net (4,957) (210)
Gain on sales of mortgage servicing rights, net 0 (406)
Minority interest held by affiliates 1,467 300
Minority interest - other 2,438 2,438
(Increase) decrease in excess servicing assets (2,832) 4,163
Increase in other assets (13,179) (14,280)
Decrease in other liabilities and accrued expenses (20,897) (6,401)
Increase in tax sharing payable (10,000) (5,000)
Other, net (5,608) 5,905
------------- -------------
785,608 585,037
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Net cash provided by operating activities 780,324 580,114
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (833) (745)
Property acquisitions 0 (10,170)
Property sales 1,812 0
Equity investment in unconsolidated entities (1,266) (2,311)
Notes receivable - affiliates 0 0
Other investing activities 0 1
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(287) (13,225)
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Banking
Proceeds from maturities of investment securities 0 100
Net proceeds from sales of real estate 26,709 22,651
Net proceeds from sales of mortgage servicing rights 966 406
Net fundings of loans receivable (487,366) (841,293)
Principal collected on mortgage-backed securities 56,758 46,597
Purchases of loans receivable (12,625) (54,806)
Purchases of property and equipment (12,599) (7,102)
Disbursements for real estate held for investment or sale (8,505) (15,509)
Other investing activities, net (4,176) 107
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(440,838) (848,849)
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Net cash used in investing activities (441,125) (862,074)
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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 Three Months Ended
December 31
--------------------------
(In thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $0 $7,500
Principal curtailments and repayments of mortgages (3,153) (1,967)
Proceeds from sales of unsecured notes 731 838
Repayments of unsecured notes (809) (1,093)
Other financing activities, net (144) (107)
Other financing activities, net 0 0
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(3,375) 5,171
------------- -------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 3,569,101 3,413,260
Customer withdrawals of deposits and payments for maturing certificates of deposit (3,516,262) (3,356,322)
Net increase in securities sold under repurchase agreements 96 41,670
Advances from the Federal Home Loan Bank 34 85,000
Repayments of advances from the Federal Home Loan Bank (24) (82,000)
Proceeds from other borrowings 369,222 141,556
Repayments of other borrowings (372,077) (140,471)
Cash dividends paid on preferred stock (2,438) (2,438)
Other financing activities, net 427 2,104
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48,079 102,359
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Net cash provided by financing activities 44,704 107,530
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 383,903 (174,430)
Cash and cash equivalents at beginning of period 376,637 402,508
------------- -------------
Cash and cash equivalents at end of period $760,540 $228,078
- ------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $65,746 $49,779
Income taxes 5,494 4,462
Supplemental schedule of non-cash activities:
Rollovers of notes payable - unsecured 1,195 975
Loans held for sale exchanged for trading securities 59,020 29,179
Loans receivable transferred to loans held for sale and/or securitization 672,583 835,000
Loans made in connection with the sale of real estate 34,361 610
Loans receivable transferred to real estate acquired in settlement of loans 1,308 648
Loans receivable exchanged for mortgage-backed securities held-to-maturity 0 23,155
- ------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements
reflect all adjustments necessary for a fair presentation of the Trust's
financial position and results of operations. All such adjustments are of a
normal recurring nature. These financial statements and the accompanying
notes should be read in conjunction with the Trust's audited consolidated
financial statements included in its Form 10-K for the fiscal year ended
September 30, 1995. 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 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.
4. BANKING:
LOANS HELD FOR SALE:
At December 31, 1995 and September 30, 1995, 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:
December 31, September 30,
1995 1995
------------ -------------
(In thousands)
Credit card receivables $ 250,000 $ 300,000
Automobile loan receivables 25,000 200,000
Home improvement and other
consumer loan receivables 100,000 -
------------ -------------
Total $ 375,000 $ 500,000
============ =============
<PAGE>
<PAGE>
LOANS RECEIVABLE:
December 31, September 30,
1995 1995
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(In thousands)
Single-family residential $ 1,297,366 $ 1,322,772
Home equity 52,895 29,024
Commercial and multifamily 83,121 86,007
Real estate construction 40,612 46,848
Ground 38,894 6,892
Credit card 606,866 712,548
Automobile 43,279 39,217
Overdraft lines of credit 17,198 15,049
Home improvement and
other consumer 39,214 112,705
Other 39,301 31,975
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2,258,746 2,403,037
------------- -------------
Less:
Undisbursed portion of loans 31,927 28,147
Unearned discounts 1,032 1,101
Net deferred loan origination
costs (12,371) (13,929)
Allowance for loan losses 55,879 60,496
------------- -------------
76,467 75,815
------------- -------------
Total $ 2,182,279 $ 2,327,222
============= =============
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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:
December 31, September 30,
1995 1995
------------- -------------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
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Real estate held for sale 286,780 354,277
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Less:
Allowance for losses on real estate
held for investment 189 193
Allowance for losses on real estate
held for sale 123,792 135,043
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123,981 135,236
------------- -------------
Total real estate held for
investment or sale $ 166,618 $ 222,860
============= =============
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The principal business conducted by the Trust and its wholly-owned
subsidiaries is the ownership and development of income-producing properties.
The Trust owns 80% of the outstanding common stock of Chevy Chase Bank,
F.S.B. ("Chevy Chase" or the "Bank"). At December 31, 1995, the Bank's
assets accounted for approximately 94% of the Trust's consolidated assets.
The Trust recorded net income of $1.3 million for the three-month period
ended December 31, 1995, compared to a net loss of $3.5 million for the
three-month period ended December 31, 1994.
The Trust has prepared its financial statements and other disclosures on a
fully consolidated basis. The term "Trust" used in the text and the
financial statements included herein refers to the combined entity, which
includes B. F. Saul Real Estate Investment and its subsidiaries, including
Chevy Chase and Chevy Chase's subsidiaries. "Real Estate Trust" refers to
B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding Chevy
Chase and Chevy Chase's subsidiaries. The operations conducted by the Real
Estate Trust are designated as "Real Estate," while the business conducted by
the Bank and its subsidiaries is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at
December 31, 1995, which consisted primarily of hotels, office and industrial
projects, and land parcels, was reduced slightly from the number at September
30, 1995. In the first quarter of fiscal 1996, the Real Estate Trust sold a
344- room Howard Johnsons Hotel in Norfolk, Virginia and reclassified its
office and industrial investment in Perimeter Way in Atlanta, Georgia, as a
land parcel in anticipation of razing the buildings to prepare the site for
future development. The leasing rate at December 31, 1995 discussed below
for the office and industrial property portfolio excludes Perimeter Way.
The Real Estate Trust's office and industrial property portfolio had an 85%
leasing rate at December 31, 1995, compared to leasing rates of 84% and 93%
at September 30, 1995 and December 31, 1994, respectively. The decline in
leasing rates during fiscal 1995 was primarily attributable to the
termination of leases for 137,000 square feet of space by two tenants at one
property. At December 31, 1995, the Real Estate Trust's office and
industrial property portfolio had a total gross leasable area of 1.3 million
square feet, of which 152,000 square feet (11.6%) and 235,000 square feet
(18.0%) are subject to leases whose terms expire in the balance of fiscal
1996 and in fiscal 1997, respectively. Due to a decline in market leasing
rates for office space over the past several years, the terms of certain of
the new leases may be less favorable to the Real Estate Trust than the terms
of the expiring leases.
For the eight hotel properties owned by the Real Estate Trust throughout the
1995 and 1994 quarters, the average occupancy rates were 63% and 60%,
respectively, and the average room rates were $63.48 and $60.62,
respectively. Five of these hotels registered improved occupancies and seven
registered higher average room rates in the current period. Overall results
for the hotel portfolio for the December 1995 quarter (during which one
property was sold) and the December 1994 quarter (during which one property
was acquired) reflected average occupancy rates of 64% and 58%, respectively,
and average room rates of $65.29 and $58.42, respectively.
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BANKING
General. The Bank recorded operating income of $16.0 million during the
December 1995 quarter, compared to operating income of $6.0 million in the
prior corresponding period. The $10.0 million increase in operating income
for the current quarter was primarily a result of the Bank's continued
expansion of its credit card program, which contributed to the $21.8 million
increase in loan and deposit servicing fees over the December 1994 quarter.
The Bank also recognized a $6.2 million increase in net interest income
before the provision for loan losses. Partially offsetting the positive
effect these items had on income was a $16.0 million increase in operating
expenses and a $3.3 million increase in the provision for loan losses. See
"Results of Operations."
At December 31, 1995, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.88%, 5.88%, 6.66% and 11.73%,
respectively. The Bank's capital ratios exceeded the requirements under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well capitalized"
institutions under the prompt corrective action regulations issued pursuant
to the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). On the basis of its balance sheet at December 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 "well capitalized"
institutions under the prompt corrective action regulations. See "Capital."
Real estate owned, net of valuation allowances, declined 25.6% during the
December 1995 quarter to $163.0 million at December 31, 1995, from $219.2
million at September 30, 1995. This reduction was primarily a result of the
sale to a single purchaser of the Bank's remaining residential lots in two of
its five planned unit developments (the "Communities") and other residential
properties. See "REO."
The Bank securitized and sold $550.0 million of credit card receivables
pursuant to its portfolio funding strategy during the first quarter of fiscal
1996. The Bank also securitized and sold $247.6 million of automobile loan
receivables in the current quarter, which sale resulted in a gain of $4.6
million. See "Liquidity."
The Bank's assets are subject to review and classification by the Office of
Thrift Supervision ("OTS") upon examination. The OTS concluded its most
recent annual examination of the Bank in December 1995.
Asset Quality.
Non-Performing Assets. The Bank's level of non-performing assets continued
to decline during the first quarter of fiscal 1996 from the level at
September 30, 1995. The following table sets forth information concerning
the Bank's non-performing assets at the dates indicated. The figures shown
are after charge-offs and, in the case of real estate acquired in settlement
of loans, after all valuation allowances.
<PAGE>
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)
<CAPTION>
December 31, September 30, December 31,
1995 1995 1994
------------- -------------- -------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 9,652 $ 8,593 $ 7,747
Commercial and multifamily 194 194 114
------------- -------------- -------------
Total non-accrual real estate loans 9,846 8,787 7,861
Credit card 21,168 18,569 14,634
Consumer and other 757 595 1,036
------------- -------------- -------------
Total non-accrual loans (1) 31,771 27,951 23,531
------------- -------------- -------------
Non-accrual real estate held for investment (1) -- -- 9,079
------------- -------------- -------------
Real estate acquired in settlement of loans 286,780 354,277 380,926
Reserve for losses on real estate acquired in settlement
of loans (123,792) (135,043) (114,491)
------------- -------------- -------------
Real estate acquired in settlement of loans, net 162,988 219,234 266,435
------------- -------------- -------------
Total non-performing assets $ 194,759 $ 247,185 $ 299,045
============= ============== =============
Reserve for losses on loans $ 55,879 $ 60,496 $ 49,741
Reserve for losses on real estate held for investment 189 193 10,064
Reserve for losses on real estate acquired in settlement
of loans 123,792 135,043 114,491
------------- -------------- -------------
Total reserves for losses $ 179,860 $ 195,732 $ 174,296
============= ============== =============
Ratios:
Non-performing assets, net to total assets (2) 2.80% 3.80% 5.03%
Reserve for losses on real estate loans to non-accrual
real estate loans (1) 112.81% 123.82% 175.79%
Reserve for losses on credit card loans to non-accrual
credit card loans (1) 201.25% 249.47% 235.96%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (1) 286.92% 553.11% 134.36%
Reserve for losses on loans to non-accrual loans (1) 175.88% 216.44% 211.38%
Reserve for losses on loans to total loans receivable (3) 2.09% 2.05% 1.76%
(1) Before deduction of reserves for losses.
(2) Non-performing assets is presented after all reserves for losses on loans and real estate held
for investment or sale.
(3) Includes loans receivable and loans held for sale and/or securitization, before deduction of
reserve for losses.
</TABLE>
<PAGE>
<PAGE>
Non-performing assets include non-accrual loans (loans contractually past due
90 days or more or with respect to which other factors indicate that full
payment of principal and interest is unlikely), non-accrual real estate held
for investment ("non-accrual REI"), and real estate acquired in settlement of
loans, either through foreclosure or deed-in-lieu of foreclosure.
Non-performing assets totaled $194.8 million, after valuation allowances on
real estate held for sale or real estate owned ("REO") of $123.8 million, at
December 31, 1995, compared to $247.2 million, after valuation allowances on
REO of $135.0 million, at September 30, 1995. In addition to the valuation
allowances on REO, the Bank maintained $2.6 million of valuation allowances
on its non-accrual loans at December 31, 1995 compared to $2.3 million at
September 30, 1995. The decrease in non-performing assets for the current
quarter was primarily attributable to a net decrease in REO of $56.2 million.
See "REO".
Non-accrual Loans. The Bank's non-accrual loans totaled $31.8 million at
December 31, 1995, which represented an increase of $3.8 million from $28.0
million at September 30, 1995. At December 31, 1995, non-accrual loans
consisted primarily of $9.8 million of non-accrual real estate loans and
$21.2 million of non-accrual credit card loans.
REO. At December 31, 1995, the Bank's REO totaled $163.0 million, after
valuation allowances on such assets of $123.8 million. The principal
component of REO consists of the Communities, which had an aggregate book
value of $117.5 million at that date. Four of the five Communities are under
active development but, as a result of the large residential lot sale
discussed below, the Bank owns only commercial land in two of the four
Communities.
During the three months ended December 31, 1995, REO decreased $56.2 million.
This decrease was primarily attributable to the sale of the remaining
residential lots (1,963) in two of its Communities and certain other
residential properties to a single purchaser, at an amount that approximated
the net carrying value, after utilization of applicable valuation allowances,
of these assets. The impact of this transaction was to reduce REO, net of
all valuation allowances, by $49.2 million. The Bank provided financing of
$33.4 million, net of participations, in connection with this sale.
During the three months ended December 31, 1995, the Bank received revenues
of approximately $58.0 million upon the disposition of REO, which consisted
of one commercial ground property ($0.7 million), 2,024 residential lots or
units in the Communities and other smaller residential properties ($51.7
million), approximately 17.4 acres of land in two of the Communities ($4.1
million) and various single-family residential properties ($1.5 million).
At December 31, 1995, the Bank had executed contracts to sell, or had
received from potential buyers letters of intent to purchase, five additional
REO properties at their aggregate book value of $24.3 million at that date.
In addition to the active Communities, REO includes a fifth Community,
consisting of approximately 2,400 acres in Loudoun County, Virginia, which is
in the pre-development stage and at September 30, 1995, was to be developed
into approximately 4,200 residential units. During the first quarter of
fiscal 1996, a zoning agreement was amended which increased the number of
authorized residential units from 4,200 units to 6,200 units.
<PAGE>
<PAGE>
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 December 31,
1995, potential problem assets totaled $7.6 million, before valuation
allowances of $1.4 million, as compared to $8.2 million, before valuation
allowances of $1.5 million, at September 30, 1995. The $0.6 million decrease
in potential problem assets was primarily attributable to net principal
reductions.
Delinquent Loans. At December 31, 1995, delinquent loans totaled $42.3
million (or 1.6% of loans) compared to $39.7 million (or 1.4% of loans) at
September 30, 1995. The following table sets forth information regarding the
Bank's delinquent loans at December 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 .......... $ 5,502 $ 22,052 $ 27,554 1.0%
60-89 days .......... 1,178 13,615 14,793 0.6%
-------- ------------ --------- ------------
Total ............. $ 6,680 $ 35,667 $ 42,347 1.6%
======== ============ ========= ============
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
Mortgage loans classified as delinquent 30-59 days includes one commercial
permanent loan with a book balance of $0.1 million. The remaining balance of
loans delinquent 30-89 days consists of single-family permanent residential
mortgage loans and home equity credit line loans. Total delinquent mortgage
loans increased slightly to $6.7 million at December 31, 1995 from $6.0
million at September 30, 1995.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $35.7 million at December 31, 1995 from $33.7 million at
September 30, 1995, and increased as a percentage of total non-mortgage loans
to 3.2% at December 31, 1995 from 2.4% at September 30, 1995.
Troubled Debt Restructurings. At December 31, 1995, loans accounted for as
troubled debt restructurings totalled $16.1 million and included two
commercial permanent loans with principal balances totaling $13.2 million,
one residential ground loan with a principal balance of $2.2 million and one
commercial collateralized loan with a principal balance of $0.7 million. The
$1.2 million decrease in loans accounted for as troubled debt restructurings
from $17.3 million at September 30, 1995 resulted from net principal
reductions. At December 31, 1995, the Bank had commitments to lend $1.1
million of additional funds on loans that have been restructured.
Real Estate Held for Investment. At December 31, 1995 and September 30 1995,
real estate held for investment consisted of two properties with an aggregate
book value of $3.6 million, net of valuation allowances of $0.2 million.
<PAGE>
<PAGE>
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 periods indicated
and may include charge-offs taken against assets which the Bank disposed of
during such periods.
<PAGE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of Loans
(Dollars in thousands)
<CAPTION>
Three Months Ended
December 31, Year Ended
---------------------- September 30,
1995 1994 1995
--------- --------- ---------------
<S> <C> <C> <C>
Balance at beginning of period $ 60,496 $ 50,205 $ 50,205
--------- --------- ---------------
Provision for loan losses 11,913 8,607 54,979
--------- --------- ---------------
Charge-offs:
Residential 236 112 1,174
Ground 1,768
Credit card 17,510 11,216 50,172
Consumer and other 1,612 627 3,463
--------- --------- ---------------
Total charge-offs 19,358 11,955 56,577
--------- --------- ---------------
Recoveries:
Residential 2 1 20
Credit card 2,691 2,766 11,219
Consumer and other 135 117 650
--------- --------- ---------------
Total recoveries 2,828 2,884 11,889
--------- --------- ---------------
Charge-offs, net of recoveries 16,530 9,071 44,688
--------- --------- ---------------
Balance at end of period $ 55,879 $ 49,741 $ 60,496
========= ========= ===============
Provision for loan losses to average loans (1) (2) 1.63% 1.71% 1.85%
Net loan charge-offs to average loans (1) (2) 2.26% 1.78% 1.51%
Ending reserve for losses on loans to total
loans (2) (3) 2.09% 1.76% 2.05%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
/TABLE
<PAGE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans by Type
(Dollars in Thousands)
<CAPTION>
December 31,
----------------------------------------------------- September 30,
1995 1994 1995
------------------------ ------------------------ ------------------------
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 $ 934 51.1 % $ 1,348 49.6 % $ 929 47.3 %
Home equity 298 2.0 262 2.7 164 1.0
Commercial and multifamily 8,449 3.1 8,502 3.0 8,523 2.9
Residential construction 1,034 0.7 1,392 1.0 1,159 0.8
Commercial construction 13 0.1 58 0.2 56 0.2
Ground 379 1.3 2,257 0.5 49 0.1
Credit card 42,600 32.1 34,530 29.1 46,325 34.4
Consumer and other 2,172 9.6 1,392 13.9 3,291 13.3
-------- -------- --------
Total $55,879 $49,741 $60,496
======== ======== ========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
<CAPTION>
Three Months Ended
December 31, Year Ended
-------------------------- September 30,
1995 1994 1995
----------- ----------- -------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 193 $ 9,899 $ 9,899
Real estate held for sale 135,043 109,074 109,074
----------- ----------- -------------
Total 135,236 118,973 118,973
----------- ----------- -------------
Provision for real estate losses:
Real estate held for investment (4) 165 (6,974)
Real estate held for sale 9,460 7,302 33,295
----------- ----------- -------------
Total 9,456 7,467 26,321
----------- ----------- -------------
Charge-offs:
Real estate held for investment:
Commercial ground - - 2,732
----------- ----------- -------------
Total - - 2,732
----------- ----------- -------------
Real estate held for sale:
Residential construction - 1,782 1,924
Residential ground 20,711 103 103
Commercial ground - - 2,827
Commercial construction - - 2,472
----------- ----------- -------------
Total 20,711 1,885 7,326
----------- ----------- -------------
Total charge-offs on real estate
held for investment or sale 20,711 1,885 10,058
----------- ----------- -------------
Balance at end of period:
Real estate held for investment 189 10,064 193
Real estate held for sale 123,792 114,491 135,043
----------- ----------- -------------
Total $ 123,981 $ 124,555 $ 135,236
=========== =========== =============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
<CAPTION>
December 31,
-------------------------- September 30,
1995 1994 1995
----------- ----------- ---------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment:
Commercial and multifamily $ - $ 7,793 $ -
Ground - 1,999 -
Other 189 272 193
----------- ----------- ---------------
Total 189 10,064 193
----------- ----------- ---------------
Allowance for losses on real estate
held for sale:
Residential 158 57 184
Home equity 13 8 2
Commercial and multifamily - 143 -
Commercial construction - 2,044 -
Residential construction - 253 -
Ground 122,621 111,986 134,857
Unallocated 1,000 - -
----------- ----------- ---------------
Total 123,792 114,491 135,043
----------- ----------- ---------------
Total allowance for losses on real
estate held for investment or sale $ 123,981 $ 124,555 $ 135,236
=========== =========== ===============
</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 decreased by $15.9 million from the
level at September 30, 1995 to $179.9 million at December 31, 1995. The
$15.9 million decrease was primarily attributable to decreased valuation
allowances on credit card and consumer and other loans and sales of
residential lots in the Communities. During the three months ended December
31, 1995, the Bank provided an additional $9.9 million of valuation
allowances on loans secured by real estate and real estate held for
investment or sale and recorded net charge-offs of $20.9 million on these
assets, of which $20.7 million related to charge-offs of valuation allowances
previously established on REO properties sold, as discussed above.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $135.1 million at December 31, 1995, which
constituted 45.5% of total non-performing real estate assets, before
valuation allowances. This amount represented an $11.0 million decrease from
the September 30, 1995 level of $146.1 million, or 40.2% of total non-
performing real estate assets, before valuation allowances at that date. The
allowance for losses on real estate held for sale at December 31, 1995 is in
addition to approximately $54.4 million of cumulative charge-offs previously
taken against assets remaining in the Bank's portfolio at December 31, 1995.
During the December 1995 quarter, the Bank provided an additional $1.8
million of general valuation allowances against its Communities pursuant to
its policy to provide additional general valuation allowances equal to, or in
excess of, the amount of the net earnings generated by the development and
sale of land in the Communities.
Net charge-offs of credit card loans for the three months ended December 31,
1995 were $14.8 million, compared to $8.5 million for the three months ended
December 31, 1994. The increase in net charge-offs resulted primarily from a
$238.4 million increase in average credit card balances and increased payment
defaults due to maturation of the portfolio. The allowance for losses on
credit card loans decreased to $42.6 million at December 31, 1995 from $46.3
million at September 30, 1995, primarily because the securitization and sale
of $550.0 million of credit card receivables during the current quarter
reduced the amount of credit card loans against which the Bank maintains the
reserve. The ratios of the allowance for such losses to non-performing
credit card loans and to outstanding credit card loans changed to 201.3% and
5.0%, respectively, at December 31, 1995 from 249.5% and 4.6%, respectively,
at September 30, 1995.
The allowance for losses on consumer and other loans decreased to $2.2
million at December 31, 1995 from $3.3 million at September 30, 1995,
primarily because the securitization and sale of $247.6 million of automobile
loan receivables during the December 1995 quarter reduced the amount of
consumer loans against which the Bank maintains the reserve. The ratios of
the allowances for losses on consumer and other loans to non-performing
consumer and other loans and to outstanding consumer and other loans changed
to 286.9% and 0.9%, respectively, at December 31, 1995 from 553.1%and 0.8%,
respectively, at September 30, 1995.
Asset and Liability Management. A key element of banking is the monitoring
and management of liquidity risk and interest-rate risk. The process of
planning and controlling asset and liability mixes, volumes and maturities to
stabilize the net interest spread is referred to as asset and liability
management. The objective of asset and liability management is to maximize
the net interest yield within the constraints imposed by prudent lending and
investing practices, liquidity needs and capital planning.
<PAGE>
<PAGE>
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at December 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 December 31, 1995
Mortgage loans:
Adjustable-rate $ 324,676 $ 193,444 $ 547,607 $ 166,960 $ 27,589 $1,260,276
Fixed-rate 10,755 10,295 35,943 70,454 52,068 179,515
Loans held for sale 66,240 - - - - 66,240
Home equity credit lines and second mortgages 59,342 34 11 - - 59,387
Credit card and other 644,044 17,292 38,915 24,738 13,991 738,980
Loans held for securitization and sale 375,000 - - - - 375,000
Mortgage-backed securities 183,878 144,186 475,646 6,653 12,620 822,983
Other investments 673,213 - 4,386 - - 677,599
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 2,337,148 365,251 1,102,508 268,805 106,268 4,179,980
Total non-interest earning assets - - - - 768,844 768,844
----------- ----------- ----------- ----------- ----------- -----------
Total assets $2,337,148 $ 365,251 $1,102,508 $ 268,805 $ 875,112 $4,948,824
=========== =========== =========== =========== =========== ===========
Deposits:
Fixed maturity deposits $ 660,740 $ 275,606 $ 241,171 $ 112,096 $ - $1,289,613
NOW, statement and passbook accounts 1,355,478 39,147 130,385 88,743 189,122 1,802,875
Money market deposit accounts 985,228 - - - - 985,228
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 157,851 3,124 901 2,466 5,910 170,252
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 3,169,297 317,877 372,457 203,305 345,032 4,407,968
Total non-interest bearing liabilities - - - - 241,103 241,103
Stockholders' equity - - - - 299,753 299,753
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities & stockholders' equity $3,169,297 $ 317,877 $ 372,457 $ 203,305 $ 885,888 $4,948,824
=========== =========== =========== =========== =========== ===========
Gap ($832,149) $47,374 $730,051 $65,500 ($238,764)
Cumulative gap ($832,149) ($784,775) ($54,724) $10,776 ($227,988)
Cumulative gap as a percentage
of total assets (16.8)% (15.9)% (1.1)% 0.2 % (4.6)%
</TABLE>
<PAGE>
<PAGE>
The interest sensitivity gap represents the sum of all interest-earning
assets minus all interest-bearing liabilities subject to repricing within the
same period. The one-year gap, as a percentage of total assets, was a
negative 15.9% at December 31, 1995, compared to a negative 17.0% at
September 30, 1995. A negative gap like that shown for the Bank implies
that, if market 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.
Tax Sharing Payments. During the first three months of fiscal 1996, 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.
Capital. At December 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 December 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 "well capitalized" institutions under the prompt corrective
action regulations.
The following table shows the Bank's regulatory capital levels at December
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 Amount of Assets Amount of Assets
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $335,775
Net unrealized holding losses (1) 2,780
---------
Adjusted capital 338,555
Adjustments for tangible and core capital:
Intangible assets (44,535)
Non-includable subsidiaries (2) (2,088)
Non-qualifying purchased/originated
loan servicing (1,854)
---------
Total tangible capital 290,078 5.88% $ 74,000 1.50% $216,078 4.38%
--------- ========= ========= ========= ========= =========
Total core capital (3) 290,078 5.88% $197,333 4.00% $ 92,745 1.88%
--------- ========= ========= ========= ========= =========
Tier 1 risk-based capital (3) 290,078 6.66% $174,131 4.00% $115,947 2.66%
--------- ========= ========= ========= ========= =========
Adjustments for risk-based capital:
Subordinated capital debentures 151,400
Allowance for general loan losses 48,647
---------
Total supplementary capital 200,047
Excess allowance for loan losses
--
---------
Adjusted supplementary capital 200,047
---------
Total available capital 490,125
Equity investments (2) (25,990)
---------
Total risk-based capital (3) $464,135 11.73% $348,261 8.00% $115,874 3.73%
========= ========= ========= ========= ========= =========
(1) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded from regulatory capital.
(2) Reflects an aggregate offset of $1.6 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%.
</TABLE>
<PAGE>
<PAGE>
Regulatory Action and Requirements. The Bank remains subject to a written
agreement with the OTS, asamended in October 1993, which imposes certain
restrictions on the Bank's operations and requires certain affirmative
actions by the Bank. Primarily because of its level of non-performing
assets, the Bank is also subject to restrictions on asset growth. Under the
applicable OTS requirements, the Bank may not increase its total assets
during any calendar quarter in excess of an amount equal to net interest
credited on deposit liabilities during such quarter without prior written
approval from the OTS. During the period October 1, 1995 through December
31, 1995, the Bank's total assets increased by $36.9 million, which is $6.3
million less than the net interest credited on deposit liabilities for such
period. On December 21, 1995, the OTS notified the Bank that it would waive
the growth restriction for the quarter ending March 31, 1996 to allow for an
increase in total assets of up to $200 million, subject to the conditions
that the Bank maintain sufficient capital to meet the "well capitalized"
ratios under the OTS's prompt corrective action regulations as well as all
fully phased-in regulatory capital requirements.
The Bank has been able to maintain capital compliance in recent periods
despite the gradual phase-out of various assets from regulatory capital. At
December 31, 1995, the only remaining assets subject to a future increased
phase-out from regulatory capital were the Bank's extensions of credit to,
and investments in, subsidiaries engaged in activities impermissible to
national banks ("non-includable subsidiaries"). At December 31, 1995, the
Bank had $3.8 million, after subsequent valuation allowances, of such assets,
which were subject at that date to a 60% phase-out from all three FIRREA
capital requirements. This phase-out will increase to 100% on July 1, 1996.
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. In September 1995, the Bank received from the OTS an
extension through September 29, 1996 of the five-year holding period for
certain of its REO properties acquired through foreclosure in fiscal 1990 and
fiscal 1991. The following table sets forth the Bank's REO at December 31,
1995, after valuation allowances of $123.8 million, by the fiscal year in
which the property was acquired through foreclosure.
Fiscal Year (In thousands)
------------ --------------
1990 (1) (2)............. $ 44,912
1991 (2)................. 84,450
1992 .................... 14,844
1993 .................... 4,827
1994 .................... 2,321
1995 .................... 10,644
1996 .................... 990
--------------
Total REO ....... $ 162,988
===============
(1) Includes REO with an aggregate net book value of $26.0 million,
which the Bank treats as equity investments for regulatory capital
purposes.
(2) Includes REO with an aggregate net book value of $101.7 million,
for which the Bank received an extension of the five-year holding
period through September 29, 1996.
<PAGE>
<PAGE>
Although the Bank's regulatory capital ratios on a fully phased-in basis at
December 31, 1995 would meet the ratios established for "well capitalized"
institutions, 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" under the prompt corrective action
standards.
Deposit Insurance Premiums. Thrift institutions insured by the SAIF,
including the Bank, paid substantially higher deposit insurance premiums in
the first quarter of fiscal 1996 than similarly-situated commercial banks
insured by the Bank Insurance Fund ( BIF ). The disparity in insurance
premiums between commercial banks and thrifts increased as of January 1,
1996, when BIF insurance rates were further lowered. Legislation designed to
reduce or eliminate the disparity between BIF and SAIF insurance premiums by,
among other things, imposing on thrift institutions a one-time assessment
estimated to be up to 85 basis points on their SAIF-insured deposits to
capitalize the SAIF has been included in the budget legislation which has
passed Congress and has been vetoed for other reasons by President Clinton.
As a result, it is unclear if, and in what form, such legislation will be
enacted. In the absence of such legislation, the Bank and the remainder of
the thrift industry will continue to pay higher insurance premiums than
commercial banks which could lead to a competitive disadvantage in the
pricing of loans and deposits and additional operating expenses.
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of
outstanding debt.
Historically, the Real Estate Trust's total cash requirements have exceeded
the cash generated by its operations. This condition is expected to continue
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 interest on its
Senior Secured Notes ("Secured Notes"), and the payment of capital
improvement costs. In the past, the Real Estate Trust 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. See the
Consolidated Statements of Cash Flows included in the Consolidated Financial
Statements in this report.
Recent Liquidity Trends. During the three-month period ended December 31,
1995, the Real Estate Trust purchased 200,000 shares of common stock of Saul
Centers, Inc. (representing 1.7% of such company's outstanding common stock)
for approximately $2.8 million. These shares have been deposited with the
Trustee for the Secured Notes to satisfy in part the collateral requirements
for those securities, thereby permitting release to the Trust of a portion of
the cash on deposit with the Trustee.
In the fourth quarter of fiscal 1995, the Real Estate Trust established a
$15.0 million secured revolving credit line with an unrelated bank. This
facility is for a two-year period and may be extended for one or more
additional one-year terms. Interest is computed by reference to a floating
rate index. At December 31, 1995, borrowings under the facility were
$500,000. Availability under this facility will vary from time to time
depending upon the value of the collateral deposited by the Real Estate
Trust.
In the first quarter of fiscal 1996, the Real Estate Trust established an
$8.0 million secured revolving credit line with an unrelated bank. This
facility is for a one-year term, after which the loan amount amortizes over a
two-year period. Interest is computed by reference to a floating rate index.
At December 31, 1995, availability under this facility was entirely
restricted pending the delivery of collateral by the Real Estate Trust.
The Real Estate Trust is currently selling Unsecured Notes principally to
provide funds to pay outstanding Unsecured Notes as they mature. During the
three-month period ended December 31, 1995, the Real Estate Trust sold $1.9
million of new Unsecured Notes and paid $2.0 million of maturing notes. In
paying maturing Unsecured Notes with proceeds of Unsecured Note sales, the
Real Estate Trust is effectively refinancing its outstanding Unsecured Notes
with similar new unsecured debt at the lower interest rates prevailing in
today's market. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, which was the case
in the December 1995 quarter, it will finance such repayments from other
sources of funds.
<PAGE>
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at
December 31, 1995 for the balance of fiscal 1996 and subsequent years is set
forth in the following table:
Debt Maturity Schedule
(In thousands)
- ---------------------------------------------------------------------------
Notes Payable Notes Payable
Fiscal Year Mortgage Notes - Secured - Unsecured Total
- ---------------------------------------------------------------------------
1996 (1) $ 7,937 $ -- $ 4,119 $ 12,056
1997 17,690 500 5,616 23,806
1998 7,413 -- 7,293 14,706
1999 17,076 -- 13,763 30,839
2000 18,855 -- 5,990 24,845
Thereafter 112,005 175,000 4,198 291,203
- ---------------------------------------------------------------------------
Total $180,976 $ 175,500 $ 40,979 $397,455
===========================================================================
(1) January 1, 1996 - September 30, 1996
Of the $181.0 million of mortgage debt outstanding at December 31, 1995,
$140.6 million was nonrecourse to Real Estate Trust.
The Real Estate Trust believes that its capital improvement costs in the next
several fiscal years willbe in range of $5.0 to $8.0 million per year.
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 1996 and subsequent years, will depend in
significant part on its receipt of dividends from the Bank and tax sharing
payments from the Bank pursuant to the tax sharing agreement among the Trust,
the Bank, and their subsidiaries. The availability and amount of tax sharing
payments and dividends in future periods is dependent upon, among other
things, the Bank's operating performance and income, regulatory restrictions
on such payments and (in the case of tax sharing payments) the continued
consolidation of the Bank and the Bank's subsidiaries with the Trust for
federal income tax purposes.
The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods enhance prospects for the Real Estate
Trust to receive tax sharing payments and dividends from the Bank. Under
the terms of the Bank's written agreement with the OTS, any tax sharing
payments by the Bank must be approved by the OTS. During the three-month
period ended December 31, 1995, the OTS approved, and the Bank made, a tax
sharing payment of $10.0 million to the Real Estate Trust.
As the owner, directly and through two wholly-owned subsidiaries, of a 21.5%
limited partnership interest in Saul Holdings Limited Partnership ("Saul
Holdings Partnership"), the Real Estate Trust will share in cash
distributions from operations and from capital transactions involving the
sale or refinancing of the properties of Saul Holdings Partnership. The
partnership agreement of Saul Holdings Partnership provides for quarterly
cash distributions to the partners out of net cash flow. During the three-
month period ended December 31, 1995, the Real Estate Trust received total
cash distributions of $1.36 million from Saul Holdings Partnership.
<PAGE>
<PAGE>
BANKING
Liquidity. The Bank's average liquidity ratio for the month ended December
31, 1995 was 21.7%, compared to 17.5% for the month ended September 30, 1995.
Additionally, the Bank met the liquidity level requirements imposed by the
OTS for each month of the first three months of fiscal 1996.
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables. Of the $4.6 billion of outstanding
trust certificate balances at December 31, 1995, the primary recourse to the
Bank was approximately $118.5 million. The Bank is also obligated under
various recourse provisions related to the swap of single-family residential
loans for participation certificates issued to the Bank by the Federal Home
Loan Mortgage Corporation. At December 31, 1995, recourse to the Bank under
these arrangements was approximately $4.3 million.
There were no material commitments for capital expenditures at December 31,
1995.
The Bank's liquidity requirements in fiscal 1996 and for years subsequent to
fiscal 1996 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1994
REAL ESTATE
The following table sets forth for the three-month period ended December 31,
1995 (the "1996 quarter") and the three-month period ended December 31, 1994
(the "1995 quarter") direct operating results for the Real Estate Trust's
hotel properties and commercial properties (consisting of office and
industrial properties).
<PAGE>
<PAGE>
Three Months Ended December 31,
1995 1994
(In thousands) -------------- --------------
HOTELS (1)
Revenue
Room sales $ 8,710 $ 7,735
Food sales 2,570 2,497
Beverage sales 744 745
Other 681 712
------- -------
Total revenue 12,705 11,689
------- -------
Direct operating expenses
Payroll 3,726 3,738
Cost of sales 1,184 1,147
Utilities 596 680
Repairs and maintenance 590 611
Advertising and promotion 670 560
Property taxes 347 306
Insurance 160 140
Other 1,430 1,253
------- -------
Total direct operating expenses 8,703 8,435
------- -------
Income after direct operating expenses $ 4,002 $ 3,254
======= =======
COMMERCIAL PROPERTIES
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $ 4,164 $ 4,315
Expense recoveries 207 221
Other 143 103
------- -------
Total revenues 4,514 4,639
------- -------
Direct operating expenses
Utilities 518 575
Repairs and maintenance 439 498
Real estate taxes 361 342
Payroll 158 142
Insurance 64 64
Other 182 201
------- -------
Total direct operating expenses 1,722 1,822
------- -------
Income after direct operating expenses $ 2,792 $ 2,817
======= =======
(1) Includes the results of the acquisition of a 192-room hotel on November
30, 1994 and results of a 344-room hotel until it was sold on October 6,
1995.
<PAGE>
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization of
$4.5 million and an operating loss of $7.0 million in the 1996 quarter,
compared to a loss before depreciation and amortization of $4.8 million and
an operating loss of $7.2 million in the corresponding prior period. The
reduction in the operating loss was largely attributable to improved
operating results of the hotel properties.
Income after direct operating expenses from hotel properties increased
$748,000 (23.0%) in the 1996 quarter over the level achieved in the 1995
quarter. In the current period, room sales increased $975,000 (12.6%), while
food and beverage sales increased $72,000 (2.2%). The increase in total
revenue of $1,016,000 (8.7%) exceeded the increase of $268,000 (3.2%) in
direct operating expenses. The revenue increase was attributable to improved
market conditions, which contributed to higher occupancy rates and permitted
the Real Estate Trust to raise average room rates.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, decreased $25,000 (0.9%) in the
1996 quarter from the level in the 1995 quarter. The decrease in gross
income, which totaled $125,000 (2.8%), resulted from a decline in leasing
revenue. Expenses decreased by $100,000 (5.5%) in the 1996 quarter,
primarily as a result of lower repair and maintenance costs, utility payments
and management fees.
Interest expense decreased $92,000 (0.9%) in the 1996 quarter, primarily
because of lower average borrowings. Average balances of the Real Estate
Trust's outstanding borrowings decreased slightly to $398.8 million for the
1996 quarter from $403.9 million for the 1995 quarter. The average interest
rate in the 1996 quarter was 10.28%, compared to 10.19% in the 1995 quarter.
Depreciation increased $84,000 (3.6%) in the 1996 quarter as a result of new
assets placed in service and the changes in the hotel portfolio described
above. Amortization of debt expense increased $36,000 (34%) in the 1996
quarter.
Advisory, management and leasing fees paid to related parties increased
$30,000 (1.7%) in the 1996 quarter from the level in the 1995 quarter. The
monthly advisory fees were $301,000 in the 1996 quarter, compared to $292,000
in the 1995 quarter.
BANKING
Overview. The Bank recorded operating income of $16.0 million for the three
months ended December 31, 1995 (the "1995 quarter"), compared to operating
income of $6.0 million for the three months ended December 31, 1994 (the
"1994 quarter"). The increase in income for the 1995 quarter was primarily
attributable to a $23.1 million increase in other (non-interest income)
resulting primarily from an increase in loan and deposit servicing fees and a
$6.2 million increase in net interest income before the provision for loan
losses. These increases were partially offset by a $16.0 million increase in
operating expenses and a $3.3 million increase in the provision for loan
losses.
Net Interest Income. Net interest income, before the provision for loan
losses, increased $6.2 million (or 15.8%) in the 1995 quarter. The Bank
would have recorded interest income of $2.1 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 $0.1 million was
actually recorded on non-accrual assets and restructured loans for the 1995
<PAGE>
<PAGE>
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 December 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) $2,924,489 $76,484 10.46 % $2,724,241 $63,628 9.34 %
Mortgage-backed securities 853,012 13,212 6.20 1,031,726 15,606 6.05
Federal funds sold and securities
purchased under agreements to resell 121,996 1,829 6.00 75,756 987 5.21
Trading securities 8,769 155 7.07 4,101 84 8.19
Investment securities 4,406 49 4.45 4,400 49 4.45
Other interest-earning assets 160,495 1,860 4.64 125,113 1,429 4.57
----------- -------- ----------- --------
Total 4,073,167 93,589 9.19 3,965,337 81,783 8.25
-------- ------- -------- -------
Noninterest-earning assets:
Cash 150,671 127,061
Real estate held for investment or sale 176,741 327,492
Property and equipment, net 197,747 143,552
Cost in excess of net assets acquired, net 34,107 6,653
Other assets 224,952 129,457
----------- -----------
Total assets $4,857,385 $4,699,552
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 875,606 5,950 2.72 $ 870,984 5,980 2.75
Savings deposits 928,988 7,901 3.40 1,186,409 9,939 3.35
Time deposits 1,286,806 18,382 5.71 790,826 8,654 4.38
Money market deposits 976,924 9,746 3.99 1,133,372 11,368 4.01
----------- -------- ----------- --------
Total deposits 4,068,324 41,979 4.13 3,981,591 35,941 3.61
Borrowings 340,420 6,290 7.39 368,719 6,700 7.27
----------- -------- ----------- --------
Total liabilities 4,408,744 48,269 4.38 4,350,310 42,641 3.92
-------- ------- -------- -------
Noninterest-bearing items:
Noninterest-bearing deposits 63,801 65,348
Other liabilities 60,114 33,549
Stockholders' equity 324,726 250,345
----------- -----------
Total liabilities and stockholders' equity $4,857,385 $4,699,552
=========== ===========
Net interest income $45,320 $39,142
======== ========
Net interest spread (2) 4.81 % 4.33 %
======= =======
Net yield on interest-earning assets (3) 4.45 % 3.95 %
======= =======
Interest-earning assets to interest-bearing liabilities 92.39 % 91.15 %
======= =======
(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 December 31, 1995
Compared to
Three Months Ended December 31, 1994
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 4,886 $ 7,970 $ 12,856
Mortgage-backed securities (4,802) 2,408 (2,394)
Federal funds sold and securities
purchased under agreements to resell 674 168 842
Trading securities 145 (74) 71
Investment securities - - 0
Other interest-earning assets 409 22 431
------------ ------------ ------------
Total interest income 1,312 10,494 11,806
------------ ------------ ------------
Interest expense:
Deposit accounts 793 5,245 6,038
Borrowings (1,066) 656 (410)
------------ ------------ ------------
Total interest expense (273) 5,901 5,628
------------ ------------ ------------
Increase in net interest income $ 1,585 $ 4,593 $ 6,178
============ ============ ============
(1) The net change attributable to the combined impact of volume and rate has been
allocated in proportion to the absolute value of the change due to volume and
the change due to rate.
(2) Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
<PAGE>
Interest income in the 1995 quarter increased $11.8 million (or 14.4%) from
the level in the 1994 quarter primarily as a result of higher average yields
earned by the Bank on its principal categories of its interest-earning
assets. Higher average balances of loans receivable, and, to a lesser
extent, securities purchased under agreements to resell also contributed to
the increase in interest income. The effect on interest income of higher
average yields and higher average balances was offset in part by lower
average balances of mortgage-backed securities.
The Bank's net yield on interest-earning assets increased to 4.45% in the
1995 quarter from 3.95% 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 expiration of introductory rates on
certain products and higher yields on other consumer loans. The positive
effect of the increase on the Bank s net yield was offset in part by the
increase of interest rates on the Bank s interest-bearing liabilities.
Interest income on loans, the largest category of interest-earning assets,
increased by $12.9 million (or 20.2%) from the 1994 quarter primarily because
of higher average yields on the loan portfolio. The average yield on the
loan portfolio in the 1995 quarter increased by 112 basis points (to 10.46%
from 9.34%) from the average yield in the 1994 quarter. Average yield
increases on credit card loans and consumer loans, principally automobile and
home improvement loans, to 16.91% from 13.84% (or 22.2%) and to 11.08% from
8.51% (or 30.2%), respectively, largely contributed to the higher average
yields on the loan portfolio. The increase in the yield on credit card loans
was primarily a result of the expiration of promotional introductory rates
and was primarily responsible for a $16.3 million (or 57.9%) increase in
interest income from credit card receivables. The increase in the yield on
consumer loans was primarily due to higher yields earned on automobile loans
originated by one of the Bank s operating subsidiaries and was largely
responsible for a $2.9 million (or 36.1%) increase in interest income on
consumer loans. Average yields on single-family residential permanent loans
increased to 7.27% from 7.06%, which resulted in a $0.2 million (or 0.8%)
increase in interest income from these assets. Average yields on home equity
credit line loans, construction loans and commercial permanent loans
increased to 8.01% from 7.91%, to 10.11% from 9.66% and to 6.75% from 6.65%,
respectively.
Higher average balances of credit card and consumer loans also contributed to
the increase in interest income on loans. Average balances of credit card
loans increased $238.4 million (or 29.2%) and average balances of consumer
loans increased $16.9 million (or 4.6%) in the 1995 quarter, primarily as a
result of increased origination volume of such loans. The positive effect of
the higher average balances of credit card and consumer loans was partially
offset by lower average balances of real estate loans. Average balances of
single-family residential permanent loans decreased $28.1 million (or 2.0%)
as a result of the decline in origination of such loans for the current
period. Average balances of home equity credit line loans declined in the
1995 quarter, largely as a result of the Bank's securitization and sale
activity. The securitization and sale of $150.5 million of home equity
credit line loan receivables in September 1995 contributed to a decline of
$15.8 million (or 27.7%) in average balances of home equity credit line
loans, which resulted in a $0.3 million decrease in income earned on these
assets.
Interest income on mortgage-backed securities decreased $2.4 million (or
15.3%) primarily because of lower average balances. The reduced mortgage-
backed securities balances in the 1995 quarter reflected the effects of
<PAGE>
<PAGE>
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 6.20% from
6.05%.
Other interest income increased $1.3 million (or 52.7%) in the December 1995
quarter primarily as a result of higher average balances and higher average
yields on securities purchased under agreements to resell, and, to a lesser
extent, higher average balances on other interest-earning assets.
Interest expense increased $5.6 million for the 1995 quarter primarily
because of an increase of $6.0 million (or 16.8%) in interest expense on
deposits, the largest category of interest-bearing liabilities. Interest
expense on deposits increased primarily as a result of an increase in average
rates (to 4.13% from 3.61%), which reflected a shift in the composition of
the Bank's deposits to higher yielding certificates of deposit and, to a
lesser extent, an increase in average deposit balances of $86.7 million. See
Financial Condition - Asset and Liability Management.
The increase in interest expense on deposits was partially offset by a $0.4
million decrease in interest expense on borrowings. The decrease in interest
paid on borrowings was primarily attributable to a $0.6 million decrease in
interest expense on bonds payable due to a decrease in the aggregate average
balance of $23.9 million, as a result of the sale in April 1995 of two
residential apartment buildings securing the bonds. In connection with this
sale, the bonds were assumed by the purchaser.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$11.9 million in the 1995 quarter from $8.6 million in the 1994 quarter. The
$3.3 million increase was primarily attributable to increases of $2.6 million
in the provision for losses on credit card loans, $0.6 million in the
provision for losses real estate loans and $0.1 million in the provision for
losses on consumer loans. The higher provisions on credit card and consumer
loans resulted from increased origination volume and increased charge-offs of
such loans over the prior quarter. See Financial Condition - Asset Quality
- - Allowances for Losses.
Other Income. The increase in other (non-interest) income to $66.2 million
in the 1995 quarter from $43.1 million in the 1994 quarter was primarily
attributable to increases in loan and deposit servicing fees and gain on
sales of loans. The positive effect of these items on other income was
partially offset by an increase in loss on real estate held for investment or
sale.
An increase of $11.3 million in excess servicing fees and $6.3 million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $21.8 million (or 55.9%) in
loan and deposit servicing fees. Such excess servicing fees and servicing
fees have increased in recent periods as a result of greater securitization
activity by the Bank. The increase in loan and deposit servicing fees also
reflected a $2.2 million increase in excess servicing fees related to home
equity credit line loan securitizations, because of a decrease in the average
prepayment rate with respect to the underlying receivables.
Gain on sales of loans increased by $4.7 million primarily as a result of a
$4.6 million gain on the securitization and sale of $247.6 million of
automobile loan receivables during the 1995 quarter.
The $4.9 million increase in loss on real estate held for investment or sale
was primarily attributable to an increase of $2.0 million in the provision
<PAGE>
<PAGE>
for losses on such assets, a decrease of $1.9 million in the gain recorded on
sales of the Bank's REO properties and a decrease of $1.0 million in the
operating income generated by the REO properties. See "Financial Condition -
Asset Quality - Allowance for Losses".
Operating Expenses. Operating expenses for the 1995 quarter increased $16.0
million (or 23.7%) 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, loan, 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 $2.6
million increase in loan expenses was primarily attributable to an increase
in the amortization of capitalized mortgage servicing rights, which resulted
from acquisitions of single-family residential mortgage servicing rights in
July 1995. The $2.5 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 $6.5 million increase in other operating expenses resulted
primarily from an increase in credit card fraud losses recorded during the
current period. During the December 1995 quarter, management changed its
policy regarding the recognition of fraud losses which had the effect of
increasing such losses by $3.7 million.
