<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated August 14, 1996
to Prospectus Dated January 26, 1996
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
JUNE 30, 1996
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<PAGE>
TABLE OF CONTENTS
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at June 30, 1996 and
September 30, 1995
(b) Consolidated Statements of Operations for the
three-month and nine-month periods ended
June 30, 1996 and 1995
(c) Consolidated Statements of Cash Flows for the
nine-month periods ended June 30, 1996 and 1995
(d) Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three months ended June 30, 1996 compared to three
months ended June 30, 1995
Nine months ended June 30, 1996 compared to nine
months ended June 30, 1995
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
June 30 September 30
(In thousands) 1996 1995
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<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotels $ 119,835 $ 122,649
Commercial 108,741 111,646
Other 4,705 4,632
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233,281 238,927
Accumulated depreciation (78,063) (75,140)
-------------- --------------
155,218 163,787
Land parcels 41,504 38,458
Cash and cash equivalents 7,495 17,355
Other assets 83,031 93,812
-------------- --------------
Total real estate assets 287,248 313,412
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Banking
Cash and due from banks 244,163 198,096
Interest-bearing deposits 8,252 51,186
Federal funds sold and securities purchased under agreements to resell 219,000 110,000
Loans held for sale 102,079 68,679
Loans held for securitization and sale 315,000 500,000
Investment securities (market value $9,741 and $4,371, respectively) 9,749 4,370
Mortgage-backed securities (market value $842,618 and $879,720, respectively) 847,029 880,208
Loans receivable (net of allowance for losses of $71,619 and $60,496, respectively) 2,459,730 2,327,222
Federal Home Loan Bank stock 31,940 31,940
Real estate held for investment or sale (net of allowance for losses of $127,958
and $135,236, respectively) 140,033 222,860
Property and equipment, net 209,647 180,438
Cost in excess of net assets acquired, net 2,766 4,173
Excess servicing assets, net 45,023 25,640
Mortgage servicing rights, net 33,727 28,573
Other assets 317,277 278,151
-------------- --------------
Total banking assets 4,985,415 4,911,536
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TOTAL ASSETS $ 5,272,663 $ 5,224,948
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LIABILITIES
Real Estate
Mortgage notes payable $ 176,183 $ 184,502
Notes payable - secured 175,000 175,500
Notes payable - unsecured 41,488 41,057
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 33,125 41,872
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Total real estate liabilities 538,679 555,814
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Banking
Deposit accounts 4,225,110 4,159,252
Securities sold under repurchase agreements and other short-term borrowings 17,121 10,435
Notes payable 7,340 7,514
Federal Home Loan Bank advances 116,749 155,052
Custodial accounts 14,261 7,413
Amounts due to banks 38,279 32,240
Other liabilities 84,690 87,545
Capital notes -- subordinated 160,000 160,000
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Total banking liabilities 4,663,550 4,619,451
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Commitments and contingencies
Minority interest held by affiliates 49,512 43,556
Minority interest -- other 74,307 74,307
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TOTAL LIABILITIES 5,326,048 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 (109,870) (123,943)
Net unrealized holding loss (1,768) (2,490)
-------------- --------------
(11,537) (26,332)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (53,385) (68,180)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 5,272,663 $ 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)
===================================================================================================================================
For the Three Months Ended For the Nine Months Ended
June 30 June 30
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(In thousands, except per share amounts) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 15,540 $ 15,984 $ 40,178 $ 39,184
Commercial properties 4,164 4,719 12,828 14,178
Other 992 1,051 3,055 3,257
-------------- -------------- -------------- --------------
Total income 20,696 21,754 56,061 56,619
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Expenses
Direct operating expenses:
Hotels 9,291 10,172 26,733 27,580
Commercial properties 1,715 1,775 5,184 5,466
Land parcels and other 408 321 1,187 1,009
Interest expense 9,921 10,134 29,923 30,449
Amortization of debt expense 154 109 479 346
Depreciation 2,432 2,422 7,277 7,085
Advisory, management and leasing fees - related parties 1,956 1,964 5,523 5,478
General and administrative 238 428 955 1,984
-------------- -------------- -------------- --------------
Total expenses 26,115 27,325 77,261 79,397
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Equity in earnings of unconsolidated entities 854 979 2,230 2,742
Gain (loss) on sale of property 1 11 (56) 1,664
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REAL ESTATE OPERATING LOSS $ (4,564) $ (4,581) $ (19,026) $ (18,372)
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BANKING
Interest income
Loans $ 82,679 $ 79,833 $ 231,515 $ 216,734
Mortgage-backed securities 11,481 15,217 36,966 46,257
Trading securities 281 76 640 220
Investment securities 74 49 171 146
Other 4,739 1,972 14,781 6,883
-------------- -------------- -------------- --------------
Total interest income 99,254 97,147 284,073 270,240
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Interest expense
Deposit accounts 39,929 39,654 123,333 112,257
Short-term borrowings 1,491 7,587 5,366 15,636
Long-term borrowings 3,981 4,036 11,771 12,844
-------------- -------------- -------------- --------------
Total interest expense 45,401 51,277 140,470 140,737
-------------- -------------- -------------- --------------
Net interest income 53,853 45,870 143,603 129,503
Provision for loan losses (30,062) (13,604) (70,825) (35,829)
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Net interest income after provision for loan losses 23,791 32,266 72,778 93,674
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Other income
Credit card fees 7,964 2,526 18,682 9,197
Loan servicing fees 70,579 51,796 200,548 127,226
Deposit servicing fees 7,226 6,241 20,355 17,818
Gain (loss) on sales of trading securities, net 401 (250) 1,061 (579)
Earnings (loss) on real estate held for investment or sale, net (5,875) 5,048 (19,376) 2,476
Gain on sales of loans, net 11,850 4,483 17,092 4,721
Other 4,790 (1,894) 14,109 5,502
-------------- -------------- -------------- --------------
Total other income 96,935 67,950 252,471 166,361
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Continued on following page.
</TABLE>
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<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months Ended For the Nine Months Ended
June 30 June 30
------------------------------ ------------------------------
(In thousands, except per share amounts) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 32,670 $ 28,156 $ 93,354 $ 78,739
Loan 7,012 3,468 19,758 10,310
Property and equipment 8,629 7,207 24,729 21,028
Marketing 14,473 11,656 35,568 34,835
Data processing 12,504 11,365 37,081 31,525
Deposit insurance premiums 2,712 2,298 8,046 8,136
Amortization of cost in excess of net assets acquired 444 677 1,407 1,929
Other 10,665 11,797 36,364 31,536
-------------- -------------- -------------- --------------
Total operating expenses 89,109 76,624 256,307 218,038
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BANKING OPERATING INCOME $ 31,617 $ 23,592 $ 68,942 $ 41,997
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TOTAL COMPANY
Operating income before income taxes and minority interest $ 27,053 $ 19,011 $ 49,916 $ 23,625
Income tax provision 11,432 6,596 21,254 7,029
-------------- -------------- -------------- --------------
Income before minority interest 15,621 12,415 28,662 16,596
Minority interest held by affiliates (3,129) (2,598) (6,776) (4,249)
Minority interest -- other (2,438) (2,438) (7,313) (7,313)
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TOTAL COMPANY NET INCOME $ 10,054 $ 7,379 $ 14,573 $ 5,034
DEFICIT
Beginning of period (119,424) (137,138) (123,943) (134,793)
Dividend distribution
Preferred shares of beneficial interest (500) -- (500) --
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End of period $ (109,870) $ (129,759) $ (109,870) $ (129,759)
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NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 8,699 $ 6,024 $ 10,508 $ 969
NET INCOME PER COMMON SHARE
Income before minority interest 2.96 2.30 5.10 2.60
Minority interest held by affiliates (0.65) (0.54) (1.40) (0.88)
Minority interest -- other (0.51) (0.51) (1.52) (1.52)
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NET INCOME PER COMMON SHARE $ 1.80 $ 1.25 $ 2.18 $ 0.20
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Nine Months Ended
June 30
------------------------------
(In thousands) 1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (12,529) $ (11,962)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 7,277 7,085
(Gain) loss on sale of property 56 (1,654)
Increase in accounts receivable and accrued income (4,534) (429)
Increase in deferred tax asset (6,821) (6,426)
Decrease in accounts payable and accrued expenses (6,434) (4,904)
Decrease in tax sharing receivable 20,000 12,000
Amortization of debt expense 479 346
Equity in earnings of unconsolidated entities (2,230) (2,742)
Other 3,236 2,287
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(1,500) (6,399)
-------------- --------------
Banking
Net income 27,102 16,996
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 2,798 (1,160)
Depreciation and amortization 18,112 16,085
Amortization of cost in excess of net assets acquired and mortgage
servicing rights 6,956 2,847
Provision for loan losses 70,825 35,829
Net fundings of loans held for sale and/or securitization (530,783) (251,804)
Proceeds from sales of trading securities 257,257 78,323
Proceeds from sales of loans held for sale and/or securitization 1,585,916 1,810,474
Earnings on real estate (1,597) (6,946)
Provision for losses on real estate held for investment or sale 20,152 16,000
(Gain) loss on sales of trading securities, net (1,061) 579
Gain on sales of loans, net (17,092) (4,721)
Minority interest held by affiliates 6,776 4,249
Minority interest - other 7,313 7,313
(Increase) decrease in excess servicing assets (19,383) 1,578
Increase in other assets (19,650) (13,900)
Increase (decrease) in other liabilities and accrued expenses 3,184 (30,604)
Decrease in tax sharing payable (20,000) (12,000)
Other, net (9,622) 7,462
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1,387,203 1,676,600
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Net cash provided by operating activities 1,385,703 1,670,201
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (3,606) (4,257)
Property acquisitions -- (10,193)
Property sales 1,812 --
Equity investment in unconsolidated entities 1,018 (2,600)
Other investing activities 1 52
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(775) (16,998)
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Banking
Proceeds from maturities of investment securities 4,410 100
Proceeds from sales of loans -- 8
Net proceeds from sales of real estate 46,046 110,131
Net proceeds from sales of mortgage servicing rights 966 1,270
Net fundings of loans receivable (1,088,856) (2,021,848)
Principal collected on mortgage-backed securities 166,790 121,659
Purchases of investment securities (10,000) --
Purchases of mortgage-backed securities (135,125) --
Purchases of loans receivable (209,480) (73,183)
Purchases of property and equipment (47,635) (45,546)
Purchases of mortgage servicing rights (9,902) --
Disbursements for real estate held for investment or sale (15,359) (30,202)
Other investing activities, net (5,527) 544
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(1,303,672) (1,937,067)
-------------- --------------
Net cash used in investing activities (1,304,447) (1,954,065)
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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)
===================================================================================================================================
For the Nine Months Ended
June 30
------------------------------
(In thousands) 1996 1995
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ -- $ 11,400
Principal curtailments and repayments of mortgages (6,837) (10,289)
Repayment of secured note (500) --
Proceeds from sales of unsecured notes 2,617 3,221
Repayments of unsecured notes (2,186) (3,390)
Dividends on preferred shares of beneficial interest (500) --
Other financing activities, net (179) (310)
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(7,585) 632
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Banking
Proceeds from customer deposits and sales of certificates of deposit 11,255,134 10,575,028
Customer withdrawals of deposits and payments for maturing certificates of deposit (11,189,276) (10,466,126)
Net (decrease) increase in securities sold under repurchase agreements (1,055) 90,037
Advances from the Federal Home Loan Bank 11,904 851,213
Repayments of advances from the Federal Home Loan Bank (50,207) (817,005)
Proceeds from other borrowings 1,399,981 487,277
Repayments of other borrowings (1,392,414) (467,885)
Cash dividends paid on preferred stock (7,313) (7,313)
Cash dividends paid on common stock (5,000) --
Other financing activities, net 6,848 (4,191)
-------------- --------------
28,602 241,035
-------------- --------------
Net cash provided by financing activities 21,017 241,667
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Net increase (decrease) in cash and cash equivalents 102,273 (42,197)
Cash and cash equivalents at beginning of period 376,637 402,542
-------------- --------------
Cash and cash equivalents at end of period $ 478,910 $ 360,345
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Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) $ 189,504 $ 179,615
Income taxes 8,075 23
Supplemental schedule of non-cash investing and financing activities:
Rollovers of notes payable - unsecured 2,991 3,275
Loans held for sale exchanged for trading securities 256,770 79,253
Mortage-backed securities available-for-sale transferred to
mortgage-backed securities held-to-maturity -- 942,085
Loans receivable transferred to loans held for sale and/or securitization 1,142,802 2,202,235
Investment securities available-for-sale transferred to
investment securities held-to-maturity -- 4,354
Real estate held for investment transferred to real estate held for sale -- 9,273
Loans made in connection with the sale of real estate 42,441 8,337
Loans receivable transferred to real estate acquired in settlement of loans 4,891 6,320
Loans receivable exchanged for mortgage-backed securities held-to-maturity -- 23,154
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
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.
New Accounting Pronouncement
During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long Lived Assets and for Long-Lived Assets to be disposed Of." SFAS 121,
established standards for measuring and accounting for impairment of long-lived
assets held for production of income as well as long-lived assets to be disposed
of. The standard is required to be implemented in 1996 and, in the opinion of
management, will not have a material impact on the consolidated results of
operations or financial position.
3. The Real Estate Trust voluntarily terminated its qualification as a real
estate investment trust under the Internal Revenue code during fiscal 1978. As a
result of the Trust's acquisition of an additional 20% equity interest in the
Bank in June 1990, the Bank became a member of the Trust's affiliated group
filing consolidated federal income tax returns. The current effect of the
Trust's consolidation of the Bank's operations into its federal income tax
return results in the use of the Trust's net operating losses and net operating
loss carryforwards to reduce the federal income taxes the Bank would otherwise
owe.
<PAGE>
4. BANKING:
LOANS HELD FOR SALE:
At June 30, 1996 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:
June 30, September 30,
1996 1995
-------- --------
(In thousands)
Credit card receivables $180,000 $300,000
Automobile loan receivables 50,000 200,000
Home equity credit line receivables 85,000 -
-------- --------
Total $315,000 $500,000
======== ========
LOANS RECEIVABLE:
June 30, September 30,
1996 1995
----------- -----------
(In thousands)
Single-family residential $ 1,398,126 $ 1,322,772
Home equity 13,482 29,024
Commercial and multifamily 79,245 86,007
Real estate construction 41,911 46,848
Ground 43,300 6,892
Credit card 776,538 712,548
Automobile 63,044 39,217
Overdraft lines of credit 19,629 15,049
Home improvement and
other consumer 44,901 112,705
Other 87,890 31,975
----------- -----------
2,568,066 2,403,037
----------- -----------
Less:
Undisbursed portion of loans 48,534 28,147
Unearned discounts 911 1,101
Net deferred loan origination
costs (12,728) (13,929)
Allowance for loan losses 71,619 60,496
----------- -----------
108,336 75,815
----------- -----------
Total $ 2,459,730 $ 2,327,222
=========== ===========
<PAGE>
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:
June 30, September 30,
1996 1995
-------- --------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
-------- --------
Real estate held for sale 264,172 354,277
-------- --------
Less:
Allowance for losses on real estate
held for investment 188 193
Allowance for losses on real estate
held for sale 127,770 135,043
-------- --------
127,958 135,236
-------- --------
Total real estate held for
investment or sale $140,033 $222,860
======== ========
REGULATORY MATTERS:
In connection with the termination of the Bank's written agreement with the OTS
in March 1996, the Board of Directors of the Bank adopted a resolution which,
among other things, authorizes the Bank: (i) to make tax sharing payments to the
B. F. Saul Real Estate Investment Trust of up to $15 million relating to any
single fiscal year without OTS approval; and (ii) to declare dividends on its
common stock in any quarterly period up to the lesser of (A) 50% of its after
tax net income for the immediately preceding quarter or (B) 50% of the average
quarterly after tax net income for the immediately preceding four quarter
period, minus (in either case) dividends declared on the Bank's preferred stock
during that quarterly period. The resolution also provides that the Bank will
present a plan annually to the OTS detailing anticipated consumer loan
securitization activity.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal business conducted by the B.F. Saul Real Estate Investment Trust
(the "Trust") and its wholly-owned subsidiaries is the ownership and development
of income-producing properties. The Trust owns 80% of the outstanding common
stock of Chevy Chase Bank, F.S.B. ("Chevy Chase" or the "Bank"). At June 30,
1996, the Bank's assets accounted for approximately 95% of the Trust's
consolidated assets. The Trust recorded net income of $14.6 million for the
nine- month period ended June 30, 1996 compared to net income of $5.0 million
for the nine-month period ended June 30, 1995.
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 Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real
Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The business conducted by the Bank and its subsidiaries is
identified by the term "Banking," while the operations conducted by the Real
Estate Trust are designated as "Real Estate."
The financial data on Banking reflect certain purchase accounting adjustments
made by the Trust in connection with its acquisition of the Bank and therefore
differ in certain respects from the comparable financial data set forth in the
unconsolidated financial statements of the Bank.
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at June
30, 1996, 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 land in anticipation of
razing the buildings to prepare the site for future development.
The eight hotel properties owned by the Real Estate Trust throughout the
nine-month periods of fiscal 1996 and fiscal 1995 achieved average occupancy
rates of 67% and 66%, respectively, and average room rates of $66.16 and $61.98,
respectively. Four of these hotels registered improved occupancies and all eight
registered higher average room rates in the current period. Overall, the hotel
portfolio achieved for the nine-month period ended June 30, 1996, compared to
the nine-month period ended June 30, 1995, average occupancy rates of 67% and
66%, respectively, and average room rates of $68.04 and $59.45, respectively.
The Real Estate Trust's office and industrial property portfolio was 91% leased
at June 30, 1996, compared to leasing rates of 84% and 92% at September 30, 1995
and at June 30, 1995, 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. Progress continues to be made in
releasing this space. At June 30, 1996, the Real Estate Trust's office and
industrial property portfolio had a total gross leasable area of 1.3 million
square feet, of which 62,000(4.8%) and 243,000(18.6%), are subject to leases
whose terms expire in the balance of fiscal 1996 and in fiscal 1997,
respectively.
<PAGE>
BANKING
GENERAL. The Bank recorded operating income of $31.6 million during the June
1996 quarter, compared to operating income of $23.6 million in the prior
corresponding period. The $8.0 million increase in pre-tax income for the
current quarter was primarily a result of an increase in credit card loan
servicing fee income and gains on sales of loans reflecting the Bank's
securitization activity during the June quarter. A $19.8 million increase in
loan and deposit servicing fees over the June 1995 quarter contributed to a
$28.9 million increase in non-interest income. The Bank's net interest income
before provision for loan losses increased $8.0 million primarily as a result of
a decline in the Bank's interest expense. Partially offsetting the positive
effect of these items on income was a $12.5 million increase in operating
expenses and a $16.5 million increase in the provision for loan losses. See
"Results of Operations."
At June 30, 1996, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.30%, 6.30%, 6.91% and 12.04%,
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 June 30, 1996, the Bank met the FIRREA-mandated fully phased-in
capital requirements and, on a fully phased-in basis, met the capital standards
established for "well capitalized" institutions under the prompt corrective
action regulations. See "Capital."
In the June 1996 quarter, the Bank securitized and sold $227.7 million of
automobile loan receivables and recognized a gain of $2.7 million in connection
with this sale. The Bank also securitized and sold $153.5 million of home loan
receivables in the current quarter and recognized a gain of $9.5 million. See
"Liquidity."
Real estate owned, net of valuation allowances, declined 6.9% during the June
1996 quarter to $136.4 million at June 30, 1996, from $146.5 million at March
31, 1996. This reduction resulted primarily from sales of residential properties
and increased valuation allowances on the real estate owned portfolio. See
"REO."
During the June 1996 quarter, the Bank paid, out of the retained earnings of the
Bank, cash dividends on its Common Stock in the amount of $500 per share, $200
per share of which was declared during the March 1996 quarter. Subsequent to
June 30, 1996, the Bank declared a cash dividend on its Common Stock in the
amount of $350 per share, to be paid upon the expiration of the applicable OTS
notice period.
ASSET QUALITY. Non-Performing Assets. The Bank's level of non-performing assets
continued to decline during the third 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>
<TABLE>
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
June 30, March 31, September 30,
1996 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
NON-PERFORMING ASSETS:
Non-accrual loans:
Residential $ 7,626 $ 9,688 $ 8,593
Commercial and multifamily 0 305 194
----------------- ----------------- -----------------
Total non-accrual real estate loans 7,626 9,993 8,787
Credit card 20,584 21,030 18,569
Consumer and other 2,277 1,155 595
----------------- ----------------- -----------------
Total non-accrual loans (1) 30,487 32,178 27,951
----------------- ----------------- -----------------
Real estate acquired in settlement of loans 264,173 268,566 354,277
Allowance for losses on real estate acquired in settlement
of loans (127,770) (122,111) (135,043)
----------------- ----------------- -----------------
Real estate acquired in settlement of loans, net 136,403 146,455 219,234
----------------- ----------------- -----------------
Total non-performing assets $ 166,890 $ 178,633 $ 247,185
================= ================= =================
Allowance for losses on loans $ 71,619 $ 60,879 $ 60,496
Allowance for losses on real estate held for investment 188 188 193
Allowance for losses on real estate acquired in settlement
of loans 127,770 122,111 135,043
----------------- ----------------- -----------------
Total allowances for losses $ 199,577 $ 183,178 $ 195,732
================= ================= =================
RATIOS:
Non-performing assets, net to total assets (2) 1.91% 2.34% 3.80%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) (4) 143.55% 112.34% 123.82%
Allowance for losses on credit card loans to non-accrual
credit card loans (1) (4) 248.16% 219.12% 249.47%
Allowance for losses on consumer and other loans to
non-accrual consumer and other loans (1) (4) 157.71% 309.26% 553.11%
Allowance for losses on loans to non-accrual loans (1) 234.92% 189.19% 216.44%
Allowance for losses on loans to total loans receivable (3) 2.41% 2.07% 2.05%
(1) Before deduction of allowance for losses.
(2) Non-performing assets is presented after the allowance for losses on
loans and the allowance for losses on real estate held for investment
or sale.
(3) Includes loans receivable and loans held for sale and/or
securitization, before deduction of allowance for losses on loans.
(4) Excludes a $6.0 million unallocated valuation allowance at June 30, 1996 which
can be used to offset losses on any of the Bank's loan portfolio.
</TABLE>
<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) and real estate acquired in settlement of
loans, either through foreclosure or deed-in-lieu of foreclosure.
Non-performing assets totaled $166.9 million, after valuation allowances on real
estate held for sale or real estate owned ("REO") of $127.8 million, at June 30,
1996, compared to $178.6 million, after valuation allowances on REO of $122.1
million, at March 31, 1996. In addition to the valuation allowances on REO, the
Bank maintained $1.5 million of valuation allowances on its non-accrual loans at
June 30, 1996 compared to $1.6 million at March 31, 1996. The decrease in
non-performing assets for the current quarter was primarily attributable to a
net decrease in REO of $10.1 million. See "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $30.5 million at June
30, 1996, as compared to $32.2 million at March 31, 1996. At June 30, 1996,
non-accrual loans consisted of $7.6 million of non-accrual real estate loans,
$20.6 million of non-accrual credit card loans and $2.3 million of non-accrual
consumer and other loans.
REO. At June 30, 1996, the Bank's REO totaled $136.4 million, after valuation
allowances on such assets of $127.8 million. The principal component of REO
consists of the five planned unit developments (the "Communities"), which had an
aggregate book value of $102.8 million at that date. Four of the five
Communities are under active development. However, as a result of the sale in
the December 1995 quarter of the remaining residential lots in two of the
Communities, the Bank owns only commercial land in two of the four active
Communities.
During the three months ended June 30, 1996, REO decreased $10.1 million. This
decrease was primarily attributable to sales in the Communities and other
residential properties and an increase in the valuation allowances against these
properties.
During the three months ended June 30, 1996, the Bank received revenues of
approximately $8.1 million upon the disposition of REO, which consisted of 147
residential lots or units in the Communities and other smaller residential
properties ($7.5 million) and various single-family residential properties ($0.6
million).
At June 30, 1996, the Bank had executed contracts to sell two additional REO
properties at their aggregate book value of $9.2 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.
<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 June 30, 1996, potential problem assets
totaled $6.4 million, before valuation allowances of $1.2 million, as compared
to $7.1 million, before valuation allowances of $1.4 million, at March 31, 1996.
The $0.7 million decrease in potential problem assets was primarily attributable
to net principal reductions.
Delinquent Loans. At June 30, 1996, delinquent loans totaled $47.7 million (or
1.6% of loans) compared to $41.6 million (or 1.4% of loans) at March 31, 1996.
The following table sets forth information regarding the Bank's delinquent loans
at June 30, 1996.
Principal Balance
-------------------------------------- Total as a
Mortgage Non-Mortgage Percentage
Loans Loans Total of Loans (1)
---------- -------------- ----------- ------------
(Dollars in thousands)
Loans delinquent for:
30-59 days .......... $ 5,339 $ 26,601 $ 31,940 1.1%
60-89 days .......... 1,187 14,527 15,714 0.5%
---------- -------------- ----------- --------
Total ............. $ 6,526 $ 41,128 $ 47,654 1.6%
========== ============== =========== ========
- ----------------
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity credit line
loans. Total delinquent mortgage loans were $6.5 million at June 30, 1996
compared to $6.4 million at March 31, 1996.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $41.1 million at June 30, 1996 from $35.2 million at March 31,
1996, and increased as a percentage of total non-mortgage loans to 3.4% from
2.7%. The increased percentage of delinquent non-mortgage loans to total
non-mortgage loans outstanding resulted primarily from the increase in
delinquent non-mortgage loans, but also reflected the securitization and sale of
$227.7 million of automobile loan receivables and $153.5 million of home loan
receivables, which transactions reduced the Bank's portfolio of non-mortgage
loans.
<PAGE>
Troubled Debt Restructurings. At June 30, 1996, loans accounted for as troubled
debt restructurings totalled $14.4 million and included two commercial permanent
loans with principal balances totaling $13.2 million, one residential ground
loan with a principal balance of $0.6 million and one commercial collateralized
loan with a principal balance of $0.6 million. The $1.2 million decrease in
loans accounted for as troubled debt restructurings from $15.6 million at March
31, 1996 resulted from net principal reductions. At June 30, 1996, the Bank had
commitments to lend $0.7 million of additional funds on loans that have been
restructured.
Real Estate Held for Investment. At June 30, 1996 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.
Allowances for Losses. The following tables show loss experience by asset type
and the compo nents 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 indi cated and may include
charge-offs taken against assets which the Bank disposed of during such periods.
<PAGE>
<TABLE>
ANALYSIS OF ALLOWANCE FOR AND CHARGE-OFFS OF LOANS
(DOLLARS IN THOUSANDS)
Three Months
Nine Months Ended Ended
June 30, June 30,
--------------------------------------
1996 1995 1996
--------------- ---------------- ----------------------
<S> <C> <C> <C>
Balance at beginning of period $ 60,496 $ 50,205 $ 60,879
--------------- ---------------- ----------------------
Provision for loan losses 70,825 35,829 30,062
--------------- ---------------- ----------------------
Charge-offs:
Residential 655 866 229
Credit card 62,804 34,617 20,163
Other 4,790 2,369 1,745
--------------- ---------------- ----------------------
Total charge-offs 68,249 37,852 22,137
--------------- ---------------- ----------------------
Recoveries:
Residential 16 14 10
Credit card 8,172 8,388 2,686
Other 359 491 119
--------------- ---------------- ----------------------
Total recoveries 8,547 8,893 2,815
--------------- ---------------- ----------------------
Charge-offs, net of recoveries 59,702 28,959 19,322
--------------- ---------------- ----------------------
Balance at end of period $ 71,619 $ 57,075 $ 71,619
=============== ================ ======================
Provision for loan losses to average loans (1) (2) 3.28% 1.60% 4.10%
Net loan charge-offs to average loans (1) (2) 2.77% 1.29% 2.63%
Ending allowance for losses on loans to total
loans (2) (3) 2.43% 1.95% 2.43%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
</TABLE>
<PAGE>
<TABLE>
COMPONENTS OF ALLOWANCE FOR LOSSES ON LOANS BY TYPE
(DOLLARS IN THOUSANDS)
June 30, March 31, September 30,
1996 1996 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 $ 896 50.8% $ 992 48.1% $ 929 47.3%
Home equity 374 3.3 307 2.5 164 1.0
Commercial and multifamily 8,402 2.7 8,453 2.8 8,523 2.9
Residential construction 862 0.6 1,031 0.7 1,159 0.8
Commercial construction 21 0.1 16 0.1 56 0.2
Ground 392 1.3 427 1.4 49 0.1
Credit card 51,081 32.4 46,081 30.2 46,325 34.4
Consumer and other 3,591 8.8 3,572 14.2 3,291 13.3
Unallocated 6,000 0.0 0 0.0 0 0.0
-------------- -------------- --------------
Total $ 71,619 $ 60,879 $ 60,496
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
ANALYSIS OF ALLOWANCE FOR AND CHARGE-OFFS OF
REAL ESTATE HELD FOR INVESTMENT OR SALE
(IN THOUSANDS)
Three Months
Nine Months Ended Ended
June 30, June 30,
-------------------------------------------
1996 1995 1996
------------------ ------------------ --------------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 193 $ 9,899 $ 188
Real estate held for sale 135,043 109,074 122,111
------------------ ------------------ --------------------
Total 135,236 118,973 122,299
------------------ ------------------ --------------------
Provision for real estate losses:
Real estate held for investment (5) (8,556) 0
Real estate held for sale 20,157 24,556 7,197
------------------ ------------------ --------------------
Total 20,152 16,000 7,197
------------------ ------------------ --------------------
Charge-offs:
Real estate held for investment:
Commercial ground 0 750 0
------------------ ------------------ --------------------
Total 0 750 0
------------------ ------------------ --------------------
Real estate held for sale:
Residential construction 0 1,924 0
Commercial construction 0 933 0
Commercial ground 0 925 0
Residential ground 27,430 103 1,538
------------------ ------------------ --------------------
Total 27,430 3,885 1,538
------------------ ------------------ --------------------
Total charge-offs on real estate
held for investment or sale 27,430 4,635 1,538
------------------ ------------------ --------------------
Balance at end of period:
Real estate held for investment 188 1,343 188
Real estate held for sale 127,770 129,745 127,770
------------------ ------------------ --------------------
Total $ 127,958 $ 130,338 $ 127,958
================== ================== ====================
</TABLE>
<PAGE>
<TABLE>
COMPONENTS OF ALLOWANCE FOR LOSSES
ON REAL ESTATE HELD FOR INVESTMENT OR SALE
(IN THOUSANDS)
June 30, March 31, September 30,
1996 1996 1995
------------------- ------------------ --------------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 188 $ 188 $ 193
------------------- ------------------ --------------------
Allowance for losses on real estate held for sale:
Residential 160 115 184
Home equity 38 35 2
Ground 127,572 121,961 134,857
------------------- ------------------ --------------------
Total 127,770 122,111 135,043
------------------- ------------------ --------------------
Total allowance for losses on real
estate held for investment or sale $ 127,958 $ 122,299 $ 135,236
=================== ================== ====================
</TABLE>
<PAGE>
The Bank maintains valuation allowances for estimated losses on loans and real
estate. The Bank's total valuation allowances for losses on loans and real
estate held for investment or sale increased by $16.4 million from the level at
March 31, 1996 to $199.6 million at June 30, 1996. The $16.4 million increase
was primarily attributable to increased valuation allowances on credit card
loans and real estate held for investment or sale, as well as the Bank's
establishment during the June 1996 quarter of a $6.0 million unallocated
valuation allowance to offset losses from any of the Bank's loan portfolios.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $138.9 million at June 30, 1996, which
constituted 51.1% of total non-performing real estate assets, before valuation
allowances. This amount represented a $5.4 million increase from the March 31,
1996 level of $133.5 million, or 47.9% of total non-performing real estate
assets, before valuation allowances at that date.
During the nine months ended June 30, 1996, the Bank provided an additional
$20.9 million of valuation allowances on loans secured by real estate and real
estate held for investment or sale and recorded net charge-offs of $28.1 million
on these assets. The allowance for losses on real estate held for sale at June
30, 1996 is in addition to approximately $53.3 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at June 30,
1996.
During the June 1996 quarter, the Bank provided an additional $2.0 million of
general valuation allowances against its Communities pursuant to its policy of
providing 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 nine months ended June 30, 1996
were $54.6 million, compared to $26.2 million for the nine months ended June 30,
1995. The increase in net charge-offs resulted primarily from continued
maturation of the Bank's portfolio and reflects the industry-wide decline in the
performance of credit card loans. The allowance for losses on credit card loans
increased to $51.1 million at June 30, 1996 from $46.1 million at March 31,
1996. The increase in such allowance for losses resulted primarily from an
increase in the reserve percentage used to calculate allowances for losses
reflecting the recent trend of increased charge-offs and an increase in the
ending balance of such loans. The ratios of the allowance for such losses to
non-performing credit card loans and to outstanding credit card loans increased
to 248.2% and 5.3%, respectively, at June 30, 1996 from 219.1% and 5.2%,
respectively, at March 31, 1996.
The allowance for losses on consumer and other loans remained constant at $3.6
million from March 31, 1996 to June 30, 1996. 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 were 157.7% and 1.4%, respectively,
at June 30, 1996 compared to 309.3% and 0.9%, respectively, at March 31, 1996.
<PAGE>
ASSET AND LIABILITY MANAGEMENT. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mixes, volumes and maturities to stabilize the
net interest spread is referred to as asset and liability management. The
objective of asset and liability management is to maximize the net interest
yield within the constraints imposed by prudent lending and investing practices,
liquidity needs and capital planning.
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 1996, 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>
<TABLE>
INTEREST RATE SENSITIVITY TABLE (GAP)
(DOLLARS IN THOUSANDS)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
------------- ------------- --------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996 Mortgage loans:
Adjustable-rate $ 292,143 $ 244,220 $ 687,278 $ 135,152 $ 8,792 $ 1,367,585
Fixed-rate 12,727 8,544 37,376 81,438 30,407 170,492
Loans held for sale 102,079 0 0 0 0 102,079
Home equity credit lines and second
mortgages 20,459 195 646 473 1,213 22,986
Credit card and other 877,802 17,886 39,222 24,198 11,178 970,286
Loans held for securitization and sale 315,000 0 0 0 0 315,000
Mortgage-backed securities 198,785 324,695 306,489 5,765 11,295 847,029
Other investments 375,237 0 4,995 0 0 380,232
------------- ------------- --------------- --------------- ------------- ------------
Total interest-earning assets 2,194,232 595,540 1,076,006 247,026 62,885 4,175,689
Total non-interest earning assets 0 0 0 0 809,726 809,726
------------- ------------- --------------- --------------- ------------- ------------
Total assets $ 2,194,232 $ 595,540 $ 1,076,006 $ 247,026 $ 872,611 $ 4,985,415
============= ============= =============== =============== ============= ============
Deposits:
Fixed maturity deposits $ 649,772 $ 266,493 $ 191,463 $ 109,907 $ 0 $ 1,217,635
NOW, statement and passbook accounts 1,390,450 40,649 135,386 92,147 196,376 1,855,008
Money market deposit accounts 1,000,733 0 0 0 0 1,000,733
Borrowings:
Capital notes - subordinated 10,000 0 0 0 150,000 160,000
Other 117,193 3,125 3,968 9,695 7,229 141,210
------------- ------------- --------------- --------------- ------------- ------------
Total interest-bearing liabilities 3,168,148 310,267 330,817 211,749 353,605 4,374,586
Total non-interest bearing liabilities 0 0 0 0 288,964 288,964
Stockholders' equity 0 0 0 0 321,865 321,865
------------- ------------- --------------- --------------- ------------- ------------
Total liabilities & stockholders'
equity $ 3,168,148 $ 310,267 $ 330,817 $ 211,749 $ 964,434 $ 4,985,415
============= ============= =============== =============== ============= ============
Gap ($973,916) $285,273 $745,189 $35,277 ($290,720)
Cumulative gap ($973,916) ($688,643) $56,546 $91,823 ($198,897)
Cumulative gap as a percentage
of total assets (19.5%) (13.8%) 1.1% 1.8% (4.0%)
</TABLE>
<PAGE>
The interest sensitivity "gap" shown in the table 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 13.8% at June 30, 1996, compared to a negative 14.1% at
March 31, 1996. 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 June 1996 quarter, the Bank made a tax sharing
payment of $5.0 million to B. F. Saul Real Estate Investment Trust (the
"Trust"), which owns 80% of the Bank's Common Stock. Subsequent to June 30,
1996, the Bank made an additional tax sharing payment of $2.7 million to the
Trust.
CAPITAL. At June 30, 1996, the Bank was in compliance with all of its regulatory
capital requirements under FIRREA, and its capital ratios exceeded the ratios
established for "well capitalized" institutions under OTS prompt corrective
action regulations. On the basis of its June 30, 1996 balance sheet, the Bank
also met the fully phased-in capital requirements under FIRREA that took effect
on July 1, 1996 as the last of the phase-in periods for the deductions from
capital expired and, after giving effect to those deductions, met the capital
standards for "well capitalized" institutions under the prompt corrective action
regulations.
The following table shows the Bank's regulatory capital levels at June 30, 1996
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>
<TABLE>
REGULATORY CAPITAL
(DOLLARS IN THOUSANDS)
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 $ 356,969
Net unrealized holding losses (1) 2,210
-----------
Adjusted capital 359,179
Adjustments for tangible and core capital:
Intangible assets (42,213)
Non-includable subsidiaries (2) (4) (2,078)
Non-qualifying purchased/originated
loan servicing (1,410)
-------------
Total tangible capital 313,478 6.30% $ 74,634 1.50% $ 238,844 4.80%
------------- ============ ============= ============ ============= ============
Total core capital (3) (4) 313,478 6.30% $ 199,023 4.00% $ 114,455 2.30%
------------- ============ ============= ============ ============= ============
Tier 1 risk-based capital (3) 313,478 6.91% $ 181,511 4.00% $ 131,967 2.91%
------------- ============ ============= ============ ============= ============
Adjustments for risk-based capital:
Subordinated capital debentures 150,000
Allowance for general loan losses 64,387
-------------
Total supplementary capital 214,387
Excess allowance for loan losses (7,570)
-------------
Adjusted supplementary capital 206,817
-------------
Total available capital 520,295
Equity investments (2) (20,169)
-------------
Total risk-based capital (3) $ 500,126 12.04% $ 363,022 8.00% $ 137,104 4.04%
============= ============ ============= ============ ============= ============
(1) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(2) Reflects an aggregate offset of $1.3 million representing the allowance
for general loan losses maintained against the Bank's equity investments
and non-includable subsidiaries which, pursuant to OTS guidelines, is
available as a "credit" against the deductions from capital otherwise
required for such investments.
(3) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least
6.0% and a total risk-based capital ratio of at least 10.0%.
(4) Effective July 1, 1996, the percentage of non-includable subsidiaries
required to be phased out from core capital increased from 60% to 100%.
If this phase-out had been in effect at June 30, 1996, the Bank's
tangible, core and risk-based regulatory capital ratios would have been
6.27%, 6.27% and 12.00%.
</TABLE>
<PAGE>
Regulatory Action and Requirements. In connection with the termination of the
Bank's written agreement, the Board of Directors of the Bank adopted a
resolution which, among other things, authorizes the Bank: (i) to make tax
sharing payments to the Trust of up to $15 million relating to any single fiscal
year without OTS approval; and (ii) to declare dividends on its common stock in
any quarterly period up to the lesser of (A) 50% of its after tax net income for
the immediately preceding quarter or (B) 50% of the average quarterly after tax
net income for the immediately preceding four quarter period, minus (in either
case) dividends declared on the Bank's preferred stock during that quarterly
period. The resolution also provides that the Bank will present a plan annually
to the OTS detailing anticipated consumer loan securitization activity.
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 June 30, 1996, after valuation
allowances of $127.8 million, by the fiscal year in which the property was
acquired through foreclosure.
Fiscal Year (In thousands)
1990 (1) (2)......... $ 38,958
1991 (2)............... 75,641
1992 .................... 3,339
1993 .................... 4,853
1994 .................... 1,474
1995 .................... 8,979
1996 .................... 3,158
---------
Total REO ...... $136,402
========
- -----------------------
(1) Includes REO with an aggregate net book value of $20.2 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $92.5 million, for
which the Bank received an extension of the five-year holding period
through September 29, 1996.
Although the Bank's regulatory capital ratios on a fully phased-in basis at June
30, 1996 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.
<PAGE>
Deposit Insurance Premiums. Thrift institutions insured by the Savings
Association Insurance Fund ("SAIF"), including the Bank, currently pay
substantially higher deposit insurance premiums than similarly situated
commercial banks insured by the Bank Insurance Fund ("BIF"). 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, remains under consideration by Congress although it
remains unclear if, and in what form, such legislation will be enacted. In the
absence of such legislation, the Bank and other SAIF-insured institutions will
continue to pay higher deposit insurance premiums than commercial banks, which
could lead to a competitive disadvantage in the pricing of loans and deposits
and additional operating expenses. In addition, regulators have recently begun
approving applications by several thrift organizations to establish or acquire
BIF-insured affiliates and prolonged continuation of the disparity in deposit
insurance premiums could lead to more widespread efforts to shift insured
deposits from SAIF to BIF thus further destabilizing the SAIF.
Bad Debt Reserves. Provisions that would repeal the thrift bad debt provisions
of the Internal Revenue Code have been included in the Small Business Jobs
Protection Act of 1996 that passed the House of Representatives and the Senate
on August 2, 1996. The bad debt provisions of this legislation also would
require thrifts to recapture and pay tax on bad debt reserves accumulated since
1987 over a six year period, beginning with a thrift's first taxable year
starting after December 31, 1995 (or, if the thrift meets a loan origination
test, beginning up to two years later). Bad debt reserves accumulated prior to
1988 would not have to be recaptured under this legislation. Enactment of this
legislation will not have a material impact on the Bank's financial statements
which already reflect a tax liability related to the bad debt reserves
accumulated since 1987.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of outstanding
debt.
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. This condition is currently the case and is
expected to continue to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, the payment of
interest on its Senior Secured Notes (the "Secured Notes"), and the payment of
capital improvement costs. In the past, the Real Estate Trust had funded such
shortfalls through a combination of external funding sources, primarily new
financings (including the sale of additional 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. 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 June 30, 1996, there were no borrowings. Availability
under this facility at June 30, 1996, was $7.1 million and 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 June 30,
1996, availability under this facility was entirely restricted pending the
delivery of collateral by 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 LP"), 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 LP. The partnership agreement of Saul Holdings
LP provides for quarterly cash distributions to the partners out of net cash
flow. During the nine-month period ended June 30, 1996, the Real Estate Trust
received total cash distributions of $4.1 million.
The Real Estate Trust is currently selling Unsecured Notes principally to
provide funds to pay outstanding Unsecured Notes as they mature. During the
nine-month period ended June 30, 1996, the Real Estate Trust sold $5.6 million
of new Unsecured Notes and paid $5.2 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. 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, it will finance such
repayments from other sources of funds.
<PAGE>
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, restrictions on such payments (as set forth in the
following sentence) 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. At its March 1996 Board meeting, the Bank adopted a
resolution which authorizes the Bank to make tax sharing payments to the Real
Estate Trust of up to $15 million relating to any single fiscal year without OTS
approval and to declare dividends on its common stock in any quarterly period up
to the lesser of: (i) 50% of the Bank's after tax net income for the immediately
preceding quarter or (ii) 50% of the average quarterly after tax net income for
the immediately preceding four quarter period, minus (in either case) dividends
declared on the Bank's preferred stock during that quarterly period. See
"Banking - Capital - Regulatory Action and Requirements."
During the nine-month period ended June 30, 1996, the Bank made tax sharing
payments totalling $20.0 million to the Real Estate Trust. In July 1996, the
Bank made an additional tax sharing payment of $2.7 million. During the
nine-month period ending June 30, 1996, the Bank paid the Real Estate Trust $4.0
million in dividends on its common stock. At its July 1996 board meeting, the
Bank declared an additional dividend on its common stock, which will result in a
dividend payment of $2.8 million to the Real Estate Trust when paid.
During the nine-month period ended June 30, 1996, the Real Estate Trust
purchased 200,000 shares of common stock of Saul Centers, Inc. in the open
market and purchased an additional 71,686 shares at a 3% discount through a
dividend reinvestment plan. All 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.
The maturity schedule for the Real Estate Trust's outstanding debt at June 30,
1996 for the balance of fiscal 1996 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- -------------------------------------------------------------------
1996 (1) $ 2,840 $ -- $ 946 $ 3,786
1997 17,995 -- 5,716 23,711
1998 7,413 -- 7,373 14,786
1999 17,076 -- 15,388 32,464
2000 18,854 -- 6,020 24,874
Thereafter 112,005 175,000 6,045 293,050
- -------------------------------------------------------------------
Total $176,183 $175,000 $41,488 $392,671
===================================================================
(1) July 1, 1996 - September 30, 1996
Of the $176.0 million of mortgage debt outstanding at June 30, 1996, $134.7
million was nonrecourse to Real Estate Trust.
The Real Estate Trust believes that its capital improvement costs in the next
several fiscal years will be in range of $5.0 to $8.0 million per year.
<PAGE>
BANKING
LIQUIDITY. The Bank's average liquidity ratio for the month ended June 30, 1996
was 21.1%, compared to 22.7% for the month ended March 31, 1996. Additionally,
the Bank met the liquidity level requirements imposed by the OTS for each month
of the first nine months of fiscal 1996.
In recent periods, the proceeds from the securitization and sale of credit card,
home equity credit line, automobile and home improvement and other consumer loan
receivables have been significant sources of liquidity for the Bank. The Bank
securitized and sold $699.0 million of credit card receivables, $475.3 million
of automobile loan receivables and $153.5 million of home loan receivables
during the first nine months of fiscal 1996. Additionally, during the March 1996
quarter, the Bank securitized and sold $42.1 million of amounts on deposit in
certain spread accounts established in connection with certain of the Bank's
outstanding credit card securitizations. At June 30, 1996, the Bank was
considering the securitization and sale of the following receivables: (i)
approximately $650.0 million of credit card receivables, including $180.0
million of receivables outstanding at June 30, 1996 and $470.0 million of
receivables which the Bank expects to become available through additional
fundings during the six months ending December 31, 1996; (ii) approximately
$325.0 million of automobile loan receivables, including $50.0 million of
receivables outstanding at June 30, 1996 and $275.0 million of receivables which
the Bank expects to become available through additional fundings during the six
months ending December 31, 1996; and (iii) approximately $100.0 million of home
equity credit line receivables, including $85.0 million of receivables
outstanding at June 30, 1996 and $15.0 million of receivables which the Bank
expects to become available through additional fundings or maturation of
existing transactions during the six months ending December 31, 1996. To the
extent these receivables were outstanding at June 30, 1996, such receivables are
classified as held for securitization and sale in the Consolidated Balance
Sheets. As part of its operating strategy, the Bank will continue to explore
opportunities to securitize and sell credit card, home equity credit line,
automobile and home loan receivables to meet liquidity and other balance sheet
objectives.
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables. Of the $4.9 billion of outstanding trust
certificate balances at June 30, 1996, the primary recourse to the Bank was
approximately $108.5 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 June 30, 1996, recourse to the Bank under these arrangements was
approximately $4.3 million.
There were no material commitments for capital expenditures at June 30, 1996.
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 con strained by capital requirements, and the
composition of the asset portfolio. Management believes that the Bank's primary
sources of funds, described above, will be sufficient to meet the Bank's
foreseeable long-term liquidity needs. The mix of funding sources utilized from
time to time will be determined by a number of factors, including capital
planning objectives, lending and investment strategies and market conditions.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1995
REAL ESTATE
The following table sets forth, for the three-month period ended June 30, 1996
(the "1996 quarter") and the three-month period ended June 30, 1995 (the "1995
quarter") direct operating results for the Real Estate Trust's (i) hotel
properties and (ii) commercial properties (consisting of office and industrial
properties).
<PAGE>
Three Months Ended
June 30
--------------------
1996 1995
------- -------
(In thousands)
HOTELS (1)
Room sales $11,378 $11,442
Food sales 2,693 2,977
Beverage sales 648 704
Other 821 861
------- -------
Total revenues 15,540 15,984
------- -------
Direct operating expenses
Payroll 3,860 4,465
Cost of sales 1,126 1,296
Utilities 625 712
Repairs and maintenance 693 795
Advertising and promotion 789 706
Property taxes 360 349
Insurance 151 160
Other 1,687 1,689
------- -------
Total direct operating expenses 9,291 10,172
------- -------
Income after direct operating expenses $ 6,249 $ 5,812
======= =======
COMMERCIAL PROPERTIES (2)
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $ 4,000 $ 4,376
Expense recoveries 99 241
Other 65 102
------- -------
Total revenues 4,164 4,719
------- -------
Direct operating expenses
Utilities 519 559
Repairs and maintenance 526 447
Real estate taxes 236 349
Payroll 144 138
Insurance 55 66
Other 235 216
------- -------
Total direct operating expenses 1,715 1,775
------- -------
Income after direct operating expenses $ 2,449 $ 2,944
======= =======
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.
2) Includes the results of an office project until it was reclassified as a
land parcel on December 31, 1995
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization of
$2.0 million and an operating loss of $4.6 million in both the 1996 and 1995
quarters.
Income after direct operating expenses from hotel properties increased $437,000
(7.5%) in the 1996 quarter over the level achieved in the 1995 quarter. In the
current period, room sales decreased $64,000 (0.6%), and food and beverage sales
decreased $340,000 (9.2%). Expenses decreased in the current quarter from the
prior year's level by $881,000 (8.7%). The decreases occurred primarily as a
result of the sale of a property earlier in the year.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, decreased $495,000 (17.9%) in the
1996 quarter compared to such income in the 1995 quarter. This decrease
reflected lower base rents due to a reduction in the leasing rate. Gross income
in the 1996 quarter was $555,000 (12.3%) below its level in the 1995 quarter.
Expenses decreased by $60,000 (3.4%).
Interest expense decreased $213,000 (2.1%) in the 1996 quarter, primarily
because of the lower level of borrowings in the current quarter. Average
balances of the Real Estate Trust's outstanding borrowings decreased to $394.3
million for the 1996 quarter from $403.5 million for the 1995 quarter. This
decrease in average borrowings was the result of mortgage loan amortization.
Depreciation increased $10,000 (0.4%) in the 1996 quarter as a result of new
tenant improvements and capital replacements.
Amortization of debt expense increased $45,000 (41.3%) in the 1996 quarter,
largely due to a recognition of costs in connection with the establishment of a
new line of credit.
Advisory, management and leasing fees paid to related parties decreased $8,000
(0.4%)in 1996 quarter from their expense level in the 1995 quarter. The monthly
advisory fee in the 1996 quarter was $306,000 compared to $292,000 in the 1995
quarter, which represented an aggregate increase of $43,000. Management fees
were lower in the current quarter due to a decreased level of gross revenue from
operating properties.
General and administrative expense decreased $190,000 (44.4%) in the 1996
quarter, principally as a result of higher legal costs incurred last year in
litigation with a tenant.
<PAGE>
BANKING
OVERVIEW. The Bank recorded operating income of $31.6 million for the three
months ended June 30, 1996 (the "1996 quarter"), compared to operating income of
$23.6 million for the three months ended June 30, 1995 (the "1995 quarter"). The
increase in income for the 1996 quarter was primarily attributable to a $28.9
million increase in other (non-interest) income resulting primarily from an
increase in loan and deposit servicing fees. In addition, the Bank's net
interest income before provision for loan losses increased $8.0 million
primarily as a result of a decline in the Bank's interest expense. These
increases were partially offset by a $12.5 million increase in operating
expenses and a $16.5 million increase in the provision for loan losses.
NET INTEREST INCOME. Net interest income, before the provision for loan losses,
increased $8.0 million (or 17.4%) in the 1996 quarter. The Bank would have
recorded interest income of $1.9 million for the 1996 quarter if the Bank's
non-accrual assets and restructured loans had been current in accordance with
their original terms. Interest income of $0.4 million was actually recorded on
non-accrual assets and restructured loans for the 1996 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>
<TABLE>
NET INTEREST MARGIN ANALYSIS
(DOLLARS IN THOUSANDS)
Three Months Ended June 30,
-------------------------------------------------------------------------------------------
1996 1995
--------------------------------------------- --------------------------------------------
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) $ 2,935,309 $ 82,679 11.27% $ 3,261,828 $ 79,833 9.79%
Mortgage-backed securities 756,641 11,481 6.07 969,236 15,217 6.28
Securities purchased under
agreements to resell and
federal funds sold 230,889 3,066 5.31 52,403 792 6.05
Trading securities 16,396 281 6.86 3,842 76 7.91
Investment securities 5,532 74 5.35 4,403 49 4.45
Other interest-earning assets 155,837 1,673 4.29 110,324 1,180 4.28
---------------- --------------- ---------------- --------------
Total 4,100,604 99,254 9.68 4,402,036 97,147 8.83
--------------- ------------ -------------- ------------
Noninterest-earning assets:
Cash 169,883 132,938
Real estate held for investment
or sale 148,533 287,847
Property and equipment, net 202,515 157,291
Cost in excess of net assets
acquired, net 3,028 4,680
Other assets 268,322 154,910
---------------- ----------------
Total assets $ 4,892,885 $ 5,139,702
================ ================
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 950,959 5,683 2.39 $ 875,599 5,902 2.70
Savings deposits 954,954 8,038 3.37 986,373 8,276 3.36
Time deposits 1,249,602 16,770 5.37 1,122,574 15,293 5.45
Money market deposits 993,476 9,438 3.80 1,034,252 10,183 3.94
---------------- --------------- ---------------- --------------
Total deposits 4,148,991 39,929 3.85 4,018,798 39,654 3.95
Borrowings 292,830 5,472 7.47 685,410 11,623 6.78
---------------- --------------- ---------------- --------------
Total 4,441,821 45,401 4.09 4,704,208 51,277 4.36
--------------- ------------ -------------- ------------
Noninterest-bearing items:
Noninterest-bearing deposits 80,336 78,517
Other liabilities 61,672 85,951
Stockholders' equity 309,056 271,026
---------------- ----------------
Total liabilities and
stockholders' equity $ 4,892,885 $ 5,139,702
================ ================
Net interest income $ 53,853 $ 45,870
=============== ==============
Net interest spread (2) 5.59% 4.47%
============ ============
Net yield on interest-earning assets (3) 5.25% 4.17%
============ ============
Interest-earning assets to
interest-bearing liabilities 92.32% 93.58%
============ ============
- -----------------------------------------------------------------------------------------------------------------------------------
(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>
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>
<TABLE>
VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(IN THOUSANDS)
Three Months Ended June 30, 1996
Compared to
Three Months Ended June 30, 1995
Increase (Decrease)
Due to Change in (1)
----------------------------------------------------------------------
Total
Volume Rate Change
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (37,329) $ 40,175 $ 2,846
Mortgage-backed securities (3,242) (494) (3,736)
Securities purchased under agreements
to resell and federal funds sold 2,944 (670) 2,274
Trading securities 275 (70) 205
Investment securities 14 11 25
Other interest-earning assets 490 3 493
-------------------- -------------------- --------------------
Total interest income (36,848) 38,955 2,107
-------------------- -------------------- --------------------
Interest expense:
Deposit accounts 4,666 (4,391) 275
Borrowings (13,255) 7,104 (6,151)
-------------------- -------------------- --------------------
Total interest expense (8,589) 2,713 (5,876)
-------------------- -------------------- --------------------
Increase (decrease) in
net interest income $ (28,259) $ 36,242 $ 7,983
==================== ==================== ====================
- ----------------------------------------------------------------------------------------------------------------------------------
(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>
Interest income in the 1996 quarter increased $2.1 million or (2.2%) from the
level in the 1995 quarter primarily as a result of higher average yields earned
by the Bank on its loan portfolio. Higher average balances of securities
purchased under agreements to resell and federal funds sold also contributed to
the increase in interest income. Lower average balances of loans receivable and
mortgage-backed securities partially offset the effect on interest income of the
higher average yields and higher average balances.
The Bank's net yield on interest-earning assets increased to 5.25% in the 1996
quarter from 4.17% in the 1995 quarter. The increase primarily reflected the
upward adjustment of interest rates on certain of the Bank's adjustable-rate
products to reflect the expiration of introductory rates on certain products and
higher yields on credit card and automobile loans.
Interest income on loans, the largest category of interest-earning assets,
increased by $2.8 million (or 3.6%) from the 1995 quarter primarily because of
higher average yields.
The average yield on the loan portfolio in the 1996 quarter increased by 148
basis points (to 11.27% from 9.79%) from the average yield in the 1995 quarter
which contributed to a $40.2 million increase in interest income earned on
loans, shown in the table above. The higher yields were primarily due to
increases in the average yield on credit card loans from 15.41% to 19.92% and on
automobile loans from 6.78% to 11.63%. The increase in the average yield on
credit card loans was primarily a result of the expiration of promotional
introductory rates and the increase in the average yield on automobile loans was
primarily due to higher yielding nonprime loans originated by one of the Bank's
operating subsidiaries.
Lower average balances on the loan portfolio, which partially offset the effect
of the higher average yields, contributed to a decline of $37.4 million in
interest income earned on loans, shown in the table above. Average balances of
credit card receivables, automobile loans, and home equity credit line loans
decreased $237.4 million (or 20.6%), $117.1 million (or 33.8%) and $43.1 million
(or 33.0%), respectively, from the 1995 quarter as a result of the increased
securitization and sale activity by the Bank over the preceding twelve month
period. Higher average balances of consumer loans other than automobile loans,
principally home improvement loans, partially offset the lower average balances
discussed above. An increase of $96.5 million (or 89.9%) in the average balances
of other consumer loans, due largely to an increase in the origination volume of
home improvement loans, resulted in an increase of $2.8 million (or 82.2%) in
interest income from these assets.
<PAGE>
Interest income on mortgage-backed securities decreased $3.7 million (or 24.6%)
primarily because of lower average balances. The reduced mortgage-backed
securities balances in the 1996 quarter reflected the effects of scheduled
principal paydowns and unscheduled principal prepayments which was partially
offset by the purchase of $135.1 million of mortgage-backed securities in the
1996 quarter.
Other interest income increased $2.8 million (or 140.3%) in the 1996 quarter
primarily as a result of higher average balances on securities purchased under
agreements to resell and federal funds sold which increased $178.5 million (or
340.6%), and, to a lesser extent, higher average balances and higher average
yields on other interest-earning assets.
Interest expense decreased $5.9 million (or 11.5%) for the 1996 quarter
primarily because of a decrease of $392.6 million (or 57.3%) in the average
balances of the Bank's borrowings. The decline in the average balances of
borrowings resulted in a decrease of $6.2 million in interest expense for the
1996 quarter for such liabilities. The decrease in interest paid on borrowings
is primarily due to a $4.5 million and a $1.3 million decrease in interest
expense on securities sold under repurchase agreements and Federal Home Loan
Bank advances, respectively, resulting from lower average balances of such
borrowings. The positive effect of the lower average balances was partially
offset by an increase in the average borrowing rate (to 7.47% from 6.78%).
The decrease in interest expense on borrowings was partially offset by a $0.3
million increase in interest expense on deposits, the largest category of
interest-bearing liabilities. A $4.7 million increase in interest expense on
deposits, shown in the table above and primarily due to higher average balances
of such deposits, was partially offset by a $4.4 million decrease in interest
expense on deposits, shown in the table above, as a result of a decline in the
average rates on deposits (to 3.85% from 3.95%).
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased to
$30.1 million in the 1996 quarter from $13.6 million in the 1995 quarter. The
$16.5 million increase was primarily attributable to increases of $9.7 million
in the provision for losses on credit card loans, $1.0 million in the provision
for losses on consumer loans and the establishment of a $6.0 million unallocated
provision for losses on loans. These increases were partially offset by a $0.2
million decrease in the provision for losses on real estate loans. The higher
provisions on credit card and consumer loans resulted from increased charge-offs
of such loans over the prior quarter and an increase in the reserve percentages
to reflect this recent trend. See "Financial Condition Asset Quality -
Allowances for Losses."
OTHER INCOME. The increase in other (non-interest) income to $96.9 million in
the 1996 quarter from $68.0 million in the 1995 quarter was primarily
attributable to increases in credit card fees, loan and deposit servicing fees,
gain on sales of loans and other income. 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.
Credit card fees, consisting primarily of membership fees, late charges, cash
advance charges and overlimit fees increased to $7.9 million in the 1996 quarter
from $2.5 million in the 1995 quarter. The $5.4 million (or 215.3%) increase was
primarily attributable to the impact of recent changes in the fee structure for
the Bank's credit card program.
<PAGE>
An increase of $13.3 million in excess spread income and $5.1 million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $19.8 million (or 34.1%) in loan
and deposit servicing fees. Such excess spread income and servicing fees have
increased in recent periods as a result of greater securitization activity by
the Bank. The increase in loan and deposit servicing fees also reflected a $1.6
million increase in mortgage loan servicing fee income resulting from the
acquisition of servicing rights and retention of servicing rights related to
loans sold as part of the Bank's mortgage banking operations.
Gain on sales of loans increased $7.4 million primarily as a result of a $2.7
million and a $9.5 million gain on the securitization and sale of $227.7 million
of automobile loans and $153.5 million of home loans in the 1996 quarter,
respectively, compared to a $4.0 million gain on the securitization and sale of
$252.2 million of automobile loans in the 1995 quarter.
Other income increased $6.7 million primarily because of the establishment of a
valuation allowance on an office building, which offset other income, during the
1995 quarter. A $6.2 million valuation allowance, previously established as an
allowance against an REI property, was transferred with such property to
property and equipment.
The $10.9 million increase in loss on real estate held for investment or sale
was primarily attributable to a decrease of $5.5 million in the gain recorded on
sales of the Bank's REO properties, an increase of $5.0 million in the provision
for losses on such assets and a decrease of $0.4 million in the operating income
generated by the REO properties. See "Financial Condition - Asset Quality -
Allowance for Losses."
OPERATING EXPENSES. Operating expenses for the 1996 quarter increased $12.5
million (or 16.3%) from the level in the 1995 quarter, largely as a result of
the Bank's credit card lending program. The main components of the higher
operating expenses were increases in salaries and employee benefits, loan and
marketing expenses. The $4.5 million increase in salaries and employee benefits
resulted primarily from the addition of staff to the Bank's credit card,
consumer lending and branch operations. The $3.5 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 recent periods, and a
$1.1 million valuation allowance against its mortgage servicing rights recorded
during the 1996 quarter. The $2.8 million increase in marketing expenses was
principally attributable to a $2.1 million increase in marketing expenses
associated with the credit card portfolio as the Bank continues to focus on
increased originations of such loans.
<PAGE>
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO
NINE MONTHS ENDED JUNE 30, 1995
REAL ESTATE
The following table sets forth, for the nine-month period ended June 30, 1996
(the "1996 period") and the nine-month period ended June 30, 1995 (the "1995
period") direct operating results for the Real Estate Trust's (i) hotel
properties), and (ii) commercial properties (consisting of office and industrial
properties).
<PAGE>
Nine Months Ended
June 30
--------------------
1996 1995
------- -------
(In thousands)
HOTELS (1)
Room sales $28,499 $27,225
Food sales 7,511 7,607
Beverage sales 1,978 2,067
Other 2,190 2,285
------- -------
Total revenues 40,178 39,184
------- -------
Direct operating expenses
Payroll 11,290 12,195
Cost of sales 3,355 3,425
Utilities 2,050 2,307
Repairs and maintenance 1,898 2,044
Advertising and promotion 2,105 1,860
Property taxes 1,034 997
Insurance 450 451
Other 4,551 4,301
------- -------
Total direct operating expenses 26,733 27,580
------- -------
Income after direct operating expenses $13,445 $11,604
======= =======
COMMERCIAL PROPERTIES
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $12,020 $13,177
Expense recoveries 539 696
Other 269 305
------- -------
Total revenues 12,828 14,178
------- -------
Direct operating expenses
Utilities 1,588 1,740
Repairs and maintenance 1,456 1,433
Real estate taxes 945 1,034
Payroll 441 439
Insurance 179 197
Other 575 623
------- -------
Total direct operating expenses 5,184 5,466
------- -------
Income after direct operating expenses $ 7,644 $ 8,712
======= =======
(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.
(2) Includes the results of an office project until it was reclassified as a
land parcel on December 31, 1995
<PAGE>
The Real Estate Trust recorded a loss before depreciation and amortization of
$11.3 million and an operating loss of $19.0 million in the 1996 period compared
to a loss before depreciation and amortization of $10.9 million and an operating
loss of $18.4 million in the 1995 period. The increase in the operating loss was
largely attributable to $1.7 million earned on the condemnation of a portion of
a land parcel, which was recognized in the 1995 period.
Income after direct operating expenses from hotel properties increased
$1,841,000 (15.9%) in the 1996 period over the level achieved in the 1995
period. In the current period, room sales increased $1,274,000 (4.7%), while
food and beverage sales decreased $185,000 (1.9%). The increase in total revenue
of $994,000 (2.5%), was nearly equalled by a reduction in expenses of $847.000
(3.1%). The increase in revenue was due to improved market conditions, which
permitted management to raise average room rates while maintaining or increasing
occupancy at several of the hotels. The decrease in expenses was largely due to
the sale of a property.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, decreased $1,068,000 (13.0%) in
the 1996 period compared to such income in the 1995 period. The decrease was
caused by lower gross income of $1,350,000 (9.9%) due to a reduction in the
leasing rate. Expenses for the current period were $282,000 (5.2%) below last
year due to lower utility and real estate tax expenses.
Interest expense decreased $526,000 (1.7%) in the 1996 period, primarily because
of the lower level of borrowings in the current period. Average balances of the
Real Estate Trust's outstanding borrowings decreased to $396.7 million for the
1996 period from $404.4 million for the prior period. This decrease in average
borrowings occurred as a result of mortgage loan amortization.
Amortization of debt expense increased $133,000(38.4%) in the 1996 period. This
increase reflected costs incurred for new lines of credit which were acquired
after the 1995 period.
Depreciation increased $192,000(2.7%)in the 1996 period as a result of new
tenant improvements and capital replacements.
Advisory, management and leasing fees paid to related parties increased $45,000
(0.8%) in 1996 period from their expense level in the 1995 period. The monthly
advisory fee was $301,000 for the period October 1995 through March 1996 and
$306,000 for the period April 1996 through June 1996 as compared to $292,000
throughout the 1995 period, which represented an aggregate increase of $98,000.
The management fees were lower in the current period as a result of lower gross
income on which fees are based.
General and administrative expense decreased $1,029,000 (51.9%) in the 1996
period, principally as a result of higher legal costs incurred last year in
litigation with a tenant.
<PAGE>
BANKING
OVERVIEW. The Bank recorded operating income of $68.9 million for the nine
months ended June 30, 1996 (the "1996 period"), compared to operating income of
$42.0 million for the nine months ended June 30, 1995 (the "1995 period"). The
increase in income for the 1996 period was primarily attributable to a $86.1
million increase in other (non-interest) income resulting primarily from an
increase in loan and deposit servicing fees and a $14.1 million increase in net
interest income before the provision for loan losses. These increases were
partially offset by a $38.3 million increase in operating expenses and a $35.0
million increase in the provision for loan losses.
NET INTEREST INCOME. Net interest income, before the provision for loan losses,
increased $14.1 million (or 10.9%) in the 1996 period. The Bank would have
recorded interest income of $6.1 million for the 1996 period if the Bank's
non-accrual assets and restructured loans had been current in accordance with
their original terms. Interest income of $0.7 million was actually recorded on
non-accrual assets and restructured loans for the 1996 period. The Bank's net
interest income in future periods will continue to be adversely affected by the
Bank's non-performing assets. See "Financial Condition - Asset Quality -
Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
<PAGE>
<TABLE>
NET INTEREST MARGIN ANALYSIS
(DOLLARS IN THOUSANDS)
Nine Months Ended June 30,
-----------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------- ----------------------------------------------
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) $ 2,876,044 $ 231,515 10.73% $ 2,992,374 $ 216,734 9.66%
Mortgage-backed securities 803,789 36,966 6.13 1,002,104 46,257 6.15
Securities purchased under
agreements to resell
and federal funds sold 221,557 9,144 5.50 60,974 2,590 5.66
Trading securities 12,367 640 6.90 3,597 220 8.15
Investment securities 4,782 171 4.77 4,401 146 4.42
Other interest-earning assets 166,874 5,637 4.50 123,730 4,293 4.63
---------------- -------------- ---------------- --------------
Total 4,085,413 284,073 9.27 4,187,180 270,240 8.61
-------------- ------------ -------------- -----------
Noninterest-earning assets:
Cash 160,496 128,581
Real estate held for investment
or sale 169,164 311,142
Property and equipment, net 191,559 150,130
Cost in excess of net assets
acquired, net 3,509 5,672
Other assets 240,349 146,436
---------------- ----------------
Total assets $ 4,850,490 $ 4,929,141
================ ================
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 914,928 17,781 2.59 $ 874,404 17,756 2.71
Savings deposits 939,103 23,758 3.37 1,081,504 27,063 3.34
Time deposits 1,279,248 53,172 5.54 942,173 34,920 4.94
Money market deposits 985,186 28,622 3.87 1,095,108 32,518 3.96
---------------- -------------- ---------------- --------------
Total deposits 4,118,465 123,333 3.99 3,993,189 112,257 3.75
306,371 17,137 7.46 548,146 28,480 6.93
---------------- -------------- ---------------- --------------
Total 4,424,836 140,470 4.23 4,541,335 140,737 4.13
-------------- ------------ -------------- -----------
Noninterest-bearing items:
Noninterest-bearing deposits 71,332 70,973
Other liabilities 55,699 60,620
Stockholders' equity 298,623 256,213
---------------- ----------------
Total liabilities and
stockholders' equity $ 4,850,490 $ 4,929,141
================ ================
Net interest income $ 143,603 $ 129,503
============== ==============
Net interest spread (2) 5.04% 4.48%
============ ===========
Net yield on interest-earning
assets (3) 4.69% 4.12%
============ ===========
Interest-earning assets to
interest-bearing
liabilities 92.33% 92.20%
============ ===========
- ----------------------------------------------------------------------------------------------------------------------------------
(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>
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>
<TABLE>
VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(IN THOUSANDS)
Nine Months Ended June 30, 1996
Compared to
Nine Months Ended June 30, 1995
Increase (Decrease)
Due to Change in (1)
----------------------------------------------------------------------
Total
Volume Rate Change
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (12,796) $ 27,577 $ 14,781
Mortgage-backed securities (9,141) (150) (9,291)
Securities purchased under agreements
to resell and federal funds sold 6,677 (123) 6,554
Trading securities 480 (60) 420
Investment securities 13 12 25
Other interest-earning assets 1,542 (198) 1,344
-------------------- -------------------- -------------------
Total interest income (13,225) 27,058 13,833
-------------------- -------------------- -------------------
Interest expense:
Deposit accounts 3,643 7,433 11,076
Borrowings (14,619) 3,276 (11,343)
-------------------- -------------------- -------------------
Total interest expense (10,976) 10,709 (267)
-------------------- -------------------- -------------------
Increase (decrease) in
net interest income $ (2,249) $ 16,349 $ 14,100
==================== ==================== ===================
- ---------------------------------------------------------------------------------------------------------------------------------
(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>
Interest income in the 1996 period increased $13.8 million (or 5.1%) from the
level in the 1995 period primarily as a result of higher average yields earned
by the Bank on its loan portfolio. Higher average balances of securities
purchased under agreements to resell and federal funds sold 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 loans receivable and mortgage-backed securities.
The Bank's net yield on interest-earning assets increased to 4.69% in the 1996
period from 4.12% in the 1995 period. The increase primarily reflected the
upward adjustment of interest rates on certain of the Bank's adjustable-rate
products to reflect the expiration of introductory rates on certain products
(principally credit card loans) and higher yields on other consumer loans. The
positive effect of the increase on the Bank's net yield was offset in part by
increased interest rates on the Bank's interest-bearing liabilities.
Interest income on loans, the largest category of interest-earning assets,
increased by $14.8 million (or 6.8%) from the 1995 period primarily because of
higher average yields on the loan portfolio, which were partially offset by
lower average balances. The average yield on the loan portfolio in the 1996
period increased by 107 basis points (to 10.73% from 9.66%) from the average
yield in the 1995 period. The higher yields were primarily due to increases in
the average yield on credit card loans from 14.81% to 18.23% and on automobile
loans from 7.35% to 11.02%. 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 $23.3 million (or 21.2%) increase in interest income
from credit card receivables. The increase in the yield on automobile loans was
primarily due to higher yields earned on loans originated by one of the Bank's
operating subsidiaries. Higher average balances of consumer loans other than
automobile loans, which increased $102.8 million (or 115.6%), also contributed
to the increase in interest income on loans. The increased average balances of
other consumer loans resulted primarily from the higher origination volume of
home improvement loans during the 1996 period, and was largely responsible for a
$9.4 million (or 113.3%) increase in interest income on other consumer loans.
The effect on interest income of higher average yields and higher average
balances of certain consumer loans was offset in part by a $139.3 million
decrease in the average balances of automobile loan receivables due to the
securitization and sale of such loans in the amount of $247.6 million and $227.7
million in the December 1995 quarter and the June 1996 quarter, respectively.
Interest income on real estate loans decreased $2.3 million primarily as a
result of a $55.3 million decrease in the average balances of such loans, which
was partially offset by an increase in the average yield to 7.31% from 7.25%.
Interest income on mortgage-backed securities decreased $9.3 million (or 20.1%)
primarily because of lower average balances. The reduced mortgage-backed
securities balances in the 1996 period reflected the effects of scheduled
principal paydowns and unscheduled principal prepayments. The negative effect of
the lower average balances was compounded by a decrease in the average interest
rates on these securities to 6.13% from 6.15%.
<PAGE>
Other interest income increased $7.9 million (or 114.8%) in the 1996 period
primarily as a result of higher average balances on securities purchased under
agreements to resell and federal funds sold which increased by $160.6 million
(or 263.4%) and, to a lesser extent, higher average balances on other
interest-earning assets. Higher average yields on such interest-earning assets
also contributed to the increased interest income for the current period.
Interest expense decreased $0.3 million for the 1996 period primarily because of
a decrease of $241.8 million (or 44.1%) in the average balances of the Bank's
borrowings, which resulted in an $11.3 million decrease in interest expense for
the 1996 period for such liabilities. The decrease in interest expense on
borrowings is primarily a result of an $8.2 million, a $1.7 million and a $1.3
million decrease in interest expense on securities sold under repurchase
agreements, Federal Home Loan Bank ("FHLB") advances and bonds payable,
respectively. The decrease in interest expense on securities sold under
repurchase agreements was primarily a result of a $186.3 million decrease in the
average balances of such liabilities as the Bank's deposit base has increased in
recent periods. A $33.5 million decline in the average balances of FHLB advances
contributed to the $1.7 million decrease in the interest expense on such
liabilities. The decrease in interest expense on bonds payable was due to the
assumption of bonds payable in April 1995 by the purchaser of two residential
apartment buildings that were securing the bonds. The positive effect of such
lower average balances was offset in part by an increase in the average
borrowing rate (to 7.46% from 6.93%).
The decrease in interest expense on borrowings was partially offset by an $11.1
million increase 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 3.99% from 3.75%), 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 $125.3 million.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased to
$70.8 million in the 1996 period from $35.8 million in the 1995 period. The
$35.0 million increase was primarily attributable to increases of $26.1 million
in the provision for losses on credit card loans, $0.5 million in the provision
for losses real estate loans, $2.4 million in the provision for losses on other
consumer loans and the establishment of a $6.0 million unallocated provision for
losses on loans. The higher provisions on credit card and other consumer loans
resulted from increased origination volume and increased charge-offs of such
loans over the prior period and increased reserve percentages to reflect this
recent trend. See "Financial Condition - Asset Quality Allowances for Losses."
OTHER INCOME. The increase in other (non-interest) income to $252.5 million in
the 1996 period from $166.4 million in the 1995 period was primarily
attributable to increases in credit card fees, loan and deposit servicing fees,
gain on sales of loans and other income. 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.
Credit card fees, consisting primarily of membership fees, late charges, cash
advance charges and overlimit fees, increased to $18.7 million in the 1996
period from $9.2 million in the 1995 period. The $9.5 million (or 103.1%)
increase was primarily attributable to the initial impact of recent changes in
the fee structure for the Bank's credit card program.
<PAGE>
An increase of $49.9 million in excess spread income and $17.6 million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $75.9 million (or 52.3%) in loan
and deposit servicing fees. Such excess spread income 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 $3.6
million increase in mortgage loan servicing fee income as the Bank increased the
size of its loan servicing portfolio.
Gain on sales of loans increased by $12.4 million primarily from gains of $7.3
million and $9.5 million on the securitization and sale of $475.3 million of
automobile loan receivables and $153.5 million of home loan receivables,
respectively, during the 1996 period.
Other income increased $8.6 million primarily because of the establishment of a
valuation allowance on an office building which offset other income during the
1995 period. A $6.2 million valuation allowance, previously established as an
allowance against an REI property, was transferred with such property to
property and equipment.
The $21.9 million increase in loss on real estate held for investment or sale
was primarily attributable to a decrease of $4.5 million in the equity earnings
in partnership income, a decrease of $10.9 million in the gain recorded on sales
of the Bank's REO properties, a decrease of $2.4 million in the operating income
generated by the REO properties, and an increase of $4.1 million in the
provision for losses on such assets. See "Financial Condition - Asset Quality
Allowance for Losses."
OPERATING EXPENSES. Operating expenses for the 1996 period increased $38.3
million (or 17.6%) from the level in the 1995 period, 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 $14.6
million increase in salaries and employee benefits resulted primarily from the
addition of staff to the Bank's credit card, consumer lending and branch
operations. The $9.4 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 recent periods, and a $1.8 million valuation
allowance against mortgage servicing rights. The $5.6 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 1996 period. The $4.8 million increase in other operating expenses
resulted primarily from an increases in credit card fraud losses,
telecommunications expenses and other expenses recorded during the current
period. During the 1996 period, management changed its policy regarding the
recognition of fraud losses, which had the effect of increasing such losses by
$3.6 million.
