<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated May 14, 1996
to Prospectus Dated January 26, 1996
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
MARCH 31, 1996
----------------------------
<PAGE>
TABLE OF CONTENTS
FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at March 31, 1996 and
September 30, 1995
(b) Consolidated Statements of Operations for the
three-month and six-month periods ended
March 31, 1996 and 1995
(c) Consolidated Statements of Cash Flows for the
six-month periods ended March 31, 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 March 31, 1996 compared to
three months ended March 31, 1995
Six months ended March 31, 1996 compared to six
Months Ended March 31, 1995
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
March 31 September 30
(In thousands) 1996 1995
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<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotels $ 119,185 $ 122,649
Commercial 108,293 111,646
Other 4,684 4,632
--------------- ---------------
232,162 238,927
Accumulated depreciation (75,636) (75,140)
--------------- ---------------
156,526 163,787
Land parcels 41,496 38,458
Cash and cash equivalents 13,905 17,355
Other assets 88,050 93,812
--------------- ---------------
Total real estate assets 299,977 313,412
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Banking
Cash and due from banks 242,423 198,096
Interest-bearing deposits 87,170 51,186
Securities purchased under agreements to resell 300,000 110,000
Loans held for sale 113,364 68,679
Loans held for securitization and sale 510,000 500,000
Investment securities (market value $4,404 and $4,371, respectively) 4,403 4,370
Mortgage-backed securities (market value $769,979 and $879,720, respectively) 771,235 880,208
Loans receivable (net of allowance for losses of $60,879 and $60,496, respectively) 2,254,625 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 $122,299
and $135,236, respectively) 150,086 222,860
Property and equipment, net 196,229 180,438
Cost in excess of net assets acquired, net 3,210 4,173
Excess servicing assets, net 24,463 25,640
Mortgage servicing rights, net 35,431 28,573
Other assets 294,558 278,151
--------------- ---------------
Total banking assets 5,019,137 4,911,536
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TOTAL ASSETS $ 5,319,114 $ 5,224,948
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LIABILITIES
Real Estate
Mortgage notes payable $ 178,005 $ 184,502
Notes payable - secured 180,500 175,500
Notes payable - unsecured 40,691 41,057
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 38,768 41,872
--------------- ---------------
Total real estate liabilities 550,847 555,814
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Banking
Deposit accounts 4,291,706 4,159,252
Securities sold under repurchase agreements and other short-term borrowings 15,037 10,435
Notes payable 7,398 7,514
Federal Home Loan Bank advances 109,666 155,052
Custodial accounts 12,163 7,413
Amounts due to banks 34,068 32,240
Other liabilities 80,177 87,545
Capital notes -- subordinated 160,000 160,000
--------------- ---------------
Total banking liabilities 4,710,215 4,619,451
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Commitments and contingencies
Minority interest held by affiliates 46,923 43,556
Minority interest -- other 74,307 74,307
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TOTAL LIABILITIES 5,382,292 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 (119,424) (123,943)
Net unrealized holding loss (2,007) (2,490)
--------------- ---------------
(21,330) (26,332)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
--------------- ---------------
TOTAL SHAREHOLDERS' DEFICIT (63,178) (68,180)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 5,319,114 $ 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 Six Months Ended
March 31 March 31
-------------------------------------- --------------------------------------
(In thousands, except per share amounts) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 11,933 $ 11,511 $ 24,638 $ 23,200
Commercial properties 4,150 4,820 8,664 9,459
Other 1,123 1,210 2,063 2,206
------------------ ------------------ ------------------ ------------------
Total income 17,206 17,541 35,365 34,865
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Expenses
Direct operating expenses:
Hotels 8,739 8,973 17,442 17,408
Commercial properties 1,747 1,869 3,469 3,691
Land parcels and other 411 338 779 688
Interest expense 9,954 10,175 20,002 20,315
Amortization of debt expense 183 131 325 237
Depreciation 2,432 2,334 4,845 4,663
Advisory, management and leasing fees - related
parties 1,778 1,755 3,567 3,514
General and administrative 297 1,128 717 1,556
------------------ ------------------ ------------------ ------------------
Total expenses 25,541 26,703 51,146 52,072
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Equity in earnings of unconsolidated entities 905 935 1,376 1,763
Gain (loss) on sale of property -- 1,653 (57) 1,653
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REAL ESTATE OPERATING LOSS $ (7,430) $ (6,574) $ (14,462) $ (13,791)
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BANKING
Interest income
Loans $ 72,352 $ 73,273 $ 148,836 $ 136,901
Mortgage-backed securities 12,273 15,434 25,485 31,040
Trading securities 204 60 359 144
Investment securities 48 51 97 97
Other 6,353 2,492 10,042 4,911
------------------ ------------------ ------------------ ------------------
Total interest income 91,230 91,310 184,819 173,093
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Interest expense
Deposit accounts 41,425 36,662 83,404 72,603
Short-term borrowings 1,472 5,725 3,875 8,049
Long-term borrowings 3,903 4,432 7,790 8,808
------------------ ------------------ ------------------ ------------------
Total interest expense 46,800 46,819 95,069 89,460
------------------ ------------------ ------------------ ------------------
Net interest income 44,430 44,491 89,750 83,633
Provision for loan losses (28,850) (13,618) (40,763) (22,225)
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Net interest income after provision for loan losses 15,580 30,873 48,987 61,408
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Other income
Credit card fees 6,433 2,559 10,718 6,671
Loan servicing fees 75,929 42,277 129,969 75,430
Deposit servicing fees 6,415 5,750 13,129 11,577
Gain (loss) on sales of trading securities, net 407 (218) 660 (329)
Earnings (loss) on real estate held for investment
or sale, net (5,056) 957 (13,501) (2,572)
Gain on sales of loans, net 285 28 5,242 238
Other 4,911 3,951 9,319 7,396
------------------ ------------------ ------------------ ------------------
Total other income 89,324 55,304 155,536 98,411
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Continued on following page.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==================================================================================================================================
For the Three Months Ended For the Six Months Ended
March 31 March 31
-------------------------------------- --------------------------------------
(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 $ 31,354 $ 26,817 $ 60,684 $ 50,583
Loan 7,146 3,865 12,746 6,842
Property and equipment 8,375 7,091 16,100 13,821
Marketing 10,670 11,061 21,095 23,179
Data processing 12,732 10,801 24,577 20,160
Deposit insurance premiums 2,677 2,907 5,334 5,838
Amortization of cost in excess of net assets
acquired 481 627 963 1,252
Other 10,128 10,637 25,699 19,739
------------------ ------------------ ------------------ ------------------
Total operating expenses 83,563 73,806 167,198 141,414
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BANKING OPERATING INCOME $ 21,341 $ 12,371 $ 37,325 $ 18,405
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TOTAL COMPANY
Operating income before income taxes and minority
interest $ 13,911 $ 5,797 $ 22,863 $ 4,614
Income tax provision 6,069 874 9,822 433
------------------ ------------------ ------------------ ------------------
Income before minority interest 7,842 4,923 13,041 4,181
Minority interest held by affiliates (2,180) (1,351) (3,647) (1,651)
Minority interest -- other (2,437) (2,437) (4,875) (4,875)
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TOTAL COMPANY NET INCOME (LOSS) $ 3,225 $ 1,135 $ 4,519 $ (2,345)
DEFICIT
Beginning of period (122,649) (138,273) (123,943) (134,793)
- ----------------------------------------------------------------------------------------------------------------------------------
End of period $ (119,424) $ (137,138) $ (119,424) $ (137,138)
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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 1,870 $ (220) $ 1,809 $ (5,055)
NET INCOME (LOSS) PER COMMON SHARE
Income before minority interest 1.34 0.73 2.14 0.30
Minority interest held by affiliates (0.45) (0.28) (0.76) (0.34)
Minority interest -- other (0.50) (0.50) (1.01) (1.01)
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NET INCOME (LOSS) PER COMMON SHARE $ 0.39 $ (0.05) $ 0.37 $ (1.05)
- ----------------------------------------------------------------------------------------------------------------------------------
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 Six Months Ended
March 31
--------------------------------------
(In thousands) 1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (10,067) $ (8,947)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 4,845 4,663
(Gain) loss on sale of property 57 (1,653)
Increase in accounts receivable and accrued income (3,783) (6,992)
Increase in deferred tax asset (4,640) (4,860)
Increase (decrease) in accounts payable and accrued expenses (2,114) 137
Decrease in tax sharing receivable 15,000 10,000
Amortization of debt expense 325 230
Equity in earnings of unconsolidated entities (1,376) (1,869)
Other (1,009) 8,127
------------------ ------------------
(2,762) (1,164)
------------------ ------------------
Banking
Net income 14,586 6,602
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 836 (928)
Depreciation and amortization 11,813 10,616
Amortization of cost in excess of net assets acquired and mortgage servicing rights 4,703 1,604
Provision for loan losses 40,763 22,225
Net fundings of loans held for sale and/or securitization (334,777) (141,979)
Proceeds from sales of trading securities 139,307 49,154
Proceeds from sales of loans held for sale and/or securitization 1,102,793 1,083,992
Earnings (loss) on real estate 11 (1,895)
Provision for losses on real estate held for investment or sale 12,955 13,809
(Gain) loss on sales of trading securities, net (660) 329
Gain on sales of loans, net (5,242) (238)
Minority interest held by affiliates 3,647 1,651
Minority interest - other 4,875 4,875
Decrease in excess servicing assets 1,177 6,294
Increase in other assets (1,873) (9,297)
Decrease in other liabilities and accrued expenses (7,539) (18,270)
Decrease in tax sharing payable (15,000) (10,000)
Other, net (4,813) 4,607
------------------ ------------------
967,562 1,023,151
------------------ ------------------
Net cash provided by operating activities 964,800 1,021,987
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (2,522) (2,786)
Property acquisitions -- (10,159)
Property sales 1,812 --
Equity investment in unconsolidated entities 671 (2,960)
Other investing activities -- 51
------------------ ------------------
(39) (15,854)
------------------ ------------------
Banking
Proceeds from maturities of investment securities -- 100
Net proceeds from sales of real estate 38,602 34,005
Net proceeds from sales of mortgage servicing rights 966 814
Net fundings of loans receivable (834,692) (1,452,497)
Principal collected on mortgage-backed securities 107,890 81,633
Purchases of loans receivable (45,169) (61,708)
Purchases of property and equipment (27,849) (17,932)
Purchases of mortgage servicing rights (10,243) --
Disbursements for real estate held for investment or sale (12,909) (23,129)
Other investing activities, net (5,276) 313
------------------ ------------------
(788,680) (1,438,401)
------------------ ------------------
Net cash used in investing activities (788,719) (1,454,255)
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Continued on following page.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Six Months Ended
March 31
--------------------------------------
(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 (5,121) (8,173)
Proceeds from secured note financing 5,000 --
Proceeds from sales of unsecured notes 1,384 2,254
Repayments of unsecured notes (1,750) (2,008)
Other financing activities, net (162) (267)
------------------ ------------------
(649) 3,206
------------------ ------------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 7,246,517 6,881,059
Customer withdrawals of deposits and payments for maturing certificates of deposit (7,114,063) (6,850,481)
Net increase in securities sold under repurchase agreements 9 116,181
Advances from the Federal Home Loan Bank 4,665 315,690
Repayments of advances from the Federal Home Loan Bank (50,051) (250,000)
Proceeds from other borrowings 772,600 331,625
Repayments of other borrowings (768,123) (332,667)
Cash dividends paid on preferred stock (4,875) (4,875)
Other financing activities, net 4,750 11,099
------------------ ------------------
91,429 217,631
------------------ ------------------
Net cash provided by financing activities 90,780 220,837
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 266,861 (211,431)
Cash and cash equivalents at beginning of period 376,637 402,542
------------------ ------------------
Cash and cash equivalents at end of period $ 643,498 $ 191,111
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) $ 118,190 $ 112,524
Income taxes 7,164 (163)
Supplemental schedule of non-cash investing and financing activities:
Rollovers of notes payable - unsecured 2,153 2,045
Loans held for sale exchanged for trading securities 138,891 49,735
Loans receivable transferred to loans held for sale and/or securitization 956,583 1,738,000
Loans made in connection with the sale of real estate 41,391 1,389
Loans receivable transferred to real estate acquired in settlement of loans 3,154 3,832
Loans receivable exchanged for mortgage-backed securities held-to-maturity -- 23,155
- -----------------------------------------------------------------------------------------------------------------------------------
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.
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.
4. BANKING:
LOANS HELD FOR SALE:
At March 31, 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:
March 31, September 30,
1996 1995
----------- -----------
(In thousands)
Credit card receivables $175,000 $300,000
Automobile loan receivables 135,000 200,000
Home improvement and other
consumer loan receivables 140,000 -
Home equity credit line receivables 60,000 -
-------- --------
Total $510,000 $500,000
======== ========
<PAGE>
LOANS RECEIVABLE:
March 31, September 30,
1996 1995
----------- -----------
(In thousands)
Single-family residential $ 1,294,147 $ 1,322,772
Home equity 13,529 29,024
Commercial and multifamily 83,026 86,007
Real estate construction 42,097 46,848
Ground 46,768 6,892
Credit card 707,922 712,548
Automobile 52,312 39,217
Overdraft lines of credit 18,099 15,049
Home improvement and
other consumer 25,382 112,705
Other 61,389 31,975
----------- -----------
2,344,671 2,403,037
----------- -----------
Less:
Undisbursed portion of loans 40,076 28,147
Unearned discounts 991 1,101
Net deferred loan origination
costs (11,900) (13,929)
Allowance for loan losses 60,879 60,496
----------- -----------
90,046 75,815
----------- -----------
Total $ 2,254,625 $ 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:
March 31, September 30,
1996 1995
-------- --------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
-------- --------
Real estate held for sale 268,566 354,277
-------- --------
Less:
Allowance for losses on real estate
held for investment 188 193
Allowance for losses on real estate
held for sale 122,111 135,043
-------- --------
122,299 135,236
-------- --------
Total real estate held for
investment or sale $150,086 $222,860
======== ========
<PAGE>
REGULATORY MATTERS:
Because of the continued improvement in the financial condition of the Bank, on
March 29, 1996, the OTS released the Bank from its September 30, 1991 written
agreement with the OTS, as amended in October 1993, and from regulatory
restrictions on asset growth. In connection with the termination of the written
agreement and at the request of the OTS, the Board of Directors of the Bank has
adopted a resolution which addresses certain issues previously addressed by the
written agreement. Among other things, the resolution 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 Trust and its wholly-owned subsidiaries
is the ownership and development of income-producing properties. The Trust owns
80% of the outstanding common stock of Chevy Chase Bank, F.S.B. ("Chevy Chase"
or the "Bank"). At March 31, 1996, the Bank's assets accounted for approximately
94% of the Trust's consolidated assets. The Trust recorded net income of $4.5
million for the six-month period ended March 31, 1996 compared to a net loss of
$2.3 million for the six-month period ended March 31, 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 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
March 31, 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 a land parcel in
anticipation of razing the buildings to prepare the site for future development.
The Real Estate Trust's office and industrial property portfolio was 88% leased
at March 31, 1996, compared to leasing rates of 84% and 95% at September 30,
1995 and at March 31, 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 is being made in
releasing this space. At March 31, 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 90,000(6.9%) and 236,000(18.0%), are subject to leases
whose terms expire in the balance of fiscal 1996 and in fiscal 1997,
respectively. Due to a decline in market leasing rates for office space over the
past several years, the terms of certain of the new leases may be less favorable
to the Real Estate Trust than the terms of the expiring leases.
<PAGE>
For the eight hotel properties owned by the Real Estate Trust throughout the
six-month periods of fiscal 1996 and fiscal 1995, the average occupancy rates
were 62% and 59%, respectively, and the average room rates were $63.76 and
$60.66, respectively. Six of these hotels registered improved occupancies and
seven registered higher average room rates in the current period. Overall
results for the hotel portfolio for the six-month period ended March 31, 1996,
(during which one property was sold) and the six-month period ended March 31,
1995 (during which one property was acquired) reflected average occupancy rates
of 63% and 59%, respectively, and average room rates of $64.85 and $58.28,
respectively.
BANKING
GENERAL. The Bank recorded operating income of $21.3 million during the March
1996 quarter, compared to operating income of $12.4 million in the prior
corresponding period. The $8.9 million increase in operating income for the
current quarter was primarily a result of the Bank's continued expansion of its
credit card program, which contributed to the $34.3 million increase in loan and
deposit servicing fees over the March 1995 quarter. The Bank also recognized a
$3.9 million increase in credit card fees. Partially offsetting the positive
effect of these items on income was a $9.8 million increase in operating
expenses and a $15.2 million increase in the provision for loan losses. See
"Results of Operations."
At March 31, 1996, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.96%, 5.96%, 6.98% and 12.11%,
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 March 31, 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 March 1996 quarter, the Bank securitized and sold $149.0 million of
credit card receivables pursuant to its portfolio funding strategy. See
"Liquidity." During the March 1996 quarter, the Bank also 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.
See "Capital."
Because of the continued improvement in the financial condition of the Bank,
on March 29, 1996, the Office of Thrift Supervision (the "OTS") released the
Bank from its written agreement with the OTS, and the Board of Directors of
the Bank adopted a resolution addressing certain issues previously addressed
by the written agreement. See "Capital - Regulatory Actions and Requirements."
Real estate owned, net of valuation allowances, declined 10.1% during the March
1996 quarter to $146.5 million at March 31, 1996, from $163.0 million at
December 31, 1995. This reduction was primarily a result of sales of residential
properties. See "REO."
In the March 1996 quarter, the Bank declared, out of the retained earnings of
the Bank, a cash dividend on its Common Stock in the amount of $200 per share,
which was paid in April 1996. Subsequent to March 31, 1996, the Bank declared a
cash dividend on its Common Stock in the amount of $300 per share, to be paid
upon the expiration of the applicable OTS notice period.
<PAGE>
ASSET QUALITY.
Non-Performing Assets. The Bank's level of non-performing assets
continued to decline during the second 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)
March 31, December 31, September 30,
1996 1995 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 9,688 $ 9,652 $ 8,593
Commercial and multifamily 305 194 194
----------------- ----------------- -----------------
Total non-accrual real estate loans 9,993 9,846 8,787
Credit card 21,030 21,168 18,569
Consumer and other 1,155 757 595
----------------- ----------------- -----------------
Total non-accrual loans (1) 32,178 31,771 27,951
----------------- ----------------- -----------------
Non-accrual real estate held for investment (1) 268,566 286,780 354,277
Real estate acquired in settlement of loans (122,111) (123,792) (135,043)
----------------- -------------- -----------------
Reserve for losses on real estate acquired in
settlement of loans 146,455 162,988 219,234
----------------- ----------------- -----------------
Real estate acquired in settlement of loans, net $ 178,633 $ 194,759 $ 247,185
================= ================= =================
Total non-performing assets
$ 60,879 $ 55,879 $ 60,496
188 189 193
Reserve for losses on loans
Reserve for losses on real estate held for investment 122,111 123,792 135,043
----------------- ----------------- -----------------
Reserve for losses on real estate acquired in settlement
of loans $ 183,178 $ 179,860 $ 195,732
================= ================= =================
Total reserves for losses
Ratios:
Non-performing assets, net to total assets (2) 2.34% 2.80% 3.80%
Reserve for losses on real estate loans to non-accrual
real estate loans (1) 112.34% 112.81% 123.82%
Reserve for losses on credit card loans to non-accrual
credit card loans (1) 219.12% 201.25% 249.47%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (1) 309.26% 286.92% 553.11%
Reserve for losses on loans to non-accrual loans (1) 189.19% 175.88% 216.44%
Reserve for losses on loans to total loans receivable (3) 2.07% 2.09% 2.05%
(1) Before deduction of reserves for losses.
(2) Non-performing assets is presented after all reserves for losses on loans
and real estate held for investment or sale. (3) Includes loans receivable
and loans held for sale and/or securitization, before deduction of reserve
for losses.
</TABLE>
<PAGE>
Non-performing assets include non-accrual loans (loans contractually past due 90
days or more or with respect to which other factors indicate that full payment
of principal and interest is unlikely), non-accrual real estate held for
investment ("non-accrual REI"), and real estate acquired in settlement of loans,
either through foreclosure or deed-in-lieu of foreclosure.
Non-performing assets totaled $178.6 million, after valuation allowances on real
estate held for sale or real estate owned ("REO") of $122.1 million, at March
31, 1996, compared to $194.8 million, after valuation allowances on REO of
$123.8 million, at December 31, 1995. In addition to the valuation allowances on
REO, the Bank maintained $1.6 million of valuation allowances on its non-accrual
loans at March 31, 1996 compared to $2.6 million at December 31, 1995. The
decrease in non-performing assets for the current quarter was primarily
attributable to a net decrease in REO of $16.5 million. See "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $32.2 million at March
31, 1996, as compared to $31.8 million at December 31, 1995. At March 31, 1996,
non-accrual loans consisted primarily of $10.0 million of non-accrual real
estate loans and $21.0 million of non-accrual credit card loans.
REO. At March 31, 1996, the Bank's REO totaled $146.5 million, after valuation
allowances on such assets of $122.1 million. The principal component of REO
consists of the five planned unit developments (the "Communities"), which had an
aggregate book value of $112.3 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 March 31, 1996, REO decreased $16.5 million. This
decrease was primarily attributable to the sale of one residential ground
property with a book value of $12.4 million and sales in the Communities and
other residential properties.
During the three months ended March 31, 1996, the Bank received revenues of
approximately $18.0 million upon the disposition of REO, which consisted of one
residential ground property ($10.3 million), one commercial ground property
($0.3 million), 64 residential lots or units in the Communities ($4.0 million),
approximately 5.7 acres of land in two of the Communities and other smaller
residential properties ($1.3 million) and various single-family residential
properties ($2.1 million).
At March 31, 1996, the Bank had executed contracts to sell three additional REO
properties at their aggregate book value of $13.0 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 March 31, 1996, potential problem assets
totaled $7.1 million, before valuation allowances of $1.4 million, as compared
to $7.6 million, before valuation allowances of $1.4 million, at December 31,
1995. The $0.5 million decrease in potential problem assets was primarily
attributable to net principal reductions.
Delinquent Loans. At March 31, 1996, delinquent loans totaled $41.6 million (or
1.4% of loans) compared to $42.3 million (or 1.6% of loans) at December 31,
1995. The following table sets forth information regarding the Bank's delinquent
loans at March 31, 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 $4,718 $21,537 $26,255 0.9%
60-89 days 1,703 13,682 15,385 0.5%
------ ------- ------- ---
Total $6,421 $35,219 $41,640 1.4%
====== ======= ======= ===
- ----------------
(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 decreased to $6.4 million at March 31,
1996 from $6.7 million at December 31, 1995.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
decreased to $35.2 million at March 31, 1996 from $35.7 million at December 31,
1995, and, primarily as a result of an increase in the balance of the Bank's
portfolio of non-mortgage loans, decreased as a percentage of total non-mortgage
loans from 3.2% to 2.7%.
Troubled Debt Restructurings. At March 31, 1996, loans accounted for as troubled
debt restructurings totalled $15.6 million and included two commercial permanent
loans with principal balances totaling $13.2 million, one residential ground
loan with a principal balance of $1.7 million and one commercial collateralized
loan with a principal balance of $0.7 million. The $0.5 million decrease in
loans accounted for as troubled debt restructurings from $16.1 million at
December 31, 1995 resulted from net principal reductions. At March 31, 1996, the
Bank had commitments to lend $0.7 million of additional funds on loans that have
been restructured.
<PAGE>
Real Estate Held for Investment. At March 31, 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 components of the allowance for losses on loans and the allowance for
losses on real estate held for investment or sale. These tables reflect
charge-offs taken against assets during the periods indicated and may include
charge-offs taken against assets which the Bank disposed of during such periods.
<PAGE>
<TABLE>
ANALYSIS OF ALLOWANCE FOR AND CHARGE-OFFS OF LOANS
(Dollars in thousands)
Three Months
Six Months Ended Ended
March 31, March 31,
--------------------------------------
1996 1995 1996
--------------- ---------------- -----------------
<S> <C> <C> <C>
Balance at beginning of period $ 60,496 $ 50,205 $ 55,879
--------------- ---------------- -----------------
Provision for loan losses 40,763 22,225 28,850
--------------- ---------------- -----------------
Charge-offs:
Residential 426 599 190
Credit card 42,641 22,069 25,131
Other 3,045 1,503 1,433
--------------- ---------------- -----------------
Total charge-offs 46,112 24,171 26,754
--------------- ---------------- -----------------
Recoveries:
Residential 6 2 4
Credit card 5,486 5,554 2,795
Other 240 322 105
--------------- ---------------- -----------------
Total recoveries 5,732 5,878 2,904
--------------- ---------------- -----------------
Charge-offs, net of recoveries 40,380 18,293 23,850
--------------- ---------------- -----------------
Balance at end of period $ 60,879 $ 54,137 $ 60,879
=============== ================ =================
Provision for loan losses to average loans (1) (2) 2.86% 1.56% 4.17%
Net loan charge-offs to average loans (1) (2) 2.84% 1.28% 3.44%
Ending allowance for losses on loans to total
loans (2) (3) 2.07% 1.79% 2.07%
(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)
March 31, December 31, September 30,
1996 1995 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 $ 992 48.1% $ 934 51.1% $ 929 47.3%
Home equity 307 2.5 298 2.0 164 1.0
Commercial and multifamily 8,453 2.8 8,449 3.1 8,523 2.9
Residential construction 1,031 0.7 1,034 0.7 1,159 0.8
Commercial construction 16 0.1 13 0.1 56 0.2
Ground 427 1.4 379 1.3 49 0.1
Credit card 46,081 30.2 42,600 32.0 46,325 34.4
Consumer and other 3,572 14.2 2,172 9.7 3,291 13.3
---------- ---------- ---------
Total $ 60,879 $ 55,879 $ 60,496
========== ========== =========
</TABLE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Three Months
Six Months Ended Ended
March 31, March 31,
--------------------------------------------
1996 1995 1996
------------------- ------------------ -------------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 193 $ 9,899 $ 189
Real estate held for sale 135,043 109,074 123,792
------------------- ------------------ -------------------
Total 135,236 118,973 123,981
------------------- ------------------ -------------------
Provision for real estate losses:
Real estate held for investment (5) (706) (1)
Real estate held for sale 12,960 14,515 3,500
------------------- ------------------ -------------------
Total 12,955 13,809 3,499
------------------- ------------------ -------------------
Charge-offs:
Real estate held for sale:
Residential construction 0 1,924 0
Residential ground 25,892 103 5,181
------------------- ------------------ -------------------
Total 25,892 2,027 5,181
------------------- ------------------ -------------------
Total charge-offs on real estate
held for investment or sale 25,892 2,027 5,181
------------------- ------------------ -------------------
Balance at end of period:
Real estate held for investment 188 9,193 188
Real estate held for sale 122,111 121,562 122,111
------------------- ------------------ -------------------
Total $ 122,299 $ 130,755 $ 122,299
=================== ================== ===================
</TABLE>
<PAGE>
<TABLE>
COMPONENTS OF ALLOWANCE FOR LOSSES
ON REAL ESTATE HELD FOR INVESTMENT OR SALE
(In thousands)
March 31, December 31, September 30,
1996 1995 1995
------------------- ------------------ -------------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 188 $ 189 $ 193
------------------- ------------------ -------------------
Allowance for losses on real estate held for sale:
Residential 115 158 184
Home equity 35 13 2
Ground 121,961 122,621 134,857
Unallocated 0 1,000 0
------------------- ------------------ -------------------
Total 122,111 123,792 135,043
------------------- ------------------ -------------------
Total allowance for losses on real
estate held for investment or sale $ 122,299 $ 123,981 $ 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 $3.3 million from the level at
December 31, 1995 to $183.2 million at March 31, 1996. The $3.3 million increase
was primarily attributable to increased valuation allowances on credit card and
consumer and other loans.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $133.5 million at March 31, 1996, which
constituted 47.9% of total non-performing real estate assets, before valuation
allowances. This amount represented a $1.6 million decrease from the December
31, 1995 level of $135.1 million, or 45.5% of total non-performing real estate
assets, before valuation allowances at that date. During the six months ended
March 31, 1996, the Bank provided an additional $13.7 million of valuation
allowances on loans secured by real estate and real estate held for investment
or sale and recorded net charge-offs of $26.3 million on these assets. The
allowance for losses on real estate held for sale at March 31, 1996 is in
addition to approximately $53.3 million of cumulative charge-offs previously
taken against assets remaining in the Bank's portfolio at March 31, 1996.
During the March 1996 quarter, the Bank provided an additional $1.2 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 six months ended March 31, 1996
were $37.2 million, compared to $16.5 million for the six months ended March 31,
1995. The increase in net charge-offs resulted primarily from increased payment
defaults as the portfolio matured and a $94.9 million increase in average credit
card balances. The allowance for losses on credit card loans increased to $46.1
million at March 31, 1996 from $42.6 million at December 31, 1995. The increase
in such allowance for losses resulted primarily from an increase in the reserve
percentage used to calculate allowances for losses (which, in turn reflects 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 219.1% and 5.2%,
respectively, at March 31, 1996 from 201.3% and 5.0%, respectively, at December
31, 1995.
The allowance for losses on consumer and other loans increased to $3.6 million
at March 31, 1996 from $2.2 million at December 31, 1995, primarily as a result
of the increase in the ending balance of such loans. The ratios of the
allowances for losses on consumer and other loans to non-performing consumer and
other loans and to outstanding consumer and other loans were 309.3% and 0.9%,
respectively, at March 31, 1996 compared to 286.9% and 0.9%, respectively, at
December 31, 1995.
ASSET AND LIABILITY MANAGEMENT. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mixes, volumes and maturities to stabilize the
net interest spread is referred to as asset and liability management. The
objective of asset and liability management is to maximize the net interest
yield within the constraints imposed by prudent lending and investing practices,
liquidity needs and capital planning.
<PAGE>
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at March 31, 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
More than
than Three
Six Months One Year Years More
through through through than
Six Months One Three Five Five
or Less Year Years Years Years Total
----------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1996 Mortgage loans:
Adjustable-rate $ 303,256 $ 209,091 $ 585,497 $156,112 $ 11,932 $1,265,888
Fixed-rate 11,399 9,663 34,563 78,668 42,931 177,224
Loans held for sale 113,364 - - - - 113,364
Home equity credit lines and second mortgages 20,157 35 - - - 20,192
Credit card and other 759,914 19,659 41,829 20,877 9,921 852,200
Loans held for securitization and sale 510,000 - - - - 510,000
Mortgage-backed securities 189,806 156,797 402,667 4,668 17,297 771,235
Other investments 517,922 - 4,403 - - 522,325
----------- --------- ---------- -------- --------- ----------
Total interest-earning assets 2,425,818 395,245 1,068,959 260,325 82,081 4,232,428
Total non-interest earning assets - - - - 786,709 786,709
----------- --------- ---------- -------- --------- ----------
Total assets $ 2,425,818 $ 395,245 $1,068,959 $260,325 $ 868,790 $5,019,137
=========== ========= ========== ======== ========= ==========
Deposits:
Fixed maturity deposits $ 690,746 $ 276,669 $ 215,243 $111,368 $ - $1,294,026
NOW, statement and passbook accounts 1,398,146 39,860 132,758 90,359 192,565 1,853,688
Money market deposit accounts 1,000,573 - - - - 1,000,573
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 115,106 3,178 1,099 6,903 5,815 132,101
----------- --------- ---------- -------- --------- ----------
Total interest-bearing liabilities 3,214,571 319,707 349,100 208,630 348,380 4,440,388
Total non-interest bearing liabilities - - - - 269,827 269,827
Stockholders' equity - - - - 308,922 308,922
----------- --------- ---------- -------- --------- ----------
Total liabilities & stockholders' equity $ 3,214,571 $ 319,707 $ 349,100 $208,630 $ 927,129 $5,019,137
=========== ========= ========== ======== ========= ==========
Gap ($ 788,753) $ 75,538 $ 719,859 $ 51,695 ($266,299)
Cumulative gap ($ 788,753) ($713,215) $ 6,644 $ 58,339 ($207,960)
Cumulative gap as a percentage
of total assets (15.7) % (14.2) % 0.1 % 1.2 % (4.1) %
</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 14.2% at March 31, 1996, compared to a negative 15.9% at
December 31, 1995. A negative gap like that shown for the Bank implies that, if
market rates rise, the Bank's average cost of funds will increase more rapidly
than the concurrent increase in the average yield on interest-earning assets.
TAX SHARING PAYMENTS. During the March 1996 quarter, the Bank made a tax sharing
payment of $5.0 million to the Real Estate Trust. Subsequent to March 31, 1996,
the Bank made an additional tax sharing payment of $5.0 million to the Real
Estate Trust.
CAPITAL. At March 31, 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 March 31, 1996 balance sheet,
the Bank also would meet the fully phased-in capital requirements under FIRREA
that will apply as certain deductions from capital are phased in and, after
giving effect to those deductions, would meet the capital standards for "well
capitalized" institutions under the prompt corrective action regulations.
The following table shows the Bank's regulatory capital levels at March 31, 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 $ 344,510
Net unrealized holding losses (1) 2,508
-----------
Adjusted capital 347,018
Adjustments for tangible and core capital:
Intangible assets (43,374)
Non-includable subsidiaries (2) (2,085)
Non-qualifying purchased/originated
loan servicing (3,171)
-----------
Total tangible capital 298,388 5.96% $ 75,110 1.50% $ 223,278 4.46%
----------- ============== =========== ============= =========== ============
Total core capital (3) 298,388 5.96% $ 200,294 4.00% $ 98,094 1.96%
----------- ============== =========== ============= =========== ============
Tier 1 risk-based capital (3) 298,388 6.98% $ 170,976 4.00% $ 127,412 2.98%
----------- ============== =========== ============= =========== ============
Adjustments for risk-based capital:
Subordinated capital debentures 150,000
Allowance for general loan losses 53,647
-----------
Total supplementary capital 203,647
Excess allowance for loan losses (214)
-----------
Adjusted supplementary capital 203,433
-----------
Total available capital 501,821
Equity investments (2) (23,921)
-----------
Total risk-based capital (3) $ 477,900 12.11% $ 341,952 8.00% $ 135,948 4.11%
=========== ============== =========== ============= =========== ============
(1) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(2) Reflects an aggregate offset of $1.4 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available
as a "credit" against the deductions from capital otherwise required for
such investments.
(3) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
and a total risk-based capital ratio of at least 10.0%.
</TABLE>
<PAGE>
Regulatory Action and Requirements. Because of the continued improvement in the
financial condition of the Bank, on March 29, 1996, the OTS released the Bank
from its September 30, 1991 written agreement with the OTS, as amended in
October 1993, and from regulatory restrictions on asset growth. In connection
with the termination of the written agreement and at the request of the OTS, the
Board of Directors of the Bank has adopted a resolution which addresses certain
issues previously addressed by the written agreement. Among other things, the
resolution permits the Bank: (i) 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 (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.
The Bank has been able to maintain capital compliance in recent periods despite
the gradual phase-out of various assets from regulatory capital. At March 31,
1996, the only remaining assets subject to a future increased deduction from
regulatory capital were the Bank's extensions of credit to, and investments in,
subsidiaries engaged in activities impermissible to national banks
("non-includable subsidiaries"). At March 31, 1996, the Bank had $3.8 million,
after subsequent valuation allowances, of such assets, which were subject at
that date to a 60% phase-out from all three FIRREA capital requirements. This
phase-out will increase to 100% on July 1, 1996.
During the March 1996 quarter, the Bank securitized and sold $42.1 million of
amounts on deposit in certain spread accounts associated with certain of the
Bank's outstanding credit card securitizations. The effect of the transaction
was to transfer $42.1 million of existing recourse liabilities from the Bank to
investors in exchange for a cash payment to the Bank, remove certain amounts of
the securitized spread accounts from the Consolidated Balance Sheets, and
reduce the Bank's risk-based capital requirement by $42.1 million.
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 March 31, 1996, after valuation
allowances of $122.1 million, by the fiscal year in which the property was
acquired through foreclosure.
<PAGE>
Fiscal Year (In thousands)
1990 (1) (2)............. $ 42,547
1991 (2)................. 82,186
1992 .................... 3,338
1993 .................... 4,847
1994 .................... 2,295
1995 .................... 10,253
1996 .................... 989
----------
Total REO ............ $146,455
==========
- -----------------------
(1) Includes REO with an aggregate net book value of $23.9 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $98.9 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
March 31, 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.
Deposit Insurance Premiums. Thrift institutions insured by the Savings
Association Insurance Fund ("SAIF"), including the Bank, paid substantially
higher deposit insurance premiums in the December 1995 quarter than similarly
situated commercial banks insured by the Bank Insurance Fund ("BIF"). The
disparity in insurance premiums between commercial banks and thrifts increased
as of January 1, 1996, when BIF insurance rates were further lowered.
Legislation designed to reduce or eliminate the disparity between BIF and SAIF
insurance premiums by, among other things, imposing on thrift institutions a
one-time assessment estimated to be up to 85 basis points on their SAIF-insured
deposits to capitalize the SAIF, was included in the 1996 budget legislation
which passed Congress but was vetoed for other reasons by President Clinton.
Although efforts to enact the legislation continue, it remains unclear if, and
in what from, such legislation will be enacted. In the absence of such
legislation, the Bank and other thrift 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, prolonged continuation of this disparity in
deposit insurance premiums could lead to more widespread efforts to shift
insured deposits from SAIF to BIF thus further destabilizing the SAIF.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
GENERAL. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of outstanding
debt.
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. This condition is currently the case and is
expected to continue to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes ("Unsecured Notes") sold to the public, the payment
of 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 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 March 31, 1996, borrowings under the facility were
$5,500,000. Availability under this facility will vary from time to time
depending upon the value of the collateral deposited by the Real Estate Trust.
In the first quarter of fiscal 1996, the Real Estate Trust established an $8.0
million secured revolving credit line with another 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 March 31,
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 Partnership"), the Real Estate Trust will share in cash distributions
from operations and from capital transactions involving the sale of refinancing
of the properties of Saul Holdings Partnership. The partnership agreement of
Saul Holdings Partnership provides for quarterly cash distributions to the
partners out of net cash flow. During the six-month period ended March 31, 1996,
the Real Estate Trust received total cash distributions of $2.7 million from
Saul Holdings Partnership.
<PAGE>
The Real Estate Trust is currently selling Unsecured Notes principally to
provide funds to pay outstanding Unsecured Notes as they mature. During the
six-month period ended March 31, 1996, the Real Estate Trust sold $3.5 million
of new Unsecured Notes and paid $3.9 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, which was the case in
the six-month period ended March 31, 1996, it will finance such repayments from
other sources of funds.
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 six-month period ended March 31, 1996, the Bank made tax sharing
payments totalling $15.0 million to the Real Estate Trust. In April 1996, the
Bank made an additional tax sharing payment of $5.0 million and a dividend
payment of $1.6 million to the Real Estate Trust, and at its April 1996 Board
meeting the Bank declared an additional dividend on its common stock which will
result in a dividend payment of $2.4 million to the Real Estate Trust when paid.
During the six-month period ended March 31, 1996, the Real Estate Trust
purchased 200,000 shares of common stock of Saul Centers, Inc. in the open
market and purchased an additional 35,049 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 March 31,
1996 for the balance of fiscal 1996 and subsequent years is set forth in the
following table:
<PAGE>
DEBT MATURITY SCHEDULE
(In thousands)
- -------------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- -------------------------------------------------------------------
1996 (1) $ 4,617 $ -- $ 2,220 $ 6,837
1997 18,040 5,500 5,616 29,156
1998 7,413 -- 7,308 14,721
1999 17,076 -- 14,433 31,509
2000 18,854 -- 6,015 24,869
Thereafter 112,005 175,000 5,099 292,104
- -------------------------------------------------------------------
Total $178,005 $180,500 $ 40,691 $399,196
===================================================================
(1) April 1, 1996 - September 30, 1996
Of the $178.0 million of mortgage debt outstanding at March 31, 1996, $135.7
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.
BANKING
LIQUIDITY. The Bank's average liquidity ratio for the month ended March 31, 1996
was 22.7%, compared to 21.7% for the month ended December 31, 1995.
Additionally, the Bank met the liquidity level requirements imposed by the OTS
for each month of the first six months of fiscal 1996.
In recent periods, the proceeds from the securitization and sale of credit card,
home equity credit line and automobile loan receivables have been significant
sources of liquidity for the Bank. The Bank securitized and sold $699.0 million
of credit card receivables and $247.6 million of automobile loan receivables
during the first six 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 March 31, 1996, the Bank was
considering the securitization and sale of the following receivables: (i)
approximately $550.0 million of credit card receivables, including $175.0
million of receivables outstanding at March 31, 1996 and $375.0 million of
receivables which the Bank expects to become available through additional
fundings during the six months ending September 30, 1996; (ii) approximately
$350.0 million of automobile loan receivables, including $135.0 million of
receivables outstanding at March 31, 1996 and $215.0 million of receivables
which the Bank expects to become available through additional fundings during
the six months ending September 30, 1996; (iii) approximately $150.0 million of
home improvement and other consumer loan receivables; and (iv) approximately
$130.0 million of home equity credit line receivables. To the extent these
receivables were outstanding at March 31, 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
improvement and other consumer loan receivables to meet liquidity and other
balance sheet objectives.
<PAGE>
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables. Of the $4.6 billion of outstanding trust
certificate balances at March 31, 1996, the primary recourse to the Bank was
approximately $97.4 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 March 31, 1996, recourse to the Bank under these arrangements
was approximately $4.3 million.
There were no material commitments for capital expenditures at March 31, 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 constrained 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 MARCH 31, 1996 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1995
REAL ESTATE
The following table sets forth, for the three-month period ended March 31, 1996
(the "1996 quarter") and the three-month period ended March 31, 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 March 31
---------------------------
1996 1995
------------ ------------
(In thousands)
HOTELS (1)
Room sales $ 8,411 $ 8,048
Food sales 2,248 2,133
Beverage sales 586 618
Other 688 712
------- -------
Total revenues 11,933 11,511
------- -------
Direct operating expenses
Payroll 3,704 3,992
Cost of sales 1,045 982
Utilities 829 915
Repairs and maintenance 615 638
Advertising and promotion 646 594
Property taxes 327 342
Insurance 139 151
Other 1,434 1,359
------- -------
Total direct operating expenses 8,739 8,973
------- -------
Income after direct operating expenses $ 3,194 $ 2,538
======= =======
COMMERCIAL PROPERTIES (2)
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $ 3,856 $ 4,486
Expense recoveries 233 234
Other 61 100
------- -------
Total revenues 4,150 4,820
------- -------
Direct operating expenses
Utilities 551 606
Repairs and maintenance 491 488
Real estate taxes 348 343
Payroll 139 159
Insurance 60 67
Other 156 206
------- -------
Total direct operating expenses 1,745 1,869
------- -------
Income after direct operating expenses $ 2,405 $ 2,951
======= =======
(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
$4.8 million and an operating loss of $7.4 million in the 1996 quarter compared
to a loss of $4.1 million and an operating loss of $6.6 million in the
corresponding prior period. The increase in the operating loss was largely
attributable to a $1.7 million gain on the condemnation of a portion of a land
parcel recognized in the 1995 quarter.
Income after direct operating expenses from hotel properties increased $656,000
(25.8%) in the 1996 quarter over the level achieved in the 1995 quarter. In the
current period, room sales increased $363,000 (4.5%), while food and beverage
sales increased $83,000 (3.0%). The increase in revenue was due to improved
market conditions, which permitted management to raise average room rates while
maintaining occupancy levels.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, decreased $546,000 (19.7%) 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 $670,000 (14.5%) below its level in the 1995 quarter.
Expenses decreased by $124,000 (6.7%).
Interest expense decreased $221,000 (2.2%) 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 $396.9
million for the 1996 quarter from $404.8 million for the 1995 quarter. This
decrease in average borrowings was the result of mortgage loan amortization.
Depreciation increased $98,000 (4.2) in the 1996 quarter as a result of new
tenant improvements and capital replacements.
Amortization of debt expense increased $52,000 (39.7%) 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 increased $23,000
(1.3%)in 1996 quarter from their expense level in the 1995 quarter. The monthly
advisory fee in the 1996 quarter was $301,000 compared to $292,000 in the 1995
quarter, which represented an aggregate increase of $28,000. Management fees
were lower in the current quarter due to a decreased level of gross revenue from
operating properties.
General and administrative expense decreased $831,000 (73.7%) 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 $21.3 million for the three
months ended March 31, 1996 (the "1996 quarter"), compared to operating income
of $12.4 million for the three months ended March 31, 1995 (the "1995 quarter").
The increase in income for the 1996 quarter was primarily attributable to a
$34.0 million increase in other (non-interest) income resulting primarily from
an increase in loan and deposit servicing fees. These increases were partially
offset by a $9.8 million increase in operating expenses and a $15.2 million
increase in the provision for loan losses.
NET INTEREST INCOME. Net interest income, before the provision for loan losses,
decreased slightly (0.1%) in the 1996 quarter. The Bank would have recorded
interest income of $2.1 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 $0.2 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 March 31,
------------------------------------------------------------------------------
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) $ 2,769,399 $ 72,352 10.45% $ 2,991,028 $ 73,273 9.80%
Mortgage-backed securities 801,713 12,273 6.12 1,005,351 15,434 6.14
Federal funds sold and securities
purchased under agreements to resell 311,787 4,249 5.45 54,764 811 5.92
Trading securities 11,935 204 6.84 2,849 60 8.42
Investment securities 4,409 48 4.35 4,401 51 4.64
Other interest-earning assets 184,291 2,104 4.57 135,748 1,681 4.95
------------- ----------- ------------- ----------
Total 4,083,534 91,230 8.94 4,194,141 91,310 8.71
----------- ---------- ----------- ----------
Noninterest-earning assets:
Cash 160,934 125,744
Real estate held for investment or sale 147,191 318,086
Property and equipment, net 206,843 149,516
Cost in excess of net assets acquired, net 2,995 5,704
Other assets 233,807 154,917
------------- -------------
Total assets $ 4,835,304 $ 4,948,108
============= =============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 918,218 6,148 2.68 $ 876,627 5,875 2.68
Savings deposits 933,365 7,819 3.35 1,071,728 8,847 3.30
Time deposits 1,301,335 18,019 5.54 913,120 10,972 4.81
Money market deposits 985,158 9,439 3.83 1,117,701 10,968 3.93
------------- ---------- ------------- -----------
Total deposits 4,138,076 41,425 4.00 3,979,176 36,662 3.69
Borrowings 285,863 5,375 7.52 590,310 10,157 6.88
------------- ----------- ------------- ----------
Total 4,423,939 46,800 4.23 4,569,486 46,819 4.10
----------- ---------- ----------- ----------
Noninterest-bearing items:
Noninterest-bearing deposits 69,858 69,055
Other liabilities 45,169 62,337
Stockholders' equity 296,338 247,230
------------- -------------
Total liabilities and
stockholders' equity $ 4,835,304 $ 4,948,108
============= =============
Net interest income $ 44,430 $ 44,491
=========== ===========
Net interest spread (2) 4.70% 4.61%
========== ==========
Net yield on interest-earning assets (3) 4.35% 4.24%
========== ==========
Interest-earning assets to interest-
bearing liabilities 92.31% 91.79%
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
(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 March 31, 1996
Compared to
Three Months Ended March 31, 1995
Increase (Decrease)
Due to Change in (1)
-----------------------------------------------------------
Total
Volume Rate Change
---------------- ----------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (21,004) $ 20,083 $ (921)
Mortgage-backed securities (3,111) (50) (3,161)
Federal funds sold and securities
purchased under agreements to resell 3,887 (449) 3,438
Trading securities 221 (77) 144
Investment securities 1 (4) (3)
Other interest-earning assets 1,198 (775) 423
---------------- ----------------- ----------------
Total interest income (18,808) 18,728 (80)
---------------- ----------------- ----------------
Interest expense:
Deposit accounts 1,535 3,228 4,763
Borrowings (10,453) 5,671 (4,782)
---------------- ----------------- ----------------
Total interest expense (8,918) 8,899 (19)
---------------- ----------------- ----------------
Increase (decrease) in
net interest income $ (9,890) $ 9,829 $ (61)
================ ================= ================
(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 of $91.2 million in the 1996 quarter increased $0.1 million from
the level in the 1995 quarter. The positive effect on current quarter income of
higher average yields on the loan portfolio and higher average balances of
securities purchased under agreements to resell primarily was offset by lower
average balances of loans receivable and mortgage-backed securities.
The Bank's net yield on interest-earning assets increased to 4.35% in the 1996
quarter from 4.24% 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 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,
decreased by $0.9 million (or 1.3%) from the 1995 quarter primarily because of
lower average balances. Average balances of automobile loans, the principal
category of consumer loans, decreased $220.7 million (or 68.8%) in the 1996
quarter, primarily as a result of the securitization and sale of $252.2 million
and $247.6 million of automobile loan receivables in the June 1995 quarter and
the December 1995 quarter, respectively, which was largely responsible for the
decrease of $3.2 million (or 51.9%) in interest income on automobile loans.
Average balances of credit card and home equity credit line loans declined in
the 1996 quarter by $48.6 million (or 4.8%) and $30.9 million (or 32.8%),
respectively, largely as a result of the Bank's securitization and sale
activity. The securitization and sale of $181.9 million of home equity credit
line receivables in September 1995 contributed to the decline in the average
balances of such loans, which resulted in a $0.7 million (or 34.0%) decline in
interest income from these assets. Average balances of single-family residential
permanent loans decreased $37.0 million (or 2.7%), which contributed to the $0.6
million (or 2.4%) decrease in interest income on these loans from the 1995
quarter. 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 $115.1 million (or 133.7%) 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 $3.6 million (or
131.7%) in interest income from these assets.
Higher average yields on the loan portfolio partially offset the effect of lower
average balances. The average yield on the loan portfolio in the 1996 quarter
increased by 65 basis points (to 10.45% from 9.80%) from the average yield in
the 1995 quarter. The higher yields were primarily due to increases in the
average yield on credit card loans from 14.89% to 18.07% and on consumer loans
(principally automobile loans) from 8.78% to 12.31%. The increase in the yield
on credit card loans was primarily a result of the expiration of promotional
introductory rates and was largely responsible for a $5.8 million (or 15.5%)
increase in interest income from credit card receivables. The increase in the
average yield on consumer loans was primarily due to higher yields earned on
automobile loans originated by one of the Bank's operating subsidiaries.
Interest income on mortgage-backed securities decreased $3.2 million (or 20.5%)
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.
Other interest income increased $3.9 million (or 154.9%) in the 1996 quarter
primarily as a result of higher average balances on securities purchased under
agreements to resell, and, to a lesser extent, higher average balances on other
interest-earning assets.
<PAGE>
Interest expense of $46.8 million in the 1996 quarter was consistent with the
level in the 1995 quarter. Interest expense on deposits, the largest category of
interest-bearing liabilities, increased by $4.8 million (or 13.0%) primarily as
a result of an increase in average rates (to 4.00% from 3.69%), which reflected
a continued 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 $158.9 million.
The increase in interest expense on deposits was entirely offset by a $4.8
million (or 47.1%) decrease in interest expense on borrowings. The decrease in
interest expense on borrowings was primarily attributable to a $3.4 million
decrease in interest expense on securities sold under repurchase agreements, a
$0.7 million decrease in Federal Home Loan Bank advances, and a $0.6 million
decrease in bonds payable. The decreases in interest expense on securities sold
under repurchase agreements and Federal Home Loan Bank advances were primarily a
result of a $232.2 million and a $40.1 million decrease in the average balances
of such liabilities, respectively, as the Bank's deposit base has increased in
recent periods. The decrease in the interest expense on bonds payable was due to
a $23.8 million decrease in the aggregate average balance, which resulted from
the sale in April 1995 of the two residential apartment buildings securing the
bonds. In connection with this sale, the bonds were assumed by the purchaser.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased to
$28.8 million in the 1996 quarter from $13.6 million in the 1995 quarter. The
$15.2 million increase was primarily attributable to increases of $13.8 million
in the provision for losses on credit card loans, $0.1 million in the provision
for losses real estate loans and $1.3 million in the provision for losses on
consumer 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 $89.3 million in
the 1996 quarter from $55.3 million in the 1995 quarter was primarily
attributable to increases in credit card fees and loan and deposit servicing
fees. 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 and cash
advance charges, increased to $6.4 million in the 1996 quarter from $2.6 million
in the 1995 quarter. The $3.9 million (or 151.4%) increase was primarily
attributable to the initial impact of recent changes in the fee structure for
the Bank's credit card program.
An increase of $25.3 million in excess spread income and $6.1 million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $34.3 million (or 71.5%) 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 $0.8
million increase in
excess spread income related to home equity credit line loan securitizations,
because of a decrease in the average prepayment rate with respect to the
underlying receivables.
<PAGE>
The $6.0 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 $3.4 million in the gain recorded on sales of
the Bank's REO properties and a decrease of $0.9 million in the operating income
generated by the REO properties. The increased loss was partially offset by a
$2.8 million decrease in the provision for losses on such assets. See "Financial
Condition - Asset Quality - Allowance for Losses."
OPERATING EXPENSES. Operating expenses for the 1996 quarter increased $9.8
million (or 13.2%) from the level in the 1995 quarter, largely as a result of
the continued expansion of the Bank's credit card lending program. The main
components of the higher operating expenses were increases in salaries and
employee benefits, loan and data processing 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 $3.3
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. In accordance with Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"), the Bank recorded a
$0.7 million valuation allowance against its mortgage servicing rights at March
31, 1996, which contributed to the $3.3 million increase in loan expenses. The
$1.9 million increase in data processing expenses was principally attributable
to an increase in the number of credit card accounts outstanding and the
activity generated by such accounts during the 1996 period.
<PAGE>
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO
SIX MONTHS ENDED MARCH 31, 1995
REAL ESTATE
The following table sets forth, for the six-month period ended March 31, 1996
(the "1996 period") and the six-month period ended March 31, 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>
Six Months Ended March 31
----------------------------
1996 1995
------------- -------------
(In thousands)
HOTELS (1)
Room sales $17,121 $15,783
Food sales 4,818 4,630
Beverage sales 1,330 1,363
Other 1,369 1,424
------- -------
Total revenues 24,638 23,200
------- -------
Direct operating expenses
Payroll 7,430 7,730
Cost of sales 2,229 2,129
Utilities 1,425 1,595
Repairs and maintenance 1,205 1,249
Advertising and promotion 1,316 1,154
Property taxes 674 648
Insurance 299 291
Other 2,864 2,612
------- -------
Total direct operating expenses 17,442 17,408
------- -------
Income after direct operating expenses $ 7,196 $ 5,792
======= =======
COMMERCIAL PROPERTIES (2)
(OFFICE AND INDUSTRIAL PROPERTIES)
Revenue
Base rent $ 8,020 $ 8,801
Expense recoveries 440 455
Other 204 203
------- -------
Total revenues 8,664 9,459
------- -------
Direct operating expenses
Utilities 1,069 1,181
Repairs and maintenance 930 986
Real estate taxes 709 685
Payroll 297 301
Insurance 124 131
Other 340 407
------- -------
Total direct operating expenses 3,469 3,691
------- -------
Income after direct operating expenses $ 5,195 $ 5,768
======= =======
(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
$9.3 million and an operating loss of $14.5 million in the 1996 period compared
to a loss before depreciation and amortization of $8.9 million and an operating
loss of $13.8 million in the 1995 period. The increase in the operating loss was
largely attributable to a $1.7 million condemnation of a portion of a land
parcel recognized in the 1995 period.
Income after direct operating expenses from hotel properties increased
$1,404,000 (24.2%) in the 1996 period over the level achieved in the 1995
period. In the current period, room sales increased $1,338,000 (8.5%), while
food and beverage sales increased $155,000 (2.6%). The increase in total revenue
of $1,438,000 (9.1%), exceeded the increase of $34,000 (0.2%) in direct
operating expenses. 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.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, decreased $573,000 (10.5%) in the
1996 period compared to such income in the 1995 period. The decrease was caused
by lower gross income of $795,000 (8.7%) due to a reduction in the leasing rate.
Expenses for the current period were $222,000 (6.1%) below last year due to
lower utility and management fee expenses.
Interest expense decreased $313,000 (1.5%) 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 $397.8 million for the
1996 period from $405.7 million for the prior period. This decrease in average
borrowings occurred largely as a result of mortgage loan amortization and
payoffs of Unsecured Notes.
Amortization of debt expense increased $88,000(37.1%) in the 1996 period. This
increase reflected costs incurred for new lines of credit which were acquired
after the 1995 period.
Depreciation increased $182,000(3.9%)in the 1996 period as a result of new
tenant improvements and capital replacements.
Advisory, management and leasing fees paid to related parties increased $53,000
(1.5%) in 1996 period from their expense level in the 1995 period. The monthly
advisory fee in the 1996 period was $301,000 compared to $292,000 in the prior
period, which represented an aggregate increase of $56,000. 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 $839,000 (53.9%) 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 $37.3 million for the six months
ended March 31, 1996 (the "1996 period"), compared to operating income of $18.4
million for the six months ended March 31, 1995 (the "1995 period"). The
increase in income for the 1996 period was primarily attributable to a $57.1
million increase in other (non-interest) income resulting primarily from an
increase in loan and deposit servicing fees and a $6.2 million increase in net
interest income before the provision for loan losses. These increases were
partially offset by a $25.8 million increase in operating expenses and an $18.5
million increase in the provision for loan losses.
NET INTEREST INCOME. Net interest income, before the provision for loan losses,
increased $6.1 million (or 7.3%) in the 1996 period. The Bank would have
recorded interest income of $4.2 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 $0.3 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)
Six Months Ended March 31,
-----------------------------------------------------------------------------
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) $ 2,846,410 $ 148,836 10.46% $ 2,857,635 $ 136,901 9.58%
Mortgage-backed securities 827,362 25,485 6.16 1,018,538 31,040 6.10
Federal funds sold and securities
purchased under agreements to resell 216,891 6,077 5.60 65,260 1,799 5.51
Trading securities 10,352 359 6.94 3,475 144 8.29
Investment securities 4,407 97 4.40 4,401 97 4.41
Other interest-earning assets 172,395 3,965 4.60 130,431 3,112 4.77
------------- ---------- ------------- ---------
Total 4,077,817 184,819 9.06 4,079,740 173,093 8.49
---------- --------- ---------- ---------
Noninterest-earning assets:
Cash 155,802 126,403
Real estate held for investment or sale 161,966 322,789
Property and equipment, net 203,594 146,534
Cost in excess of net assets acquired, net 3,750 6,178
Other assets 226,364 142,198
------------- -------------
Total assets $ 4,829,293 $ 4,823,842
============= =============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 896,912 12,098 2.70 $ 873,806 11,855 2.71
Savings deposits 931,177 15,720 3.38 1,129,069 18,787 3.33
Time deposits 1,294,071 36,401 5.63 851,973 19,626 4.61
Money market deposits 981,041 19,185 3.91 1,125,536 22,335 3.97
------------- --------- ------------- ----------
Total deposits 4,103,201 83,404 4.07 3,980,384 72,603 3.65
Borrowings 313,141 11,665 7.45 479,514 16,857 7.03
------------- ---------- ------------- ---------
Total 4,416,342 95,069 4.31 4,459,898 89,460 4.01
---------- --------- ---------- ---------
Noninterest-bearing items:
Noninterest-bearing deposits 66,829 67,201
Other liabilities 52,715 47,955
Stockholders' equity 293,407 248,788
------------- -------------
Total liabilities and
stockholders' equity $ 4,829,293 $ 4,823,842
============= =============
Net interest income $ 89,750 $ 83,633
========== ==========
Net interest spread (2) 4.76% 4.47%
========= =========
Net yield on interest-earning assets (3) 4.40% 4.10%
========= =========
Interest-earning assets to interest-
bearing liabilities 92.33% 91.48%
========= =========
- ----------------------------------------------------------------------------------------------------------------------------
(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)
Six Months Ended March 31, 1996
Compared to
Six Months Ended March 31, 1995
Increase (Decrease)
Due to Change in (1)
-----------------------------------------------------------
Total
Volume Rate Change
---------------- ----------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (1,573) $ 13,508 $ 11,935
Mortgage-backed securities (6,440) 885 (5,555)
Federal funds sold and securities
purchased under agreements to resell 4,248 30 4,278
Trading securities 285 (70) 215
Other interest-earning assets 1,167 (314) 853
---------------- ----------------- ----------------
Total interest income (2,313) 14,039 11,726
---------------- ----------------- ----------------
Interest expense:
Deposit accounts 2,284 8,517 10,801
Borrowings (7,866) 2,674 (5,192)
---------------- ----------------- ----------------
Total interest expense (5,582) 11,191 5,609
---------------- ----------------- ----------------
Increase (decrease) in
net interest income $ 3,269 $ 2,848 $ 6,117
================ ================= ================
(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 $11.7 million (or 6.8%) from the
level in the 1995 period primarily as a result of higher average yields earned
by the Bank on the principal categories of its interest-earning assets. Higher
average balances of securities purchased under agreements to resell also
contributed to the increase in interest income. The effect on interest income of
higher average yields and higher average balances was offset in part by lower
average balances of mortgage-backed securities and loans receivable.
The Bank's net yield on interest-earning assets increased to 4.40% in the 1996
period from 4.10% 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 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 $11.9 million (or 8.7%) 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 88 basis points (to 10.46% from 9.58%) 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 14.42% to 17.46% and on consumer
loans (principally automobile and home improvement loans) from 8.65% to 11.62%.
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
$22.2 million (or 33.7%) increase in interest income from credit card
receivables. The increase in the yield on consumer loans was primarily due to
higher yields earned on automobile loans originated by one of the Bank's
operating subsidiaries. Higher average balances of credit card and consumer
loans, other than automobile loans, also contributed to the increase in interest
income on loans. Average balances of credit card loans and other consumer loans
increased $94.9 million (or 10.4%) and $105.9 million (or 133.2%), respectively.
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 $3.2 million (or 18.9%) increase in interest
income on consumer loans. Partially offsetting the increase in such average
balances and the increase in the average yield on consumer loans was a $150.3
million decrease in the average balances of automobile loan receivables due to a
$247.6 million securitization of such loans in the December 1995 quarter.
Interest income on real estate loans decreased $1.4 million primarily as a
result of a $54.2 million decrease in the average balances of such loans, which
was partially offset by an increase in the average yield to 7.33% from 7.25%.
Interest income on mortgage-backed securities decreased $5.6 million (or 17.9%)
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 offset in part by an increase in the average
interest rates on these securities to 6.16% from 6.10%.
Other interest income increased $5.1 million (or 104.5%) 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 $151.6 million
(or 232.4%) 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.
<PAGE>
Interest expense increased $5.6 million for the 1996 period primarily because of
an increase of $10.8 million (or 14.9%) in interest expense on deposits, the
largest category of interest-bearing liabilities. Interest expense on deposits
increased primarily as a result of an increase in average rates (to 4.07% from
3.65%), 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 $122.8 million.
The increase in interest expense on deposits was partially offset by a $5.2
million decrease in interest expense on borrowings. The decrease in interest
paid on borrowings was primarily attributable to a $3.7 million and a $1.2
million decrease in interest expense on securities sold under repurchase
agreements and bonds payable, respectively. The decrease in interest expense on
securities sold under repurchase agreements was primarily a result of a $128.3
million decrease in the average balances of such liabilities as the Bank's
deposit base has increased in recent periods. The decrease in interest expense
on bonds payable was due to a $23.8 million decrease in the aggregate average
balance, which resulted from the sale in April 1995 of the two residential
apartment buildings securing the bonds. In connection with this sale, the bonds
were assumed by the purchaser.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased to
$40.8 million in the 1996 period from $22.2 million in the 1995 period. The
$18.6 million increase was primarily attributable to increases of $16.4 million
in the provision for losses on credit card loans, $0.8 million in the provision
for losses real estate loans and $1.4 million in the provision for losses on
consumer loans. The higher provisions on credit card and consumer loans resulted
from increased origination volume, 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 $155.5 million in
the 1996 period from $98.4 million in the 1995 period was primarily attributable
to increases in credit card fees, loan and deposit servicing fees and gain on
sales of loans. The positive effect of these items on other income was partially
offset by an increase in loss on real estate held for investment or sale.
Credit card fees, consisting primarily of membership fees, late charges and cash
advance charges, increased to $10.7 million in the 1996 period from $6.7 million
in the 1995 period. The $4.0 million (or 60.7%) increase was primarily
attributable to the initial impact of recent changes in the fee structure for
the Bank's credit card program.
An increase of $36.6 million in excess spread income and $12.5 million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $56.1 million (or 64.5%) 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 $3.1
million increase in excess spread income related to home equity credit line loan
securitizations, because of a decrease in the average prepayment rate with
respect to the underlying receivables.
Gain on sales of loans increased by $5.0 million primarily as a result of a $4.6
million gain on the securitization and sale of $247.6 million of automobile loan
receivables during the 1996 period.
<PAGE>
The $10.9 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 $5.3 million in the gain recorded on sales
of the Bank's REO properties and a decrease of $1.9 million in the operating
income generated by the REO properties. The increased loss was partially offset
by a $0.8 million decrease 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 $25.8
million (or 18.2%) 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 $10.1
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 $5.9 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. In accordance with SFAS 122, the
Bank recorded a $0.7 million valuation allowance against its mortgage servicing
rights at March 31, 1996, which contributed to the $5.9 million increase in loan
expenses. The $4.4 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 $6.0
million increase in other operating expenses resulted primarily from an increase
in credit card fraud losses 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 $3.7 million.
