<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated February 14, 1997
to Prospectus Dated January 30, 1997
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
DECEMBER 31, 1996
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<PAGE>
TABLE OF CONTENTS
Page
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FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets at December 31, 1996 and
September 30, 1996 3
(b) Consolidated Statements of Operations for the
three-month periods ended December 31, 1996 and 1995 4
(c) Consolidated Statements of Cash Flows for the
three-month periods ended December 31, 1996 and 1995 6
(d) Notes to Consolidated Financial Statements 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) Financial Condition
Real Estate 11
Banking 12
(b) Liquidity and Capital Resources
Real Estate 27
Banking 30
(c) Results of Operations
Three months ended December 31, 1996 compared
to three months ended December 31, 1995 31
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
December 31 September 30
--------------- ---------------
(In thousands) 1996 1996
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<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 126,771 $ 121,417
Commercial 107,189 106,496
Other 4,734 4,715
--------------- ---------------
238,694 232,628
Accumulated depreciation (79,162) (76,513)
--------------- ---------------
159,532 156,115
Land parcels 41,720 41,580
Cash and cash equivalents 9,431 15,516
Other assets 83,608 81,292
--------------- ---------------
Total real estate assets 294,291 294,503
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Banking
Cash and due from banks 247,900 213,394
Interest-bearing deposits 40,278 53,031
Securities purchased under agreements to resell 40,000 --
Loans held for sale 104,881 76,064
Loans held for securitization and sale 350,000 450,000
Investment securities (market value $9,910 and $9,820, respectively) 9,887 9,818
Mortgage-backed securities (market value $1,375,792 and $1,307,838, respectively) 1,371,422 1,306,417
Loans receivable (net of allowance for losses of $95,485 and $95,523, respectively) 3,091,253 2,772,967
Federal Home Loan Bank stock 22,458 31,940
Real estate held for investment or sale (net of allowance for losses of $131,407 and $126,710,
respectively) 118,889 123,489
Property and equipment, net 235,698 225,135
Cost in excess of net assets acquired, net 2,030 2,399
Other assets 507,380 428,420
--------------- ---------------
Total banking assets 6,142,076 5,693,074
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TOTAL ASSETS $ 6,436,367 $ 5,987,577
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LIABILITIES
Real Estate
Mortgage notes payable $ 183,085 $ 173,345
Notes payable - secured 175,000 177,500
Notes payable - unsecured 43,897 42,367
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred shares of beneficial interest 32,167 31,563
Other liabilities and accrued expenses 34,460 40,434
--------------- ---------------
Total real estate liabilities 581,492 578,092
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Banking
Deposit accounts 4,205,971 4,164,037
Borrowings 678,468 644,418
Federal Home Loan Bank advances 418,665 269,065
Other liabilities 134,315 150,924
Capital notes -- subordinated 250,000 160,000
--------------- ---------------
Total banking liabilities 5,687,419 5,388,444
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Commitments and contingencies
Minority interest held by affiliates 47,270 46,065
Minority interest -- other 218,307 74,307
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TOTAL LIABILITIES 6,534,488 6,086,908
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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 (155,135) (156,084)
Net unrealized holding loss (1,239) (1,500)
--------------- ---------------
(56,273) (57,483)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
--------------- ---------------
TOTAL SHAREHOLDERS' DEFICIT (98,121) (99,331)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,436,367 $ 5,987,577
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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
December 31
--------------------------------
(In thousands, except per share amounts) 1996 1995
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<S> <C> <C>
REAL ESTATE
Income
Hotels $ 13,209 $ 12,705
Commercial properties 4,833 4,514
Other 978 940
--------------- ---------------
Total income 19,020 18,159
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Expenses
Direct operating expenses:
Hotels 9,061 8,703
Commercial properties 1,840 1,722
Land parcels and other 469 368
Interest expense 9,971 10,048
Amortization of debt expense 174 142
Depreciation 2,649 2,413
Advisory, management and leasing fees - related parties 1,912 1,789
General and administrative 480 420
--------------- ---------------
Total expenses 26,556 25,605
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Equity in earnings of unconsolidated entities 444 471
Loss on sale of property -- (57)
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REAL ESTATE OPERATING LOSS $ (7,092) $ (7,032)
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BANKING
Interest income
Loans $ 93,240 $ 76,484
Mortgage-backed securities 18,914 13,212
Trading securities 244 155
Investment securities 144 49
Other 2,729 3,689
--------------- ---------------
Total interest income 115,271 93,589
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Interest expense
Deposit accounts 38,326 41,979
Borrowings 19,218 6,290
--------------- ---------------
Total interest expense 57,544 48,269
--------------- ---------------
Net interest income 57,727 45,320
Provision for loan losses (26,840) (11,913)
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Net interest income after provision for loan losses 30,887 33,407
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Other income
Credit card fees 14,532 4,285
Loan and deposit servicing fees 63,285 60,754
Gain (loss) on sales of trading securities, net (51) 253
Loss on real estate held for investment or sale, net (4,374) (8,298)
Gain on sales of loans, net 7,901 4,957
Other 6,318 4,408
--------------- ---------------
Total other income 87,611 66,359
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Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months Ended
December 31
--------------------------------
(In thousands, except per share amounts) 1996 1995
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<S> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 36,604 $ 29,330
Loan 4,320 5,600
Property and equipment 9,267 7,872
Marketing 20,077 10,425
Data processing 14,786 11,845
Deposit insurance premiums 2,066 2,657
Amortization of cost in excess of net assets acquired 368 482
Other 11,052 15,571
--------------- ---------------
Total operating expenses 98,540 83,782
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BANKING OPERATING INCOME $ 19,958 $ 15,984
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TOTAL COMPANY
Operating income $ 12,866 $ 8,952
Income tax provision 5,131 3,753
--------------- ---------------
Income before minority interest 7,735 5,199
Minority interest held by affiliates (1,740) (1,467)
Minority interest -- other (3,692) (2,438)
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TOTAL COMPANY NET INCOME 2,303 1,294
DEFICIT
Beginning of period (156,084) (123,943)
Dividends
Preferred shares of beneficial interest 1,354 --
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End of period $ (155,135) $ (122,649)
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NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 949 $ (61)
NET INCOME (LOSS) PER COMMON SHARE
Income before minority interest $ 1.32 $ 0.80
Minority interest held by affiliates (0.36) (0.30)
Minority interest -- other (0.76) (0.51)
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NET INCOME (LOSS) PER COMMON SHARE $ 0.20 $ (0.01)
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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 Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months Ended
December 31
--------------------------------
(In thousands) 1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (4,658) $ (4,575)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 2,649 2,413
Loss on sale of property -- 57
Increase in accounts receivable and accrued income (855) (3,778)
Increase in deferred tax asset (2,517) (2,510)
Decrease in accounts payable and accrued expenses (5,772) (8,610)
Decrease in tax sharing receivable -- 10,000
Amortization of debt expense 174 142
Equity in earnings of unconsolidated entities (444) (471)
Other 2,653 2,048
--------------- ---------------
(8,770) (5,284)
--------------- ---------------
Banking
Net income 6,961 5,869
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees (1,172) 590
Depreciation and amortization 6,656 5,753
Amortization of cost in excess of net assets acquired and mortgage
servicing rights 2,418 2,297
Capitalized interest on real estate held for investment or sale (559) (968)
Originations of mortgage servicing rights (1,519) (966)
Provision for loan losses 26,840 11,913
Net fundings of loans held for sale and/or securitization (191,348) (137,895)
Proceeds from sales of trading securities 91,926 58,993
Proceeds from sales of loans held for sale and/or securitization 755,197 883,711
Provision for losses on real estate held for investment or sale 4,697 9,456
Earnings on real estate (424) (1,258)
(Gain) loss on sales of trading securities, net 51 (253)
Gain on sales of loans, net (7,901) (4,957)
Minority interest held by affiliates 1,740 1,467
Minority interest - other 2,438 2,438
Increase in excess servicing assets (9,117) (2,832)
Increase in other assets (64,169) (13,179)
Decrease in other liabilities and accrued expenses (16,475) (20,897)
Decrease in tax sharing payable -- (10,000)
Other operating activities, net (2,136) (5,608)
--------------- ---------------
604,104 783,674
--------------- ---------------
Net cash provided by operating activities 595,334 778,390
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (1,497) (833)
Property sales -- 1,812
Property acquisition (4,709) --
Equity investment in unconsolidated entities, net 1,097 (1,266)
--------------- ---------------
(5,109) (287)
--------------- ---------------
Banking
Net proceeds from redemption of Federal Home Loan Bank stock 9,482 --
Net proceeds from sales of real estate 7,327 26,709
Net proceeds from sales of mortgage servicing rights -- 966
Net fundings of loans receivable (725,811) (487,366)
Principal collected on mortgage-backed securities 103,667 56,758
Purchases of mortgage-backed securities (168,941) --
Purchases of loans receivable (195,186) (12,625)
Purchases of property and equipment (17,295) (12,599)
Disbursements for real estate held for investment or sale (5,952) (7,537)
Other investing activities, net 233 (3,210)
--------------- ---------------
(992,476) (438,904)
--------------- ---------------
Net cash used in investing activities (997,585) (439,191)
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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 Three Months Ended
December 31
--------------------------------
(In thousands) 1996 1995
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 19,500 $ --
Principal curtailments and repayments of mortgages (9,750) (3,153)
Repayments of secured notes (2,500) --
Proceeds from sales of unsecured notes 1,881 731
Repayments of unsecured notes (351) (809)
Costs of obtaining financings (236) (144)
Dividends paid - preferred shares of beneficial interest (750) --
--------------- ---------------
7,794 (3,375)
--------------- ---------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 4,221,190 3,569,101
Customer withdrawals of deposits and payments for maturing certificates of deposit (4,179,256) (3,516,262)
Net increase in securities sold under repurchase agreements 55,755 96
Advances from the Federal Home Loan Bank 393,216 34
Repayments of advances from the Federal Home Loan Bank (243,616) (24)
Proceeds from other borrowings 1,004,944 369,222
Repayments of other borrowings (1,026,649) (372,077)
Cash dividends paid on preferred stock (2,438) (2,438)
Cash dividends paid on common stock (3,000) --
Repayment of capital notes - subordinated (10,000) --
Net proceeds received from capital notes - subordinated 96,112 --
Net proceeds from issuance of preferred stock of subsidiary 144,000 --
Other financing activities, net (133) 427
--------------- ---------------
450,125 48,079
--------------- ---------------
Net cash provided by financing activities 457,919 44,704
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Net increase in cash and cash equivalents 55,668 383,903
Cash and cash equivalents at beginning of period 281,941 376,637
--------------- ---------------
Cash and cash equivalents at end of period $ 337,609 $ 760,540
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 72,718 $ 65,746
Income taxes 290 5,494
Supplemental schedule of noncash activities:
Rollovers of notes payable - unsecured 1,514 1,195
Loans held for sale exchanged for trading securities 92,072 59,020
Loans receivable transferred to loans held for sale and/or securitization 576,582 672,583
Loans made in connection with the sale of real estate 467 34,361
Loans receivable transferred to real estate acquired in settlement of loans 1,148 1,308
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The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements
reflect all adjustments necessary for a fair presentation of the Trust's
financial position and results of operations. All such adjustments are of a
normal recurring nature. These financial statements and the accompanying notes
should be read in conjunction with the Trust's audited consolidated financial
statements included in its Form 10-K for the fiscal year ended September 30,
1996. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year.
2. The accompanying financial statements include the accounts of B. F. Saul
Real Estate Investment Trust and its wholly owned subsidiaries (the "Real Estate
Trust"), which are involved in the ownership and development of income-producing
properties. The accounts of the Trust's 80%-owned banking subsidiary, Chevy
Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase" or the "Bank") have also
been consolidated. Accordingly, the accompanying financial statements reflect
the assets, liabilities, operating results and cash flows for two business
segments: Real Estate and Banking. All significant intercompany balances and
transactions have been eliminated.
3. The Trust voluntarily terminated its qualification as a real estate
investment trust under the Internal Revenue Code during fiscal 1978. As a result
of the Trust's acquisition of an additional 20% equity interest in the Bank in
June 1990, the Bank became a member of the Trust's affiliated group filing
consolidated federal income tax returns. The current effect of the Trust's
consolidation of the Bank's operations into its federal income tax return
results in the use of the Trust's net operating losses and net operating loss
carryforwards to reduce the federal income taxes the Bank would otherwise owe.
<PAGE>
4. BANKING:
LOANS HELD FOR SALE:
At December 31, 1996 and September 30, 1996, loans held for sale is
composed of single-family residential loans.
LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale are composed of the following:
December 31, September 30,
1996 1996
-------- --------
(In thousands)
Credit card receivables .......................... $165,000 $225,000
Automobile loan receivables ...................... 60,000 225,000
Home loan receivables ............................ 100,000 --
Home equity credit line receivables .............. 25,000 --
-------- --------
Total .......................................... $350,000 $450,000
======== ========
LOANS RECEIVABLE:
December 31, September 30,
1996 1996
----------- -----------
(In thousands)
Single-family residential .................... $ 1,635,382 $ 1,525,322
Home equity .................................. 177,277 32,052
Commercial real estate and multifamily ....... 75,514 78,951
Real estate construction ..................... 48,110 41,561
Ground ....................................... 42,744 44,723
Credit card .................................. 988,446 893,271
Automobile ................................... 98,688 72,560
Overdraft lines of credit .................... 22,325 21,296
Home improvement and
other consumer ............................. 26,162 94,316
Commercial ................................... 108,843 84,916
Other ........................................ 16,412 17,114
----------- -----------
3,239,903 2,906,082
----------- -----------
Less:
Undisbursed portion of loans ............... 75,142 50,811
Unearned discounts ......................... 755 836
Net deferred loan origination
costs .................................... (22,732) (14,055)
Allowance for loan losses .................. 95,485 95,523
----------- -----------
148,650 133,115
----------- -----------
Total ...................................... $ 3,091,253 $ 2,772,967
=========== ===========
<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:
December 31, September 30,
1996 1996
-------- --------
(In thousands)
Real estate held for investment .................. $ 3,819 $ 3,819
-------- --------
Real estate held for sale ........................ 246,477 246,380
-------- --------
Less:
Allowance for losses on real estate
held for investment ............................ 191 191
Allowance for losses on real estate
held for sale .................................. 131,216 126,519
-------- --------
131,407 126,710
-------- --------
Total real estate held for
investment or sale ............................ $118,889 $123,489
======== ========
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 1997, the Bank will account for transfers and
servicing of financial assets in accordance with Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
Although management is continuing its analysis of the impact of SFAS 125 on
the financial condition and earnings of the Bank, it currently anticipates that
the only significant impact will be the recognition of gains upon the
securitization and sale of credit card receivables. The exact amount of such
gains has not yet been determined.
Prior to January 1, 1997, the Bank recognized gains upon the securitization
and sale of its automobile loan, home loan and home equity credit line
receivables. The method of determining the amount of gains recognized on future
transactions is not expected to be significantly affected by the adoption of
SFAS 125. Except for the effects discussed above, other impacts of SFAS 125 are
not expected to be material.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The principal business conducted by the Trust and its wholly-owned
subsidiaries is the ownership and development of income-producing properties.
The Trust owns 80% of the outstanding common stock of Chevy Chase Bank, F.S.B.
("Chevy Chase" or the "Bank"). At December 31, 1996, the Bank's assets accounted
for approximately 95% of the Trust's consolidated assets. The Trust recorded net
income of $2.3 million for the three-month period ended December 31, 1996,
compared to net income of $1.3 million for the three-month period ended December
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 Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real
Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The operations conducted by the Real Estate Trust are
designated as "Real Estate," while the business conducted by the Bank and its
subsidiaries is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at
December 31, 1996, which consisted primarily of hotels, office and industrial
projects, and land parcels, was increased by one property from the number at
September 30, 1996. In the first quarter of fiscal 1997, the Real Estate Trust
purchased a 115-room Holiday Inn Express in Herndon, Virginia.
Space in the Real Estate Trust's commercial property portfolio was 95%
leased at December 31, 1996, compared to leasing rates of 93% and 85% at
September 30, 1996 and December 31, 1995, respectively. At December 31, 1996,
the Real Estate Trust's commercial property portfolio had a total gross leasable
area of 1.3 million square feet, of which 174,000 square feet (13.3%) and
279,000 square feet (21.3%) are subject to leases whose terms expire in the
balance of fiscal 1997 and in fiscal 1998, respectively.
The nine hotel properties owned by the Real Estate Trust throughout the
first fiscal quarters of 1997 and 1996 experienced average occupancy rates of
61% and 64%, respectively, and average room rates of $69.96 and $65.63,
respectively. Two of these hotels registered improved occupancy rates and
nine registered higher average room rates in the current period. Overall, the
hotel portfolio experienced an average occupancy rate of 61% and an average room
rate of $69.54 during the quarter ended December 31, 1996. On October 30, 1996,
the Real Estate Trust purchased a 115-room Holiday Inn Express hotel in Herndon,
Virginia, approximately three miles from the Washington Dulles International
Airport. The purchase price was $4.7 million. The Real Estate Trust obtained
five year floating-rate financing on the project in the amount of $3.3 million.
<PAGE>
BANKING
General. The Bank recorded operating income of $20.0 million during the
December 1996 quarter compared to operating income of $16.0 million in the prior
corresponding period. The $4.0 million increase in operating income for the
current quarter was primarily a result of a $21.3 million increase in
non-interest income, which in turn resulted from a $10.2 million increase in
credit card fee income. In addition, the Bank's net interest income before
provision for loan losses increased $12.4 million primarily as a result of an
increase in interest income on the Bank's loan portfolio. Partially offsetting
the positive effect of these items on income was a $14.8 million increase in
operating expenses and a $14.9 million increase in the provision for loan
losses. See "Results of Operations."
At December 31, 1996, the Bank's tangible, core, tier 1 risk-based and
total risk-based regulatory capital ratios were 6.58%, 6.58%, 7.05% and 14.06%,
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"). See "Capital."
On December 3, 1996, the Bank sold $100 million of its 9 1/4% Subordinated
Debentures due 2008 (the "1996 Debentures"), the principal amount of which is
includable in the Bank's supplementary capital. In addition, on December 3,
1996, a new real estate investment trust subsidiary of the Bank (the "REIT
Subsidiary") sold $150 million of its 10 3/8% Noncumulative Exchangeable
Preferred Stock, Series A (the "REIT Preferred Stock"), which is eligible for
inclusion as core capital of the Bank in an amount up to 25% of the Bank's total
core capital. See "Capital."
In the December 1996 quarter, the Bank securitized and sold $321.4 million
of automobile loan receivables and recognized a gain of $7.3 million in
connection with this sale. The Bank also securitized and sold $355.0 million of
credit card receivables in the December quarter pursuant to its portfolio
funding strategy. See "Liquidity."
During the quarter, the Bank declared, out of the retained earnings of the
Bank, a cash dividend on its Common Stock in the amount of $300 per share. The
Bank paid the dividend subsequent to December 31, 1996.
Asset Quality. Non-Performing Assets. 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)
December 31, September 30, December 31,
1996 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 9,082 $ 8,200 $ 9,652
Commercial real estate and multifamily -- -- 194
--------------- --------------- --------------
Total non-accrual real estate loans 9,082 8,200 9,846
Credit card 31,414 25,350 21,168
Consumer and other 2,720 1,239 757
--------------- --------------- --------------
Total non-accrual loans (1) 43,216 34,789 31,771
--------------- --------------- --------------
Real estate acquired in settlement of loans 246,477 246,380 286,780
Reserve for losses on real estate acquired in settlement
of loans (131,216) (126,519) (123,792)
--------------- --------------- --------------
Real estate acquired in settlement of loans, net 115,261 119,861 162,988
--------------- --------------- --------------
Total non-performing assets $ 158,477 $ 154,650 $ 194,759
=============== =============== ==============
Reserve for losses on loans $ 95,485 $ 95,523 $ 55,879
Reserve for losses on real estate held for investment 191 191 189
Reserve for losses on real estate acquired in settlement
of loans 131,216 126,519 123,792
--------------- --------------- --------------
Total reserves for losses $ 226,892 $ 222,233 $ 179,860
=============== =============== ==============
Ratios:
Non-performing assets, net to total assets (2) 1.02% 1.04% 2.80%
Reserve for losses on real estate loans to non-accrual
real estate loans (1) 115.68% 134.44% 112.81%
Reserve for losses on credit card loans to non-accrual
credit card loans (1) 253.65% 314.32% 201.25%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (1) 194.78% 388.86% 286.92%
Reserve for losses on loans to non-accrual loans (1) 220.95% 274.58% 175.88%
Reserve for losses on loans to total loans receivable (3) 2.62% 2.81% 2.09%
(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) and real estate acquired in
settlement of loans, either through foreclosure or deed-in-lieu of foreclosure.
Non-performing assets totaled $158.5 million, after valuation allowances on
real estate held for sale or real estate owned ("REO") of $131.2 million, at
December 31, 1996, compared to $154.6 million, after valuation allowances on REO
of $126.5 million, at September 30, 1996. In addition to the valuation
allowances on REO, the Bank maintained $32.1 million of valuation allowances on
its non-accrual loans at December 31, 1996 compared to $26.1 million at
September 30, 1996. The increase in non-performing assets for the current
quarter was primarily attributable to an increase in non-accrual credit card
loans of $6.1 million, which was partially offset by a net decrease in REO of
$4.6 million. See "Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $43.2 million at
December 31, 1996, as compared to $34.8 million at September 30, 1996. At
December 31, 1996, non-accrual loans consisted of $9.1 million of non-accrual
real estate loans, $31.4 million of non-accrual credit card loans and $2.7
million of non-accrual consumer and other loans. The $8.4 million increase in
non-accrual loans was primarily due to an increase in non-accrual credit card
loans, reflecting a continued industry-wide decline in the performance of such
loans.
REO. At December 31, 1996, the Bank's REO totaled $115.3 million, after
valuation allowances on such assets of $131.2 million as set forth in the
following table. The principal component of REO consists of five planned unit
developments (the "Communities"), four of which are under active development.
Only commercial ground remains in two of the four active Communities. The fifth
Community, consisting of approximately 2,400 acres in Loudoun County, Virginia,
is in the pre-development stage.
Number
of Balance Before Balance After
Prop- Valuation All Valuation Valuation Percent
(Dollars in erties Allowances Allowances Allowances of Total
thousands) ------- -------------- ------------- ------------- --------
Communities 5 $210,773 $119,171 $ 91,602 79.5%
Residential ground 3 11,156 6,073 5,083 4.4%
Commercial ground 8 22,863 5,888 16,975 14.7%
Single-family
residential
properties 13 1,685 84 1,601 1.4%
---- ---------- ----------- ---------- -------
Total REO 29 $246,477 $131,216 $115,261 100.0%
==== ========== =========== ========== =======
During the three months ended December 31, 1996, REO decreased $4.6
million, which was primarily attributable to sales in the Communities and other
residential properties.
The Bank received revenues of $7.4 million from the disposition of REO,
which consisted of 56 residential lots or units in the Communities ($3.1
million), 3.86 acres of commercial land in two of the Communities ($1.7
million), one partial sale of commercial ground ($0.5 million), one partial sale
of residential ground ($0.3 million) and various single-family residential
properties ($1.8 million).
<PAGE>
At December 31, 1996, the Bank had executed a contract to sell one
additional REO property at its aggregate book value of $1.5 million at that
date.
Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. The
majority of the Bank's potential problem assets involve borrowers or properties
experiencing cash flow problems. At December 31, 1996, potential problem assets
totaled $2.6 million, before valuation allowances of $0.4 million, as compared
to $5.9 million, before valuation allowances of $1.1 million, at September 30,
1996. The $3.3 million decrease in potential problem assets was primarily
attributable to the payoff of one commercial permanent loan with a principal
balance of $1.5 million and net principal reductions.
Delinquent Loans. At December 31, 1996, delinquent loans totaled $64.4
million (or 1.8% of loans) compared to $51.6 million (or 1.5% of loans) at
September 30, 1996. The following table sets forth information regarding the
Bank's delinquent loans at December 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 .......... $ 8,621 $ 34,257 $ 42,878 1.2%
60-89 days .......... 1,817 19,732 21,549 0.6%
--------- ---------- --------- -----
Total ................ $10,438 $ 53,989 $ 64,427 1.8%
========= ========== ========= =====
- ----------------
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity credit line
loans. Total delinquent mortgage loans increased from $5.9 million at September
30, 1996 to $10.4 million at December 31, 1996.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $54.0 million at December 31, 1996 from $45.7 million at September
30, 1996, and increased as a percentage of total non-mortgage loans to 3.5% from
2.9%, respectively. The increased percentage of delinquent non-mortgage loans to
total non-mortgage loans outstanding resulted primarily from the increase in
delinquent credit card loans, reflecting a continued industry-wide decline in
the performance of such loans, but also reflected the securitization and sale of
$321.4 million of automobile loan receivables, which reduced the Bank's
portfolio of non-mortgage loans.
Troubled Debt Restructurings. At December 31, 1996, loans accounted for as
troubled debt Restructurings totalled $12.0 million and included one commercial
permanent loan with a principal balance of $11.7 million and one commercial
collateralized loan with a principal balance of $0.3 million. The $1.6 million
decrease in loans accounted for as troubled debt restructurings from $13.6
million at September 30, 1996 resulted from the payoff of one commercial
<PAGE>
permanent loan with a principal balance of $1.5 million and net principal
reductions. At December 31, 1996, the Bank had commitments to lend $0.1 million
of additional funds on loans that have been restructured.
Real Estate Held for Investment. At December 31, 1996 and September 30,
1996, 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 Ended Year Ended
December 31, September 30,
---------------------------------
1996 1995 1996
-------------- -------------- -------------------
<S> <C> <C> <C>
Balance at beginning of period $ 95,523 $ 60,496 $ 60,496
-------------- -------------- -------------------
Provision for loan losses 26,840 11,913 115,740
-------------- -------------- -------------------
Increase due to acquisition of loans 118 -- --
-------------- -------------- -------------------
Charge-offs:
Residential 332 236 867
Credit card 27,236 17,510 84,805
Consumer and other 1,902 1,612 6,375
-------------- -------------- -------------------
Total charge-offs 29,470 19,358 92,047
-------------- -------------- -------------------
Recoveries:
Residential 9 2 32
Credit card 2,225 2,691 10,720
Consumer and other 240 135 582
-------------- -------------- -------------------
Total recoveries 2,474 2,828 11,334
-------------- -------------- -------------------
Charge-offs, net of recoveries 26,996 16,530 80,713
-------------- -------------- -------------------
Balance at end of period $ 95,485 $ 55,879 $ 95,523
============== ============== ===================
Provision for loan losses to average loans (1) (2) 3.12% 1.63% 3.94%
Net loan charge-offs to average loans (1) (2) 3.14% 2.26% 2.75%
Ending reserve for losses on loans to total
loans (2) (3) 2.62% 2.09% 2.81%
(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)
December 31, September 30,
--------------------------------------------------------
1996 1995 1996
------------------------- ------------------------- --------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period allocated to:
Residential permanent $ 1,025 48.0% $ 934 51.1% $ 925 47.4%
Home equity 608 5.6 298 2.0 446 0.9
Commercial real estate and multifamily 7,924 2.1 8,449 3.1 8,398 2.3
Residential construction 529 0.5 1,034 0.7 823 0.6
Commercial construction 27 0.1 13 0.1 15 0.1
Ground 393 1.0 379 1.3 417 1.2
Credit card 79,681 31.9 42,600 32.1 79,681 33.1
Consumer and other 5,298 10.8 2,172 9.6 4,818 14.4
--------- ---------- ----------
Total $ 95,485 $ 55,879 $ 95,523
========= ========== ==========
</TABLE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Three Months Ended Year Ended
December 31, September 30,
------------------------------------
1996 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 191 $ 193 $ 193
Real estate held for sale 126,519 135,043 135,043
------------- ------------- --------------
Total 126,710 135,236 135,236
------------- ------------- --------------
Provision for real estate losses:
Real estate held for investment -- (4) (2)
Real estate held for sale 4,697 9,460 26,343
------------- ------------- --------------
Total 4,697 9,456 26,341
------------- ------------- --------------
Charge-offs:
Real estate held for sale:
Residential ground -- 20,711 34,867
----------- ------------- --------------
Total charge-offs on real estate
held for investment or sale -- 20,711 34,867
------------- ------------- --------------
Balance at end of period:
Real estate held for investment 191 189 191
Real estate held for sale 131,216 123,792 126,519
------------- ------------- --------------
Total $ 131,407 $ 123,981 $ 126,710
============= ============= ==============
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
December 31, September 30,
-------------------------------
1996 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 191 $ 189 $ 191
------------- ------------- --------------
Allowance for losses on real estate held for sale:
Residential 83 158 112
Home equity 1 13 8
Ground 131,132 122,621 126,399
Unallocated -- 1,000 --
------------- ------------- --------------
Total 131,216 123,792 126,519
------------- ------------- --------------
Total allowance for losses on real
estate held for investment or sale $ 131,407 $ 123,981 $ 126,710
============= ============= ==============
</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 $4.7 million from the level at
September 30, 1996 to $226.9 million at December 31, 1996. The $4.7 million
increase was primarily attributable to increased valuation allowances on the
Communities.
The allowance for losses on loans secured by real estate and real estate
held for investment or sale totaled $141.9 million at December 31, 1996, which
constituted 55.5% of total non-performing real estate assets, before valuation
allowances. This amount represented a $4.2 million increase from the September
30, 1996 level of $137.7 million, or 54.1% of total non-performing real estate
assets, before valuation allowances at that date.
During the three months ended December 31, 1996, the Bank provided an
additional $4.5 million of valuation allowances on loans secured by real estate
and real estate held for investment or sale and recorded net charge-offs of $0.3
million on these assets. The allowance for losses on real estate held for sale
at December 31, 1996 is in addition to approximately $50.9 million of cumulative
charge-offs previously taken against assets remaining in the Bank's portfolio at
December 31, 1996.
During the December 1996 quarter, the Bank provided an additional $0.8
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 three months ended December
31, 1996 were $25.0 million, compared to $14.8 million for the three months
ended December 31, 1995. The increase in net charge-offs reflected the
industry-wide decline in the performance of credit card loans. The allowance for
losses on credit card loans remained constant at $79.7 million from September
30, 1996 to December 31, 1996. The ratios of the allowance for such losses to
non-performing credit card loans and to outstanding credit card loans were
253.6% and 6.9%, respectively, at December 31, 1996 compared to 314.3% and 7.1%,
respectively, at September 30, 1996.
The allowance for losses on consumer and other loans increased to $5.3
million at December 31, 1996 from $4.8 million at September 30, 1996. The ratios
of the allowances for losses on consumer and other loans to non-performing
consumer and other loans and to outstanding consumer and other loans were 194.8%
and 1.4%, respectively, at December 31, 1996 compared to 388.9% and 1.0%,
respectively, at September 30, 1996.
<PAGE>
Asset and Liability Management. A key element of banking is the monitoring
and management of liquidity risk and interest-rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to stabilize
the net interest spread is referred to as asset and liability management. The
objective of asset and liability management is to maximize the net interest
yield within the constraints imposed by prudent lending and investing practices,
liquidity needs and capital planning.
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at December 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 than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
------------- ------------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Mortgage loans:
Adjustable-rate $ 360,008 $ 425,965 $ 720,335 $ 93,484 $ 10,162 $ 1,609,954
Fixed-rate 10,904 9,401 31,924 87,805 21,889 161,923
Loans held for sale 104,881 -- -- -- -- 104,881
Home equity credit lines and
second mortgages 192,786 272 902 906 1,756 196,622
Credit card and other 1,086,370 32,029 75,347 11,189 13,305 1,218,240
Loans held for securitization and
sale 350,000 -- -- -- -- 350,000
Mortgage-backed securities 386,042 297,605 316,618 170,243 200,914 1,371,422
Other investments 250,709 -- 4,996 -- -- 255,705
------------- ------------- --------------- -------------- ------------ ------------
Total interest-earning assets 2,741,700 765,272 1,150,122 363,627 248,026 5,268,747
Total non-interest earning assets -- -- -- -- 873,329 873,329
------------- ------------- --------------- -------------- ------------ ------------
Total assets $ 2,741,700 $ 765,272 $ 1,150,122 $ 363,627 $ 1,121,355 $ 6,142,076
============= ============= =============== ============== ============ ============
Deposits:
Fixed maturity deposits $ 673,714 $ 198,934 $ 206,889 $ 100,832 $ -- $ 1,180,369
NOW, statement and passbook
accounts 1,386,358 39,981 133,161 90,633 193,149 1,843,282
Money market deposit accounts 997,318 -- -- -- -- 997,318
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 871,436 168,338 51,152 755 5,452 1,097,133
------------- ------------- --------------- -------------- ------------ ------------
Total interest-bearing
liabilities 3,928,826 407,253 391,202 192,220 448,601 5,368,102
Total non-interest bearing
liabilities -- -- -- -- 463,317 463,317
Stockholders' equity -- -- -- -- 310,657 310,657
------------- ------------- --------------- -------------- ------------ ------------
Total liabilities &
stockholders' equity $ 3,928,826 $ 407,253 $ 391,202 $ 192,220 $ 1,222,575 $ 6,142,076
============= ============= =============== ============== ============ ============
Gap $ (1,187,126) $ 358,019 $ 758,920 $ 171,407 $ (200,575)
Cumulative gap $ (1,187,126) $ (829,107) $ (70,187) $ 101,220 $ (99,355)
Adjustment for interest
rate caps (1) $ 425,000 $ 325,000 $ 156,250 $ 0 $ 0
Adjusted cumulative gap $ (762,126) $ (504,107) $ 86,063 $ 101,220 $ (99,355)
Adjusted cumulative gap as a
percentage of total assets (12.4%) (8.2%) 1.4% 1.6% (1.6%)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 1996, the Bank had $450,000 notional amount of interest rate
caps. The adjustments reflect the average notional amount outstanding for
each period until the last cap expires June 30, 1999.
</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, adjusted for the effect of
the Bank's interest rate caps, as a percentage of total assets, was a negative
8.2% at December 31, 1996, compared to a negative 4.7% at September 30, 1996. A
negative gap like that shown for the Bank implies that, if market rates rise,
the Bank's average cost of funds will increase more rapidly than the concurrent
increase in the average yield on interest-earning assets.
Tax Sharing Payments. During the December 1996 quarter, the Bank made no
tax sharing payments to B. F. Saul Real Estate Investment Trust (the "Trust"),
which owns 80% of the Bank's Common Stock. Subsequent to December 31, 1996, the
Bank made a $3.2 million tax sharing payment to the Trust.
Capital. At December 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.
The following table shows the Bank's regulatory capital levels at December
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>
Stockholders' equity per financial statements $ 344,655
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding losses (2) 1,549
-------------
490,204
Adjustments for tangible and core capital:
Intangible assets (39,890)
Non-allowable minority interest in
REIT Subsidiary (1) (43,187)
Non-includable subsidiaries (3) (3,644)
Non-qualifying purchased/originated
loan servicing (230)
-------------
Total tangible capital 403,253 6.58% $ 91,939 1.50% $ 311,314 5.08%
------------- ============ ============= ============ ============= ============
Total core capital (4) 403,253 6.58% $ 245,169 4.00% $ 158,084 2.58%
------------- ============ ============= ============ ============= ============
Tier 1 risk-based capital (4) 403,253 7.05% $ 228,696 4.00% $ 174,557 3.05%
------------- ============ ============= ============ ============= ============
Adjustments for risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 88,026
-------------
Total supplementary capital 338,026
Excess allowance for loan losses (16,354)
-------------
Adjusted supplementary capital 321,672
-------------
Total available capital 724,925
Equity investments (3) (18,933)
-------------
Total risk-based capital $ 705,992 14.06% $ 457,392 8.00% $ 248,600 6.06%
============= ============ ============= ============ ============= ============
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are
excluded from regulatory capital.
(3) Reflects an aggregate offset of $1.2 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.
(4) 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>
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 November 1996, the Bank received from the OTS a one-year extension
of the holding periods for certain of its REO properties. The following table
sets forth the Bank's REO at December 31, 1996, after valuation allowances of
$131.2 million, by the fiscal year in which the property was acquired through
foreclosure.
Fiscal Year (In thousands)
1990 (1) (2)......... $ 29,982
1991 (2)............... 65,853
1992 (2)............... 3,341
1993 .................... 4,931
1994 .................... 1,594
1995 .................... 6,401
1996 .................... 3,159
----------
Total REO ...... $ 115,261
=========
- -----------------------
(1) Includes REO with an aggregate net book value of $18.9 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $80.3 million, for
which the Bank received an extension of the holding periods through
November 12, 1997.
On December 3, 1996, the Bank sold $100.0 million principal amount of its 9
1/4% Subordinated Debentures due 2008. The Bank received net proceeds of $96.1
million from the sale of the 1996 Debentures which will be used for general
corporate purposes. The Bank has received OTS approval to include the principal
amount of the 1996 Debentures in the Bank's supplementary capital for regulatory
capital purposes.
In addition, on December 3, 1996, the REIT Subsidiary sold $150.0 million
of its preferred stock and received net cash proceeds of $144.0 million. Cash
dividends on the REIT Preferred Stock are payable quarterly in arrears at an
annual rate of 103/8%. The REIT Preferred Stock is automatically exchangeable
for a new series of preferred stock of the Bank upon the occurrence of certain
events (specifically, if the appropriate federal regulatory agency directs in
writing an exchange of the REIT Preferred Stock for Chevy Chase Bank, F.S.B.
103/8% Noncumulative Preferred Stock, Series B because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations established
pursuant to FDICIA, (ii) the Bank is placed into conservatorship or
receivership, or (iii) the appropriate federal regulatory agency, in its sole
discretion and even if the Bank is not "undercapitalized", anticipates the Bank
becoming "undercapitalized" in the near term). The Bank has received OTS
approval to include the proceeds received from the sale of the REIT Preferred
Stock in the core capital of the Bank for regulatory capital purposes in an
amount up to 25% of the Bank's core capital. The REIT Preferred Stock is not
redeemable until January 15, 2007, and is redeemable thereafter at the option of
the REIT Subsidiary.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of outstanding
debt.
Historically, the Real Estate Trust's total cash requirements have exceeded
the cash generated by its operations. This condition is expected to continue for
the foreseeable future. The Real Estate Trust's internal sources of funds,
primarily cash flow generated by its income-producing properties, generally have
been sufficient to meet its cash needs other than the repayment of principal on
outstanding debt, including outstanding unsecured notes ("Unsecured Notes") sold
to the public, the payment of interest on its Senior Secured Notes ("Secured
Notes"), and the payment of capital improvement costs. In the past, the Real
Estate Trust funded such shortfalls through a combination of external funding
sources, primarily new financings (including the sale of Unsecured Notes),
refinancings of maturing mortgage debt, asset sales and tax sharing payments
from the Bank. See the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements in this report.
The Real Estate Trust's current program of public Unsecured Note sales was
initiated in the 1970's as vehicle for supplementing other external funding
sources. In the December 1996 quarter, the Real Estate Trust sold $3.4 million
of Unsecured Notes. The table under "Recent Liquidity Trends" below provides
information as of December 31, 1996 with respect to the maturities of Unsecured
Notes outstanding at such date.
Recent Liquidity Trends. In fiscal 1994, the Real Estate Trust refinanced a
significant portion of its outstanding secured indebtedness with the proceeds of
the issuance of $175.0 million aggregate principal amount of 11 5/8% Senior
Secured Notes due 2002 (the "Senior Secured Notes"). The indenture pursuant to
which the Senior Secured Notes were issued contains covenants that, among other
things, restrict the ability of the Trust and/or its subsidiaries (excluding, in
most cases, the Bank and the Bank's subsidiaries) to incur additional
indebtedness, make investments, sell assets or pay dividends and make other
distributions to holders of the Trust's capital stock.
Through February 3, 1997, the Trust has purchased either in the open market
or through dividend reinvestment 1.6 million shares of common stock of Saul
Centers (representing 13.3% of such company's outstanding common stock). These
shares have been deposited with the Trustee for the Senior 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 Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to pay outstanding
Unsecured Notes as they mature. In paying maturing Unsecured Notes with proceeds
of Unsecured Note sales, the Real Estate Trust effectively is refinancing its
outstanding Unsecured Notes with similar new unsecured debt. To the degree that
the Real Estate Trust does not sell new Unsecured Notes in an amount sufficient
to finance completely the scheduled repayment of outstanding Unsecured Notes as
they mature, it will finance such repayments from other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility is for a two-year
period and may be extended for one or more additional one-year terms. Interest
is computed by reference to a floating rate index. At December 31, 1996, there
<PAGE>
were no borrowings under the facility and unrestricted availability on that
date was $8.7 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility is for a one-year
term, after which the loan amount amortizes over a two-year period. Interest in
computed by reference to the floating rate index. At December 31, 1996, there
were no borrowings under the facility. Management and the bank are currently
holding discussions to extend the term of this facility.
In the three-month period ended December 1996, the Real Estate Trust
refinanced one hotel and three office properties with five-year floating rate
debt. After payment of all financing costs, the Real Estate Trust received net
proceeds of approximately $7.9 million.
The maturity schedule for the Real Estate Trust's outstanding debt at
December 31, 1996 for the balance of fiscal 1997 and subsequent years is set
forth in the following table:
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------------------
Notes Payable- Notes Payable-
Fiscal Year Mortgage Notes Secured Unsecured Total
------------ -------------- -------------- -------------- -----------
1997 (1) $ 8,745 $ -- $ 3,886 $ 12,631
1998 8,132 -- 7,475 15,607c
1999 17,811 -- 16,028 33,839
2000 19,609 -- 7,160 26,769
2001 5,796 -- 3,907 9,703
Thereafter 122,992 175,000 5,441 303,433
------------ -------------- -------------- -------------- -----------
Total $183,085 $ 175,000 $43,897 401,982
============= ============== ============== ============== ===========
(1) January 1, 1997 - September 30, 1997
Of the $183.1 million of mortgage debt outstanding at December 31, 1996,
$132.7 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.
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 1997 and subsequent years, will depend in significant
part on its receipt of dividends from the Bank and tax sharing payments from the
Bank pursuant to the tax sharing agreement among the Trust, the Bank, and their
subsidiaries. The availability and amount of tax sharing payments and dividends
in future periods is dependent upon, among other things, the Bank's operating
performance and income, regulatory restrictions on such payments and (in the
case of tax sharing payments) the continued consolidation of the Bank and the
Bank's subsidiaries with the Trust for federal income tax purposes.
<PAGE>
The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods, as well as the Bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the Bank. During the three-month period ended
December 31, 1996, the Bank made no such payments to the Real Estate Trust. In
January 1997, the Bank made a $3.2 million tax sharing payment and a $2.4
million dividend payment to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating
losses while the Bank has reported net income. It is anticipated that the
Trust's consolidation of the Bank's operations into the Trust's federal income
tax return will result in the use of the Trust's net operating losses to reduce
the federal income taxes the Bank would otherwise owe. If in any future year,
the Bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the Bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated federal income
tax returns or (ii) the amount of tax refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.
As the owner, directly and through two wholly-owned subsidiaries, of a
21.5% limited partnership interest in Saul Holdings Limited Partnership ("Saul
Holdings Partnership"), the Real Estate Trust will share in cash distributions
from operations and from capital transactions involving the sale or refinancing
of the properties of Saul Holdings Partnership. The partnership agreement of
Saul Holdings Partnership provides for quarterly cash distributions to the
partners out of net cash flow. During the three-month period ended December 31,
1996, the Real Estate Trust received a cash distribution of $1.4 million from
Saul Holdings Partnership.
<PAGE>
BANKING
Liquidity. The Bank's average liquidity ratio for the month ended December
31, 1996 was 11.8%, compared to 13.1% for the month ended September 30, 1996.
Additionally, the Bank met the liquidity level requirements imposed by the OTS
for each month of the first three months of fiscal 1997.
In recent periods, the proceeds from the securitization and sale of credit
card, home equity credit line, automobile and home loan receivables have been
significant sources of liquidity for the Bank. The Bank securitized and sold
$355.0 million of credit card receivables and $321.4 million of automobile loan
receivables during the first three months of fiscal 1997. At December 31, 1996,
the Bank was considering the securitization and sale of the following
receivables: (i) approximately $1.1 billion of credit card receivables,
including $165.0 million of receivables outstanding at December 31, 1996 and
$910.0 million of receivables which the Bank expects to become available through
additional fundings during the six months ending June 30, 1997; (ii)
approximately $460.0 million of automobile loan receivables, including $60.0
million of receivables outstanding at December 31, 1996 and $400.0 million of
receivables which the Bank expects to become available through additional
fundings during the six months ending June 30, 1997; (iii) approximately $100.0
million of home loan receivables; and (iv) approximately $25.0 million of home
equity credit line receivables. As part of its operating strategy, the Bank will
continue to explore opportunities to sell assets and to securitize and sell
credit card, home equity credit line, automobile and home loan receivables to
meet liquidity and other balance sheet objectives. See Note 7 to the
Consolidated Financial Statements in this report.
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables. Of the $5.4 billion of outstanding trust
certificate balances at December 31, 1996, the primary recourse to the Bank was
approximately $140.7 million. The Bank is also obligated under various recourse
provisions related to the swap of single-family residential loans for
participation certificates issued to the Bank by the Federal Home Loan Mortgage
Corporation. At December 31, 1996, recourse to the Bank under these arrangements
was approximately $4.2 million.
There were no material commitments for capital expenditures at December 31,
1996.
The Bank's liquidity requirements in fiscal 1997 and for years subsequent
to fiscal 1997 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 DECEMBER 31, 1996 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1995
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization
of $4.3 million and an operating loss of $7.1 million in the three-month period
ended December 31, 1996 (the "1997 quarter") compared to a loss before
depreciation and amortization of $4.5 million and an operating loss of $7.0
million in the three-month period ended December 31, 1995 (the "1996 quarter").
The changes reflect improved results from properties and higher depreciation and
amortization.
Income after direct operating expenses from hotel properties increased
$146,000 (3.6%) in the 1997 quarter over the level achieved in the 1996 quarter.
In the current period, room sales increased $453,000 (5.2%), while food and
beverage sales increased $74,000 (2.2%). The increase in total revenue of
$504,000 (4.0%) exceeded the increase of $358,000 (4.1%) in direct operating
expenses. The revenue increase was attributable to improved market conditions
which permitted the Real Estate Trust to raise average room rates.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $203,000 (7.3%) in the
1997 quarter over the 1996 quarter results. The increase in gross income, which
totaled $319,000 (7.1%), exceeded the increase in expenses of $116,000 (6.7%).
The improved income was due to a higher level of leased space in the current
period.
Interest expense decreased $77,000 (0.8%) in the 1997 quarter, primarily
because of lower average borrowings. Average balances of the Real Estate Trust's
outstanding borrowings decreased slightly to $396.4 million for the 1997 quarter
from $398.8 million for the 1996 quarter. The average interest rate in both
quarters was 10.28%.
Amortization of debt expense increased $32,000 (22.5%) in the 1997 quarter,
primarily due to the expense of the $8.0 million line of credit.
Depreciation increased $236,000 (9.8%) in the 1997 quarter as a result of
new assets placed in service and the change in the hotel portfolio described
above.
Advisory, management and leasing fees paid to related parties increased
$123,000 (6.9%) in the 1997 quarter from their level in the 1996 quarter. The
monthly advisory fees were $311,000 in the 1997 quarter, compared to $301,000 in
the 1996 quarter, an increase totalling $30,000 (3.3%). Management and leasing
fees increased $93,000 (10.5%) in the current quarter, reflecting both higher
hotel sales and office rents on which the fees are based.
General and administrative expense increased $60,000 (14.3%) in the 1997
quarter due to higher legal and accounting expense ($106,000), partially reduced
by a lower level of expense for other administrative items ($46,000).
<PAGE>
BANKING
Overview. The Bank recorded operating income of $20.0 million for the three
months ended December 31, 1996 (the "1996 quarter"), compared to operating
income $16.0 million for the three months ended December 31, 1995 (the "1995
quarter"). The increase in income for the 1996 quarter was primarily
attributable to a $21.3 million increase in other (non-interest) income
resulting primarily from an increase in credit card fee income. In addition, the
Bank's net interest income before provision for loan losses increased $12.4
million primarily as a result of an increase in interest income on the Bank's
loan portfolio. These increases were partially offset by a $14.8 million
increase in operating expenses and a $14.9 million increase in the provision for
loan losses.
Net Interest Income. Net interest income, before the provision for loan
losses, increased $12.4 million (or 27.4%) in the 1996 quarter. The Bank would
have recorded interest income of $2.9 million for the 1996 quarter if the Bank's
non-accrual assets and restructured loans had been current in accordance with
their original terms. 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 December 31,
-----------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
------------ ---------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $ 3,439,724 $ 93,240 10.84% $ 2,924,489 $ 76,484 10.46%
Mortgage-backed securities 1,277,901 18,914 5.92 853,012 13,212 6.20
Federal funds sold and securities
purchased under agreements to resell 78,391 1,055 5.38 121,996 1,829 6.00
Trading securities 13,325 244 7.32 8,769 155 7.07
Investment securities 9,850 144 5.85 4,406 49 4.45
Other interest-earning assets 158,765 1,674 4.22 160,495 1,860 4.64
------------ ---------- ------------ ----------
Total 4,977,956 115,271 9.26 4,073,167 93,589 9.19
---------- --------- ---------- ---------
Noninterest-earning assets:
Cash 185,194 150,671
Real estate held for investment or sale 123,451 176,741
Property and equipment, net 229,447 200,401
Cost in excess of net assets acquired, net 2,255 3,989
Other assets 322,118 224,952
------------ ------------
Total assets $ 5,840,421 $ 4,829,921
============ ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 939,041 5,296 2.26 $ 875,606 5,950 2.72
Savings deposits 953,087 8,133 3.41 928,988 7,901 3.40
Time deposits 1,183,496 15,290 5.17 1,286,806 18,382 5.71
Money market deposits 993,038 9,607 3.87 976,924 9,746 3.99
------------ ---------- ------------ ----------
Total deposits 4,068,662 38,326 3.77 4,068,324 41,979 4.13
Borrowings 1,281,952 19,218 6.00 340,420 6,290 7.39
------------ ---------- ------------ ----------
Total liabilities 5,350,614 57,544 4.30 4,408,744 48,269 4.38
---------- --------- ---------- ---------
Noninterest-bearing items:
Noninterest-bearing deposits 83,861 63,801
Other liabilities 48,732 60,114
Minority interest 45,016 0
Stockholders' equity 312,198 297,262
------------ ------------
Total liabilities and stockholders' equity$ 5,840,421 $ 4,829,921
============ ============
Net interest income $ 57,727 $ 45,320
========== ==========
Net interest spread (2) 4.96% 4.81%
========= =========
Net yield on interest-earning assets (3) 4.64% 4.45%
========= =========
Interest-earning assets to interest-bearing liabilities 93.04% 92.39%
========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
(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 December 31, 1996
Compared to
Three Months Ended December 31, 1995
Increase (Decrease)
Due to Change in (1)
------------------------------------------------------------
Total
Volume Rate Change
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 13,894 $ 2,862 $ 16,756
Mortgage-backed securities 9,608 (3,906) 5,702
Federal funds sold and securities
purchased under agreements to resell (600) (174) (774)
Trading securities 83 6 89
Investment securities 76 19 95
Other interest-earning assets (20) (166) (186)
----------------- ----------------- -----------------
Total interest income 23,041 (1,359) 21,682
----------------- ----------------- -----------------
Interest expense:
Deposit accounts 23 (3,676) (3,653)
Borrowings 20,966 (8,038) 12,928
----------------- ----------------- -----------------
Total interest expense 20,989 (11,714) 9,275
----------------- ----------------- -----------------
Increase in net interest income $ 2,052 $ 10,355 $ 12,407
================= ================= =================
- -----------------------------------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and
rate has been allocated in proportion to the absolute value of the
change due to volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
Interest income in the 1996 quarter increased $21.7 million (or 23.2%) from
the level in the 1995 quarter primarily as a result of higher average balances
of loans receivable and, to a lesser extent, mortgage-backed securities. Higher
average yields earned by the Bank on its loan portfolio also contributed to the
increase in interest income. Lower average yields on mortgage-backed securities
partially offset the effect on interest income of the higher average yields and
higher average balances related to the Bank's loan portfolio.
The Bank's net yield on interest-earning assets increased to 4.64% in the
1996 quarter from 4.45% in the 1995 quarter. The increase primarily reflected
lower interest rates on the Bank's interest-bearing liabilities and, to a lesser
extent, the upward adjustment of interest rates on certain of the Bank's
adjustable-rate products and higher yields on other consumer loans.
Interest income on loans, the largest category of interest-earning assets,
increased by $16.8 million (or 21.9%) from the 1995 quarter primarily because of
higher average balances and, to a lesser extent, higher average yields on the
loan portfolio.
Higher average balances on credit card loans, which increased $114.1
million (or 10.8%), resulted primarily from the Bank's continued expansion of
the credit card loan program. The increase was primarily responsible for a $7.2
million (or 19.0%) increase in interest income from credit card loans. Higher
average balances of automobile loans resulted primarily from the higher
origination volume of such loans, and was largely responsible for a $3.8 million
(or 68.3%) increase in interest income on automobile loans. Interest income on
the Bank's single family residential loans increased by $4.4 million (or 17.9%)
primarily because of increased originations, which resulted in an increase of
$280.5 million in the average balances of such loans.
The average yield on the loan portfolio in the 1996 quarter increased by 38
basis points (to 10.84% from 10.46%) from the average yield in the 1995 quarter.
The higher yields were primarily due to increases in the average net yield on
credit card loans from 14.32% to 15.38% and on automobile loans from 10.19% to
11.95%. The increase in the net yield on credit card loans was primarily a
result of risk management strategies that have repriced upward the yield on
higher risk credit card accounts and the expiration of promotional introductory
rates. The increase in the net yield on automobile loans was primarily due to
higher yields earned on loans originated by one of the Bank's operating
subsidiaries.
Interest income on mortgage-backed securities increased $5.7 million (or
43.2%) primarily because of higher average balances. The increased
mortgage-backed securities balances in the 1996 quarter reflected the effects of
the purchase of $649.7 million of mortgage-backed securities during fiscal 1996.
The positive effect of the higher average balances was partially offset by a
decrease in the average interest rates on these securities from 6.20% to 5.92%.
<PAGE>
Interest expense increased $9.3 million (or 19.2%) for the 1996 quarter
primarily because of an increase of $941.5 million (or 276.6%) in the average
balances of the Bank's borrowings. The increase in the average balances of
borrowings resulted in an increase of $12.9 million in interest expense for the
1996 quarter for such liabilities. The increase in interest paid on borrowings
is primarily due to a $8.8 million and a $3.3 million increase in interest
expense on securities sold under repurchase agreements and Federal Home Loan
Bank advances, respectively, resulting from higher average balances of such
borrowings. The negative effect of the higher average balances was partially
offset by a decrease in the average borrowing rate (to 6.00% from 7.39%), which
reflected lower market interest rates in the 1996 quarter as compared to the
1995 quarter.
The increase in interest expense on borrowings was partially offset by a
$3.7 million decrease in interest expense on deposits, the largest category of
interest-bearing liabilities. Interest expense on deposits decreased primarily
because of a decline in the average rates on deposits (to 3.77% from 4.13%).
Provision for Loan Losses. The Bank's provision for loan losses increased
to $26.8 million in the 1996 quarter from $11.9 million in the 1995 quarter. The
$14.9 million increase was primarily attributable to a $13.9 million increase in
the provision for losses on credit card loans primarily because of increased
charge-offs of such loans, reflecting an industry-wide decline in the
performance of credit card loans. See "Financial Condition - Asset Quality -
Allowances for Losses."
Other Income. The increase in other (non-interest) income to $87.6 million
in the 1996 quarter from $66.4 million in the 1995 quarter was primarily
attributable to increases in credit card fees and gain on sales of loans. Also
contributing to the increase in other income was a decrease in loss on real
estate held for investment or sale.
Credit card fees, consisting primarily of membership fees, late charges,
cash advance charges and overlimit fees increased to $14.5 million in the 1996
quarter from $4.3 million in the 1995 quarter. The $10.2 million (or 239.1%)
increase was primarily attributable to the impact of recent changes in the fee
structure for the Bank's credit card program.
Gain on sales of loans increased $2.9 million (or 59.4%) primarily as a
result of a $7.3 million gain on the securitization and sale of $321.4 million
of automobile loans in the 1996 quarter, compared to a $4.6 million gain on the
securitization and sale of $247.6 million of automobile loans in the 1995
quarter.
The $3.9 million (or 47.3%) decrease in loss on real estate held for
investment or sale was primarily attributable to a decrease of $4.7 million in
the provision for losses on such assets, which was partially offset by a $0.8
million decrease in the gain recorded on sales of the Bank's REO properties. See
"Financial Condition - Asset Quality - Allowance for Losses."
<PAGE>
Operating Expenses. Operating expenses for the 1996 quarter increased $14.8
million (or 17.6%) from the level in the 1995 quarter, largely as a result of
the Bank's credit card lending program. The main components of the higher
operating expenses were increases in salaries and employee benefits, marketing
and data processing expenses. The $7.3 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card, consumer lending and branch operations. The $9.7 million increase in
marketing expenses was primarily attributable to a $7.5 million increase in
marketing expenses associated with the credit card portfolio as the Bank
continues to focus on increased originations of such loans. The $2.9 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 quarter. Partially offsetting these increases was
a $4.5 million decrease in other expenses which was primarily due to a decline
in credit card fraud losses recorded during the current period.
