<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
Supplement Dated February 17,1998
to Prospectus Dated January 30, 1998
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
DECEMBER 31, 1997
----------------------------
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Statements:
(a) Consolidated Balance Sheets at December 31, 1997 and
September 30, 1997
(b) Consolidated Statements of Operations for the
three-month periods ended December 31, 1997 and 1996
(c) Consolidated Statements of Cash Flows for the
three-month periods ended December 31, 1997 and 1996
(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 December 31, 1997 compared
to three months ended December 31, 1996
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
December 31 September 30
-------------- --------------
(In thousands) 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 155,325 $ 128,557
Office and industrial 109,443 109,628
Other 4,275 4,265
------------ ------------
269,043 242,450
Accumulated depreciation (88,574) (85,915)
------------ ------------
180,469 156,535
Land parcels 42,279 42,160
Construction in progress 4,298 2,480
Cash and cash equivalents 8,628 18,248
Other assets 81,745 81,150
------------ ------------
Total real estate assets 317,419 300,573
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and other deposits 376,751 286,891
Federal funds sold and securities purchased under agreements to resell 300,000 365,000
Loans held for sale 108,441 102,749
Loans held for securitization and sale 180,000 220,000
Trading securities 16,744 7,899
Investment securities (market value $38,977 and $5,012, respectively) 39,008 4,998
Mortgage-backed securities (market value $1,746,589 and $1,984,667, respectively) 1,752,149 1,985,707
Loans receivable (net of allowance for losses of $113,131 and $105,679, respectively) 2,327,325 2,104,240
Federal Home Loan Bank stock 33,170 33,170
Real estate held for investment or sale (net of allowance for losses of $143,872 and $140,936,
respectively 88,932 94,290
Property and equipment, net 278,832 273,562
Goodwill and other intangible assets, net 31,680 8,846
Interest-only strips, net 139,365 105,812
Other assets 456,544 464,249
------------ ------------
Total banking assets 6,128,941 6,057,413
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,446,360 $ 6,357,986
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LIABILITIES
Real Estate
Mortgage notes payable $ 206,969 $ 180,204
Notes payable - secured 175,000 175,000
Notes payable - unsecured 47,252 46,633
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred shares of beneficial interest 37,585 36,231
Other liabilities and accrued expenses 31,648 39,959
------------ ------------
Total real estate liabilities 611,337 590,910
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 4,994,545 4,893,756
Borrowings 86,931 81,840
Federal Home Loan Bank advances 139,939 188,511
Other liabilities and accrued expenses 170,551 168,060
Capital notes -- subordinated 250,000 250,000
------------ ------------
Total banking liabilities 5,641,966 5,582,167
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 53,734 51,388
Minority interest -- other 218,307 218,306
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,525,344 6,442,771
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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 (137,140) (142,642)
Net unrealized holding loss (97) (396)
------------ ------------
(37,136) (42,937)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (78,984) (84,785)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,446,360 $ 6,357,986
- ------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<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) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE
Income
Hotels $ 15,206 $ 13,209
Office and industrial properties 5,518 4,833
Other 1,025 978
-------------- --------------
Total income 21,749 19,020
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Expenses
Direct operating expenses:
Hotels 10,222 9,061
Office and industrial properties 1,911 1,840
Land parcels and other 399 469
Interest expense 10,082 9,971
Amortization of debt expense 140 174
Depreciation 2,659 2,649
Advisory, management and leasing fees - related parties 2,043 1,912
General and administrative 384 480
-------------- --------------
Total expenses 27,840 26,556
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Equity in earnings (losses) of unconsolidated entities (1,339) 444
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REAL ESTATE OPERATING LOSS $ (7,430) $ (7,092)
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BANKING
Interest income
Loans $ 74,495 $ 93,240
Mortgage-backed securities 26,607 18,914
Trading securities 472 244
Investment securities 402 144
Other 4,419 2,729
-------------- --------------
Total interest income 106,395 115,271
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Interest expense
Deposit accounts 48,779 38,326
Borrowings 9,513 19,218
-------------- --------------
Total interest expense 58,292 57,544
-------------- --------------
Net interest income 48,103 57,727
Provision for loan losses (35,062) (26,840)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,041 30,887
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Other income
Loan and deposit servicing fees 76,228 63,285
Credit card fees 13,758 14,532
Gain (loss) on sales of trading securities, net 557 (51)
Loss on real estate held for investment or sale, net (4,914) (4,374)
Gain on sales of loans, net 33,172 7,901
Net unrealized gain on interest-only strips 3,824 --
Other 6,744 6,318
-------------- --------------
Total other income 129,369 87,611
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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 December 31
------------------------------
(In thousands, except per share amounts) 1997 1996
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<S> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 44,845 $ 36,604
Loan 9,762 4,320
Property and equipment 6,680 5,665
Marketing 20,315 20,077
Data processing 10,549 11,845
Depreciation and amortization 7,830 6,543
Deposit insurance premiums 1,466 2,066
Amortization of goodwill and other intangible assets 798 368
Other 10,732 11,052
-------------- --------------
Total operating expenses 112,977 98,540
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BANKING OPERATING INCOME $ 29,433 $ 19,958
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TOTAL COMPANY
Operating income $ 22,003 $ 12,866
Income tax provision 5,581 5,131
-------------- --------------
Income before extraordinary item and minority interest 16,422 7,735
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (266) --
-------------- --------------
Income before minority interest 16,156 7,735
Minority interest held by affiliates (2,971) (1,740)
Minority interest -- other (6,329) (3,692)
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TOTAL COMPANY NET INCOME 6,856 2,303
DEFICIT
Beginning of period (142,642) (156,084)
Dividends
Preferred shares of beneficial interest 1,354 1,354
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End of period $ (137,140) $ (155,135)
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NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 5,502 $ 949
NET INCOME PER COMMON SHARE
Income before extraordinary item and minority interest $ 3.13 $ 1.32
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (0.06) --
-------------- --------------
Income before minority interest 3.07 1.32
Minority interest held by affiliates (0.62) (0.36)
Minority interest -- other (1.31) (0.76)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.14 $ 0.20
- -----------------------------------------------------------------------------------------------------------------------------------
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 Three Months
Ended December 31
------------------------------
(In thousands) 1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (5,027) $ (4,658)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 2,659 2,649
Early extiguishment of debt 266 --
Decrease (increase) in accounts receivable and accrued income (1,397) (855)
Decrease (increase) in deferred tax asset (2,691) (2,517)
Increase in accounts payable and accrued expenses (7,209) (5,772)
Amortization of debt expense 140 174
Equity in (earnings) losses of unconsolidated entities 1,339 (444)
Other 2,632 2,653
-------------- --------------
(9,288) (8,770)
-------------- --------------
Banking
Net income 11,883 6,961
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 7,998 (1,172)
Depreciation and amortization 7,889 6,656
Amortization of goodwill and other intangible assets 802 2,418
Provision for loan losses 35,062 26,840
Capitalized interest on real estate held for investment or sale (499) (559)
Net purchases of trading securities (8,845) --
Proceeds from sales of trading securities 137,539 91,926
Net fundings of loans held for sale and/or securitization (197,425) (191,348)
Proceeds from sales of loans held for sale and/or securitization 829,487 755,197
Earnings on real estate (332) (424)
Provision for losses on real estate held for investment or sale 5,307 4,697
(Gain) loss on sales of trading securities, net (557) 51
Gain on sales of loans, net (33,172) (7,901)
Unrealized gain on interest-only strips (3,824) --
Increase in interest-only strips (33,553) --
Increase in excess servicing assets -- (9,117)
Decrease (increase) in servicing assets 6,930 (1,519)
Increase in goodwill and other intangible assets (23,870) --
Decrease (increase) in other assets 557 (64,169)
Increase (decrease )in other liabilities and accrued expenses 1,455 (16,475)
Minority interest held by affiliates 2,971 1,740
Minority interest - other 2,438 2,438
Other 3,940 (2,136)
-------------- --------------
752,181 604,104
-------------- --------------
Net cash provided by operating activities 742,893 595,334
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (2,086) (1,497)
Property acquisitions (26,124) (4,709)
Equity investment in unconsolidated entities 1,327 1,097
-------------- --------------
(26,883) (5,109)
-------------- --------------
Banking
Net proceeds from redemption of Federal Home Loan Bank stock -- 9,482
Net proceeds from sales of real estate 3,566 7,327
Net fundings of loans receivable (691,629) (725,811)
Principal collected on mortgage-backed securities 233,730 103,667
Purchases of investment securities (34,010) --
Purchases of mortgage-backed securities -- (168,941)
Purchases of loans receivable (272,979) (195,186)
Purchases of property and equipment (13,253) (17,295)
Disbursements for real estate held for investment or sale (3,325) (5,952)
Other (1,830) 233
-------------- --------------
(779,730) (992,476)
-------------- --------------
Net cash used in investing activities (806,613) (997,585)
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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) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 54,278 $ 19,500
Principal curtailments and repayments of mortgages (27,448) (9,750)
Repayments of secured notes -- (2,500)
Proceeds from sales of unsecured notes 2,587 1,881
Repayments of unsecured notes (1,968) (351)
Costs of obtaining financings (818) (236)
Loan prepayment fees (80) --
Dividends paid - preferred shares of beneficial interest -- (750)
-------------- --------------
26,551 7,794
-------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 6,181,097 4,221,190
Customer withdrawals of deposits and payments for maturing certificates of deposit (6,080,308) (4,179,256)
Net increase in securities sold under repurchase agreements 8,768 55,755
Advances from the Federal Home Loan Bank 106,602 393,216
Repayments of advances from the Federal Home Loan Bank (155,174) (243,616)
Proceeds from other borrowings 2,385,502 1,004,944
Repayments of other borrowings (2,389,177) (1,026,649)
Cash dividends paid on preferred stock (2,438) (2,438)
Cash dividends paid on common stock (3,500) (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 -- 144,000
Other 1,037 (133)
-------------- --------------
52,409 450,125
-------------- --------------
Net cash provided by financing activities 78,960 457,919
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 15,240 55,668
Cash and cash equivalents at beginning of period 670,139 281,941
-------------- --------------
Cash and cash equivalents at end of period $ 685,379 $ 337,609
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 76,216 $ 72,718
Income taxes paid 1,826 290
Shares of Saul Centers, Inc. common stock 706 844
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 706 565
Distributions from Saul Holdings Limited Partnership 1,363 1,363
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 1,204 1,514
Loans held for sale exchanged for trading securities 137,414 92,072
Loans receivable transferred to loans held for sale and/or securitization 697,547 576,582
Loans made in connection with the sale of real estate 3,624 467
Loans receivable transferred to real estate acquired in settlement of loans 1,222 1,148
Loans receivable exchanged for mortgage-backed securities held-to-maturity 2,786 --
- -----------------------------------------------------------------------------------------------------------------------------------
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,
1997. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year.
2. The accompanying financial statements include the accounts of B. F. Saul Real
Estate Investment Trust and its wholly owned subsidiaries (the "Real Estate
Trust"), which are involved in the ownership and development of income-producing
properties. The accounts of the Trust's 80%-owned banking subsidiary, Chevy
Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase" or the "Bank") have also
been consolidated. Accordingly, the accompanying financial statements reflect
the assets, liabilities, operating results and cash flows for two business
segments: Real Estate and Banking. All significant intercompany balances and
transactions have been eliminated.
3. The Trust voluntarily terminated its qualification as a real estate
investment trust under the Internal Revenue Code during fiscal 1978. As a result
of the Trust's acquisition of an additional 20% equity interest in the Bank in
June 1990, the Bank became a member of the Trust's affiliated group filing
consolidated federal income tax returns. The current effect of the Trust's
consolidation of the Bank's operations into its federal income tax return
results in the use of the Trust's net operating losses and net operating loss
carryforwards to reduce the federal income taxes the Bank would otherwise owe.
4. BANKING:
LOANS HELD FOR SALE:
Loans held for sale are composed of the following:
December 31, September 30,
1997 1997
------------ -----------
(In thousands)
Single-family residential $ 97,616 $ 102,749
Home improvement and related loans 10,825 -
------------ -----------
$ 108,441 $ 102,749
============ ===========
<PAGE>
LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale are composed of the following:
December 31, September 30,
1997 1997
---------- ----------
(In thousands)
Credit card $ 60,000 $ 90,000
Automobile 60,000 80,000
Home equity credit line 60,000 50,000
---------- ----------
Total $ 180,000 $ 220,000
========== ==========
LOANS RECEIVABLE:
December 31, September 30,
1997 1997
-------------- -------------
(In thousands)
Single-family residential $ 993,291 $ 747,070
Home equity credit line 81,101 44,088
Commercial real estate and multifamily 73,270 53,816
Real estate construction 118,330 77,221
Ground 29,446 29,592
Commercial 183,439 152,483
Credit card 949,173 987,149
Automobile 88,563 137,111
Home improvement and related loans 57,003 49,551
Overdraft lines of credit and
other consumer 35,578 36,029
-------------- -------------
2,609,194 2,314,110
-------------- -------------
Less:
Undisbursed portion of loans 171,462 106,217
Unearned discounts 420 449
Net deferred loan origination
costs (3,144) (2,475)
Allowance for loan losses 113,131 105,679
-------------- -------------
281,869 209,870
-------------- -------------
Total $ 2,327,325 $ 2,104,240
============== =============
<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,
1997 1997
----------- -----------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
----------- -----------
Real estate held for sale 228,985 231,407
----------- -----------
Less:
Allowance for losses on real estate
held for investment 198 198
Allowance for losses on real estate
held for sale 143,674 140,738
----------- -----------
143,872 140,936
----------- -----------
Total real estate held for
investment or sale $ 88,932 $ 94,290
=========== ===========
<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, 1997, the Bank's assets accounted for
approximately 95% of the Trust's consolidated assets. The Trust recorded net
income of $6.9 million for the three-month period ended December 31, 1997,
compared to net income of $2.3 million for the three-month period ended December
31, 1996.
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B. F.
Saul Real Estate Investment and its subsidiaries, including Chevy Chase and
Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real Estate
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the Bank and its subsidiaries
is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at
December 31, 1997, which consisted primarily of hotels, office and industrial
projects, and land parcels, was increased by one property from the number at
September 30, 1997. In the first quarter of fiscal 1998, the Real Estate Trust
purchased a 308-room Holiday Inn in Arlington, Virginia.
Space in the Real Estate Trust's commercial property portfolio was 99% leased at
December 31, 1997, compared to leasing rates of 99% and 95% at September 30,
1997 and December 31, 1996, respectively. At December 31, 1997, the Real Estate
Trust's commercial property portfolio had a total gross leasable area of 1.3
million square feet, of which 217,000 square feet (16.6%) and 258,000 square
feet (19.7%) are subject to leases whose terms expire in the balance of fiscal
1998 and in fiscal 1999, respectively.
The nine hotel properties owned by the Real Estate Trust throughout the first
fiscal quarters of 1998 and 1997 experienced average occupancy rates of 64% and
61%, respectively, and average room rates of $75.91 and $69.96, respectively.
Five of these hotels registered improved occupancy rates and seven registered
higher average room rates in the current period. Overall, the hotel portfolio
experienced an average occupancy rate of 63% and an average room rate of $75.84
during the quarter ended December 31, 1997. On December 10, 1997, the Real
Estate Trust purchased a 308-room Holiday Inn hotel located in Arlington,
Virginia, near Washington National Airport and the Real Estate Trust's Howard
Johnsons hotel. The purchase price was $25.8 million. The Real Estate Trust
obtained 15 - year fixed rate financing on the hotel in the amount of $17.7
million.
<PAGE>
BANKING
General. The Bank recorded operating income of $29.4 million during the December
1997 quarter, compared to operating income of $20.0 million in the prior
corresponding period. The increase in operating income for the current quarter
was primarily a result of a $41.8 million increase in the Bank's other
(non-interest) income, which was primarily due to increased gains on sales of
loans and loan and deposit servicing fees. Partially offsetting these increases
were a decrease in interest income, an increase in the provision for loan losses
and an increase in operating expenses. See "Results of Operations."
Gains on sales of loans of $33.2 million continued to be a large component of
the Bank's non-interest income during the current quarter and resulted primarily
from the Bank's securitization activity. During the December 1997 quarter, the
Bank securitized and sold $335.0 million of credit card receivables, $220.9
million of automobile loan receivables and $161.7 million of home equity credit
line receivables, and recognized gains of $4.5 million, $9.0 million and $4.1
million, respectively, in connection with these sales. See "Liquidity." Gains of
$17.6 million were also recognized during the quarter on sales of loans that
were transferred to existing trusts. Amortization of the interest-only strips
related to prior gains on sales of loans, in the amount of $8.6 million is
included in loan and deposit servicing fees.
At December 31, 1997, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.65%, 6.65%, 6.81% and 13.01%,
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."
During the quarter, the Bank declared and paid, out of the retained earnings of
the Bank, a cash dividend on its Common Stock in the amount of $350 per share.
On November 12, 1997, the Bank purchased ASB Capital Management, Inc. ("ASB"),
formerly a wholly-owned subsidiary of NationsBank Corporation and one of the
largest SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area. ASB provides a variety of investment products, including
equity and fixed income securities, money market investments, and real estate
investments, to a primarily institutional client base and has approximately $3.0
billion of assets under management. The Bank anticipates that the acquisition
will provide an additional source of fee-based revenues. Although the
acquisition generated additional goodwill which reduced the Bank's regulatory
capital levels, the Bank's capital levels remained above the levels established
for well-capitalized institutions.
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 and Past Due Credit Card Loans
(Dollars in thousands)
December 31, September 30, December 31,
1997 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 10,379 $ 9,617 $ 9,082
Credit card (1) -- -- 31,414
Consumer and other 5,875 4,226 2,720
------------------ ------------------ -----------------
Total non-accrual loans (2) 16,254 13,843 43,216
------------------ ------------------ -----------------
Real estate acquired in settlement of loans 228,985 231,407 246,477
Allowance for losses on real estate acquired in
settlement of loans (143,674) (140,738) (131,216)
------------------ ------------------ -----------------
Real estate acquired in settlement of loans, net 85,311 90,669 115,261
------------------ ------------------ -----------------
Total non-performing assets 101,565 104,512 158,477
Accruing credit card loans past due 90 days (1) 26,357 25,700 --
------------------ ------------------ -----------------
Total non-performing assets and accruing credit card
loans past due 90 days $ 127,922 $ 130,212 $ 158,477
================== ================== =================
Allowance for losses on loans $ 113,131 $ 105,679 $ 95,485
Allowance for losses on real estate held for investment 198 198 191
Allowance for losses on real estate acquired in settlement
of loans 143,674 140,738 131,216
------------------ ------------------ -----------------
Total allowances for losses $ 257,003 $ 246,615 $ 226,892
================== ================== =================
Ratios:
Non-performing assets and credit card loans past due
90 days, net to total assets (3) 0.24% 0.40% 1.02%
Allowance for losses on real estate loans to non-accrual
real estate loans (2) 95.41% 99.80% 115.68%
Allowance for losses on consumer and other loans to
non-accrual consumer and other loans (2) 136.94% 148.37% 187.02%
Allowance for losses on loans to non-accrual loans (2) 696.02% 763.41% 220.95%
Allowance for losses on loans to total loans receivable (4) 4.15% 4.17% 2.62%
(1) Effective June 30, 1997, the Bank no longer places credit card loans on
non-accrual status.
(2) Before deduction of allowances for losses.
(3) Non-performing assets and credit card loans past due 90 days are presented
after all allowances for losses on loans and real estate held for investment
or sale.
(4) Includes loans receivable and loans held for sale and/or securitization,
before deduction of allowance for losses.
</TABLE>
<PAGE>
Non-performing assets include non-accrual loans (loans, other than credit card
loans, which are 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. Credit card loans are not placed on non-accrual
status, but continue to accrue interest until the loan is either paid or
charged-off.
Non-performing assets totaled $101.6 million, after valuation allowances on real
estate held for sale or real estate owned ("REO") of $143.7 million, at December
31, 1997, compared to $104.5 million, after valuation allowances on REO of
$140.7 million, at September 30, 1997. In addition to the valuation allowances
on REO, the Bank maintained $3.8 million of valuation allowances on its
non-accrual loans at December 31, 1997. The $2.9 million decrease in
non-performing assets for the current quarter was primarily attributable to a
net decrease in REO of $5.4 million, which was partially offset by an increase
in non-accrual loans of $2.5 million. See "Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $16.3 million at
December 31, 1997, as compared to $13.8 million at September 30, 1997. At
December 31, 1997, non-accrual loans consisted of $10.4 million of real estate
loans and $5.9 million of other consumer loans.
REO. At December 31, 1997, the Bank's REO totaled $85.3 million, after valuation
allowances on such assets of $143.7 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
predevelopment stage.
Balance Balance
Before All After
Number of Valuation Valuation Valuation Percent
Properties Allowances Allowances Allowances of Total
---------- ------------ ----------- ----------- --------
(Dollars in thousands)
Communities 5 $ 205,332 $ 138,013 $ 67,319 78.9%
Residential ground 3 6,844 1,097 5,747 6.7%
Commercial ground 4 14,217 4,564 9,653 11.3%
Single-family
residential properties 22 2,592 - 2,592 3.1%
-- --------- --------- -------- -------
Total REO 34 $ 228,985 $ 143,674 $ 85,311 100.0%
== ========= ========= ======== =======
During the three months ended December 31, 1997, REO decreased $5.4 million,
which was primarily attributable to additional sales in the Communities and
other properties, partially offset by additional capitalized costs, and
additional valuation allowances of $2.9 million.
During the three months ended December 31, 1997, the Bank received revenues of
$9.2 million from the disposition of REO, which consisted of 36 residential lots
or units in the Communities ($2.5 million), 65.4 acres of commercial land ($5.3
million) and various single-family residential properties ($1.4 million).
At December 31, 1997, the Bank had executed contracts to sell one residential
ground property and one commercial ground property at their aggregate book value
of $2.4 million at that date.
<PAGE>
Delinquent Loans. At December 31, 1997, delinquent loans totaled $81.8 million
(or 3.0% of loans) compared to $84.6 million (or 3.3% of loans) at September 30,
1997. The following table sets forth information regarding the Bank's delinquent
loans at December 31, 1997.
Principal Balance
----------------------------------------- Total as a
Mortgage Non-Mortgage Percentage
Loans Loans Total of Loans (1)
----------- --------------- ----------- ------------
(Dollars in thousands)
Loans delinquent for:
30-59 days ............$ 5,142 $ 29,793 $ 34,935 1.3%
60-89 days ............ 1,609 18,923 20,532 0.7%
90 days or more and
still accruing....... - 26,357 26,357 1.0%
----------- ------------ ----------- -----
Total ................$ 6,751 $ 75,073 $ 81,824 3.0%
=========== ============ =========== =====
- ----------------
(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 from $8.5 million at September
30, 1997 to $6.8 million at December 31, 1997.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
decreased to $48.7 million at December 31, 1997 from $50.4 million at September
30, 1997, primarily due to a decline in delinquent credit card loans.
Non-mortgage loans delinquent 90 days or more and still accruing, which consists
entirely of credit card loans, increased slightly from $25.7 million at
September 30, 1997.
Troubled Debt Restructurings. At December 31, 1997 and September 30, 1997, loans
accounted for as troubled debt restructurings totaled $11.9 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 $0.2 million.
At December 31, 1997, 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, 1997 and September 30, 1997,
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,
----------------------------------
1997 1996 1997
-------------- -------------- --------------------
<S> <C> <C> <C>
Balance at beginning of period $ 105,679 $ 95,523 $ 95,523
-------------- -------------- --------------------
Provision for loan losses 35,062 26,840 125,115
-------------- -------------- --------------------
Increase due to acquisition of loans -- 118 118
-------------- -------------- --------------------
Charge-offs:
Single-family residential 274 332 1,014
Credit card 26,442 27,236 115,835
Other 3,972 1,902 9,657
-------------- -------------- --------------------
Total charge-offs 30,688 29,470 126,506
-------------- -------------- --------------------
Recoveries:
Single-family residential -- 9 34
Credit card 2,842 2,225 10,365
Other 236 240 1,030
-------------- -------------- --------------------
Total recoveries 3,078 2,474 11,429
-------------- -------------- --------------------
Charge-offs, net of recoveries 27,610 26,996 115,077
-------------- -------------- --------------------
Balance at end of period $ 113,131 $ 95,485 $ 105,679
============== ============== ====================
Provision for loan losses to average loans (1) (2) 5.45% 3.12% 3.50%
Net loan charge-offs to average loans (1) (2) 4.29% 3.14% 3.22%
Ending allowance for losses on loans to total
loans (2) (3) 4.15% 2.62% 4.17%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of allowance for losses.
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans by Type
(Dollars in thousands)
December 31,
-------------------------------------------------------------- September 30,
1997 1996 1997
------------------------------- ------------------------------ ------------------------------
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:
Single-family residential $ 784 40.1% $ 1,025 48.0% $ 661 33.5%
Home equity credit line 757 5.2 608 5.6 683 3.7
Commercial real estate and multifamily 7,781 2.2 7,924 2.1 7,705 2.1
Real estate construction and ground 581 2.1 949 1.6 550 2.2
Commercial 425 4.2 211 1.8 364 3.9
Credit card 94,758 37.0 79,681 31.9 89,446 42.6
Automobile 3,820 5.4 1,800 4.4 3,080 8.6
Home improvement and related loans 3,450 2.5 1,750 3.5 2,415 2.0
Overdraft lines of credit and
other consumer 775 1.3 1,537 1.1 775 1.4
-------------- -------------- --------------
Total $ 113,131 $ 95,485 $ 105,679
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(Dollars in thousands)
Three Months Ended Year Ended
December 31, September 30,
------------------------------------
1997 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 198 $ 191 $ 191
Real estate held for sale 140,738 126,519 126,519
--------------- --------------- ---------------
Total 140,936 126,710 126,710
--------------- --------------- ---------------
Provision for real estate losses:
Real estate held for investment -- -- 7
Real estate held for sale 5,307 4,697 19,616
--------------- --------------- ---------------
Total 5,307 4,697 19,623
--------------- --------------- ---------------
Charge-offs:
Real estate held for sale:
Ground 2,371 -- 5,397
--------------- --------------- ---------------
Total charge-offs on real estate
held for investment or sale 2,371 -- 5,397
--------------- --------------- ---------------
Balance at end of period:
Real estate held for investment 198 191 198
Real estate held for sale 143,674 131,216 140,738
--------------- --------------- ---------------
Total $ 143,872 $ 131,407 $ 140,936
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(Dollars in thousands)
December 31, September 30,
-----------------------------------
1997 1996 1997
--------------- -------------- -----------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 198 $ 191 $ 198
--------------- -------------- -----------------
Allowance for losses on real estate held for sale:
Single-family residential -- 83 --
Home equity credit line -- 1 --
Ground 143,674 131,132 140,738
--------------- -------------- -----------------
Total 143,674 131,216 140,738
--------------- -------------- -----------------
Total allowance for losses on real
estate held for investment or sale $ 143,872 $ 131,407 $ 140,936
=============== ============== =================
</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 $10.4 million from the level at
September 30, 1997 to $257.0 million at December 31, 1997. The $10.4 million
increase was primarily attributable to increased valuation allowances on credit
card loans and the Communities.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $153.7 million at December 31, 1997, which
constituted 64.2% of total non-performing real estate assets, before valuation
allowances. This amount represented a $3.2 million increase from the September
30, 1997 level of $150.5 million, or 62.5% of total non-performing real estate
assets, before valuation allowances at that date.
During the three months ended December 31, 1997, the Bank provided an additional
$5.9 million of valuation allowances on loans secured by real estate and real
estate held for investment or sale and recorded net charge-offs of $2.6 million
on these assets. The allowance for losses on real estate held for sale at
December 31, 1997 is in addition to approximately $48.7 million of cumulative
charge-offs previously taken against assets remaining in the Bank's portfolio at
December 31, 1997.
During the three months ended December 31, 1997, the Bank provided an additional
$0.9 million of general valuation allowances against the 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,
1997 were $23.6 million, compared to $25.0 million for the three months ended
December 31, 1996. The Bank believes that the decrease in net charge-offs over
the prior three-month period partially reflects the impact of more stringent
underwriting and other lending policies which the Bank implemented in recent
periods. The allowance for losses on credit card loans increased to $94.8
million at December 31, 1997 from $89.4 million at September 30, 1997, primarily
because of an increase in the provision for losses on such loans. The increase
in the provision was primarily attributable to an unallocated allowance
established by the Bank due to bankruptcies. The ratio of the allowance for such
losses to outstanding credit card loans was 9.4% at December 31, 1997 compared
to 8.3% at September 30, 1997.
The combined allowance for losses on consumer and other loans (automobile, home
improvement, overdraft lines of credit and other consumer loans) increased to
$8.0 million at December 31, 1997 from $6.3 million at September 30, 1997,
primarily because of the increased volume of consumer and other 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 136.9% and 3.2%, respectively, at December 31, 1997 compared to
148.4% and 2.1%, respectively, at September 30, 1997.
<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, 1997,
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, 1997 Real estate
loans:
Adjustable-rate $ 317,888 $ 597,111 $ 113,273 $ 1,718 $ 568 $ 1,030,558
Fixed-rate 7,918 3,269 18,974 21,567 13,876 65,604
Loans held for sale 108,441 -- -- -- -- 108,441
Home equity credit lines and second
mortgages 90,899 1,053 3,672 2,940 11,022 109,586
Credit card and other 1,055,434 30,325 75,244 49,453 24,252 1,234,708
Loans held for securitization and sale 180,000 -- -- -- -- 180,000
Mortgage-backed securities 741,993 437,852 435,600 109,734 26,970 1,752,149
Trading securities -- -- 16,744 -- -- 16,744
Other investments 497,233 -- 34,009 -- -- 531,242
------------- ------------ ------------- ------------- ----------- ------------
Total interest-earning assets 2,999,806 1,069,610 697,516 185,412 76,688 5,029,032
Total non-interest earning assets -- -- -- -- 1,099,909 1,099,909
------------- ------------ ------------- ------------- ----------- ------------
Total assets $ 2,999,806 $ 1,069,610 $ 697,516 $ 185,412 $1,176,597 $ 6,128,941
============= ============ ============= ============= =========== ============
Deposits:
Fixed maturity deposits $ 1,222,251 $ 238,263 $ 243,300 $ 49,278 $ -- $ 1,753,092
NOW, statement and passbook accounts 1,528,868 42,688 142,178 96,770 206,227 2,016,731
Money market deposit accounts 976,555 -- -- -- -- 976,555
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 183,754 373 6,444 19,256 17,043 226,870
------------- ------------ ------------- ------------- ----------- ------------
Total interest-bearing liabilities 3,911,428 281,324 391,922 165,304 473,270 5,223,248
Total non-interest bearing liabilities -- -- -- -- 562,718 562,718
Stockholders' equity -- -- -- -- 342,975 342,975
------------- ------------ ------------- ------------- ----------- ------------
Total liabilities & stockholders'
equity $ 3,911,428 $ 281,324 $ 391,922 $ 165,304 $1,378,963 $ 6,128,941
============= ============ ============= ============= =========== ============
Gap $ (911,622) $ 788,286 $ 305,594 $ 20,108 $ (396,582)
Cumulative gap $ (911,622) $ (123,336) $ 182,258 $ 202,366 $ (194,216)
Adjustment for interest rate caps (1) $ 261,111 $ 205,556 $ 50,000 $ -- $ --
Adjusted cumulative gap $ (650,511) $ 82,220 $ 232,258 $ 202,366 $ (194,216)
Adjusted cumulative gap as a
percentage of total assets (10.6%) 1.3% 3.8% 3.3% (3.2%)
(1) At December 31, 1997, the Bank had $305,556 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 1.2% at
December 31, 1997.
Capital. At December 31, 1997, 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,
1997 in relation to the regulatory requirements in effect at that date. The
information below is based upon the Bank's under standing 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 $ 374,290
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding losses (2) 116
------------
518,406
Adjustments for tangible and core capital:
Intangible assets (66,312)
Non-allowable minority interest in
REIT Subsidiary (1) (42,582)
Non-includable subsidiaries (3) (3,762)
Non-qualifying purchased/originated
loan servicing (82)
------------
Total tangible capital 405,668 6.65% $ 91,441 1.50% $ 314,227 5.15%
------------ =========== ============ ========== ============ ==========
Total core capital (4) 405,668 6.65% $ 243,844 4.00% $ 161,824 2.65%
------------ =========== ============ ========== ============ ==========
Tier 1 risk-based capital (4) 405,668 6.81% $ 238,317 4.00% $ 167,351 2.81%
------------ =========== ============ ========== ============ ==========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 101,997
------------
Total supplementary capital 351,997
Excess allowance for loan losses (27,183)
------------
Adjusted supplementary capital 324,814
------------
Total available capital 730,482
Equity investments (3) (15,233)
------------
Total risk-based capital (4) $ 715,249 3.01% $ 476,634 8.00% $ 238,615 5.01%
============ =========== ============ ========== ============ ==========
(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 $1.0 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 February 1998, the Bank received from the OTS an extension of the
holding periods for certain of its REO properties through February 17, 1999.
The following table sets forth the Bank's REO at December 31, 1997, after
valuation allowances of $143.7 million, by the fiscal year in which the property
was acquired through foreclosure.
Fiscal Year (In thousands)
--------------------- --------------
1990 (1) (2)......... $ 23,395
1991 (2)............. 46,599
1992 (2)............. 2,903
1993 ................ -
1994 ................ 1,776
1995 ................ 8,047
1996 ................ -
1997 ................ 2,591
--------------
Total REO ...... $ 85,311
==============
- -----------------------
(1) Includes REO with an aggregate net book value of $15.2 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $57.7 million, for
which the Bank received an extension of the holding periods
through February 17, 1999.
<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 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.
Liquidity. The Real Estate Trust's ability to meet its liquidity needs,
including debt service payments in the balance of fiscal 1998 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 and restrictions imposed by various agreements 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
and the availability of Trust collateral to support such payments.
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. In the first quarter of fiscal 1998, the
Bank made no tax sharing payments, but did make a dividend payment of $2.8
million 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 continue to result in the use of the
Trust's net operating losses to reduce the federal income taxes the Bank would
otherwise owe, resulting in the Real Estate Trust receiving tax sharing
payments. 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 the 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.
The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, it will finance such
repayments from other sources of funds.
<PAGE>
In fiscal 1994, the Real Estate 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 12, 1998, the Trust has purchased either in the open market or
through dividend reinvestment approximately 2.0 million shares of common stock
of Saul Centers (representing 15.6% of such company's outstanding common stock).
Most of 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.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At December 31, 1996, there were no borrowings under the facility
and unrestricted availability on that date was $9.2 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. In fiscal 1997, the line of credit was increased to $10.0 million and
was extended for an additional year. Interest in computed by reference to the
floating rate index. At December 31, 1997, there were no borrowings under the
facility and unrestricted availability was $4.6 million.
On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in the Crystal City neighborhood in Arlington, Virginia. The purchase
price was $25.8 million. Also on December 10, 1997, the Real Estate Trust
refinanced five other hotels in its portfolio. Funds for the two transactions
were provided by a lender in the amount of $53.0 million. The new loans have a
15-year term, a fixed interest rate of 7.57% and amortization based on a 25-year
schedule.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at December
31, 1997 for the balance of fiscal 1998 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
- ----------- -------------- -------------- -------------- -----------
1998 (1) $ 8,489 $ -- $ 5,642 $ 14,131
1999 9,987 -- 16,079 26,066
2000 12,928 -- 8,834 21,762
2001 10,579 -- 4,589 15,168
2002 12,018 175,000 5,164 192,182
Thereafter 152,968 -- 6,944 159,912
-------------- -------------- -------------- -----------
Total $206,969 $175,000 $47,252 $429,221
============== =============== ============= ===========
(1) January 1, 1998 - September 30, 1998
Of the $207.0 million of mortgage debt outstanding at December 31, 1997, $173.4
million was nonrecourse to Real Estate Trust.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Limited Partnership ("Saul Holdings
Partnership"), the Real Estate Trust shares in cash distributions from
operations and from capital transactions involving the sale of properties. 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, 1997, the Real Estate Trust received a cash
distribution of $1.4 million from Saul Holdings Partnership.
Development and Capital Expenditures. During the third quarter of fiscal 1997,
the Real Estate Trust commenced development of a 46,000 square foot single-story
office research and development building on 3.2 acres of its Avenel Business
Park land parcel located in Gaithersburg, Maryland. The project is 100%
pre-leased. The Real Estate Trust financed the project with a
construction/permanent loan which is expected to cover all costs except for the
land and fees to related parties. The project was substantially completed on
January 31, 1998.
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 2.7 acre parcel located adjacent to its Hampton Inn and
Holiday Inn in Sterling, Virginia. The new hotel will be franchised as a
TownePlace Suites by Marriott and is expected to be completed in July 1998. The
Real Estate Trust has obtained a construction loan which is expected to cover
all costs except for the land, fees to related parties, taxes and insurance.
The Real Estate Trust believes that its capital improvement costs in the next
several fiscal years will be in the range of $6.0 to $7.0 million per year.
<PAGE>
BANKING
Liquidity. The OTS has established a minimum liquidity requirement, which may
vary from time to time depending upon economic conditions and deposit flows. The
required liquidity level under OTS regulations at December 31, 1997 was 4.0%.
The Bank's average liquidity ratio for the month ended December 31, 1997 was
17.1%, compared to 11.1% for the month ended September 30, 1997. Additionally,
the Bank met the liquidity requirements imposed by the OTS for each month of the
first three months of fiscal 1998.
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
$335.0 million of credit card receivables, $220.9 million of automobile loan
receivables and $161.7 million of home equity credit line receivables, during
the December 1997 quarter. At December 31, 1997, the Bank was considering the
securitization and sale of the following receivables: (i) approximately $570.0
million of credit card receivables, including $60.0 million of receivables
outstanding at December 31, 1997 and $510.0 million of receivables which the
Bank expects to become available through additional fundings or amortization of
existing trusts, during the six months ending June 30, 1998; (ii) approximately
$465.0 million of automobile loan receivables, including $60.0 million of
receivables outstanding at December 31, 1997 and $405.0 million of receivables
which the Bank expects to become available through additional fundings during
the six months ending June 30, 1998 and (iii) approximately $60.0 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 4 to the
Consolidated Financial Statements.
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables. Of the $6.1 billion of outstanding trust
certificate balances at December 31, 1997, the primary recourse to the Bank was
approximately $137.4 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 December 31, 1997, recourse to the Bank under these arrangements
was approximately $1.0 million.
There were no material commitments for capital expenditures at December 31,
1997.
The Bank's liquidity requirements in fiscal 1998 and for years subsequent to
fiscal 1998 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.
Year 2000 Considerations. Some of the Bank's computer systems are designed to
process transactions using two digits to describe the year (e.g., "97" for 1997)
rather than four digits and therefore such systems may have difficulty
accurately processing transactions and making calculations using dates later
than December 31, 1999. Management has implemented a program to upgrade or
replace its computer systems to address this problem and expects the upgrades
and replacements, along with related testing to be substantially completed not
later than December 1998. Management does not expect that the cost of converting
such systems will be material to its financial condition or results of
operations. Nevertheless, a failure on the part of the Bank to ensure that its
computer systems are year 2000 compliant could have a material adverse affect on
the Bank's operations. Moreover, if any of the Bank's significant customers or
service providers do not successfully and timely achieve year 2000 compliance
for their computer systems, the Bank also could be adversely affected.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1996
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$4.6 million and an operating loss of $7.4 million in the three-month period
ended December 31, 1997 (the "1998 quarter") compared to 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").
The changes reflect improved results from properties reduced by a loss in equity
results from unconsolidated entities.
Income after direct operating expenses from hotels increased $836,000 (20.2%) in
the 1998 quarter over the level achieved in the 1997 quarter. $717,000 (17.7%)
of this increase reflected improved results from the nine hotels owned
throughout both quarters and $119,000 reflected results from acquisition
properties. The increase in total revenue of $1,997,000 (15.1%) exceeded the
increase of $ 1,161,000 (12.8%) in direct operating expenses. For the nine
hotels owned throughout both periods, the increase in total revenue was
$1,507,000 (11.6%) and the increase in direct operating expenses was $790,000
(8.9%). The revenue increase was attributable to improved market conditions
which permitted the Real Estate Trust to raise average room rates and occupancy
levels.
Income after direct operating expenses from office and industrial properties
increased $614,000 (20.5%) in the 1998 quarter over the 1997 quarter. The
increase in gross income, which totaled $685,000 (14.2%), exceeded the increase
in expenses of $71,000 (3.9%). The improvement was due to additional space
leased in the current period and higher turnover rents.
Interest expense increased $111,000 (1.1%) in the 1998 quarter, because of
higher average borrowings. Average balances of the Real Estate Trust's
outstanding borrowings increased to $404.0 million for the 1998 quarter from
$396.4 million for the 1997 quarter. The average interest rate in the 1998 and
1997 quarters was 10.22% and 10.28%, respectively.
Amortization of debt expense decreased $34,000 (19.5%) in the 1998 quarter,
primarily due to lower costs experienced in the renewal of lines of credit.
Depreciation increased $10,000 (0.4%) in the 1998 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 $131,000
(6.9%) in the 1998 quarter from their level in the 1997 quarter. The monthly
advisory fees were $317,000 in the 1998 quarter, compared to $311,000 in the
1997 quarter, an increase aggregating $19,000 (2.0%). Management and leasing
fees increased $112,000 (11.4%) in the current quarter, reflecting both higher
hotel sales and office rents on which the fees are based.
General and administrative expense decreased $96,000 (20.0%) in the 1998
quarter, primarily due to lower legal expense ($84,000).
Equity in earnings (losses) of unconsolidated entities reflected a loss of
$1,339,000 in the 1998 quarter and earnings of $444,000 in the 1997 quarter. The
loss was attributable to nonrecurring charges for losses on sales of interest
rate protection agreements and losses on early extinguishment of debt.
<PAGE>
BANKING
Overview. The Bank recorded operating income of $29.4 million for the three
months ended December 31, 1997 (the "1997 quarter"), compared to operating of
$20.0 million for the three months ended December 31, 1996 (the "1996 quarter").
The increase in operating income for the 1997 quarter was primarily attributable
to a $41.8 million increase in other (non-interest) income resulting primarily
from increased gains on sales of loans and loan and deposit servicing fee
income. Partially offsetting the positive effect such increases had on income
were a decrease in interest income, an increase in the provision for loan losses
and an increase in operating expenses.
Net Interest Income. Net interest income, before the provision for loan losses,
decreased $9.6 million (or 16.7%) in the 1997 quarter. The Bank would have
recorded additional interest income of $0.5 million for the 1997 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,
-----------------------------------------------------------------------------
1997 1996
------------------------------------- --------------------------------------
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) $ 2,574,477 $ 74,495 11.57% $ 3,439,724 $ 93,240 10.84%
Mortgage-backed securities 1,892,345 26,607 5.62 1,277,901 18,914 5.92
Federal funds sold and securities
purchased under agreements to resell 213,924 3,027 5.66 78,391 1,055 5.38
Trading securities 27,597 472 6.84 13,325 244 7.32
Investment securities 27,804 402 5.78 9,850 144 5.85
Other interest-earning assets 168,592 1,392 3.30 158,765 1,674 4.22
------------- ------------ -------------- ------------
Total 4,904,739 106,395 8.68 4,977,956 115,271 9.26
------------ ---------- ------------ ----------
Noninterest-earning assets:
Cash 206,274 185,194
Real estate held for investment or sale 94,013 123,451
Property and equipment, net 274,908 229,447
Goodwill and other intangible assets, net 13,863 2,255
Other assets 482,025 322,118
------------- --------------
Total assets $ 5,975,822 $ 5,840,421
============= ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 929,530 5,828 2.51 $ 854,263 5,296 2.48
Savings deposits 992,692 8,531 3.44 953,087 8,133 3.41
Time deposits 1,791,592 24,775 5.53 1,183,496 15,290 5.17
Money market deposits 970,999 9,645 3.97 993,038 9,607 3.87
------------- ---------- -------------- ----------
Total deposits 4,684,813 48,779 4.16 3,983,884 38,326 3.85
Borrowings 507,732 9,513 7.49 1,281,952 19,218 6.00
------------- ------------ -------------- ------------
Total liabilities 5,192,545 58,292 4.49 5,265,836 57,544 4.37
------------ ---------- ------------ ----------
Noninterest-bearing items:
Noninterest-bearing deposits 231,583 168,639
Other liabilities 80,218 48,732
Minority interest 144,000 45,016
Stockholders' equity 327,476 312,198
------------- --------------
Total liabilities and stockholders' equity $ 5,975,822 $ 5,840,421
============= ==============
Net interest income $ 48,103 $ 57,727
============ ============
Net interest spread (2) 4.19% 4.89%
========== ==========
Net yield on interest-earning assets (3) 3.92% 4.64%
========== ==========
Interest-earning assets to interest-bearing liabilities 94.46% 94.53%
========== ==========
- ---------------------------------------------------------------------------------------------------------------------------------
(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
(Dollars in thousands)
Three Months Ended December 31, 1997
Compared to
Three Months Ended December 31, 1996
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
----------- ----------- ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (54,401) $ 35,656 $ (18,745)
Mortgage-backed securities 13,896 (6,203) 7,693
Federal funds sold and securities
purchased under agreements to resell 1,914 58 228
Trading securities 335 (107) 1,972
Investment securities 270 (12) 258
Other interest-earning assets 584 (866) (282)
----------- ----------- ------------
Total interest income (37,402) 28,526 (8,876)
----------- ----------- ------------
Interest expense:
Deposit accounts 7,171 3,282 10,453
Borrowings (33,948) 24,243 (9,705)
----------- ----------- ------------
Total interest expense (26,777) 27,525 748
----------- ----------- ------------
Increase in net interest income $ (10,625) $ 1,001 $ (9,624)
=========== =========== ============
- -----------------------------------------------------------------------------------------------
(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 1997 quarter decreased $8.9 million (or 7.7%) from the
level in the 1996 quarter as a result of lower average balances of loans
receivable, and, to a lesser extent, lower average yields on mortgage-backed
securities. Higher average yields on loans receivable and higher average
balances of mortgage-backed securities partially offset the negative effect on
interest income of the lower average loan balances and yields on mortgage-backed
securities.
The Bank's net yield on interest-earning assets decreased to 3.92% in the 1997
quarter from 4.64% in the 1996 quarter. The decrease in the net yield primarily
reflected lower yields earned on certain of the Bank's interest-earning assets
resulting from a decline in market rates, as well as higher average rates on
deposits, reflecting a shift in the composition of the Bank's deposits to higher
yielding certificates of deposit, primarily due to brokered deposits accepted in
fiscal 1997. The Bank does not currently anticipate significant reliance on
brokered deposits as a key source of funding in the future.
Interest income on loans, the largest category of interest-earning assets,
decreased by $18.8 million (or 20.1%) from the 1996 quarter primarily because of
lower average balances. Higher average yields earned on the loan portfolio
partially offset the negative effect of the lower average balances.
Lower average balances of the Bank's single-family residential loans, which
decreased $694.2 million (or 42.3%), resulted primarily from the $1.1 billion
exchange of single-family residential loans held in its portfolio for
mortgage-backed securities (which the Bank retained for its own portfolio) in
September 1997. The decrease was primarily responsible for an $11.3 million (or
38.7%) decrease in interest income from single-family residential loans. Average
balances of credit card loans and home improvement and related loans decreased
$95.4 million and $62.1 million, respectively, largely because of additional
securitization activity during fiscal 1997, which, in addition to the decline in
net yields on credit card loans discussed below, resulted in a $7.3 million and
$2.2 million decline in interest income from such loans, respectively. An
increase in the securitization of automobile loans was the primary reason for
the $81.9 million decline (or 26.2%) in average balances of automobile loans. An
increase in the average balances of home equity credit line loans of $58.4
million (or 90.3%) partially offset the decreases discussed above, and was
primarily a result of the $119.2 million purchase of such loans in December
1996. Interest income on home equity credit line loans increased by $1.6 million
(or 170.9%) in the current quarter.
The average yield on the loan portfolio in the 1997 quarter increased 73 basis
points (to 11.57% from 10.84%) from the average yield in the 1996 quarter.
Contributing to the higher net yield was an increase in the average yield on
automobile loans (from 11.95% to 15.86%), resulting from higher yields earned on
loans originated by one of the Bank's operating subsidiaries. In addition, an
increase in the average yield on single-family residential loans (from 7.14% to
7.59%) resulted from the September 1997 $1.1 billion exchange of single-family
residential loans for mortgage-backed securities. These loans had a weighted
average interest rate of 6.89% at the date of exchange.
<PAGE>
Interest income on mortgage-backed securities increased $7.7 million (or 40.7%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1997 quarter reflected the $1.1 billion
securitization of single-family residential loans in September 1997. The
positive effect of the higher average balances was partially offset by a
decrease in the average interest rates on these securities from 5.92% to 5.62%.
Interest expense increased $0.7 million (or 1.3%) for the 1997 quarter primarily
because of an increase of $10.5 million (or 27.3%) in interest expense on
deposits, the largest category of interest-bearing liabilities. Interest expense
on deposits increased as a result of an increase in average deposit balances of
$700.9 million (or 17.6%), and, to a lesser extent, an increase in the average
rates on deposits (to 4.16% from 3.85%), which reflected the shift in the
composition of the Bank's deposits to higher yielding certificates of deposit.
The increase in interest expense on deposits was partially offset by a $9.7
million (or 50.5%) decrease in interest expense on borrowings. The decrease in
interest paid on borrowings was primarily attributable to a $9.1 million and a
$2.3 million decrease in interest expense on repurchase agreement transactions
and Federal Home Loan Bank advances, respectively, largely because of a $675.2
million and a $177.1 million decline in the average balances of such borrowings,
respectively. Excess funds generated from securitization activity during fiscal
1997 and additional deposits facilitated the paydown of such borrowings.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$35.1 million in the 1997 quarter from $26.8 million in the 1996 quarter. The
$8.2 million increase was primarily due to a $3.9 million and a $3.4 million
increase in the provision for losses on credit card and other consumer loans,
respectively. See "Financial Condition - Asset Quality - Allowances for Losses."
Other Income. Other (non-interest) income increased to $129.4 million in the
1997 quarter from $87.6 million in the 1996 quarter. The $41.8 million increase
in such income was primarily attributable to increases in gain on sales of loans
and loan and deposit servicing fees.
Gain on sales of loans increased by $25.3 million to $33.2 million from $7.9
million, primarily because of $16.3 million of gains recognized on the
securitization and sale of credit card loan receivables. Additional gains
recognized on the securitization and sale of home equity credit line and
automobile loans in the amount of $7.2 million and $1.8 million, respectively,
also contributed to the $25.1 million increase during the current quarter.
Amortization of prior gains on sales of loans in the amount of $8.6 million is
included in loan and deposit servicing fees.
The Bank recognized a $3.8 million net unrealized gain on its interest-only
strips reflecting the December 31, 1997 market-value adjustment on the
interest-only strips related to the credit card securitized assets.
The increase of $12.9 million (or 20.5%) in loan and deposit servicing fees was
primarily due to an increase of $11.2 million in income earned by the Bank on
interest-only strips for servicing its portfolio of securitized credit card
loans. Fees recognized for servicing deposit accounts also increased by $1.8
million and resulted primarily from the additional fees generated through the
Bank's ATM network.
Operating Expenses. Operating expenses for the 1997 quarter increased $14.4
million (or 14.7%) from the level in the 1996 quarter. The primary component of
the higher operating expenses was an increase in salaries and employee benefits.
The $8.2 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.
