SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20579 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 ----------------------------------------------- OR - ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ---------------------- Commission file number : 1-7184 B. F. SAUL REAL ESTATE INVESTMENT TRUST - ------------------------------------------------------------------------------- (Exact name of registrant as specified in the charter) Maryland 52-6053341 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 Connecticut Avenue, Chevy Chase, Maryland 20815 - ------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) (301) 986-6000 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- --- The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as of February 10, 1997, was 4,826,910. PART I. FINANCIAL INFORMATION Item 1. Financial Statements: (a) Consolidated Balance Sheets at December 31, 1996 and September 30, 1996 (b) Consolidated Statements of Operations for the three-month periods ended December 31, 1996 and 1995 (c) Consolidated Statements of Cash Flows for the three-month periods ended December 31, 1996 and 1995 (d) Notes to Consolidated Financial Statements Item 2. 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, 1996 compared to three months ended December 31, 1995 PART II. OTHER INFORMATION Item 6. Exhibits: Exhibit 27 Consolidated Balance Sheets B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) =================================================================================================================================== December 31 September 30 --------------- --------------- (In thousands) 1996 1996 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 6,436,367 $ 5,987,577 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Minority interest held by affiliates 47,270 46,065 Minority interest -- other 218,307 74,307 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 6,534,488 6,086,908 - ----------------------------------------------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,436,367 $ 5,987,577 - ----------------------------------------------------------------------------------------------------------------------------------- The Notes to Consolidated Financial Statements are an integral part of these statements. 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 - ----------------------------------------------------------------------------------------------------------------------------------- REAL ESTATE Income Hotels $ 13,209 $ 12,705 Commercial properties 4,833 4,514 Other 978 940 --------------- --------------- Total income 19,020 18,159 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- Equity in earnings of unconsolidated entities 444 471 Loss on sale of property -- (57) - ----------------------------------------------------------------------------------------------------------------------------------- REAL ESTATE OPERATING LOSS $ (7,092) $ (7,032) - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 30,887 33,407 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- Continued on following page. 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- BANKING OPERATING INCOME $ 19,958 $ 15,984 - ----------------------------------------------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL COMPANY NET INCOME 2,303 1,294 DEFICIT Beginning of period (156,084) (123,943) Dividends Preferred shares of beneficial interest 1,354 -- - ----------------------------------------------------------------------------------------------------------------------------------- End of period $ (155,135) $ (122,649) - ----------------------------------------------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER COMMON SHARE $ 0.20 $ (0.01) - ----------------------------------------------------------------------------------------------------------------------------------- The Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Statements of Cash Flows B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) =================================================================================================================================== For the Three Months Ended December 31 -------------------------------- (In thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------------------------------------------- Continued on following page. 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- The Notes to Consolidated Financial Statements are an integral part of these statements. 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. 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 =========== =========== 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. 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. 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. Non-Performing Assets (Dollars in thousands) December 31, September 30, December 31, 1996 1996 1995 --------------- --------------- -------------- 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. 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). 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 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. Analysis of Allowance for and Charge-offs of Loans (Dollars in thousands) Three Months Ended Year Ended December 31, September 30, --------------------------------- 1996 1995 1996 -------------- -------------- ------------------- 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. 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 --------- ----------- ---------- ---------- ---------- ----------- 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 ========= ========== ========== 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 ------------- ------------- -------------- 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 ============= ============= ============== Components of Allowance for Losses on Real Estate Held for Investment or Sale (In thousands) December 31, September 30, ------------------------------- 1996 1995 1996 ------------- ------------- -------------- 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 ============= ============= ============== 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. 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. 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 ------------- ------------- --------------- -------------- ------------ ------------ 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. 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. 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 ------------- ------------ ------------- ------------ ------------- ------------ 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%. 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. 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 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. 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. 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. 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). 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. Net Interest Margin Analysis (Dollars in thousands) Three Months Ended December 31, ----------------------------------------------------------------------------------- 1996 1995 --------------------------------------- --------------------------------------- Average Yield/ Average Yield/ Balances Interest Rate Balances Interest Rate ------------ ---------- --------- ------------ ---------- --------- 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. 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. 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 ----------------- ----------------- ----------------- 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. 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%. 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." 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. PART II. OTHER INFORMATION Item 6. Exhibits: Exhibit 27 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. B. F. SAUL REAL ESTATE INVESTMENT TRUST ----------------------------------------------- (Registrant) Date: February 14, 1997 Stephen R. Halpin, Jr. ----------------- ----------------------------------------------- Vice President and Chief Financial Officer Date: February 14, 1997 Ross E. Heasley ----------------- ----------------------------------------------- Vice President and Principal Accounting Officer