<PAGE>
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 March 31, 1997
-----------------------------------------------
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 May 1, 1997, was 4,826,910.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
(a) Consolidated Balance Sheets at March 31, 1997 and
September 30, 1996
(b) Consolidated Statements of Operations for the
three-month and six-month periods ended
March 31, 1997 and 1996
(c) Consolidated Statements of Cash Flows for the
six-month periods ended March 31, 1997 and 1996
(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 March 31, 1997 compared
to three months ended March 31, 1996
Six months ended March 31, 1997 compared
to six months ended March 31, 1996
PART II. OTHER INFORMATION
Item 6. Exhibits:
Exhibit 27
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
March 31 September 30
------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 128,088 $ 121,417
Commercial 108,189 106,496
Other 4,742 4,715
-------------- --------------
241,019 232,628
Accumulated depreciation (81,818) (76,513)
-------------- --------------
159,201 156,115
Land parcels 41,813 41,580
Cash and cash equivalents 15,849 15,516
Other assets 84,045 81,292
-------------- --------------
Total real estate assets 300,908 294,503
- -----------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks 204,351 213,394
Interest-bearing deposits 37,666 53,031
Federal funds sold 23,000 --
Loans held for sale 87,434 76,064
Loans held for securitization and sale 480,000 450,000
Investment securities (market value $9,947 and $9,820, respectively) 9,954 9,818
Mortgage-backed securities (market value $1,302,495 and $1,307,838, respectively) 1,304,490 1,306,417
Loans receivable (net of allowance for losses of $91,254 and $95,523, respectively) 2,983,988 2,772,967
Federal Home Loan Bank stock 33,170 31,940
Real estate held for investment or sale (net of allowance for losses of $136,978 and $126,710,
respectively) 114,305 123,489
Property and equipment, net 251,995 225,135
Cost in excess of net assets acquired, net 1,661 2,399
Other assets 600,557 428,420
-------------- --------------
Total banking assets 6,132,571 5,693,074
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,433,479 $ 5,987,577
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable $ 183,312 $ 173,345
Notes payable - secured 175,000 177,500
Notes payable - unsecured 44,598 42,367
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred shares of beneficial interest 33,522 31,563
Other liabilities and accrued expenses 40,055 40,434
-------------- --------------
Total real estate liabilities 589,370 578,092
- -----------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 4,381,052 4,164,037
Borrowings 480,546 644,418
Federal Home Loan Bank advances 420,941 269,065
Other liabilities and accrued expenses 141,708 150,924
Capital notes -- subordinated 250,000 160,000
-------------- --------------
Total banking liabilities 5,674,247 5,388,444
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 48,003 46,065
Minority interest -- other 218,307 74,307
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,529,927 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 (153,746) (156,084)
Net unrealized holding loss (955) (1,500)
-------------- --------------
(54,600) (57,483)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (96,448) (99,331)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,433,479 $ 5,987,577
- -----------------------------------------------------------------------------------------------------------------------------------
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 For the Six Months Ended
March 31 March 31
--------------------------------------------------------------
(In thousands, except per share amounts) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 13,142 $ 11,933 $ 26,351 $ 24,638
Commercial properties 5,221 4,150 10,054 8,664
Other 290 1,123 1,268 2,063
-------------- -------------- -------------- --------------
Total income 18,653 17,206 37,673 35,365
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
Hotels 9,207 8,739 18,268 17,442
Commercial properties 1,795 1,747 3,635 3,469
Land parcels and other 441 411 910 779
Interest expense 10,071 9,954 20,042 20,002
Amortization of debt expense 162 183 336 325
Depreciation 2,656 2,432 5,305 4,845
Advisory, management and leasing fees - related parties 1,913 1,778 3,825 3,567
General and administrative 265 297 745 717
-------------- -------------- -------------- --------------
Total expenses 26,510 25,541 53,066 51,146
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities 1,095 905 1,539 1,376
Loss on sale of property -- -- -- (57)
- -----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $ (6,762) $ (7,430) $ (13,854) $ (14,462)
- -----------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans $ 99,884 $ 72,352 $ 193,124 $ 148,836
Mortgage-backed securities 19,719 12,273 38,633 25,485
Trading securities 374 204 618 359
Investment securities 142 48 286 97
Other 3,167 6,353 5,896 10,042
-------------- -------------- -------------- --------------
Total interest income 123,286 91,230 238,557 184,819
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 38,700 41,425 77,026 83,404
Borrowings 23,211 5,375 42,429 11,665
-------------- -------------- -------------- --------------
Total interest expense 61,911 46,800 119,455 95,069
-------------- -------------- -------------- --------------
Net interest income 61,375 44,430 119,102 89,750
Provision for loan losses (26,922) (28,850) (53,762) (40,763)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 34,453 15,580 65,340 48,987
- -----------------------------------------------------------------------------------------------------------------------------------
Other income
Credit card fees 13,036 6,433 27,568 10,718
Loan and deposit servicing fees 52,555 82,344 115,840 143,098
Gain on sales of trading securities, net 540 407 489 660
Loss on real estate held for investment or sale, net (5,020) (4,893) (9,394) (13,191)
Gain on sales of loans, net 21,304 285 29,205 5,242
Other 5,681 4,911 11,999 9,319
-------------- -------------- -------------- --------------
Total other income 88,096 89,487 175,707 155,846
- -----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months Ended For the Six Months Ended
March 31 March 31
--------------------------------------------------------------
(In thousands, except per share amounts) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 38,980 $ 31,354 $ 75,584 $ 60,684
Loan 6,941 7,146 11,261 12,746
Property and equipment 9,799 8,538 19,066 16,410
Marketing 18,671 10,670 38,748 21,095
Data processing 15,795 12,732 30,581 24,577
Deposit insurance premiums 970 2,677 3,036 5,334
Amortization of cost in excess of net assets acquired 368 481 736 963
Other 10,899 10,128 21,951 25,699
-------------- -------------- -------------- --------------
Total operating expenses 102,423 83,726 200,963 167,508
- -----------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME $ 20,126 $ 21,341 $ 40,084 $ 37,325
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Operating income $ 13,364 $ 13,911 $ 26,230 $ 22,863
Income tax provision 3,031 6,069 8,162 9,822
-------------- -------------- -------------- --------------
Income before minority interest 10,333 7,842 18,068 13,041
Minority interest held by affiliates (1,263) (2,180) (3,003) (3,647)
Minority interest -- other (6,327) (2,437) (10,019) (4,875)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME 2,743 3,225 5,046 4,519
DEFICIT
Beginning of period (155,135) (122,649) (156,084) (123,943)
Dividends
Preferred shares of beneficial interest 1,354 -- 2,708 --
- -----------------------------------------------------------------------------------------------------------------------------------
End of period $ (153,746) $ (119,424) $ (153,746) $ (119,424)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 1,389 $ 1,870 $ 2,338 $ 1,809
NET INCOME PER COMMON SHARE
Income before minority interest $ 1.86 $ 1.34 $ 3.18 $ 2.14
Minority interest held by affiliates (0.26) (0.45) (0.62) (0.76)
Minority interest -- other (1.32) (0.50) (2.08) (1.01)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 0.29 $ 0.39 $ 0.48 $ 0.37
- -----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Six Months Ended
March 31
------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (6,965) $ (10,067)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 5,306 4,845
Loss on sale of property -- 57
(Increase) decrease in accounts receivable and accrued income 1,052 (3,783)
Increase in deferred tax asset (7,248) (4,640)
Increase (decrease) in accounts payable and accrued expenses 981 (2,114)
Decrease in tax sharing receivable 3,167 15,000
Amortization of debt expense 336 325
Equity in earnings of unconsolidated entities (1,539) (1,376)
Other 5,769 (1,009)
-------------- --------------
859 (2,762)
-------------- --------------
Banking
Net income 12,011 14,586
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees (1,668) 836
Depreciation and amortization 13,683 11,813
Amortization of cost in excess of net assets acquired and mortgage
servicing rights 4,904 4,703
Capitalized interest on real estate held for investment or sale (1,114) (1,667)
Originations of mortgage servicing rights (3,931) (2,062)
Provision for loan losses 53,762 40,763
Net fundings of loans held for sale and/or securitization (373,606) (334,777)
Proceeds from sales of trading securities 233,728 139,307
Proceeds from sales of loans held for sale and/or securitization 1,406,191 1,102,793
Provision for losses on real estate held for investment or sale 10,268 12,955
(Earnings) loss on real estate (1,116) 11
Gain on sales of trading securities, net (489) (660)
Gain on sales of loans, net (29,205) (5,242)
Minority interest held by affiliates 3,003 3,647
Minority interest - other 4,875 4,875
(Increase) decrease in interest-only strips receivable (32,472) 1,177
Increase in other assets (130,539) (1,873)
Decrease in other liabilities and accrued expenses (14,227) (7,539)
Decrease in tax sharing payable (3,167) (15,000)
Other operating activities, net 4,923 (4,813)
-------------- --------------
1,155,814 963,833
-------------- --------------
Net cash provided by operating activities 1,156,673 961,071
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (3,793) (2,522)
Property sales -- 1,812
Property acquisition (4,709) --
Equity investment in unconsolidated entities, net (667) 671
-------------- --------------
(9,169) (39)
-------------- --------------
Banking
Net proceeds from redemption of Federal Home Loan Bank stock 9,482 --
Net proceeds from sales of real estate 11,294 38,602
Net proceeds from sales of mortgage servicing rights -- 966
Net fundings of loans receivable (1,172,921) (834,692)
Principal collected on mortgage-backed securities 312,990 107,890
Purchases of Federal Home Loan Bank stock (10,712) --
Purchases of mortgage-backed securities (311,554) --
Purchases of loans receivable (375,889) (45,169)
Purchases of property and equipment (40,730) (27,849)
Purchases of mortgage servicing rights -- (10,243)
Disbursements for real estate held for investment or sale (8,839) (11,242)
Other investing activities, net 391 (3,214)
-------------- --------------
(1,586,488) (784,951)
-------------- --------------
Net cash used in investing activities (1,595,657) (784,990)
- -----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Six Months Ended
March 31
------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 25,000 $ --
Principal curtailments and repayments of mortgages (14,947) (5,121)
Proceeds from secured note financing -- 5,000
Repayments of secured notes (2,500) --
Proceeds from sales of unsecured notes 3,218 1,384
Repayments of unsecured notes (987) (1,750)
Costs of obtaining financings (391) (162)
Dividends paid - preferred shares of beneficial interest (750) --
-------------- --------------
8,643 (649)
-------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 8,726,370 7,246,517
Customer withdrawals of deposits and payments for maturing certificates of deposit (8,509,355) (7,114,063)
Net (decrease) increase in securities sold under repurchase agreements (127,381) 9
Advances from the Federal Home Loan Bank 746,811 4,665
Repayments of advances from the Federal Home Loan Bank (594,935) (50,051)
Proceeds from other borrowings 2,325,366 772,600
Repayments of other borrowings (2,361,857) (768,123)
Cash dividends paid on preferred stock (4,875) (4,875)
Cash dividends paid on common stock (6,000) --
Repayment of capital notes - subordinated (10,000) --
Net proceeds from issuance of capital notes - subordinated 96,112 --
Net proceeds from issuance of preferred stock of subsidiary 144,000 --
Other financing activities, net 5,010 4,750
-------------- --------------
429,266 91,429
-------------- --------------
Net cash provided by financing activities 437,909 90,780
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,075) 266,861
Cash and cash equivalents at beginning of period 281,941 376,637
-------------- --------------
Cash and cash equivalents at end of period $ 280,866 $ 643,498
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest (net of amount capitalized) $ 134,690 $ 118,190
Income taxes 862 7,164
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 2,744 2,153
Loans held for sale exchanged for trading securities 233,392 138,891
Loans receivable transferred to loans held for sale and/or securitization 1,273,846 956,583
Loans made in connection with the sale of real estate 1,512 41,391
Loans receivable transferred to real estate acquired in settlement of loans 3,091 3,154
- -----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements
reflect all adjustments necessary for a fair presentation of the Trust's
financial position and results of operations. All such adjustments are of a
normal recurring nature. These financial statements and the accompanying notes
should be read in conjunction with the Trust's audited consolidated financial
statements included in its Form 10-K for the fiscal year ended September 30,
1996. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year.
2. The accompanying financial statements include the accounts of B. F. Saul
Real Estate Investment Trust and its wholly owned subsidiaries (the "Real Estate
Trust"), which are involved in the ownership and development of income-producing
properties. The accounts of the Trust's 80%-owned banking subsidiary, Chevy
Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase" or the "Bank") have also
been consolidated. Accordingly, the accompanying financial statements reflect
the assets, liabilities, operating results and cash flows for two business
segments: Real Estate and Banking. All significant intercompany balances and
transactions have been eliminated.
3. The Trust voluntarily terminated its qualification as a real estate
investment trust under the Internal Revenue Code during fiscal 1978. As a result
of the Trust's acquisition of an additional 20% equity interest in the Bank in
June 1990, the Bank became a member of the Trust's affiliated group filing
consolidated federal income tax returns. The current effect of the Trust's
consolidation of the Bank's operations into its federal income tax return
results in the use of the Trust's net operating losses and net operating loss
carryforwards to reduce the federal income taxes the Bank would otherwise owe.
<PAGE>
4. BANKING:
LOANS HELD FOR SALE:
At March 31, 1997 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:
March 31, September 30,
1997 1996
--------- ---------
(In thousands)
Credit card receivables $ 150,000 $ 225,000
Automobile loan receivables 75,000 225,000
Home loan receivables 90,000 -
Home equity credit line receivables 165,000 -
--------- ---------
Total $ 480,000 $ 450,000
========= =========
LOANS RECEIVABLE:
March 31, September 30,
1997 1996
--------- ---------
(In thousands)
Single-family residential $1,706,934 $1,525,322
Home equity 20,861 32,052
Commercial real estate and multifamily 77,429 78,951
Real estate construction 56,842 41,561
Ground 38,066 44,723
Commercial 143,805 85,372
Credit card 953,013 893,271
Automobile 97,393 72,560
Overdraft lines of credit 22,044 21,296
Home improvement and
other consumer 19,655 94,316
Other consumer 15,473 16,658
--------- ---------
3,151,515 2,906,082
--------- ---------
Less:
Undisbursed portion of loans 92,705 50,811
Unearned discounts 688 836
Net deferred loan origination
costs (17,120) (14,055)
Allowance for loan losses 91,254 95,523
--------- ---------
167,527 133,115
--------- ---------
Total $2,983,988 $2,772,967
========= =========
<PAGE>
REAL ESTATE HELD FOR INVESTMENT OR SALE:
The Bank's real estate held for investment is carried at the lower of aggregate
cost or net realizable value. The Bank's real estate acquired in settlement of
loans is considered to be held for sale and is carried at the lower of cost or
fair value (less estimated selling costs).
Real estate held for investment or sale is composed of the following:
March 31, September 30,
1997 1996
---------- ---------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
---------- ---------
Real estate held for sale 247,465 246,380
---------- ---------
Less:
Allowance for losses on real estate
held for investment 193 191
Allowance for losses on real estate
held for sale 136,785 126,519
---------- ---------
136,978 126,710
---------- ---------
Total real estate held for
investment or sale $ 114,305 $ 123,489
========== =========
MINORITY INTEREST:
On December 3, 1996, a new real estate investment trust subsidiary of the Bank
(the "REIT Subsidiary") sold $150.0 million of its Noncumulative Exchangeable
Perpetual Preferred Stock, Series A (the "REIT 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. 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 prior
to January 15, 2007, and is redeemable thereafter at the option of the REIT
Subsidiary. The net cash proceeds from the sale of the REIT Preferred Stock is
included in "Minority Interest - Other" in the Consolidated Balance Sheets.
Dividends on the REIT Preferred Stock are presented as a reduction of net income
in the Consolidated Statements of Operations.
<PAGE>
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). Among other things, SFAS 125
requires that, upon the transfer of assets, an entity recognize the financial
and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. As a result of the adoption of SFAS 125, the Bank
began to recognize gains upon the securitization and sale of credit card
receivables based upon the net present value of the expected cash flows to be
generated by the underlying receivables. Except for the effects on the Bank's
credit card securitization program, the impacts of SFAS 125 are not material to
the Bank's other lending and servicing activities.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal business conducted by the Trust and its wholly-owned subsidiaries
is the ownership and development of income-producing properties. The Trust owns
80% of the outstanding common stock of Chevy Chase Bank, F.S.B.("Chevy Chase" or
the "Bank"). At March 31, 1997, the Bank's assets accounted for approximately
95% of the Trust's consolidated assets. The Trust recorded net income of $5.0
million for the six-month period ended March 31, 1997 compared to net income of
$4.5 million for the six-month period ended March 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
March 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, 1996. In the first quarter of fiscal 1997, the Real Estate Trust
purchased a 115-room Holiday Inn Express in Herndon, Virginia.
The Real Estate Trust's office and industrial property portfolio was 98% leased
at March 31, 1997, compared to leasing rates of 93% and 88% at September 30,
1996 and at March 31, 1996, respectively. At March 31, 1997, the Real Estate
Trust's office and industrial property portfolio had a total gross leasable area
of 1.3 million square feet, of which 128,000(9.8%) and 282,000(21.5%), are
subject to leases whose terms expire in the balance of fiscal 1997 and in fiscal
1998, respectively.
Overall, the hotel portfolio experienced an average occupancy rate of 63% and an
average room rate of $69.81 during the six-month period ended March 31, 1997.
For the nine hotel properties owned by the Real Estate Trust throughout the
six-month periods of fiscal 1997 and fiscal 1996, the average occupancy rates
were 63% and 63%, respectively, and the average room rates were $70.21 and
$66.03, respectively. Seven of these hotels registered improved occupancies and
eight registered higher average room rates in the current period. On October 30,
1996, the Real Estate Trust purchased a 115-room Holiday Inn Express hotel in
Herndon, Virginia, which is located approximately three miles from the
Washington Dulles International Airport. The purchase price was $4.7 million.
The Real Estate Trust obtained five year floating-rate financing on the project
in the amount of $3.3 million.
<PAGE>
BANKING:
General. The Bank recorded operating income of $20.1 million during the March
1997 quarter, compared to operating income of $21.3 million in the prior
corresponding period. The $1.2 million decrease in operating income for the
current quarter was primarily a result of an $18.8 million increase in operating
expenses and a $1.4 million decrease in the Bank's other (non-interest) income.
Partially offsetting the negative effect of these items on income was a $16.9
million increase in net interest income before provision for loan losses and a
$1.9 million decrease in the provision for loan losses.
At March 31, 1997, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.59%, 6.59%, 6.46% and 13.44%,
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."
In the March 1997 quarter, the Bank securitized and sold $296.5 million of
credit card receivables, $209.4 million of automobile loan receivables, $34.5
million of home loan receivables and $24.0 million of home equity credit line
receivables, and recognized gains of $3.3 million, $5.7 million, $2.8 million
and $1.4 million, respectively, in connection with these sales. See Note 4 to
the Consolidated Financial Statements. See "Liquidity."
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 $300 per share.
The Bank's assets are subject to review and classification by the OTS and the
FDIC upon examination. The OTS is currently conducting its periodic examination
of the Bank.
Asset Quality. Non-Performing Assets. The following table sets forth information
concerning the Bank's non-performing assets at the dates indicated. The figures
shown are after charge-offs and, in the case of real estate acquired in
settlement of loans, after all valuation allowances.
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)
March 31, December 31, September 30,
1997 1996 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 9,533 $ 9,082 $ 8,200
Credit card 28,947 31,414 25,350
Consumer and other 2,505 2,720 1,239
------------------ ------------------ -----------------
Total non-accrual loans (1) 40,985 43,216 34,789
------------------ ------------------ -----------------
Real estate acquired in settlement of loans 247,465 246,477 246,380
Reserve for losses on real estate acquired in settlement
of loans (136,785) (131,216) (126,519)
------------------ ------------------ -----------------
Real estate acquired in settlement of loans, net 110,680 115,261 119,861
------------------ ------------------ -----------------
Total non-performing assets $ 151,665 $ 158,477 $ 154,650
================== ================== =================
Reserve for losses on loans $ 91,254 $ 95,485 $ 95,523
Reserve for losses on real estate held for investment 193 191 191
Reserve for losses on real estate acquired in settlement
of loans 136,785 131,216 126,519
------------------ ------------------ -----------------
Total reserves for losses $ 228,232 $ 226,892 $ 222,233
================== ================== =================
Ratios:
Non-performing assets, net to total assets (2) 0.98% 1.02% 1.03%
Reserve for losses on real estate loans to non-accrual
real estate loans (1) 111.05% 115.68% 134.44%
Reserve for losses on credit card loans to non-accrual
credit card loans (1) 261.79% 253.65% 314.32%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (1) 195.09% 194.78% 388.86%
Reserve for losses on loans to non-accrual loans (1) 222.65% 220.95% 274.58%
Reserve for losses on loans to total loans receivable (3) 2.51% 2.62% 2.81%
(1) Before deduction of reserves for losses.
(2) Non-performing assets is presented after all reserves for losses on loans
and real estate held for investment or sale.
(3) Includes loans receivable and loans held for sale and/or securitization,
before deduction of reserve for losses.
</TABLE>
<PAGE>
Non-performing assets include non-accrual loans (loans contractually past due 90
days or more or with respect to which other factors indicate that full payment
of principal and interest is unlikely) and real estate acquired in settlement of
loans, either through foreclosure or deed-in-lieu of foreclosure.
Non-performing assets totaled $151.7 million, after valuation allowances on real
estate held for sale or real estate owned ("REO") of $136.8 million, at March
31, 1997, compared to $158.5 million, after valuation allowances on REO of
$131.2 million, at December 31, 1996. In addition to the valuation allowances
on REO, the Bank maintained $29.6 million of valuation allowances on its
non-accrual loans at March 31, 1997, compared to $32.1 million at December 31,
1996. The $6.8 million decrease in non-performing assets for the current quarter
was comprised of a net decrease in REO of $4.6 million and a decrease in
non-accrual loans of $2.2 million. See "Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $41.0 million at March
31, 1997, as compared to $43.2 million at December 31, 1996. At March 31, 1997,
non-accrual loans consisted of $9.5 million of non-accrual real estate loans,
$29.0 million of non-accrual credit card loans and $2.5 million of non-accrual
consumer and other loans. The $2.2 million decrease in non-accrual loans was
primarily due to a $2.5 million decrease in non-accrual credit card loans which
resulted from increased collection efforts by the Bank.
REO. At March 31, 1997, the Bank's REO totaled $110.7 million, after valuation
allowances on such assets of $136.8 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.
<TABLE>
Balance Before Balance After
Number of Valuation All Valuation Valuation Percent
(Dollars in thousands) Properties Allowances Allowances Allowances of Total
---------- -------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Communities 5 $ 210,475 $ 123,964 $ 86,511 78.2%
Residential ground 3 11,323 6,134 5,189 4.7%
Commercial ground 8 22,886 6,548 16,338 14.8%
Single-family
residential properties 21 2,781 139 2,642 2.3%
---------- -------------- ------------- -------------- ---------
Total REO 37 $ 247,465 $ 136,785 $ 110,680 100.0%
========== ============== ============= ============== =========
</TABLE>
During the three months ended March 31, 1997, REO decreased $4.6 million, which
was primarily attributable to additional valuation allowances of $5.6 million
and sales in the Communities and other residential properties, offset by
additional capitalized costs.
During the three months ended March 31, 1997, the Bank received revenues of $4.6
million from the disposition of REO, which consisted of 34 residential lots or
units in the Communities ($2.5 million), 3.12 acres of commercial land in two of
the Communities ($1.1 million) and various single-family residential properties
($1.0 million).
<PAGE>
At March 31, 1997, the Bank had executed contracts to sell two additional REO
properties at their aggregate book value of $3.6 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 March 31, 1997, potential problem assets
totaled $2.3 million, before valuation allowances of $0.4 million, as compared
to $2.6 million, before valuation allowances of $0.4 million, at December 31,
1996. The $0.3 million decrease in potential problem assets was primarily
attributable to net principal reductions.
Delinquent Loans. At March 31, 1997, delinquent loans totaled $62.9 million (or
1.7% of loans) compared to $64.4 million (or 1.8% of loans) at December 31,
1996. The following table sets forth information regarding the Bank's delinquent
loans at March 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 .......... $ 12,486 $ 29,795 $ 42,281 1.2 %
60-89 days .......... 3,018 17,571 20,589 0.5 %
---------- ---------- ---------- ------------
Total ............. $ 15,504 $ 47,366 $ 62,870 1.7 %
========== ========== ========== ===========
- ----------------
(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 $10.4 million at December
31, 1996 to $15.5 million at March 31, 1997. The increase in delinquent mortgage
loans is primarily related to the acquisition in the December 1996 quarter of
$119.2 million of home equity credit line loans. The servicing of these loans
was transferred to the Bank's systems in March 1997 and, as a result, payment
processing delays have occurred because customer payments were mailed to the
previous servicer. These delays are normal when loan servicing is transferred
and management is working with the customers to correct the situation.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
decreased to $47.4 million at March 31, 1997 from $54.0 million at December 31,
1996, and decreased as a percentage of total non-mortgage loans to 3.2% from
3.5%, respectively. The decrease in non-mortgage loans was primarily due to a
decline in delinquent credit card loans due to increased collection efforts by
the Bank.
Troubled Debt Restructurings. At March 31, 1997 and 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
<PAGE>
of $0.3 million. At March 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 March 31, 1997 and December 31, 1996, real
estate held for investment consisted of two properties with an aggregate book
value of $3.6 million, net of valuation allowances of $0.2 million.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and the allowance for
losses on real estate held for investment or sale. These tables reflect
charge-offs taken against assets during the periods indicated and may include
charge-offs taken against assets which the Bank disposed of during such periods.
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of Loans
(Dollars in thousands)
Three Months
Six Months Ended Ended
March 31, March 31,
----------------------------------------
1997 1996 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance at beginning of period $ 95,523 $ 60,496 $ 95,485
------------------- ------------------- ------------------
Provision for loan losses 53,762 40,763 26,922
------------------- ------------------- ------------------
Increase due to acquisition of loans 118 -- --
------------------- ------------------- ------------------
Charge-offs:
Residential 444 426 112
Credit card 58,733 42,641 31,497
Other 4,095 3,045 2,193
------------------- ------------------- ------------------
Total charge-offs 63,272 46,112 33,802
------------------- ------------------- ------------------
Recoveries:
Residential 27 6 18
Credit card 4,606 5,486 2,381
Other 490 240 250
------------------- ------------------- ------------------
Total recoveries 5,123 5,732 2,649
------------------- ------------------- ------------------
Charge-offs, net of recoveries 58,149 40,380 31,153
------------------- ------------------- ------------------
Balance at end of period $ 91,254 $ 60,879 $ 91,254
=================== =================== ==================
Provision for loan losses to average loans (1) (2) 3.02% 2.86% 2.92%
Net loan charge-offs to average loans (1) (2) 3.26% 2.84% 3.38%
Ending allowance for losses on loans to total
loans (2) (3) 2.51% 2.07% 2.51%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans by Type
(Dollars in thousands)
March 31, December 31, September 30,
1997 1996 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:
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $ 1,076 49.6% $ 1,025 48.0% $ 925 47.4%
Home equity 583 5.1 608 5.6 446 0.9
Commercial real estate and multifamily 7,943 2.1 7,924 2.1 8,398 2.3
Real estate construction 630 0.8 556 0.6 838 0.7
Ground 354 1.0 393 1.0 417 1.2
Commercial 287 2.2 211 1.8 223 1.7
Credit card 75,781 30.4 79,681 31.9 79,681 33.1
Automobile 1,600 4.8 1,800 4.4 1,858 8.8
Home improvement, overdraft lines of
credit and other consumer 3,000 4.0 3,287 4.6 2,737 3.9
------------ ------------ -----------
Total $ 91,254 $ 95,485 $ 95,523
============ ============ ===========
</TABLE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Three Months
Six Months Ended Ended
March 31, March 31,
----------------------------------
1997 1996 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 191 $ 193 $ 191
Real estate held for sale 126,519 135,043 131,216
-------------- -------------- ---------------
Total 126,710 135,236 131,407
-------------- -------------- ---------------
Provision for real estate losses:
Real estate held for investment 2 (5) 2
Real estate held for sale 10,266 12,960 5,569
-------------- -------------- ---------------
Total 10,268 12,955 5,571
-------------- -------------- ---------------
Charge-offs:
Real estate held for sale:
Residential ground -- 25,892 --
------------ -------------- ---------------
Total charge-offs on real estate
held for investment or sale -- 25,892 --
-------------- -------------- ---------------
Balance at end of period:
Real estate held for investment 193 188 193
Real estate held for sale 136,785 122,111 136,785
-------------- -------------- ---------------
Total $ 136,978 $ 122,299 $ 136,978
============== ============== ===============
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
March 31, December 31, September 30,
1997 1996 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 193 $ 191 $ 191
-------------- -------------- ---------------
Allowance for losses on real estate
held for sale:
Residential permanent 136 83 112
Home equity 3 1 8
Ground 136,646 131,132 126,399
-------------- -------------- ---------------
Total 136,785 131,216 126,519
-------------- -------------- ---------------
Total allowance for losses on real
estate held for investment or sale $ 136,978 $ 131,407 $ 126,710
============== ============== ===============
</TABLE>
<PAGE>
The Bank maintains valuation allowances for estimated losses on loans and real
estate. The Bank's total valuation allowances for losses on loans and real
estate held for investment or sale increased by $1.3 million from the level at
December 31, 1996 to $228.2 million at March 31, 1997. The $1.3 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 $147.6 million at March 31, 1997, which
constituted 57.4% of total non-performing real estate assets, before valuation
allowances. This amount represented a $5.7 million increase from the December
31, 1996 level of $141.9 million, or 55.5% of total non-performing real estate
assets, before valuation allowances at that date.
During the six months ended March 31, 1997, the Bank provided an additional
$10.2 million of valuation allowances on loans secured by real estate and real
estate held for investment or sale and recorded net charge-offs of $0.4 million
on these assets. The allowance for losses on real estate held for sale at March
31, 1997 is in addition to approximately $50.8 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at March 31,
1997.
During the six months ended March 31, 1997, the Bank provided an additional $1.7
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 six months ended March 31, 1997
were $54.1 million, compared to $37.2 million for the six months ended March 31,
1996. The increase in net charge-offs over the prior period is consistent with
management's expectations and generally reflects the trends that are affecting
the credit card industry as a whole. In an attempt to mitigate additional
losses, the Bank has implemented more stringent underwriting policies. The
allowance for losses on credit card loans was $75.8 million at March 31, 1997
compared to $79.7 million at December 31, 1996. The ratios of the allowance for
such losses to non-performing credit card loans and to outstanding credit card
loans were 261.8% and 6.9%, respectively, at March 31, 1997 compared to 253.6%
and 6.9%, respectively, at December 31, 1996.
The combined allowance for losses on consumer and other loans (automobile, home
improvement, overdraft lines of credit and other consumer loans) decreased to
$4.6 million at March 31, 1997 from $5.1 million at December 31, 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 183.6% and 1.4%, respectively, at March 31, 1997 compared to 187.0%
and 1.6%, respectively, at December 31, 1996.
<PAGE>
Asset and Liability Management. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mixes, volumes and maturities to stabilize the
net interest spread is referred to as asset and liability management. The
objective of asset and liability management is to maximize the net interest
yield within the constraints imposed by prudent lending and investing practices,
liquidity needs and capital planning.
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at March 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 March 31, 1997
Mortgage loans:
Adjustable-rate $ 293,071 $ 260,769 $ 600,628 $ 207,628 $ 333,321 $ 1,695,417
Fixed-rate 13,027 9,775 29,422 81,970 22,177 156,371
Loans held for sale 87,434 -- -- -- -- 87,434
Home equity credit lines and second
mortgages 32,005 327 1,139 908 3,343 37,722
Credit card and other 1,051,010 32,790 73,772 13,388 14,772 1,185,732
Loans held for securitization and sale 480,000 -- -- -- -- 480,000
Mortgage-backed securities 907,147 328,019 26,766 15,381 27,177 1,304,490
Other investments 300,503 -- 4,997 -- -- 305,500
------------ ------------ ------------ ------------- ------------ ------------
Total interest-earning assets 3,164,197 631,680 736,724 319,275 400,790 5,252,666
Total non-interest earning assets -- -- -- -- 879,905 879,905
------------ ------------ ------------ ------------- ------------ ------------
Total assets $ 3,164,197 $ 631,680 $ 736,724 $ 319,275 $ 1,280,695 $ 6,132,571
============ ============ ============ ============= ============ ============
Deposits:
Fixed maturity deposits $ 722,421 $ 257,054 $ 237,136 $ 67,978 $ -- $ 1,284,589
NOW, statement and passbook accounts 1,401,740 41,464 138,102 93,996 200,316 1,875,618
Money market deposit accounts 1,008,518 -- -- -- -- 1,008,518
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 875,466 2,684 3,692 9,588 10,057 901,487
------------ ------------ ------------ ------------- ------------ ------------
Total interest-bearing liabilities 4,008,145 301,202 378,930 171,562 460,373 5,320,212
Total non-interest bearing liabilities -- -- -- -- 498,035 498,035
Stockholders' equity -- -- -- -- 314,324 314,324
------------ ------------ ------------ ------------- ------------ ------------
Total liabilities & stockholders'
equity $ 4,008,145 $ 301,202 $ 378,930 $ 171,562 $ 1,272,732 $ 6,132,571
============ ============ ============ ============= ============ ============
Gap $ (843,948) $ 330,478 $ 357,794 $ 147,713 $ (59,583)
Cumulative gap $ (843,948) $ (513,470) $ (155,676) $ (7,963) $ (67,546)
Adjustment for interest rate caps (1) $ 375,000 $ 275,000 $ 125,000 $ -- $ --
Adjusted cumulative gap $ (468,948) $ (238,470) $ (30,676) $ (7,963) $ (67,546)
Adjusted cumulative gap as a percentage
of total assets (7.6%) (3.9%) (0.5%) (0.1%) (1.1%)
(1) At March 31, 1997, the Bank had $400,000 notional amount of interest
rate caps. The adjustments reflect the average notional amount
outstanding for each period until the last cap expires June 30,
1999.
</TABLE>
<PAGE>
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, adjusted for the effect of
the Bank's interest rate caps, as a percentage of total assets, was a negative
3.9% at March 31, 1997. A negative gap like that shown for the Bank implies
that, if market rates rise, the Bank's average cost of funds will increase more
rapidly than the concurrent increase in the average yield on interest-earning
assets.
Tax Sharing Payments. During the March 1997 quarter, the Bank made a tax sharing
payment of $3.2 million to B. F. Saul Real Estate Investment Trust (the
"Trust"), which owns 80% of the Bank's Common Stock.
Capital. At March 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 March 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 $ 347,742
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding losses (2) 1,195
-----------
492,937
Adjustments for tangible and core capital:
Intangible assets (42,584)
Non-allowable minority interest in
REIT Subsidiary (1) (43,169)
Non-includable subsidiaries (3) (3,675)
Non-qualifying servicing assets (183)
-----------
Total tangible capital 403,326 6.59% $ 91,747 1.50% $ 311,579 5.09%
----------- ========= =========== ========= =========== =========
Total core capital (4) 403,326 6.59% $ 244,659 4.00% $ 158,667 2.59%
----------- ========= =========== ========= =========== =========
Tier 1 risk-based capital (4) 403,326 6.46% $ 249,670 4.00% $ 153,656 2.46%
----------- ========= =========== ========= =========== =========
Adjustments for risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 83,795
-----------
Total supplementary capital 333,795
Excess allowance for loan losses (5,702)
-----------
Adjusted supplementary capital 328,093
--
-----------
Total available capital 731,419
Equity investments (3) (17,207)
-----------
Total risk-based capital $ 714,212 13.44% $ 499,341 8.00% $ 214,871 5.44%
=========== ========= =========== ========= =========== =========
(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 $1.1 million representing the allowance for
general loan losses maintained against the Bank's equity investments
and non-includable subsidiaries which, pursuant to OTS guidelines,
is available as a "credit" against the deductions from capital
otherwise required for such investments.
(4) Under the OTS "prompt corrective action" regulations, the standards
for classification as "well capitalized" are a leverage (or "core
capital") ratio of at least 5.0%, a tier 1 risk-based capital ratio
of at least 6.0% and a total risk-based capital ratio of at least
10.0%.
</TABLE>
<PAGE>
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. In November 1996, the Bank received from the OTS a one-year extension
of the holding periods for certain of its REO properties. The following table
sets forth the Bank's REO at March 31, 1997, after valuation allowances of
$136.8 million, by the fiscal year in which the property was acquired through
foreclosure.
Fiscal Year (In thousands)
1990 (1) (2)............. $ 27,938
1991 (2)................. 62,762
1992 (2)................. 3,341
1993 .................... 4,312
1994 .................... 1,726
1995 .................... 7,442
1996 .................... 3,159
---------
Total REO ............ $ 110,680
=========
- -----------------------
(1) Includes REO with an aggregate net book value of $17.2 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $76.8 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 "1996 Debentures"). The Bank received net
proceeds of $96.1 million from the sale of the 1996 Debentures which were used
for general corporate purposes. The OTS approved inclusion of the principal
amount of the 1996 Debentures in the Bank's supplementary capital for regulatory
capital purposes.
In addition, on December 3, 1996, a new real estate investment trust subsidiary
of the Bank (the "REIT Subsidiary") sold $150.0 million of its 103/8%
Noncumulative Exchangeable Preferred Stock, Series A (the "REIT 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 OTS approved inclusion of 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 prior to January 15,
2007, and is redeemable thereafter at the option of the REIT Subsidiary.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of outstanding
debt.
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. This condition is currently the case and is
expected to continue to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes ("Unsecured Notes") sold to the public, the payment
of interest on its Senior Secured Notes (the "Secured Notes"), and the payment
of capital improvement costs. In the past, the Real Estate Trust had funded such
shortfalls through a combination of external funding sources, primarily new
financings (including the sale of Unsecured Notes), refinancings of maturing
mortgage debt, asset sales and tax sharing payments from the Bank.
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 May 1, 1997, the Trust has purchased either in the open market or
through dividend reinvestment 1.8 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 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 maturing Unsecured Notes, 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 March 31, 1997, there were
no borrowings under the facility and unrestricted availability on that date was
$8.4 million.
<PAGE>
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 is
computed by reference to a floating rate index. At March 31, 1997, there were no
borrowings under the facility. Management and the bank are currently holding
discussions to extend the term of this facility.
In the six-month period ended March 31, 1997, the Real Estate Trust refinanced
two 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 $11.0 million.
The maturity schedule for the Real Estate Trust's outstanding debt at March 31,
1997 for the balance of fiscal 1997 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- -------------------------------------------------------------------------------
1997 (1) $ 3,546 $ -- $ 2,020 $ 5,566
1998 8,264 -- 7,475 15,739
1999 17,954 -- 16,064 34,018
2000 19,770 -- 7,954 27,724
2001 5,966 -- 3,942 9,908
Thereafter 127,812 175,000 7,143 309,955
- -------------------------------------------------------------------------------
Total $183,312 $175,000 $ 44,598 $402,910
===============================================================================
(1) April 1, 1997 - September 30, 1997
Of the $183.3 million of mortgage debt outstanding at March 31, 1997, $135.4
million was nonrecourse to the 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
<PAGE>
payments and dividends from the Bank. During the six-month period ended March
31, 1997, the Bank made tax sharing payments totalling $3.2 million and dividend
payments totalling $4.8 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 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 its 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 six-month period ended March 31, 1997,
the Real Estate Trust received total cash distributions of $2.7 million from
Saul Holdings Partnership.
<PAGE>
BANKING
Liquidity. The Bank's average liquidity ratio for the month ended March 31, 1996
was 8.7%, compared to 11.8% for the month ended December 31, 1996. Additionally,
the Bank met the liquidity level requirements imposed by the OTS for each month
of the first six 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
$651.5 million of credit card receivables and $530.8 million of automobile loan
receivables during the first six months of fiscal 1997. The Bank also
securitized and sold $37.5 million and $24.0 million of home loan and home
equity credit line receivables during the March 1997 quarter. At March 31, 1997,
the Bank was considering the securitization and sale of the following
receivables: (i) approximately $741.0 million of credit card receivables,
including $150.0 million of receivables outstanding at March 31, 1997 and $591.0
million of receivables which the Bank expects to become available through
additional fundings or amortization of existing trusts, during the six months
ending September 30, 1997; (ii) approximately $500.0 million of automobile loan
receivables, including $75.0 million of receivables outstanding at March 31,
1997 and $425.0 million of receivables which the Bank expects to become
available through additional fundings during the six months ending September 30,
1997; (iii) approximately $115.0 million of home loan receivables; and (iv)
approximately $250.0 million of home equity credit line receivables. In
addition, the Bank is evaluating the possibility of securitizing and selling
approximately $100.0 million of amounts on deposit in certain spread accounts
established in connection with certain of the Bank's credit card
securitizations. 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 in this report.
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables. Of the $5.6 billion of outstanding trust
certificate balances at March 31, 1997, the primary recourse to the Bank was
approximately $209.9 million. The Bank is also obligated under various recourse
provisions related to the swap of single-family residential loans for
participation certificates issued to the Bank by the Federal Home Loan Mortgage
Corporation. At March 31, 1997, recourse to the Bank under these arrangements
was approximately $4.2 million.
There were no material commitments for capital expenditures at March 31, 1997.
The Bank's liquidity requirements in fiscal 1997 and for years subsequent to
fiscal 1997 will continue to be affected both by the asset size of the Bank, the
growth of which will be constrained by capital requirements, and the composition
of the asset portfolio. Management believes that the Bank's primary sources of
funds, described above, will be sufficient to meet the Bank's foreseeable
long-term liquidity needs. The mix of funding sources utilized from time to time
will be determined by a number of factors, including capital planning
objectives, lending and investment strategies and market conditions.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 (the "1997 quarter") COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996 (the "1996 quarter")
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$3.9 million and an operating loss of $6.8 million in the 1997 quarter compared
to a loss before depreciation and amortization of $4.8 million and an operating
loss of $7.4 million in the 1996 quarter. The decrease in the operating loss was
largely attributable to improved results from income-producing properties.
Income after direct operating expenses from hotel properties increased $741,000
(23.2%) in the 1997 quarter over the level achieved in the 1996 quarter. In the
current period, room sales increased $1,160,000 (13.8%), while food and beverage
sales increased $5,000 (0.2%). The increase in revenue was due to improved
market conditions, which permitted management to raise average room rates while
maintaining occupancy levels, and the addition of a hotel property in the
current period.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $1,023,000 (42.6%) in
the 1997 quarter compared to such income in the 1996 quarter. This increase
reflected higher base rents due to an increase in the leasing rate. Gross income
in the 1997 quarter was $1,071,000 (25.8%) above its level in the 1996 quarter.
Expenses increased by $48,000 (2.7%).
Interest expense increased $117,000 (1.2%) in the 1997 quarter, primarily
because of the higher level of borrowings in the current quarter. Average
balances of the Real Estate Trust's outstanding borrowings increased to $401.3
million for the 1997 quarter from $396.9 million for the 1996 quarter. This
increase in average borrowings was the result of mortgage loan refinancings.
Amortization of debt expense decreased $21,000 (11.5%) in the 1997 quarter,
largely due to the repayment of loans having high debt costs with the proceeds
of loans having lower debt costs.
Depreciation increased $224,000 (9.2%) in the 1997 quarter as a result of new
tenant improvements and capital replacements and the addition of a new hotel.
Advisory, management and leasing fees paid to related parties increased $135,000
(7.6%) in 1997 quarter from their expense level in the 1996 quarter. The monthly
advisory fee in the 1997 quarter was $311,000 compared to $301,000 in the 1996
quarter, which resulted in an aggregate increase of $31,000. Management fees
were higher in the current quarter due to the increased level of gross revenue
from operating properties.
General and administrative expense decreased $32,000 (10.8%) in the 1997
quarter, principally as a result of lower accounting costs.
<PAGE>
BANKING
Overview. The Bank recorded operating of $20.1 million for the 1997 quarter,
compared to operating $21.3 million for the 1996 quarter. The decrease in income
for the 1997 quarter was primarily attributable to an $18.8 million increase in
operating expenses. Also contributing to the decrease in income was a decrease
of $1.4 million in other (non-interest) income resulting primarily from a
decrease in loan and deposit servicing fee income. These items were partially
offset by a $16.9 million increase in the Bank's net interest income before
provision for loan losses and a $1.9 million decrease in the provision for loan
losses.
Net Interest Income. Net interest income, before the provision for loan losses,
increased $16.9 million (or 38.1%) in the 1997 quarter. The Bank would have
recorded additional interest income of $1.7 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 March 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) $ 3,689,360 $ 99,884 10.83% $ 2,769,399 $ 72,352 10.45%
Mortgage-backed securities 1,383,555 19,719 5.70 801,713 12,273 6.12
Federal funds sold and securities
purchased under agreements to resell 84,887 1,106 5.21 311,787 4,249 5.45
Trading securities 21,432 374 6.98 11,935 204 6.84
Investment securities 9,923 142 5.72 4,409 48 4.35
Other interest-earning assets 196,201 2,061 4.20 184,291 2,104 4.57
-------------- ------------- -------------- -------------
Total 5,385,358 123,286 9.16 4,083,534 91,230 8.94
------------- --------- ------------- --------
Noninterest-earning assets:
Cash 189,925 160,934
Real estate held for investment or sale 119,142 147,191
Property and equipment, net 242,650 206,843
Cost in excess of net assets acquired, net 1,887 2,995
Other assets 381,538 233,807
-------------- --------------
Total assets $ 6,320,500 $ 4,835,304
============== ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 974,474 5,368 2.20 $ 918,218 6,148 2.68
Savings deposits 965,519 8,065 3.34 933,365 7,819 3.35
Time deposits 1,235,342 15,655 5.07 1,301,335 18,019 5.54
Money market deposits 1,001,322 9,612 3.84 985,158 9,439 3.83
-------------- ------------- -------------- -------------
Total deposits 4,176,657 38,700 3.71 4,138,076 41,425 4.00
Borrowings 1,556,697 23,211 5.96 285,863 5,375 7.52
-------------- ------------- -------------- -------------
Total liabilities 5,733,354 61,911 4.32 4,423,939 46,800 4.23
------------- --------- ------------- --------
Noninterest-bearing items:
Noninterest-bearing deposits 91,822 69,858
Other liabilities 46,962 45,169
Minority interest 144,000 --
Stockholders' equity 304,362 296,338
-------------- --------------
Total liabilities and stockholders'
equity $ 6,320,500 $ 4,835,304
============== ==============
Net interest income $ 61,375 $ 44,430
============= =============
Net interest spread (2) 4.84% 4.70%
========= ========
Net yield on interest-earning assets (3) 4.56% 4.35%
========= ========
Interest-earning assets to interest-bearing liabilities 93.93% 92.31%
========= ========
(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.
Volume and Rate Changes in Net Interest Income
(In thousands)
Three Months Ended March 31, 1997
Compared to
Three Months Ended March 31, 1996
Increase (Decrease)
Due to Change in (1)
---------------------------------------------
Total
Volume Rate Change
------------- ------------ ------------
Interest income:
Loans (2) $ 24,816 $ 2,716 $ 27,532
Mortgage-backed securities 12,955 (5,509) 7,446
Federal funds sold and securities
purchased under agreements to
resell (2,964) (179) (3,143)
Trading securities 166 4 170
Investment securities 75 19 94
Other interest-earning assets 586 (629) (43)
------------- ------------ ------------
Total interest income 35,634 (3,578) 32,056
------------- ------------ ------------
Interest expense:
Deposit accounts 2,424 (5,149) (2,725)
Borrowings 25,562 (7,726) 17,836
------------- ------------ ------------
Total interest expense 27,986 (12,875) 15,111
------------- ------------ ------------
Increase in net interest income $ 7,648 $ 9,297 $ 16,945
============= ============ ============
(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.
<PAGE>
Interest income in the 1997 quarter increased $32.1 million (or 35.1%) from the
level in the 1996 quarter 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 4.56% in the 1997
quarter from 4.35% in the 1996 quarter. The increase primarily reflected 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 $27.5 million (or 38.1%) from the 1996 quarter primarily because of
higher average balances and, to a lesser extent, higher average yields on the
loan portfolio.
Higher average balances of credit card loans, which increased $287.8 million (or
29.9%), resulted primarily from the Bank's continued expansion of the credit
card loan program. The increase was primarily responsible for a $13.6 million
(or 39.2%) increase in interest income from credit card loans. A $123.5 million
increase in average balances of automobile loans resulted primarily from the
higher origination volume of such loans, and was largely responsible for a $5.4
million (or 170.7%) increase in interest income on automobile loans. Interest
income on the Bank's single-family residential loans increased by $6.1 million
(or 25.1%) primarily because of increased originations, which resulted in an
increase of $386.0 million (or 28.5%) in the average balances of such loans.
Home equity credit line loan average balances increased by $145.1 million (or
207.8%) primarily because of the $119.2 million purchase of such loans in
December 1996. Interest income on home equity credit line loans increased by
$2.5 million (or 253.4%) in the current quarter.
The average yield on the loan portfolio in the 1997 quarter increased by 38
basis points (to 10.83% from 10.45%) from the average yield in the 1996 quarter.
The higher yield was primarily due to an increase in the average net yield on
credit card loans from 14.46% to 15.50%, which was primarily a result of risk
management strategies that have repriced upward the yield on higher risk credit
card accounts. Also contributing to the increased average yield on the loan
portfolio was an increase in the average yield on automobile loans from 12.69%
to 15.31%, primarily due to higher yields earned on loans originated by one of
the Bank's operating subsidiaries.
Interest income on mortgage-backed securities increased $7.4 million (or 60.7%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1997 quarter reflected 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 6.12% to 5.70%.
<PAGE>
Interest expense increased $15.1 million (or 32.3%) for the 1997 quarter
primarily because of an increase of $1.3 billion in the average balances of the
Bank's borrowings. The increase in the average balances resulted in an increase
of $17.8 million in interest expense for the 1997 quarter for such liabilities.
The increase in interest expense on borrowings is a result of an $11.1 million
increase in interest expense on securities sold under repurchase agreements, a
$4.3 million increase in interest expense on Federal Home Loan Bank advances and
a $2.1 million increase in interest expense on the Bank's subordinated
debentures, respectively, resulting from higher average balances of such
borrowings. See "Financial Condition - Capital." The negative effect of the
higher average balances was partially offset by a decrease in the average
borrowing rate (to 5.96% from 7.52%), which reflected lower market interest
rates in the 1997 quarter as compared to the 1996 quarter.
The increase in interest expense on borrowings was partially offset by a $2.7
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 3.71% from 4.00%).
Provision for Loan Losses. The Bank's provision for loan losses decreased to
$26.9 million in the 1997 quarter from $28.8 million in the 1997 quarter. The
$1.9 million decrease was comprised of a $1.2 million decrease in the provision
for losses on consumer and other loans, a $0.6 million decline in the provision
for losses on credit card loans and a $0.1 million decrease in the provision for
losses on real estate loans. See "Financial Condition - Asset Quality -
Allowances for Losses."
Other Income. Other (non-interest) income totaled $88.1 million in the 1997
quarter compared to $89.5 million in the 1996 quarter. The $1.4 million decline
in such income was primarily attributable to a decrease in loan and deposit
servicing fees. Offsetting this decrease were increases in gain on sales of
loans and credit card fees.
The decrease of $29.8 million (or 36.2%) in loan and deposit servicing fees was
primarily due to a decline of $36.2 million in excess spread income earned by
the Bank for servicing its portfolio of securitized credit card loans. The
decrease in such excess spread income for the 1997 quarter was primarily a
result of an increase in charge-offs on securitized credit card loans. This high
charge-off trend is consistent with an industry-wide decline in the performance
of credit card loans in recent periods. See "Financial Condition - Asset Quality
- - Allowances for Losses."
Gain on sales of loans increased $21.0 million to $21.3 million as a result of
gains recognized on the securitization and sale of loans in the 1997 quarter. A
large component of the $21.3 million gain relates to an $11.0 million gain on
the securitization and sale of credit card loan receivables, which was recorded
in accordance with SFAS 125. Of the $11.0 million gain, $3.3 million represents
the gain recognized on the securitization and sale of $296.5 million of credit
card loans in the 1997 quarter, and the remaining portion represents gains
recognized on the transfer of new receivables into existing trusts. See Notes to
the Consolidated Financial Statements. In addition, gains of $5.7
million, $2.8 million and $1.4 million were recognized in connection with the
securitization and sales of $209.4 million, $37.5 million and $24.0 million of
automobile loan, home loan and home equity credit line receivables,
respectively, during the current quarter.
Credit card fees, consisting of annual fees, late charges, cash advance charges
and overlimit fees increased to $13.0 million in the 1997 quarter from $6.4
million in the 1996 quarter. The $6.6 million (or 102.6%) increase was primarily
attributable to the impact of changes in the fee structure for the Bank's credit
card program in March 1996.
Operating Expenses. Operating expenses for the 1997 quarter increased $18.8
million (or 22.4%) from the level in the 1996 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 $7.6 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card, consumer lending and branch operations. The $8.0 million increase in
marketing expenses was primarily attributable to a $6.2 million increase in
marketing expenses associated with the credit card program as the Bank continues
to focus on increased originations of such loans. The $3.1 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 1997 quarter.
<PAGE>
SIX MONTHS ENDED MARCH 31, 1997(the "1997 period") COMPARED TO SIX MONTHS ENDED
MARCH 31, 1996 (the "1996 period").
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$8.2 million and an operating loss of $13.9 million in the 1997 period compared
to a loss before depreciation and amortization of $9.3 million and an operating
loss of $14.5 million in the 1996 period. The decrease in the operating loss was
largely attributable to improved results from income-producing properties.
Income after direct operating expenses from hotel properties increased $887,000
(12.3%) in the 1997 period over the level achieved in the 1996 period. In the
current period, room sales increased $1,613,000(9.4%), while food and beverage
sales increased $79,000 (1.3%). The increase in total revenue of $1,713,000
(7.0%), exceeded the increase of $826,000 (4.7%) in direct operating expenses.
The increase in revenue was due to improved market conditions, which permitted
management to raise average room rates while maintaining or increasing occupancy
at several of the hotels. The Real Estate Trust also had a new hotel in the
current period.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $1,224,000 (23.6%) in
the 1997 period compared to such income in the 1996 period. The increase was
caused by higher gross income of $1,390,000 (16.0%) due to an increase in the
leasing rate. Expenses for the current period were $166,000 (4.8%) above last
year due to higher property taxes and repair and maintenance expense.
Interest expense increased $40,000 (0.2%) in the 1997 period, primarily because
of the higher level of borrowings in the current period. Average balances of the
Real Estate Trust's outstanding borrowings increased to $398.8 million for the
1997 period from $397.8 million for the prior period. This increase in average
borrowings occurred as a result of mortgage loan refinancings.
Amortization of debt expense increased $11,000 (3.4%) in the 1997 period. This
increase reflected costs incurred for the two lines of credit.
Depreciation increased $460,000 (9.5%) in the 1997 period as a result of new
tenant improvements, capital replacements, and the addition of a new
income-producing property.
Advisory, management and leasing fees paid to related parties increased $258,000
(7.2%) in 1997 period from their expense level in the 1996 period. The monthly
advisory fee in the 1997 period was $311,000 compared to $301,000 in the prior
period, which resulted in an aggregate increase of $61,000. Management fees were
higher in the current period as a result of increased gross income on which fees
are based.
General and administrative expense increased $28,000 (3.9%) in the 1997 period,
principally as a result of higher legal costs.
<PAGE>
BANKING
Overview. The Bank recorded operating income of $40.1 million for the 1997
period, compared to operating income of $37.3 million for the 1996 period. The
increase in income for the 1997 period was primarily attributable to a $29.4
million increase in the Bank's net interest income before provision for loan
losses, which was primarily a result of an increase in interest income on the
Bank's loan portfolio and a $19.9 million increase in the Bank's other
(non-interest) income. These increases were partially offset by a $33.5 million
increase in operating expenses and a $13.0 million increase in the provision for
loan losses.
Net Interest Income. Net interest income, before the provision for loan losses,
increased $29.4 million (or 32.7%) in the 1997 period. The Bank would have
recorded additional interest income of $4.7 million for the 1997 period 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)
Six Months Ended March 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) $ 3,564,551 $ 193,124 10.84% $ 2,846,410 $ 148,836 10.46%
Mortgage-backed securities 1,330,728 38,633 5.81 827,362 25,485 6.16
Federal funds sold and securities
purchased under agreements to resell 81,639 2,161 5.29 216,891 6,077 5.60
Trading securities 17,379 618 7.11 10,352 359 6.94
Investment securities 9,887 286 5.79 4,407 97 4.40
Other interest-earning assets 177,881 3,735 4.20 172,395 3,965 4.60
--------------- ------------- -------------- -------------
Total 5,182,065 238,557 9.21 4,077,817 184,819 9.06
------------- ---------- ------------- ----------
Noninterest-earning assets:
Cash 187,533 155,802
Real estate held for investment or
sale 121,520 161,966
Property and equipment, net 236,048 203,594
Cost in excess of net assets acquired,
net 2,071 3,750
Other assets 351,712 226,364
--------------- --------------
Total assets $ 6,080,949 $ 4,829,293
=============== ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 956,810 10,665 2.23 $ 896,912 12,098 2.70
Savings deposits 959,311 16,198 3.38 931,177 15,720 3.38
Time deposits 1,209,419 30,945 5.12 1,294,071 36,401 5.63
Money market deposits 997,493 19,218 3.85 981,041 19,185 3.91
--------------- ------------- -------------- -------------
Total deposits 4,123,033 77,026 3.74 4,103,201 83,404 4.07
Borrowings 1,419,317 42,429 5.98 313,141 11,665 7.45
--------------- ------------- -------------- -------------
Total liabilities 5,542,350 119,455 4.31 4,416,342 95,069 4.31
------------- ---------- ------------- ----------
Noninterest-bearing items:
Noninterest-bearing deposits 87,841 66,829
Other liabilities 47,971 52,715
Minority interest 94,508 0
Stockholders' equity 308,279 293,407
--------------- --------------
Total liabilities and stockholders'
equity $ 6,080,949 $ 4,829,293
=============== ==============
Net interest income $ 119,102 $ 89,750
============= =============
Net interest spread (2) 4.90% 4.76%
========== ==========
Net yield on interest-earning assets (3) 4.60% 4.40%
========== ==========
Interest-earning assets to interest-bearing liabilities 93.50% 92.33%
========== ==========
(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.
Volume and Rate Changes in Net Interest Income
(In thousands)
Six Months Ended March 31, 1997
Compared to
Six Months Ended March 31, 1996
Increase (Decrease)
Due to Change in (1)
---------------------------------------------
Total
Volume Rate Change
------------- ------------ ------------
Interest income:
Loans (2) $ 38,714 $ 5,574 $ 44,288
Mortgage-backed securities 17,322 (4,174) 13,148
Federal funds sold and securities
purchased under agreements to
resell (3,597) (319) (3,916)
Trading securities 250 9 259
Investment securities 151 38 189
Other interest-earning assets 308 (538) (230)
------------- ------------ ------------
Total interest income 53,148 590 53,738
------------- ------------ ------------
Interest expense:
Deposit accounts 1,165 (7,543) (6,378)
Borrowings 37,856 (7,092) 30,764
------------- ------------ ------------
Total interest expense 39,021 (14,635) 24,386
------------- ------------ ------------
Increase in net interest income $ 14,127 $ 15,225 $ 29,352
============= ============ ============
(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.
<PAGE>
Interest income in the 1997 period increased $53.7 million (or 29.1%) from the
level in the 1996 period 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 4.60% in the 1997
period from 4.40% in the 1996 period. The increase in the net yield primarily
reflected 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 $44.3 million (or 29.8%) from the 1996 period 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 $200.9 million (or
19.9%), resulted primarily from the Bank's continued expansion of the credit
card loan program. The increase was primarily responsible for a $20.8 million
(or 28.7%) 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 $9.2 million (or 105.3%)
increase in interest income on automobile loans. Interest income on the Bank's
single-family residential loans increased by $10.6 million (or 21.5%) primarily
because of increased originations, which resulted in an increase of $333.2
million (or 24.6%) in the average balances of such loans. Average balances of
home equity credit line loans increased by $81.2 million (or 138.4%) primarily
because of the $119.2 million purchase of such loans in December 1996. Interest
income on home equity credit line loans increased by $3.1 million (or 223.55%)
in the current period.
The average yield on the loan portfolio in the 1997 period increased by 38 basis
points (to 10.84% from 10.46%) from the average yield in the 1996 period. The
higher yields were primarily due to increases in the average net yield on credit
card loans from 14.39% to 15.44% and on automobile loans from 10.97% to 13.35%.
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. 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 $13.1 million (or 51.6%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1997 period 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 6.16% to 5.81%.
<PAGE>
Interest expense increased $24.4 million (or 25.7%) for the 1997 period
primarily because of an increase of $1.1 billion (or 353.3%) in the average
balances of the Bank's borrowings. The increase in the average balances of
borrowings resulted in an increase of $30.8 million in interest expense for the
1997 period for such liabilities. The increase in interest expense on borrowings
is primarily due to a $19.9 million, a $7.6 million and a $2.7 million increase
in interest expense on securities sold under repurchase agreements, Federal Home
Loan Bank advances and subordinated debentures, respectively, resulting from
higher average balances of such borrowings. See "Financial Condition Capital."
The negative effect of the higher average balances was partially offset by a
decrease in the average borrowing rate (to 5.98% from 7.45%), which reflected
lower market interest rates in the 1997 period as compared to the 1996 period.
The increase in interest expense on borrowings was partially offset by a $6.4
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 3.74% from 4.07%).
Provision for Loan Losses. The Bank's provision for loan losses increased to
$53.8 million in the 1997 period from $40.8 million in the 1996 period. The
$13.0 million increase was primarily attributable to a $13.3 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 $19.9 million (or 12.7%) increase in other (non-interest)
income to $175.7 million in the 1997 period from $155.8 million in the 1996
period was primarily attributable to increases in gain on sales of loans and
credit card fees. Also contributing to the increase in other income was a
decrease in loss on real estate held for investment or sale. Partially
offsetting these increases was a decrease in loan and deposit servicing fees for
the current period.
Gain on sales of loans increased $24.0 million (or 457.1%) to $29.2 million,
primarily as a result of $11.0 million in gains recorded on the securitization
and sales of credit card loan receivables resulting from the adoption of SFAS
125, $3.3 million of which was recognized on the securitization and sale of
$296.5 million of such loans in March 1997, and the remaining portion represents
gains recognized on the transfer of new receivables into existing trusts. See
Notes to Consolidated Financial Statements. Also contributing to the
increase was a $13.0 million gain recognized on the securitization and sale of
$530.8 million of automobile loans in the 1997 period, compared to a $4.6
million gain recognized on the securitization and sale of $247.6 million of
automobile loans in the 1996 period. In addition, the Bank recognized a gain of
$2.8 million and $1.4 million on the sale of $37.5 million and $24.0 million of
home loan and home equity credit line loan receivables, respectively, during the
current period.
Credit card fees, consisting of annual fees, late charges, cash advance charges
and overlimit fees increased to $27.6 million in the 1997 period from $10.7
million in the 1996 period. The $16.8 million (or 157.2%) increase was primarily
attributable to the impact of changes in the fee structure for the Bank's credit
card program in March 1996.
The $3.8 million (or 28.8%) decrease in loss on real estate held for investment
or sale was primarily attributable to a decrease of $2.7 million in the
provision for losses on such assets, and a $1.1 million increase in the gain
recorded on sales of the Bank's REO properties. See "Financial Condition -
Asset Quality - Allowance for Losses."
The decrease of $27.3 million (or 19.0%) in loan and deposit servicing fees was
primarily due to a decrease of $42.2 million in excess spread income earned by
the Bank for servicing its portfolios of securitized credit card loans. The
decrease in such excess spread income for the 1997 period, was primarily a
result of an increase in charge-offs on securitized credit card loans. This high
charge-off trend is consistent with an industry-wide decline in the performance
of credit card loans in recent periods. See "Financial Condition - Asset Quality
- - Allowances for Losses."
Operating Expenses. Operating expenses for the 1997 period increased $33.5
million (or 20.0%) from the level in the 1996 period, 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 $14.9 million increase in salaries and employee
benefits resulted from the addition of staff to the Bank's credit card, consumer
lending and branch operations. The $17.7 million increase in marketing expenses
was primarily attributable to a $13.7 million increase in marketing expenses
associated with the credit card program as the Bank continues to focus on
increased originations of such loans. The $6.0 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 1997 period. Partially offsetting these increases was a $3.7 million
decrease in other expenses which was primarily due to a decline in credit card
fraud losses.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits:
Exhibit 27
<PAGE>
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: May 14, 1997 Stephen R. Halpin, Jr.
------------ -----------------------------------------------
Vice President and Chief Financial Officer
Date: May 14, 1997 Ross E. Heasley
------------ -----------------------------------------------
Vice President and Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the period
ended March 31, 1997 of B. F. Saul Real Estate Investment Trust and is qualified
in its entirety by reference to such financial statements, schedules and other
disclosure.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 15849
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 282832
<DEPRECIATION> 81818
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 39212
<CGS> 0
<TOTAL-COSTS> 22813
<OTHER-EXPENSES> 9875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20378
<INCOME-PRETAX> (13854)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the period
ended March 31, 1997 of B. F. Saul Real Estate Investment Trust and is qualified
in its entirety by reference to such financial statements, schedules and other
disclosure.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 204351
<INT-BEARING-DEPOSITS> 37666
<FED-FUNDS-SOLD> 23000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 9954
<INVESTMENTS-MARKET> 9947
<LOANS> 3551422
<ALLOWANCE> 91254
<TOTAL-ASSETS> 0
<DEPOSITS> 4381052
<SHORT-TERM> 878150
<LIABILITIES-OTHER> 141708
<LONG-TERM> 273337
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 193124
<INTEREST-INVEST> 39537
<INTEREST-OTHER> 5896
<INTEREST-TOTAL> 238557
<INTEREST-DEPOSIT> 77026
<INTEREST-EXPENSE> 119455
<INTEREST-INCOME-NET> 119102
<LOAN-LOSSES> 53762
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 200963
<INCOME-PRETAX> 40084
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.60
<LOANS-NON> 40985
<LOANS-PAST> 0
<LOANS-TROUBLED> 12007
<LOANS-PROBLEM> 2347
<ALLOWANCE-OPEN> 95523
<CHARGE-OFFS> 63272
<RECOVERIES> 5123
<ALLOWANCE-CLOSE> 91254
<ALLOWANCE-DOMESTIC> 91254
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> CT
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the period
ended March 31, 1997 of B. F. Saul Real Estate Investment Trust and is qualified
in its entirety by reference to such financial statements, schedules and other
disclosure.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<TOTAL-ASSETS> 6433479
516
0
<COMMON> 6642
<OTHER-SE> (103606)
<TOTAL-LIABILITY-AND-EQUITY> 6433479
<TOTAL-REVENUES> 0
<INCOME-TAX> 8162
<INCOME-CONTINUING> 18068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5046
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
