<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
B.F. SAUL REAL ESTATE INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 6712 52-6053341
(Primary Standard (I.R.S. Employer
(State or Other Industrial Identification Number)
Jurisdiction Classification Code
of Incorporation or Number)
Organization)
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
TELEPHONE: 301-986-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
----------------
STEPHEN R. HALPIN, JR.
B.F. SAUL REAL ESTATE INVESTMENT TRUST
8401 CONNECTICUT AVENUE
CHEVY CHASE, MD 20815
TELEPHONE: 301-986-6000
(Name, Address, including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
----------------
Copies to:
THOMAS H. MCCORMICK, ESQ.
LYNN A. SOUKUP, ESQ.
SHAW PITTMAN POTTS & TROWBRIDGE
2300 N STREET, N.W.
WASHINGTON, D.C. 20037
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 3/4% Series B Senior
Secured Notes due
2008................. $200,000,000 100% $200,000,000 $59,000
</TABLE>
================================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, APPLICATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED APRIL 10, 1998
PROSPECTUS
OFFER TO EXCHANGE
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008
FOR
ALL OUTSTANDING
9 3/4% SENIOR SECURED NOTES DUE 2008
($200,000,000 PRINCIPAL AMOUNT OUTSTANDING)
OF
B.F. SAUL REAL ESTATE INVESTMENT TRUST
THE EXCHANGE OFFER
WILL EXPIRE AT P.M., NEW YORK CITY TIME,
ON , UNLESS EXTENDED
----------
B.F. Saul Real Estate Investment Trust (the "Trust") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal, to exchange $1,000 principal amount of its
9 3/4% Series B Senior Secured Notes due 2008 (the "New Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined) of which this
Prospectus constitutes a part, for each $1,000 principal amount of the Trust's
outstanding 9 3/4% Senior Secured Notes due 2008 (the "Old Notes"), of which
$200,000,000 aggregate principal amount is outstanding (the "Exchange Offer").
The New Notes and the Old Notes are collectively referred to herein as the
"Notes."
Upon the terms and subject to the conditions of the Exchange Offer, the Trust
will accept for exchange any and all Old Notes that are validly tendered prior
to the Expiration Date, which will be p.m., New York City time, on ,
unless and until the Trust extends the period of time during which the Exchange
Offer is open, in which case the Expiration Date will be the latest time and
date to which the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain conditions, which
may be waived by the Trust, and to the terms and provisions of the Registration
Rights Agreement (as defined). Old Notes may be tendered only in denominations
of $1,000 and integral multiples thereof. The Trust has agreed to pay the
expenses of the Exchange Offer. See "The Exchange Offer."
The New Notes will be entitled to the benefits of the Indenture (as defined)
relating to the Old Notes. The form and terms of the New Notes are identical in
all material respects to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof. Following the completion of
the Exchange Offer, none of the Notes will be entitled to contingent increases
in the interest rates provided for in the Registration Rights Agreement. See
"The Exchange Offer."
SEE "RISK FACTORS AND OTHER CONSIDERATIONS" BEGINNING ON PAGE 17 FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED PRIOR TO AN INVESTMENT
IN THE NEW NOTES.
----------
The New Notes will bear interest from March 25, 1998 at a rate of 9 3/4%.
Interest on the New Notes is payable semiannually on April 1 and October 1 of
each year, commencing on October 1, 1998. Interest on the Old Notes accepted
for exchange will cease to accrue upon issuance of the New Notes, and holders
of Old Notes whose Old Notes are accepted for exchange will be deemed to have
waived the right to receive any payment in respect of interest on the Old Notes
accrued from March 25, 1998 to the date of issuance of the New Notes.
(Continued on next page)
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
The Trust's ability to pay interest on the Notes will depend in significant
part on its receipt of payments from Chevy Chase Bank, F.S.B. ("Chevy Chase"
or the "Bank"), 80% of the common stock of which is owned by the Trust. See
"Risk Factors and Other Considerations--Ability to Pay Principal and Interest
on the Notes," "-- Restrictions on Dividends from the Bank" and "--
Considerations Relating to Tax Sharing Agreement." The Notes will mature on
April 1, 2008. On or after April 1, 2003, the Notes will be redeemable at the
option of the Trust, as a whole or from time to time in part, at any time at
the redemption prices set forth herein, together with accrued and unpaid
interest, if any, to the redemption date. See "Description of the Notes--
Redemption." The Notes will be redeemable at the option of the Trust, in whole
or in part, at any time prior to April 1, 2003 at a redemption price equal to
the sum of (x) the principal amount thereof, plus (y) accrued and unpaid
interest, if any, to the redemption date, plus (z) the Applicable Premium (as
defined). See "Description of the Notes--Redemption." In addition, upon the
occurrence of a Change of Control (as defined), each Holder (as defined) of
the Notes may require the Trust to purchase all or a portion of such Holder's
Notes at 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. See "Description of the
Notes--Certain Covenants--Purchase of Notes upon a Change in Control."
The Old Notes are, and the New Notes will be, secured by a first priority
perfected security interest in 80% (8,000 shares) of the issued and
outstanding common stock of the Bank (the "Pledged Bank Stock") and by certain
dividends, cash, instruments and other property and proceeds from time to time
distributed with respect to the Pledged Bank Stock and by certain other
collateral. The ability of the Trustee (as defined) to obtain and maintain a
first priority perfected security interest in such distributions may be
limited to the extent that the Trustee does not, or is not able to, cause the
pledged Bank Stock to be registered in its name. See "Description of the
Notes--Security--Certain Regulatory Considerations."
The Old Notes are, and the New Notes will be, nonrecourse obligations of the
Trust, and the sole recourse for collection of principal, premium, if any, and
interest on the Notes will be against the Pledged Bank Stock and other
collateral. There currently is no public market for the Bank's common stock.
The Trust may substitute $28,000 of cash or U.S. Government Securities (as
defined) for each share of Pledged Bank Stock (adjusted for stock splits and
combinations), provided the Notes are secured at all times by at least 66 2/3%
of the voting power of the Voting Stock (as defined) and at least 66 2/3% of
the aggregate number of outstanding shares of common stock of the Bank. The
Old Notes are, and the New Notes will be, effectively subordinated to all
existing and future liabilities of subsidiaries of the Trust, including
indebtedness and trade payables of subsidiaries of the Trust and deposit
liabilities of the Bank. At December 31, 1997, on a pro forma basis after
giving effect to the sale of the Old Notes, and the application of the net
proceeds therefrom, and based on certain assumptions described herein, the
aggregate amount of Indebtedness (as defined) of the Trust would have been
approximately $6.0 billion and the aggregate amount of Indebtedness of
subsidiaries of the Trust (other than the Bank and its subsidiaries) would
have been $174.2 million. See "Capitalization."
Subject to certain conditions, the Trust may elect to transfer the
obligations under the Notes and the Indenture, together with the ownership of
the Pledged Bank Stock, to the New Obligor (as defined). After such transfer
the Notes would be nonrecourse obligations of the New Obligor, secured only by
the Pledged Bank Stock and the other collateral. Substantially all the assets
of the New Obligor will consist of the Pledged Bank Stock. See "Description of
the Notes--Substitution of a New Obligor Under the Indenture."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") issued to third parties, the Trust believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchased such Old Notes directly from the
Trust for resale pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an "affiliate" of the Trust within
the meaning of Rule 405 under the Securities Act), except as described in the
following paragraph, without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the holder is
acquiring the New Notes in its ordinary course of business and is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of the New
Notes. Holders of Old Notes wishing to accept the Exchange Offer must
represent to the Trust that such conditions have been met.
ii
<PAGE>
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer in exchange for Old Notes that were acquired by such
broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
such New Notes. The Trust has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resales.
See "Plan of Distribution."
The Trust believes that none of the registered holders of the Old Notes is
an "affiliate" of the Trust within the meaning of Rule 405 under the
Securities Act.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Trust does not intend to list the New Notes on any securities exchange or
to seek approval for quotation of the New Notes through any automated
quotation system. The Trust has been advised by Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Friedman, Billings, Ramsey & Co., Inc., as the
initial purchasers of the Old Notes (the "Initial Purchasers"), that,
following completion of the Exchange Offer, they presently intend to make a
market in the New Notes; however, neither such entity is obligated to do so
and any market-making activities with respect to the New Notes may be
discontinued at any time. There can be no assurance that an active market for
the New Notes will develop. See "Risk Factors and Other Considerations--
Absence of a Public Market for the Notes."
The Trust will not receive any proceeds from the Exchange Offer. No dealer-
manager is being used in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE TRUST ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
iii
<PAGE>
AVAILABLE INFORMATION
The Trust has filed with the Commission a Registration Statement on Form S-4
under the Securities Act with respect to the New Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Trust and
the New Notes, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed as
part thereof. The Registration Statement (and the exhibits and schedules
thereto), may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Suite 1400, Northwestern Atrium Center, 14th Floor, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material also may be obtained at
prescribed rates by writing to the Commission, Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549 and may also be accessed
electronically by means of the Commission's Web site at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Trust is subject to the informational requirements of the Exchange Act
and in accordance therewith files periodic reports and other information with
the Commission relating to its business, financial statements and other
matters. Reports and other information may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Suite 1400, Northwestern Atrium Center,
14th Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material also may be obtained at prescribed rates by writing to the
Commission, Public Reference Section, 450 Fifth Street, N.W, Washington, D.C.
20549. The Commission also maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Indenture provides that the Trust will file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission and
whether or not the Trust has a class of securities registered under the
Exchange Act, the annual reports, quarterly reports and other documents that
the Trust would be required to file if it was subject to Section 13(a), 13(c)
or 15(d) of the Exchange Act. The Trust will also be required (a) to file with
the Trustee, and provide to each Holder of Notes upon request, without cost to
such Holder, copies of such reports and documents within 15 days after the
date on which the Trust files such reports and documents with the Commission
or the date on which the Trust would be required to file such reports and
documents if the Trust were so required, and (b) if filing such reports and
documents with the Commission is not accepted by the Commission or is
prohibited under the Exchange Act, to supply at the Trust's cost copies of
such reports and documents to any prospective holder of Notes promptly upon
written request. Additionally, upon the request of any Holder or prospective
holder of the Notes, the Trust will provide consolidated financial statements
of the Bank and its subsidiaries on an annual and quarterly basis.
iv
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Trust's (i) Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, (the "Trust 10-K"), and (ii) Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997 (the "Trust 10-Q"), are attached
hereto as Attachment A and Attachment B, respectively, and incorporated herein
by reference. Also attached are the Consolidated Financial Statements of the
Bank as of September 30, 1997 and 1996, together with Auditors' Report, and
the Interim Financial Statements of the Bank as of December 31, 1997
(Attachments C and D, respectively). In addition, all documents filed by the
Trust pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
Exchange Offer shall be deemed to be incorporated by reference herein and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
To the extent that this prospectus incorporates documents by reference which
are not presented herein or delivered herewith, the Trust will provide,
without charge to each person to whom this Prospectus has been delivered, a
copy of any or all such documents, other than exhibits to such documents
(unless such exhibits are specifically incorporated by reference therein).
Requests for such copies should be directed to B.F. Saul Real Estate
Investment Trust, 8401 Connecticut Avenue, Chevy Chase, Maryland 20815,
Attention: Chief Financial Officer, Telephone Number (301) 986-6000. In order
to ensure timely delivery of the documents, any request should be made at
least five business days prior to the Expiration Date of the Exchange Offer.
v
<PAGE>
PROSPECTUS SUMMARY
This Summary, including the Selected Consolidated Financial and Other Data,
does not purport to be complete and is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus and in the documents incorporated by reference
herein. Capitalized terms used in the summary and not defined therein have the
meanings ascribed to such terms elsewhere in this Prospectus or in the
documents incorporated by reference herein.
The Trust has prepared its financial statements and other disclosures on a
fully consolidated basis. The term "Trust" as used in this Prospectus and the
financial statements included herein generally refers to the combined entity,
which includes B. F. Saul Real Estate Investment Trust and its subsidiaries,
including the Bank and the Bank's subsidiaries. "Real Estate Trust" refers to
B. F. Saul Real Estate Investment Trust and its subsidiaries, excluding the
Bank and its subsidiaries. The financial information and other disclosures
regarding the Bank in this Prospectus are presented as they appear in the Trust
10-K. The financial statements of the Bank as reported on a stand-alone basis
vary in certain respects from the information presented in the Trust 10-K due
to certain accounting adjustments to the Trust's consolidated financial
statements required under generally accepted accounting principles.
THE TRUST
The Trust operates as a taxable Maryland real estate investment trust. The
principal business activity of the Trust and its real estate subsidiaries is
the ownership and development of income-producing properties. The Trust owns
80% of the outstanding common stock of the Bank, whose assets accounted for
more than 95% of the Trust's consolidated assets at December 31, 1997. The
Trust is a thrift holding company by virtue of its ownership of a majority
interest in the Bank. See "Real Estate--Holding Company Regulation" in the
Trust 10-K. The Offering has been structured to facilitate a potential
separation of the Trust's real estate activities from its ownership of the
Bank. See "Risk Factors--Effect of Potential Trust Reorganization."
The Trust recorded net income of $6.9 million during the three months ended
December 31, 1997 compared to net income of $2.3 million during the three
months ended December 31, 1996. The Trust recorded net income of $18.9 million
in the fiscal year ended September 30, 1997, compared to a net loss of $78,000
in the fiscal year ended September 30, 1996 and net income of $10.9 million in
the fiscal year ended September 30, 1995.
The Real Estate Trust's long-term objectives are to increase cash flow from
operations and to maximize capital appreciation of its real estate. The
properties owned by the Real Estate Trust consist principally of eleven hotels
containing approximately 2,670 total available rooms, eight office and
industrial projects with a combined gross leasable area of approximately
1,300,000 square feet, and ten undeveloped land parcels of approximately 439
total acres. These properties are located predominantly in the Mid-Atlantic and
Southeastern regions of the United States. The average occupancy rate and the
average room rate of the hotel portfolio increased to 63% and $75.84,
respectively, for the three months ended December 31, 1997 from 61% and $69.51
for the three months ended December 31, 1996. For the fiscal year ended
September 30, 1997, the average occupancy rate and average room rate increased
to 70% and $72.21, respectively, from 68% and $68.79 for the previous fiscal
year. In addition, the commercial and industrial property portfolio was 99%
leased at both December 31, 1997 and September 30, 1997, compared to leasing
rates of 95% at December 31, 1996 and 93% at September 30, 1996. See
"Business--Real Estate" in the Trust 10-K and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition--Real Estate" in the Trust 10-Q.
THE BANK
GENERAL. Chevy Chase is a federally chartered and federally insured stock
savings bank which at December 31, 1997 was conducting business from 133 full-
service offices and 640 automated teller machines
1
<PAGE>
("ATMs") in Maryland, Virginia and the District of Columbia. The Bank has its
home office in McLean, Virginia and its executive offices in Chevy Chase,
Maryland, both suburban communities of Washington, D.C. The Bank also maintains
16 mortgage loan production offices in the mid-Atlantic region, 15 of which are
operated by a wholly-owned mortgage banking subsidiary, and 30 consumer loan
production offices, 23 of which are operated by a wholly-owned finance
subsidiary of the Bank. At December 31, 1997, the Bank had total assets of $6.1
billion and total deposits of $5.0 billion. Based on total consolidated assets
at December 31, 1997, Chevy Chase is the largest bank headquartered in the
Washington, D.C. metropolitan area.
Chevy Chase is a consumer oriented, full service banking institution
principally engaged in the business of attracting deposits from the public and
using such deposits, together with borrowings and other funds, to make loans
secured by real estate, primarily residential mortgage loans, and credit card
and other types of consumer loans. The Bank also has an active commercial
lending program. The Bank's principal deposit and lending markets are located
in the Washington, D.C. metropolitan area. As a complement to its basic deposit
and lending activities, the Bank provides a number of related financial
services to its customers, including securities brokerage and insurance
products offered through its subsidiaries. On November 12, 1997, the Bank
acquired ASB Capital Management, Inc., one of the largest SEC-registered
investment managers headquartered in the Washington, D.C. metropolitan area,
through which the Bank provides a variety of investment products and fiduciary
services to a primarily institutional customer base.
Chevy Chase recorded operating income of $29.4 million during the three
months ended December 31, 1997 compared to operating income of $20.0 million
during the three months ended December 31, 1996. Chevy Chase recorded operating
income of $80.2 million for the year ended September 30, 1997 compared to
operating income of $46.1 million for the year ended September 30, 1996 and
$55.7 million for the year ended September 30, 1995. At December 31, 1997, the
Bank's tangible, core, tier 1 risk-based and total risk-based regulatory
capital ratios were 6.65%, 6.65%, 6.81% and 13.01%, respectively. As of such
date, 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 established pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
Chevy Chase is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision (the "OTS") and, to a lesser
extent, by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank's
deposit accounts are fully insured up to $100,000 per insured depositor by the
Savings Association Insurance Fund (the "SAIF"), which is administered by the
FDIC.
BUSINESS OF THE BANK. The Bank historically has relied on retail deposits
originated in its branch network as its primary funding source. The Bank's
principal market for deposits consists of Montgomery and Prince George's
Counties in Maryland and, to a lesser extent, Fairfax County in Virginia;
approximately 82% of the Bank's deposits at December 31, 1997 were obtained
from depositors in Maryland and Northern Virginia. As of such date, the Bank
had 133 full-service offices located in Maryland, Northern Virginia and the
District of Columbia. The Bank had the leading market share of deposits in
Montgomery County and ranked third in market share of deposits in Prince
George's County at June 30, 1996, according to the most recently published
industry statistics. The per capita income of each of Montgomery and Fairfax
Counties ranks among the highest of counties and equivalent jurisdictions
nationally. These two counties are also the Washington, D.C. area's largest
suburban employment centers with a substantial portion of their labor force
consisting of federal, state, and local government employees. Private
employment is concentrated in services and retail trade centers. Unemployment
in Montgomery and Fairfax Counties in December 1997 (2.3% and 1.7%,
respectively) was below the national rate (4.4%) and state rates (4.5% for
Maryland and 3.1% for Virginia) for the same month.
The Bank historically has concentrated its lending activities in the
Washington, D.C. metropolitan area. In recent periods, the Bank and its
subsidiaries have expanded the geographic region in which they purchase and
originate loans to include primarily the northern and southern areas of the
Eastern United States. The Bank has
2
<PAGE>
not changed its underwriting standards for loans purchased or originated in
these areas, although the pricing of the loans may be different based upon
local market conditions.
As of December 31, 1997, the Bank's loan portfolio consisted primarily of
single-family residential loans (approximately 40.1%), credit card loans
(approximately 37.0%) and non-credit card consumer loans (approximately 9.2%).
The Bank originates VA-guaranteed, FHA-insured and a wide variety of
conventional residential mortgage loans through its wholly owned mortgage
banking subsidiary, B.F. Saul Mortgage Company, or directly through Chevy Chase
Mortgage, a division of the Bank. The Bank currently offers fixed-rate loans
with maturities of 15 to 30 years and adjustable-rate residential mortgage
loans, principally with maturities of 30 years. The Bank also offers revolving
home equity credit line loans secured principally by a second mortgage on the
borrowers' homes. In addition to revenue generated from interest on the loan
portfolio, the Bank also recognizes income from loan origination and servicing
fees. See "Business--Banking--Lending Activities;--Single Family Residential
Lending; --Home Equity Lending; --Loan Servicing" in the Trust 10-K.
With respect to its credit card program, the Bank offers Chevy Chase
"Classic," "Gold" and "Platinum" VISA(R) and MasterCard(R) cards. Chevy Chase
issues the credit cards and receives income on credit extended, a fee paid by
merchants accepting card purchases based on a percentage of credit card sales,
an annual membership fee for use of the cards and various other fees based on
cardholder usage and repayment activity. The Bank believes its credit card
program contributes to market share growth in its local market by attracting
new depositors, promoting a high degree of customer loyalty and providing
opportunities to cross-market other products of the Bank. See "Business--
Banking--Lending Activities--Credit Card Lending" in the Trust 10-K.
Chevy Chase currently offers a variety of consumer loans other than credit
card loans, including automobile loans, overdraft lines of credit, home
improvement loans and other unsecured loans for traditional consumer purchases
and needs. In addition, through a wholly-owned subsidiary, the Bank offers
"non-prime" automobile loans. "Non-prime" refers to a category of loans made to
applicants who have experienced certain adverse credit events, but who meet
certain other creditworthiness tests. During fiscal 1997, the Bank purchased or
originated $890.0 million of automobile loans and $138.5 million of home
improvement loans, which were more than offset by the transfers of $938.9
million and $224.0 million, respectively, of such receivables to trusts for
securitization and sale to investors. During the three months ended December
31, 1997, the Bank purchased or originated $187.1 million of automobile loans
and $35.1 million of home improvement loans, which were offset in part by the
transfer of $220.9 million of automobile loan receivables to trusts for
securitization and sale to investors.
Beginning in late fiscal 1995, the Bank has diversified its loan portfolio by
developing a middle-market and small business commercial lending program. In
addition to extending credit, the Bank seeks to become the primary source of
deposit products for its commercial customers. Management believes that these
types of banking relationships are a natural extension and complement to the
Bank's existing deposit and lending base. Commercial loans increased $15.5
million during the first three months of fiscal 1998 to $113.8 million at
December 31, 1997 and are expected to continue to grow as the Bank continues to
expand this aspect of its business.
On November 12, 1997 the Bank purchased ASB Capital Management, Inc. ("ASB"),
formerly a wholly-owned subsidiary of NationsBank Corporation and one of the
largest SEC-registered investment managers headquartered in the Washington,
D.C. metropolitan area. ASB provides a variety of investment products,
including equity and fixed income securities, money market investments and real
estate investments, to a primarily institutional client base and has
approximately $3.0 billion of assets under management. The Bank anticipates
that the acquisition will provide an additional source of fee-based revenues
and will enhance the operations of the middle-market and small business
commercial lending program by allowing the Bank to offer a broader variety of
investment products and fiduciary services to institutional customers. Although
the acquisition generated additional goodwill which reduced the Bank's
regulatory capital levels, the Bank's capital levels have remained above the
levels established for well-capitalized institutions.
3
<PAGE>
RETAIL BANKING EXPANSION STRATEGY. In recent years, the Bank has made
significant investments in its retail banking franchise through establishment
of additional branches and ATMs and expansion of its residential mortgage,
consumer, middle market and small business lending operations. In the last
three fiscal years, the Bank has opened 48 new branches and established 231 new
ATMs, 22 and 85 of which, respectively, were established in fiscal 1997. During
the first three months of fiscal 1998, the Bank opened five new branches and 26
new ATMs. At December 31, 1997, the Bank has received OTS approval to open four
branches and is awaiting OTS approval to open three additional branches. At
December 31, 1997, 200 of the Bank's 640 ATMs were located in grocery stores,
and the Bank has the right to install ATMs in certain additional grocery stores
in the greater Washington, D.C, Baltimore and Richmond areas which do not
currently have ATM service. In addition, the Bank has opened five full service
branches and three interactive kiosks in grocery stores as of December 31, 1997
and is assessing various options regarding establishment of additional in-store
branches. The Bank believes that its retail banking expansion strategy will
enable it to benefit from the favorable demographics in its primary markets, to
capitalize on its status as the largest locally-owned depository institution in
the Washington, D.C. metropolitan area, and to provide the type of convenient
service that consumers and small businesses typically demand.
NON-PERFORMING ASSETS. Non-performing assets totaled $101.6 million, after
valuation allowances on real estate held for sale ("REO") of $143.7 million, at
December 31, 1997, compared to $158.5 million, after valuation allowances on
REO of $131.2 million, at December 31, 1996. The $56.9 million decrease in non-
performing assets was comprised of a net decrease in REO of $30.0 million and a
decrease in non-accrual loans of $26.9 million resulting from a change in the
Bank's reporting practices (as described below). In addition to the valuation
allowances on REO, the Bank maintained $3.8 million and $32.1 million of
valuation allowances on its non-accrual loans at December 31, 1997 and December
31, 1996, respectively.
The majority of the Bank's REO is residential property, consisting primarily
of five planned unit developments (the "Communities") which had an aggregate
book value of $67.3 million as of December 31, 1997. Four of the five
Communities are currently under active development. At December 31, 1997, two
of the four active Communities had 2,301 remaining residential lots, of which
518 lots (22.5%) were under contract and pending settlement. Four of the active
Communities had approximately 245 remaining acres of land designated for
commercial use, of which 4.8 acres (2.0%) were under contract and pending
settlement. In addition, at December 31, 1997, the Bank was engaged in
discussions with potential purchasers regarding the sale of additional
residential units and retail land. The level of REO and of non-performing
assets has decreased substantially over the past four years as the Bank has
disposed of the bulk of the assets it acquired through foreclosure or deed-in-
lieu of foreclosure in 1990 and 1991. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Financial Condition--
Banking--Asset Quality--Disposition of REO" in the Trust 10-K.
Effective June 30, 1997, the Bank conformed its reporting practices for
credit card loans to those of most credit card issuers and began to exclude
credit card loans from non-accrual loans and non-performing assets. Credit card
loans are not placed on non-accrual status, but continue to accrue interest
until the loan is either paid off or charged off. Net charge-offs of credit
card loans decreased to $23.6 million for the three months ended December 31,
1997 compared to $25.0 million for the corresponding quarter in fiscal 1996.
Net charge-offs of credit card loans for fiscal 1997 were $105.5 million,
compared to $74.1 million for fiscal 1996. The increase in net charge-offs for
fiscal 1997 versus fiscal 1996 generally reflects the trends that are affecting
the credit card industry as a whole. Management has implemented more stringent
underwriting and other lending policies designed to reduce such losses in
future periods. For example, the Bank has expanded and refined its use of
credit scoring techniques, including development of proprietary scoring
techniques intended to supplement traditional underwriting and account
management procedures with statistical information. The allowance for losses on
credit card loans increased to $94.8 million at December 31, 1997 from $89.4
million at September 30, 1997. Charge-offs in any fiscal period relate both to
balances and conditions or events that existed at the
4
<PAGE>
beginning of the period and to balances created during the period and may
therefore exceed the levels of valuation allowances established at the
beginning of the fiscal period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition--Banking--
Asset Quality--Allowances for Losses" in the Trust 10-Q.
ASSET SECURITIZATIONS. Chevy Chase has accessed the capital markets as an
additional means of funding its operations and managing its capital ratios and
asset growth. Specifically, the Bank has securitized financial
assets, including credit card, home equity credit line, home loan and
automobile loan receivables, as well as single-family residential loans,
because such securitizations provide the Bank with a source of financing at
competitive rates and assist the Bank in maintaining compliance with regulatory
capital requirements. Additionally, the securitizations have permitted the Bank
to limit the credit risk associated with these assets while continuing to earn
servicing fees and other income associated with the securitized assets.
Since 1988, the Bank has securitized approximately $11.6 billion of credit
card, home equity credit line, automobile and home loan receivables. These
transactions depend on sophisticated back-office systems to service complex
securitization structures and on personnel with the experience to design,
install and manage those systems. At December 31, 1997, the Bank serviced $4.1
billion, $405.0 million, $1.2 billion and $227.5 million of securitized credit
card, home equity credit line, automobile and home loan receivables,
respectively. Chevy Chase derives fee-based income from servicing these
securitized portfolios. However, such fee-based income has been adversely
affected in recent periods by increases in delinquencies and charge-offs
related to the receivables placed in these securitized pools.
The Bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust which holds the receivables and issues the asset-
backed certificates and ultimately the risk of repayment is transferred to the
holders of those certificates. The Bank retains risk with respect to the assets
transferred to the trust only to the extent that it retains recourse based on
the performance of the assets or holds certificates issued by the trust (such
as a "seller certificate"). In its securitizations, the Bank typically retains
a limited amount of recourse through one or more means. Most often, limited
recourse is retained through the establishment of "spread accounts."
Occasionally other structures, such as overcollateralization, are used. Spread
accounts are funded by initial deposits, if required, and by amounts generated
by the securitized assets over and above the amount required to pay interest,
defaults and other charges and fees on the investors' interest in the
securitization transaction. Because amounts on deposit in the spread accounts
are at risk depending upon performance of the securitized receivables, those
amounts represent recourse to the Bank.
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables to the extent of any amounts on deposit
in certain "spread accounts" owned by the Bank. These spread accounts provide
credit support for the Bank's securitizations and are funded by certain
deposits made by the Bank and by excess cash flow payments generated by the
securitized assets. Of the $6.1 billion of outstanding trust certificate
balances at December 31, 1997, approximately $132.7 million represented amounts
on deposit in such spread accounts subject to risk of loss. Pursuant to OTS's
capital requirements, the Bank maintains dollar-for-dollar capital against the
securitized assets in an amount equal to (i) the amounts on deposit in such
spread accounts, (ii) the amount of any interest-only strips relating to the
securitized assets, and (iii) certain other items representing recourse for
regulatory capital purposes, up to the otherwise applicable capital requirement
on the underlying loans. See "Risk Factors--Securitization Activities."
HISTORY AND OWNERSHIP. The Bank was organized in 1969 as a stock savings
institution under Maryland law. On May 22, 1985, the Bank obtained federal
insurance of its deposit accounts and on April 8, 1986 it became a federally
chartered stock savings bank. Eighty percent (80%) of the outstanding common
stock of the Bank is owned by the Trust. The remaining 20% of the Bank's common
stock is held by Derwood Investment Corporation, an affiliate of the Trust
which owns 16% of the shares, and the B. F. Saul Company Employees' Profit
Sharing and Retirement Trust, which owns 4% of the shares. B. Francis Saul II
is the Bank's founder and principal executive officer. Through his significant
equity interest and management positions in the Bank's major stockholders, Mr.
Saul has the ability to effectively control the affairs and direct the policies
of the Bank.
5
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer........ The Trust is offering to exchange $1,000 principal
amount of New Notes for each $1,000 principal
amount of Old Notes that is properly tendered and
accepted. The Trust will issue the New Notes
promptly after the Expiration Date. As of the date
of this Prospectus, $200,000,000 aggregate
principal amount of Old Notes is outstanding. See
"The Exchange Offer."
Resale of New Notes....... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Trust believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other
than (i) a broker-dealer who purchased such Old
Notes directly from the Trust for resale pursuant
to Rule 144A or any other available exemption under
the Securities Act, or (ii) a person that is an
"affiliate" of the Trust within the meaning of Rule
405 under the Securities Act), except as described
in the following paragraph, without compliance with
the registration and prospectus delivery provisions
of the Securities Act, provided that the holder is
acquiring the New Notes in its ordinary course of
business and is not participating, does not intend
to participate and has no arrangement or
understanding with any person to participate in the
distribution of the New Notes. In the event that
the Trust's belief is inaccurate, holders of New
Notes that transfer New Notes in violation of the
prospectus delivery provisions of the Securities
Act and without an exemption from registration
thereunder may incur liability under the Securities
Act. The Trust does not assume or indemnify holders
against such liability, although the Trust does not
believe that any such liability should exist.
Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer in
exchange for Old Notes that were acquired by such
broker-dealer as a result of market-making
activities or other trading activities must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of such New Notes. The Trust has agreed that, for a
period of 180 days after the Expiration Date, it
will make this Prospectus, as amended or
supplemented, available to any broker-dealer for
use in connection with any such resales. See "Plan
of Distribution."
This Exchange Offer is not being made to, nor will
the Trust accept surrenders for exchange from,
holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would
not be in compliance with the securities or blue
sky laws of such jurisdiction.
6
<PAGE>
Expiration Date........... p.m., New York City time, on , unless and
until the Trust extends the period of time during
which the Exchange Offer is open, in which case the
term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended. See
"The Exchange Offer Expiration Date; Extensions;
Amendments."
Accrued Interest on the
New Notes and the Old
Notes.................... Interest on the New Notes will accrue from March
25, 1998 at a rate of 9 3/4%. Holders of Old Notes
whose Old Notes are accepted for exchange will be
deemed to have waived the right to receive any
payment in respect of interest on such Old Notes
accrued from March 25, 1998 to the date of the
issuance of the New Notes. Consequently, holders
who exchange their Old Notes for New Notes will
receive the same interest payment on October 1,
1998 (the first interest payment date with respect
to the New Notes) that they would have received had
they not accepted the Exchange Offer. See "The
Exchange Offer--Interest on the New Notes."
Termination of the
Exchange Order........... The Trust may terminate the Exchange Offer if it
determines that (i) the Exchange Offer, or the
making of any exchange, would violate any
applicable law or any interpretation of applicable
law by the staff of the Commission, or (ii) the
Trust's ability to proceed with the Exchange Offer
could be materially impaired due to any pending or
threatened legal or governmental action or
proceeding or the enactment of any law, statute,
rule or regulation. The Trust does not expect any
of the foregoing conditions to occur, although
there can be no assurances in this regard. See "The
Exchange Offer--Termination."
Procedures for Tendering
Old Notes................ Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes to be exchanged and any other
required documentation to , as Exchange
Agent, at the address set forth herein and therein
or effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided for
herein. By executing the Letter of Transmittal,
each holder will represent to the Trust that, among
other things, (i) the New Notes acquired pursuant
to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving
such New Notes, whether or not such person is the
holder, (ii) the person receiving the New Notes is
not participating in and does not intend to
participate in a distribution of the New Notes,
(iii) neither the holder nor any such other person
has any arrangement or understanding with any
person to participate in the distribution of such
New Notes and (iv) neither the holder nor any such
other person is an "affiliate" of the Trust within
the meaning of Rule 405 under the Securities Act.
See "The Exchange Offer--Procedures for Tendering."
7
<PAGE>
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender in the Exchange Offer should contact such
registered holder promptly and instruct such
registered holder to tender on behalf of such
beneficial owner. If a beneficial owner wishes to
tender on its own behalf, such beneficial owner
must, prior to completing and executing the Letter
of Transmittal and delivering its Old Notes, either
make appropriate arrangements to register ownership
of the Old Notes in such holder's name or obtain a
properly completed bond power from the registered
holder. The transfer of record ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures................ Holders of Old Notes who wish to tender their Old
Notes and (i) whose certificates representing such
Old Notes are not immediately available, (ii) who
cannot deliver their Old Notes, a properly
completed Letter of Transmittal or any other
required documents to the Exchange Agent prior to
the Expiration Date or (iii) who cannot complete
the procedures for book-entry transfer on a timely
basis, may tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders of Old Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Acceptance of Old Notes
and Delivery of New
Notes.................... Subject to certain conditions (as summarized above
in "Termination of the Exchange Offer" and
described more fully in "The Exchange Offer--
Termination"), the Trust will accept for exchange
any and all Old Notes which are properly tendered
in the Exchange Offer prior to the Expiration Date.
The New Notes issued pursuant to the Exchange Offer
will be delivered promptly following the Expiration
Date.
Certain Tax
Considerations............ The exchange pursuant to the Exchange Offer will
generally not be a taxable event for federal income
tax purposes. See "Certain Federal Income Tax
Considerations--Exchange Offer."
Exchange Agent and
Information Agent........ is serving as exchange agent (the "Exchange
Agent") and information agent (the "Information
Agent") in connection with the Exchange Offer. The
mailing address of the Exchange Agent is
, while the address of the Exchange Agent for
hand deliveries or for deliveries by overnight
courier is . For information with
respect to the Exchange Offer, the telephone number
for the Exchange Agent is and the
numbers for facsimile transmission (for Eligible
Institutions only) are .
Use of Proceeds........... There will be no cash proceeds payable to the Trust
from the issuance of the New Notes pursuant to the
Exchange Offer.
8
<PAGE>
SUMMARY OF TERMS OF THE NOTES
The Exchange Offer applies to $200,000,000 aggregate principal amount of the
Old Notes. The form and terms of the New Notes are identical in all material
respects to the form and terms of the Old Notes, except that the New Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. In addition, the New Notes will not be
subject to certain adjustments in interest rate. The New Notes will evidence
the same indebtedness as the Old Notes, will be entitled to the benefits of the
Indenture and will be treated as a single class thereunder with the Old Notes.
See "Description of the Notes--General."
Maturity Date............. April 1, 2008.
Interest Payment Dates.... April 1 and October 1 of each year, commencing
October 1, 1998.
Optional Redemption....... On and after April 1, 2003 the Old Notes are, and
the New Notes will be, redeemable at the option of
the Trust, as a whole or from time to time in part,
at any time at the redemption prices set forth
herein, together with accrued and unpaid interest,
if any, to the redemption date. In addition, the
Old Notes are, and the New Notes will be,
redeemable at the option of the Trust, in whole or
in part, at any time prior to April 1, 2003, at a
redemption price equal to the sum of (x) the
principal amount thereof, plus (y) accrued and
unpaid interest, if any, to the redemption date,
plus (z) the Applicable Premium. See "Description
of the Notes--Redemption."
Change of Control......... Upon the occurrence of a Change of Control, each
Holder of the Notes may require the Trust to
purchase all or a portion of such Holder's Notes at
a purchase price equal to 101% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See
"Description of the Notes--Certain Covenants--
Purchase of Notes upon a Change of Control."
Failure of the Trust to purchase such Holder's
Notes would constitute an Event of Default. The
Trust's ability to purchase the Notes may be
limited by the amount of its available cash and
other factors. See "Risk Factors and Other
Considerations--Ability to Pay Principal and
Interest on the Notes."
Mandatory Redemption...... None.
Security.................. The Old Notes are, and the New Notes will be,
secured by a first priority perfected security
interest in the Pledged Bank Stock, by certain
dividends, cash, instruments and other property and
proceeds from time to time distributed with respect
to the Pledged Bank Stock, and by certain other
Collateral. The ability of the Trustee to obtain
and maintain a first priority perfected security
interest in such distributions may be limited to
the extent that the Trustee does not, or is not
able to, cause the Pledged Bank Stock to be
registered in its name. See "Description of the
Notes--Security--Certain Regulatory
Considerations." There currently is no market for
the Bank's common stock.
Nonrecourse Nature of
Notes.................... The Old Notes are, and the New Notes will be,
nonrecourse obligations of the Trust, and the sole
recourse for collection of principal, premium, if
any, and interest on the Notes will be against the
Pledged Bank Stock
9
<PAGE>
and the other Collateral. The Trust's obligations
under the Notes are not guaranteed directly or
indirectly by the Trust or any of its subsidiaries
(including the Bank and its subsidiaries), and the
Trust shall not be liable in any respect (except to
the extent of its interest in the Pledged Bank
Stock and the other Collateral) for the payment of
any obligation due under the Notes. See "Risk
Factors and Other Considerations--Security for the
Notes; Limited Recourse by Noteholders,"
"Description of the Notes--Security--Certain
Regulatory Considerations" and "--Security--Certain
Bankruptcy Limitations."
A substantial portion of the business operations of
the Trust is conducted through its subsidiaries
(including the Bank and its Subsidiaries), and the
Trust is dependent on the cash flow of such
subsidiaries to meet its obligations, including its
obligations under the Notes. Accordingly, the Notes
will be effectively subordinated to all existing
and future liabilities, including indebtedness and
trade payables, of the Trust's subsidiaries and
deposit liabilities of the Bank. As of December 31,
1997 on a pro forma basis after giving effect to
the Offering and the use of the proceeds therefrom,
the outstanding Indebtedness of the Trust would
have been approximately $6.0 billion (including
$200 million with respect to the Notes), and the
Trust's subsidiaries would have had outstanding
liabilities of $5.8 billion (including $5.6 billion
of liabilities of the Bank and its subsidiaries).
Subject to certain limitations, the Trust and its
subsidiaries may incur additional Indebtedness in
the future.
Substitution of Issuer.... Subject to certain conditions, the Trust may elect
to transfer the obligations under the Notes and the
Indenture, together with the ownership of the
Pledged Bank Stock, to the New Obligor. After such
transfer the Notes would be nonrecourse obligations
of the New Obligor. The New Obligor's obligations
under the Notes will not be guaranteed directly or
indirectly by the Trust, the New Obligor or any of
its subsidiaries (including the Bank and its
subsidiaries), and the New Obligor shall not be
liable in any respect (except to the extent of its
interest in the Pledged Bank Stock and the other
Collateral) for the payment of any obligation due
under the Notes. See "Risk Factors--Effect of
Potential Trust Reorganization" and "Description of
the Notes--Substitution of New Obligor Under the
Indenture."
Restrictive Covenants..... The Indenture will contain certain covenants,
including, but not limited to, covenants with
respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on restricted
payments; (iii) limitation on issuances and sales
of capital stock of restricted subsidiaries; (iv)
limitation on transactions with affiliates; (v)
restriction on transfer of assets to subsidiaries;
(vi) limitation on sale of assets; (vii) limitation
on restricted subsidiaries; (viii) limitation on
dividend and other payment restrictions affecting
restricted subsidiaries; (ix) required stock
ownership; and (x) purchase of notes upon a change
of control. See "Description of the Notes--Certain
Covenants" and "--Consolidation, Merger and Sale of
Assets."
10
<PAGE>
Use of Proceeds........... The Trust will not receive any cash proceeds from
the issuance of the New Notes offered hereby. The
net proceeds to the Trust from the sale of the Old
Notes were approximately $194 million after
deduction of the amount of the Initial Purchasers'
discount and estimated expenses payable by the
Trust. The Trust deposited approximately $185
million of such proceeds for the principal
redemption (including premium) of the Trust's
$175,000,000 aggregate principal amount of 11 5/8%
Senior Secured Notes due 2002 (the "Existing
Notes"). The Trust intends to use the remaining
proceeds from the sale of the Old Notes for general
corporate purposes. See "Use of Proceeds."
Exchange Offer;
Registration Rights...... In connection with the sale of the Old Notes, the
Trust agreed in the Registration Rights Agreement
to (i) to file a registration statement (the
"Exchange Offer Registration Statement") with
respect to an offer to exchange the Old Notes (the
Exchange Offer made hereby) for secured,
nonrecourse notes of the Trust with substantially
identical terms to the Old Notes within 45 calendar
days after March 25, 1998, the date of original
issuance of the Old Notes (the "Issuance Date"),
(ii) to use its best efforts to cause the Exchange
Offer Registration Statement to become effective
under the Securities Act within 150 calendar days
after the Issuance Date and (iii) to use its best
efforts to consummate the Exchange Offer within 180
calendar days after the Issuance Date.
In the event that any changes in law or the
applicable interpretations of the staff of the
Securities and Exchange Commission (the
"Commission") do not permit the Trust to effect the
Exchange Offer, or if for any other reason the
Exchange Offer is not consummated within 180 days
after the Issuance Date, or if any holder of the
Old Notes (other than the Initial Purchasers) is
not eligible to participate in the Exchange Offer,
or upon request of the Initial Purchasers under
certain circumstances, the Trust agreed in the
Registration Rights Agreement to use its best
efforts to cause to become effective by the 180th
day after the Issuance Date a shelf registration
statement pursuant to the Securities Act with
respect to the resale of the Old Notes (the "Shelf
Registration Statement") and to keep the Shelf
Registration Statement effective until two years
after the Issuance Date or such shorter period
which will terminate when all the Old Notes covered
by the Shelf Registration Statement have been sold
pursuant thereto or all the Old Notes become
eligible for resale pursuant to Rule 144 under the
Securities Act without volume restrictions.
The Registration Rights Agreement provides that in
the event that (a) the Exchange Offer Registration
Statement is not filed with the Commission on or
prior to the 45th calendar day following the
Issuance Date, (b) the Exchange Offer Registration
Statement has not been declared effective on or
prior to the 150th calendar day following the
effectiveness of the Exchange Offer Registration
Statement or (c) the Exchange Offer is not
consummated or the Shelf Registration Statement is
not declared effective on or prior to the 180th
calendar day following the Issuance Date, the
interest rate borne by the Old Notes shall be
increased by one-half of one percent
11
<PAGE>
per annum following such 45-day period in the case
of clause (a) above, following such 150-day period
in the case of clause (b) above or following such
180-day period in the case of clause (c) above,
which rate will be increased by an additional one-
half of one percent per annum for each 30-day
period that any additional interest continues to
accrue; provided that the aggregate increase in
such annual interest rate may in no event exceed
one percent per annum. Upon (x) the filing of the
Exchange Offer Registration Statement after the 45-
day period described in clause (a) above, (y) the
effectiveness of the Exchange Offer Registration
Statement after the 150-day period described in
clause (b) above or (z) the consummation of the
Exchange Offer or the effectiveness of a Shelf
Registration Statement after the 180-day period
described in clause (c) above, the interest rate
borne by the Old Notes from the date of such
filing, effectiveness or consummation, as the case
may be, will be reduced to the original interest
rate if the Trust is otherwise in compliance with
this paragraph; provided, however, that if, after
any such reduction in interest rate, a different
event specified in clause (a), (b) or (c) above
occurs, the interest rate will again be increased
and thereafter reduced pursuant to the foregoing
provisions.
The Registration Statement, of which this
Prospectus is a part, was filed on , 1998,
within 45 calendar days following the date of
original issue of the Old Notes, and was declared
effective by the Commission on , 1998, within
150 calendar days following the date of original
issue of the Old Notes, and thus no increase in the
interest rate borne by the Old Notes has been made
under clause (a) or clause (b) above.
Holders of any Old Notes not tendered in the
Exchange Offer will not be entitled to require the
Trust to file the Shelf Registration Statement, and
the interest rate on any such Old Notes will remain
at the initial level of 9 3/4%. Any Old Notes that
remain outstanding after the consummation of the
Exchange Offer and the New Notes will be treated as
a single class of securities under the Indenture.
See "Description of the Notes--General."
RISK FACTORS
See "Risk Factors and Other Considerations" for a discussion of certain
factors that should be considered in evaluating an investment in the New Notes.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of the Trust herein have
been derived from the Consolidated Financial Statements of the Trust, which
statements for the years ended September 30, 1997, 1996, and 1995 have been
audited by Arthur Andersen LLP, independent public accountants, as indicated by
its reports with respect thereto which are included in the Trust 10-K and
incorporated by reference into this Offering Memorandum. The selected
consolidated financial and other data of the Trust for the years ended
September 30, 1994 and 1993 have been derived from the Trust's audited
financial statements. The Consolidated Financial Statements of the Trust for
the three-month periods ended December 31, 1997 and December 31, 1996 are
unaudited. The data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements included in or attached to this Offering
Memorandum. In the opinion of the management of the Trust, the amounts shown
for the three months ended and as of December 31, 1997 and December 31, 1996
include all adjustments, which consist only of normal recurring adjustments,
necessary for a fair presentation of the financial results for such periods and
as of such dates. The results of operations for any interim period are not
necessarily indicative of the results for an entire fiscal year.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA--THE TRUST
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED DECEMBER 31, AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Real Estate
Revenues............... $ 21,749 $ 19,020 $ 84,569 $ 76,839 $ 77,285 $ 66,044 $ 93,245
Operating Expenses..... 27,840 26,556 108,601 104,321 109,971 102,087 137,256
Equity in earnings
(losses) of
partnership
investments........... (1,339) 444 4,150 3,374 3,681 1,738 (668)
Gain (loss) on sales of
property.............. -- -- 895 (68) 1,664 -- 184
---------- ---------- ---------- ---------- ---------- ---------- ----------
Real estate operating
loss.................. (7,430) (7,092) (18,987) (24,176) (27,341) (34,305) (44,495)
Banking operating
income................ 29,433 19,958 80,181 46,111 55,683 53,187 63,849
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income before
income taxes,
extraordinary items,
cumulative effect of
change in accounting
principle, and
minority interest..... 22,003 12,866 61,194 21,935 28,342 18,882 19,354
Provision for income
taxes................. 5,581 5,131 12,810 8,301 2,021 7,025 11,703
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary items,
cumulative effect of
change in accounting
principle and minority
interest.............. 16,422 7,735 48,384 13,634 26,321 11,857 7,651
Extraordinary items.... (266) -- -- -- -- (11,315) 7,738
Cumulative effect of
change in accounting
principle............. -- -- -- -- -- 36,260 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest.............. 16,156 7,735 48,384 13,634 26,321 36,802 15,389
Minority interest held
by affiliates......... (2,971) (1,740) (6,848) (3,962) (5,721) (3,963) (6,582)
Minority interest--
other................. (6,329) (3,692) (22,676) (9,750) (9,750) (9,750) (4,334)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total company net
income (loss)......... $ 6,856 $ 2,303 $ 18,860 $ (78) $ 10,850 $ 23,089 $ 4,473
========== ========== ========== ========== ========== ========== ==========
Net income (loss)
available to common
shareholders.......... $ 5,502 $ 949 $ 13,442 $ (5,498) $ 5,430 $ 17,669 $ (947)
BALANCE SHEET DATA:
ASSETS
Real estate assets..... $ 317,419 $ 294,291 $ 300,573 $ 294,503 $ 313,412 $ 327,739 $ 220,556
Income-producing
properties, net....... 180,469 159,532 156,535 156,115 163,787 159,529 162,356
Land parcels........... 42,279 41,720 42,160 41,580 38,458 38,455 38,411
Banking assets......... 6,128,941 6,142,076 6,057,413 5,693,074 4,911,536 4,666,298 4,872,771
Total company assets... 6,446,360 6,436,367 6,357,986 5,987,577 5,224,948 4,994,037 5,093,327
LIABILITIES
Real estate
liabilities........... 611,337 581,492 590,910 578,092 555,814 558,109 450,153
Mortgage notes
payable............... 206,969 183,085 180,204 173,345 184,502 185,730 264,776
Notes payable--
secured............... 175,000 175,000 175,000 177,500 175,500 175,000 --
Notes payable--
unsecured............. 47,252 43,897 46,633 42,367 41,057 40,288 38,661
Banking liabilities.... 5,641,966 5,687,419 5,582,167 5,388,444 4,619,451 4,413,832 4,634,001
Minority interest held
by affiliates......... 53,734 47,270 51,388 46,065 43,556 35,632 34,495
Minority interest--
other................. 218,307 218,307 218,306 74,307 74,307 74,307 74,307
Total company
liabilities........... 6,525,344 6,534,488 6,442,771 6,086,908 5,293,128 5,081,880 5,192,956
Shareholders' deficit.. (78,984) (98,121) (84,785) (99,331) (68,180) (87,843) (99,629)
</TABLE>
14
<PAGE>
STATEMENTS OF OPERATIONS AND OTHER DATA--THE BANK
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
DECEMBER 31, 1997 YEAR ENDED SEPTEMBER 30,
------------------ -----------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Interest income......... $106,395 $115,271 $450,480 $387,511 $365,315 $334,464 $348,814
Interest expense........ 58,292 57,544 239,815 188,836 189,114 165,544 167,518
-------- -------- -------- -------- -------- -------- --------
Net interest income.... 48,103 57,727 210,665 198,675 176,201 168,920 181,296
Provision for loan loss-
es..................... 35,062 26,840 125,115 115,740 54,979 29,222 60,372
-------- -------- -------- -------- -------- -------- --------
Net interest income af-
ter provision for loan
losses................ 13,041 30,887 85,550 82,935 121,222 139,698 120,924
-------- -------- -------- -------- -------- -------- --------
Non-interest income:
Credit card fees, loan
servicing fees and
deposit servicing
fees.................. 89,986 77,817 327,091 324,804 218,572 111,279 91,216
Gain on sale of invest-
ment securities, net.. -- -- -- -- -- -- 8,895
Gain (loss) on sales of
trading securities,
net................... 557 (51) 1,203 1,158 (600) 1,695 --
Earnings (loss) on real
estate held for in-
vestment or sale,
net................... (4,914) (4,374) (18,688) (24,413) (5,549) 835 (12,722)
Gain on sales of credit
card relationships,
loans and mortgage-
backed securities,
net................... 33,172 7,901 73,822 23,242 12,882 30,522 31,375
Net unrealized gain on
interest-only strips.. 3,824 -- 6,976 -- -- -- --
Other.................. 6,744 6,318 22,573 19,713 7,320 15,718 11,989
-------- -------- -------- -------- -------- -------- --------
Total non-interest in-
come.................. 129,369 87,611 412,977 344,504 232,625 160,049 130,753
-------- -------- -------- -------- -------- -------- --------
Non-interest expense:
Salaries and employee
benefits.............. 44,845 36,604 160,949 127,370 108,218 87,390 69,739
Marketing expenses..... 20,315 20,077 74,504 53,705 46,117 46,441 15,138
Other non-interest ex-
pense................. 47,817 41,859 182,893 200,253 143,829 112,729 102,951
-------- -------- -------- -------- -------- -------- --------
Total non-interest ex-
pense................. 112,977 98,540 418,346 381,328 298,164 246,560 187,828
-------- -------- -------- -------- -------- -------- --------
Banking operating in-
come................... $ 29,433 $ 19,958 $ 80,181 $ 46,111 $ 55,683 $ 53,187 $ 63,849
======== ======== ======== ======== ======== ======== ========
DISTRIBUTIONS:
Common Stock
Dividends............. $ 3,500 $ 3,000 $ 9,000 $ 8,500 $ -- $ -- $ --
Tax sharing payments to
Trust................. -- -- 9,811 25,000 20,500 9,585 5,000
</TABLE>
15
<PAGE>
BALANCE SHEET AND OTHER DATA--THE BANK
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED
DECEMBER 31, AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........... $6,128,941 $6,142,076 $6,057,413 $5,693,074 $4,911,536 $4,666,298 $4,872,771
Mortgage-backed
securities............ 1,752,149 1,371,422 1,985,707 1,306,417 880,208 1,025,525 1,501,192
Loans receivable, net.. 2,327,325 3,091,253 2,104,240 2,772,967 2,327,222 2,357,598 1,861,276
Loans held for sale.... 108,441 104,881 102,749 76,064 68,679 33,598 176,504
Loans held for
securitization and
sale.................. 180,000 350,000 220,000 450,000 500,000 115,000 300,000
Allowance for losses on
loans................. 113,131 95,485 105,679 95,523 60,496 50,205 68,040
Real estate held for
investment or sale,
net................... 88,932 118,889 94,290 123,489 222,860 330,655 388,459
Allowance for losses on
real estate held for
investment or sale.... 143,872 131,407 140,936 126,710 135,236 118,973 111,644
Goodwill and other
intangible assets,
net................... 31,680 2,030 8,846 2,399 4,173 6,582 9,383
Interest-only strips,
net................... 139,365 -- 105,812 -- -- -- -
Excess spread assets,
net................... -- 51,719 -- 42,602 25,640 25,198 27,573
Servicing assets, net.. 34,645 34,335 41,579 32,790 28,573 15,304 20,472
Deposit accounts....... 4,994,545 4,205,971 4,893,756 4,164,037 4,159,252 4,008,761 3,870,023
Securities sold under
repurchase agreements
and other short-term
borrowings............ 80,039 671,306 74,821 637,141 10,435 8,907 88,266
Bonds payable.......... -- -- -- -- -- 24,030 24,605
Notes payable.......... 6,892 7,162 7,019 7,277 7,514 7,729 7,925
Federal Home Loan Bank
advances.............. 139,939 418,665 188,511 269,065 155,052 100,000 412,000
Capital notes-
subordinated.......... 250,000 250,000 250,000 160,000 160,000 160,000 138,500
Stockholders' equity... 342,975 310,657 331,246 304,630 292,085 252,466 238,770
Non-performing assets.. 101,565 158,477 104,512 154,650 247,185 311,898 372,031
SELECTED RATIOS:
Average stockholders'
equity to average
assets................ 5.48% 5.35% 5.05% 6.18% 5.27% 5.34% 3.98%
Net loan charge-offs to
average loans......... 4.29% 3.14% 3.22% 2.75% 1.51% 1.74% 3.33%
Non-performing assets
and credit card loans
past due 90 days, net
to total assets (1)... 0.24% 1.02% 0.40% 1.04% 3.80% 5.40% 5.97%
Average interest-
earning assets to
average interest-
bearing liabilities... 94.46% 94.53% 94.81% 93.92% 92.86% 90.81% 86.44%
REGULATORY CAPITAL
RATIOS:
Tangible............... 6.65% 6.58% 6.96% 5.21% 5.77% 4.96% 4.60%
Core (or leverage)..... 6.65% 6.58% 6.96% 5.21% 5.77% 5.34% 5.35%
Tier 1 risk-based...... 6.81% 7.05% 7.24% 5.80% 6.65% 6.95% 7.29%
Total risk-based....... 13.01% 14.06% 13.50% 10.14% 11.63% 12.19% 11.70%
FULL SERVICE BANKING
FACILITIES............. 133 114 128 107 88 81 74
FULL SERVICE MORTGAGE
BANKING FACILITIES..... 16 22 17 22 18 17 17
</TABLE>
- --------
(1) Effective June 30, 1997, the Bank no longer places credit card loans on
non-accrual status.
16
<PAGE>
RISK FACTORS AND OTHER CONSIDERATIONS
An investment in the New Notes involves a high degree of risk. Prospective
investors should carefully consider the following risk factors and other
considerations relating to the Trust, the Bank and the Notes before deciding
whether to invest in the New Notes.
ABILITY TO PAY PRINCIPAL AND INTEREST ON THE NOTES
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments, depends in significant part on its receipt of dividends from
the Bank and tax sharing payments from the Bank pursuant to a tax sharing
agreement among the Trust, the Bank and their subsidiaries (the "Tax Sharing
Agreement"). As reflected in Note 35 to the Consolidated Financial Statements
included in the Trust 10-K, the Real Estate Trust had positive cash flow from
operating activities of $6.9 million, $9.0 million and $4.3 million in fiscal
1997, 1996 and 1995, respectively. The availability and amount of tax sharing
payments and dividends in future periods are dependent upon, among other
things, the Bank's operating performance and income, regulatory and
contractual 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. OTS regulations tie Chevy
Chase's ability to pay dividends to specific levels of regulatory capital and
earnings. During fiscal 1997 and 1996, the Real Estate Trust received $7.2
million and $6.8 million in dividends from the Bank and $9.8 million and $25.0
million in tax sharing payments from the Bank, respectively. In 1995, the Real
Estate Trust received $20.5 million in tax sharing payments from the Bank but
did not receive any dividends. There can be no assurance that the Real Estate
Trust will receive dividends or tax sharing payments in the future or, if it
receives funds from these sources, that such funds will be in an amount
sufficient to pay interest or other amounts on the Notes when due.
The Real Estate Trust's ratios of available earnings to fixed charges were
less than 1:1 in each of the last three fiscal years. These ratios represent a
measure of the ability to meet debt service obligations from funds generated
by operations. For purposes of computing the fixed-charges ratios, "available
earnings" consist of income (loss) from continuing operations plus (i)
provisions for income taxes, (ii) ground rent expense and (iii) interest and
debt expense reduced by interest capitalized. This sum is divided by the total
of interest and debt expense and ground rent expense to arrive at the ratio of
available earnings to fixed charges. For the Real Estate Trust, fixed charges
exceeded available earnings by $19.0 million in fiscal 1997, $24.2 million in
fiscal 1996 and $27.3 million in fiscal 1995. "Available earnings" do not
include payments made to the Trust pursuant to the Tax Sharing Agreement or
dividends received by the Trust from the Bank.
In the past, the Real Estate Trust funded debt repayment and capital
improvements by new financings (including the public sale of unsecured notes),
refinancings of maturing mortgage debt, asset sales, tax sharing payments from
the Bank pursuant to the Tax Sharing Agreement and dividends from the Bank.
See "Cash Flows from Investing Activities" in the Consolidated Financial
Statements in the Trust 10-K. In order to fund these requirements in fiscal
1998 and future years, the Real Estate Trust will be required to raise
substantial amounts of cash from a combination of such sources, which are
subject to various contingencies, as described below.
The Trust currently anticipates that in order to pay the principal amount of
the Notes at maturity or upon the occurrence of an Event of Default or to
redeem the Notes, it will be required to borrow funds, sell equity securities,
sell assets or seek capital contributions from affiliates. There can be no
assurance that any of such actions could be effected on satisfactory terms or
that any of the foregoing actions would enable the Trust to make any of the
foregoing payments on the Notes. None of the affiliates of the Trust will be
required to make any capital contributions or other payments, whether by loan
or the purchase of equity securities or assets, to the Trust in respect of the
Trust's obligations on the Notes, nor is there any assurance that any of the
affiliates of the Trust would have the financial, legal or contractual ability
to do so.
OPERATING LOSSES AND DEFICIT IN SHAREHOLDERS' EQUITY
The operations of the Real Estate Trust, before the consolidation of Chevy
Chase's results, reflect a loss from continuing operations before gain on sale
of properties in each of the Real Estate Trust's last ten fiscal
17
<PAGE>
years. As reflected in Note 35 to the Consolidated Financial Statements in the
Trust 10-K, which presents condensed financial statement information on the
Trust without consolidation of balance sheet and operating data of the Bank
and the Bank's subsidiaries, the operating loss of the Trust in recent periods
would have been significantly higher without the consolidation of the Bank's
results. The Trust's consolidated shareholders' equity at December 31, 1997
reflected a deficit of $79.0 million. There can be no assurance that the Real
Estate Trust will achieve or maintain profitability in the future, and its
ability to do so is subject to general economic conditions and to financial,
business and other factors, including factors beyond the Trust's control, nor
can there be any assurance that the Trust will at any time have sufficient
resources to make payments on its indebtedness, including the Notes. See
"Capitalization."
SUBSTANTIAL LEVEL OF INDEBTEDNESS; EFFECTIVE SUBORDINATION
The Real Estate Trust, like most real estate investors, employs significant
amounts of indebtedness to finance its investment and operations, and the
total amount of the Real Estate Trust's indebtedness outstanding has increased
as a result of issuance of the Old Notes. At December 31, 1997, on a pro forma
basis after giving effect to the Offering and the application of the net
proceeds therefrom, the Real Estate Trust would have had $567.1 million of
consolidated Indebtedness, excluding indebtedness of the Bank and the Bank's
subsidiaries. See "Capitalization." The high degree to which the Trust is
leveraged could have important consequences to the Holders of the Notes. Such
consequences include, but are not limited to, the following: (i) the Trust's
ability to obtain additional financing in the future for capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a significant portion of the Trust's cash flow must be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Trust for its operations; (iii) certain of the Trust's
borrowings are, and will continue to be, at variable rates of interest, which
could result in higher interest expense in the event of increases in interest
rates that could have an adverse effect on the Trust's operating results and
could adversely affect the amounts that would be available for payment of
interest and principal on the Notes; and (iv) the instruments evidencing such
indebtedness contain and will contain financial and restrictive covenants, the
failure to comply with which may result in an event of default which, if not
cured or waived, could have a material adverse effect on the Trust.
Substantially all of the Trust's assets consist of the assets of its
subsidiaries, and more than 95% of the Trust's consolidated assets at December
31, 1997 consisted of assets of the Bank. Accordingly, the Old Notes are, and
the New Notes will be, effectively subordinated to all existing and future
liabilities of Subsidiaries of the Trust, including indebtedness and trade
payables of subsidiaries of the Trust and deposit liabilities of the Bank. In
the event of a liquidation, dissolution or winding up of the Trust, lenders to
and other creditors of the Trust's subsidiaries would be entitled to payment
in full before holders of the Notes. In addition, holders of the preferred
stock issued by the Bank and certain of its subsidiaries have liquidation
preference rights and other rights that would, in certain circumstances,
affect the ability of the Trust to receive distributions from the Bank in
order to make payment on the Notes. See "--Restrictions on Dividends from the
Bank." As a result, there may be insufficient assets remaining after payment
of prior claims to pay any amounts due on the Notes. At December 31, 1997, on
a pro forma basis after giving effect to the Offering and the application of
the net proceeds therefrom, and based on certain assumptions as described
herein, the aggregate amount of Indebtedness of the Trust would have been $6.0
billion and the aggregate amount of Indebtedness of subsidiaries of the Trust
(other than the Bank and its subsidiaries) would have been $174.2 million and
the aggregate amount of Indebtedness of the Bank and its subsidiaries would
have been $5.5 billion.
SECURITY FOR THE NOTES; LIMITED RECOURSE BY NOTEHOLDERS
The Trust's obligations under the Indenture and the Notes will be secured
initially by a pledge of 80% (8,000 shares) of the issued and outstanding
shares of the Bank's common stock. Affiliates of the Trust currently own the
remaining 20% of the issued and outstanding shares of the Bank's common stock.
Upon an Event of Default under the Indenture, the Trustee would not have the
power to effect a foreclosure sale of all of the issued and outstanding shares
of the Bank's common stock. The inability of the Trustee to convey ownership
of all of the common stock of the Bank may have an adverse effect on the sales
price of the Pledged Bank Stock. There
18
<PAGE>
can be no assurance that the proceeds from the sale or sales of the Pledged
Bank Stock will be sufficient to satisfy the amounts due on the Notes. There
currently is no public market for the Bank's common stock. See "Description of
the Notes--Security."
The Notes will be nonrecourse obligations of the Trust and the sole recourse
for collection of principal, premium, if any, and interest on the Notes will
be against the Pledged Bank Stock and other Collateral. The Trust's
obligations under the Notes are not guaranteed directly or indirectly by the
Trust or any of its subsidiaries (including the Bank and its subsidiaries),
and the Trust shall not be liable in any respect (except to the extent of its
interest in the Pledged Bank Stock and other Collateral) for the payment of
any obligation due under the Notes.
REGULATORY CONSIDERATIONS AFFECTING ENFORCEMENT OF REMEDIES FOLLOWING AN EVENT
OF DEFAULT
The ability of the Trustee to effect a foreclosure sale of or vote the
Pledged Bank Stock upon the occurrence of an Event of Default may be limited
by various regulatory considerations. Under applicable OTS regulations
relating to acquisition of control of savings associations and their holding
companies (the "Control Regulations"), the right to effect the disposition of
25% or more of the Bank's outstanding common stock pursuant to a foreclosure
sale, the right or power to vote 25% or more of the Bank's outstanding common
stock or the acquisition of 25% or more of the Bank's outstanding common stock
pursuant to a foreclosure sale or otherwise upon or after the occurrence of an
Event of Default generally would be deemed to constitute acquisition of
control of the Bank. The Control Regulations also establish certain
presumptions of control which may apply to the power to dispose of, the
acquisition of, or the power to vote as little as 10% of the Bank's
outstanding common stock (including such power possessed by several persons
acting in concert).
Under the Control Regulations, any acquisition of control of the Bank upon
or after the occurrence of an Event of Default would cause the Trustee and
could cause the Holders of the Notes that are companies to become "thrift
holding companies" subject to supervision, regulation and examination by the
OTS. If it was determined that the pledge was made to "secure a loan
contracted for in good faith" and the loan was "made in the ordinary course of
the business of the lender," the Trustee and/or the Holders of the Notes could
hold or vote the Pledged Bank Stock for up to one year without OTS approval.
If the borrowing evidenced by the Notes were deemed to have satisfied these
conditions, the Trustee and/or the Holders of the Notes would be required to
report to the OTS within 30 days after the acquisition of control of the Bank.
Upon application by the Trustee and/or the Holders of the Notes, the OTS would
have the authority to approve, on an annual basis, an extension of the holding
period for the Pledged Bank Stock for a maximum of an additional three years
if it found that such an extension was warranted and would not be detrimental
to the public interest. If, however, it was determined that the loan was not
made in the ordinary course of business of the lender, the Trustee and/or the
Holders of the Notes could be required to file with the OTS a "change-of-
control" application within 90 days after the occurrence of an Event of
Default and the Trustee and/or such Holders could not take any action to
direct the management or policies of the Bank prior to the approval of the
application. If the OTS did not approve the application, the Trustee and/or
such Holders would be required to divest the Pledged Bank Stock within one
year after OTS action on the application or within such shorter period as the
OTS may require and in such manner as the OTS may require, and could not take
any action to control the Bank during such period.
The Control Regulations as applied to any entity acquiring control of the
Bank could reduce the attractiveness of the Bank's common stock to potential
purchasers and, accordingly, could adversely affect the value of the Pledged
Bank Stock realized in the event of a foreclosure sale. Prospective purchasers
of a controlling block of the Bank's common stock from the Trustee would be
required to file with the OTS a "change-of-control" application for prior
approval to acquire such shares. Any purchaser that is a company would become
a "thrift holding company" subject to comprehensive supervision, examination
and regulation by the OTS. As such a regulated entity, the purchasing company
would become subject to restrictions on transactions between it and the Bank
and might be required to guarantee the Bank's compliance with any capital
restoration plan that would be required to be filed by the Bank if the Bank
became undercapitalized. Such regulatory requirements may limit the number of
potential bidders for the Pledged Bank Stock and may delay any sale, either of
which events could have an adverse effect on the sale price of the Pledged
Bank Stock.
19
<PAGE>
In May 1988, in connection with the merger of a Virginia thrift into the
Bank, the B. F Saul Company, a shareholder of the Trust (the "Saul Company"),
and the Trust entered into an agreement (the "Capital Maintenance Agreement")
with the Federal Savings and Loan Insurance Corporation (the "FSLIC"), the
FDIC's predecessor agency, under which the Trust and the Saul Company agreed
to maintain the Bank's regulatory capital at the levels prescribed by
applicable regulatory requirements. See "Business--Real Estate-- Holding
Company Regulation" in the Trust 10-K. The Capital Maintenance Agreement
provides that it is binding upon the "successors and assigns" of the Trust. As
a result, upon or after an acquisition of control of the Bank by the Trustee
and/or the Holders of the Notes, it is possible that the OTS or the FDIC might
seek to impose upon the Holders of the Notes obligations under the Capital
Maintenance Agreement, if it remained in effect at such time. Under the terms
of the Indenture, the Trustee may not take any action that would expose
Holders of the Notes to liability under the Capital Maintenance Agreement.
OTS regulations require the Trust, to the extent it remains subject to the
Capital Maintenance Agreement, to file a notice with the OTS prior to
"divestiture" of the Bank so that the OTS may determine if there is any
outstanding obligation under the Capital Maintenance Agreement. If the OTS
were to treat the acquisition of control of the Pledged Bank Stock upon or
after the occurrence of an Event of Default as a "divestiture" for purposes of
this regulation, the ability of the Trustee to hold a foreclosure sale or
exercise voting rights with respect to the Pledged Bank Stock on behalf of the
Holders of the Notes would be delayed and, if the OTS were to determine that
an outstanding obligation under the Capital Maintenance Agreement existed,
could be conditioned upon the satisfaction of such obligation.
RESTRICTIONS ON DIVIDENDS FROM THE BANK
The Bank's ability to declare and pay dividends on its common stock is
subject to a number of restrictions, including restrictions under regulations
issued by the OTS and restrictions imposed by various agreements. The Bank's
efforts to maintain the required levels of capital and to generate the
required levels of income necessary to declare and pay dividends under these
agreements will be subject to all of the risks affecting its business,
including the risks discussed elsewhere in this section. The payment of any
dividends on the Bank's common stock will be determined by the Bank's Board of
Directors based on the Bank's liquidity, asset quality profile, capital
adequacy and recent earnings history, as well as economic conditions and other
factors deemed relevant by the Board of Directors, including the restrictions
discussed below.
OTS Regulations. The OTS prompt corrective action regulation prohibits
thrift institutions such as the Bank from making "capital distributions"
(defined to include a cash distribution or a stock redemption, but excluding
dividends in the form of additional shares of capital stock) unless the
institution is at least "adequately capitalized" under the OTS prompt
corrective action regulations. Currently, an institution is considered
"adequately capitalized" for this purpose if it has a leverage (or core
capital) ratio of at least 4.0%, a tier 1 risk-based capital ratio of at least
4.0% and a total risk-based capital ratio of at least 8.0%. At December 31,
1997, the Bank's leverage, tier 1 risk-based and total risk based capital
ratios of 6.65%, 6.81% and 13.01%, respectively, met the ratios established
for "well-capitalized" institutions and thus exceed the ratios established for
"adequately-capitalized" institutions. See "Business--Banking--Regulation--
Prompt Corrective Action" in the Trust 10-K.
In addition to the prompt corrective action regulation, the OTS capital
distribution regulation limits the ability of thrift institutions such as the
Bank to make "capital distributions" (defined to include a cash distribution
or a stock redemption, but excluding dividends in the form of additional
shares of capital stock) based primarily upon the institution's regulatory
capital levels and earnings. At December 31, 1997, the Bank had sufficient
levels of regulatory capital to be treated as a "Tier 1" institution eligible
to make capital distributions without OTS approval in amounts up to the
greater of (i) 100% of its net income for the calendar year to date, plus the
amount that would reduce by one-half the institution's surplus capital ratio
(i.e., the excess of the institution's total risk-based capital ratio over the
requirement) at the beginning of the calendar year in which the distribution
is made or (ii) 75% of its net income for the most recent four quarters. The
OTS, however, retains the discretion to treat the Bank as a "Tier 2" or a
"Tier 3" institution (after written notice) if it were to
20
<PAGE>
deem the Bank to be in need of more than normal supervision, in which case the
Bank could be required to obtain prior OTS approval for capital distributions.
In addition, the OTS retains general discretion to prohibit any otherwise
permitted capital distributions on general safety and soundness grounds, and
must be given 30 days advance notice of all capital distributions, during
which 30-day period it may object to any proposed distribution. See
"Business--Banking--Regulation--Dividends and Other Capital Distributions" in
the Trust 10-K.
In January 1998, the OTS proposed to amend its capital distribution
regulation to simplify and conform it to the system of "prompt corrective
action" established by FDICIA. Although the proposed amendments could have the
effect of requiring the Bank to obtain prior OTS approval for capital
distributions for which it currently is required only to provide advance
notice, the Bank does not believe that the proposed regulation would have a
material impact on its ability to pay common stock dividends.
Regulatory Agreements. At the request of the OTS, the Board of Directors of
the Bank adopted a resolution which permits the Bank to declare dividends on
its stock (other than the 13% Preferred Stock) in any quarterly period up to
the lesser of (i) 50% of its after tax net income for the immediately
preceding quarter or (ii) 50% of the average quarterly after tax net income
for the immediately preceding four quarter period, minus (in either case)
dividends declared on the Bank's 13% Preferred Stock during that quarterly
period. (The resolution does not restrict the Bank's ability to pay dividends
on the 13% Preferred Stock.) In connection with the Bank's payment of common
dividends, the OTS advised the Bank that the dividends paid on the 10 3/8%
Preferred Stock issued by the new real estate investment trust subsidiary of
the Bank (Chevy Chase Preferred Capital Corporation) must be deducted from net
income for purposes of calculating the 50% limits under this board resolution.
The Bank disagrees with the OTS's position regarding the 10 3/8% Preferred
Stock and is seeking clarification of this issue from the OTS. Since the Bank
received notice of the OTS's position, the Bank has on occasion proposed to
pay dividends on its common stock in an amount that would have exceeded the
50% limit as interpreted by the OTS. On each occasion, the Bank received OTS
approval to pay the full amount of the proposed dividends. However, there can
be no assurance that the OTS in the future would approve dividends in excess
of the amount determined using the OTS's interpretation. If the OTS's
interpretation were to prevail and the OTS did not approve payment of such
additional amounts, the maximum dividend on common stock otherwise payable by
the Bank under the board resolution would by reduced by approximately $1.2
million per quarter.
Indentures for Subordinated Debentures. The indentures pursuant to which the
Bank's outstanding 9 1/4% Subordinated Debentures due 2005 (the "1993
Debentures") and 9 1/4% Subordinated Debentures due 2008 (the "1996
Debentures") were issued both provide that the Bank may not pay cash dividends
on its capital stock unless, after giving effect to the dividend, no event of
default shall have occurred and be continuing and the Bank is in compliance
with its regulatory capital requirements. In addition, the amount of the
proposed dividend may not exceed the sum of (i) $15 million, (ii) 66 2/3% of
the Bank's consolidated net income (as defined in the indentures) accrued on a
cumulative basis commencing on October 1, 1993 and (iii) the aggregate net
cash proceeds received by the Bank after October 1, 1993 from the sale of
qualified capital stock or certain debt securities, minus the aggregate amount
of any restricted payments made by the Bank. Notwithstanding these
restrictions on dividends, provided no default or event of default has
occurred and is continuing under the indentures, the indentures do not
restrict the payment of dividends on the 13% Preferred Stock.
Terms of the 13% Preferred Stock. Assuming payment of the full noncumulative
cash dividends accrued in respect of the four quarterly dividend periods in
each year, annual dividends on the 13% Preferred Stock total $9.75 million.
Such payments count against the various income limits under the OTS capital
distribution regulation and the regulatory agreements discussed above in
calculating amounts available for payment of cash dividends on the Bank's
common stock. Such payments do not count against the dividend income limit
contained in the indentures for the 1993 Debentures and 1996 Debentures. If
the Board of Directors does not declare the full amount of the noncumulative
cash dividend accrued in respect of any quarterly dividend period, in lieu
thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new
series of payment-in-kind preferred stock of the Bank (the "PIK Preferred
Stock"). The material terms of any series of PIK Preferred Stock will be the
same as the terms of the 13% Preferred Stock, except that (i) the annual
dividend rate of the PIK Preferred Stock will be fixed at the time of
21
<PAGE>
its issuance by the Board of Directors in its discretion at an annual rate
equal to or greater than the rate on the 13% Preferred Stock, up to a maximum
annual rate of 20%, and (ii) the PIK Preferred Stock will be redeemable at any
time after the date of issue at the option of the Bank. The Bank may not
declare or pay any cash dividend on its common stock unless, with respect to
each of the four most recent quarterly dividend periods, (i) the Bank has paid
full cash dividends on the 13% Preferred Stock or (ii) the Bank has redeemed
PIK Preferred Stock of any one or more series in an aggregate dollar amount at
least equal to the unpaid cash dividend for such dividend period.
Terms of Chevy Chase Preferred Capital Corporation 10 3/8% Preferred
Stock. Assuming payment of the full noncumulative cash dividends accrued in
respect of the four quarterly dividend periods in each year, annual dividends
on the 10 3/8% Preferred Stock issued by Chevy Chase Preferred Capital
Corporation ("CCPCC") total $15.6 million. Although the Bank believes that
dividends paid on the 10 3/8% Preferred Stock should not be considered a
"capital distribution" under the OTS capital distribution regulation, there
can be no assurance that the OTS would agree with this position. Without
addressing the issue of whether such dividends are "capital distributions,"
the OTS has indicated that it would not object to the payment of the dividends
on the 10 3/8% Preferred Stock in an amount up to CCPCC's net income for that
quarter. CCPCC currently expects that its net income will be in excess of the
amount needed to pay the dividends on the 10 3/8% Preferred Stock. However,
dividends paid on the 10 3/8% Preferred Stock in excess of CCPCC's net income
could be treated as "capital distributions" by the OTS, in which case
dividends on the 10 3/8% Preferred Stock would be included, together with
dividends on the 13% Preferred Stock and the common stock of the Bank, in
calculating the amount of "capital distributions" payable by the Bank under
OTS regulations. In addition, as noted above, the OTS has advised the Bank
that the dividends paid on the 10 3/8% Preferred Stock must be deducted from
net income for purposes of calculating the 50% limit on dividends under the
resolution of the Board of Directors of the Bank. The Bank disagrees with the
OTS's position regarding the 10 3/8% Preferred Stock and is seeking
clarification of this issue from the OTS. The dividends paid on the 10 3/8%
Preferred Stock are not included in calculating the permissible dividends
under the indentures for the 1993 and 1996 Debentures.
CONSIDERATIONS RELATING TO TAX SHARING AGREEMENT
The Trust, the Bank and the other companies in the Trust's affiliated group
filing consolidated federal income tax returns entered into the Tax Sharing
Agreement on June 28, 1990. In recent years, the operations of the Trust have
generated significant net operating losses for federal income tax purposes,
while during the same period the Bank has reported taxable income. Under the
Tax Sharing Agreement, the Bank is obligated to make payments to the Trust
based on its taxable income.
OTS Restrictions on Tax Sharing Payments. Tax sharing payments by the Bank
are expected to constitute one of the Trust's sources of cash to pay interest
on the Notes. Under a resolution adopted by the Bank's Board of Directors at
the request of the OTS, the Bank may make tax sharing payments of up to $15.0
million for any fiscal year without approval of the OTS. The tax sharing
payments were conditioned on a pledge by or on behalf of the Trust of certain
Trust assets to secure certain of its obligations under the tax sharing
agreement. If OTS approval is needed for tax sharing payments, the OTS may
decline to grant such approval on, among other grounds, general safety and
soundness considerations. After obtaining OTS approval, the Bank made tax
sharing payments of $9.8 million and $25.0 million in fiscal years 1997 and
1996, respectively. There can be no assurance that the OTS will approve future
tax sharing payments by the Bank even if the Trust is able to pledge assets
satisfactory to the OTS.
Risk of Deconsolidation. The Indenture does not contain provisions that
would restrict the Trust from taking any action that might result in a
deconsolidation of the Trust and the Bank for federal income tax purposes.
Upon the occurrence of any event resulting in deconsolidation, the Trust and
the Bank generally would not be able to file a consolidated tax return with
respect to periods beginning on or after the date of such event. In such case,
no additional tax sharing payments from the Bank or its subsidiaries would
arise under the Tax Sharing Agreement with respect to such periods. In certain
circumstances, however, the Trust could be obligated to make payments to the
Bank pursuant to the Tax Sharing Agreement with respect to Bank losses in such
22
<PAGE>
periods to comply with certain OTS guidelines. Among the events that would
result in deconsolidation are a public offering by the Bank of its common
stock, a foreclosure and sale of any of the Pledged Bank Stock and, possibly,
the Trustee's exercise of, or acquisition of the right to exercise, the power
to vote the Pledged Bank Stock following an Event of Default under the
Indenture.
Allocation of Tax Liabilities. Under the consolidated return regulations,
each member of the Trust's consolidated group is jointly and severally liable
for the group's entire federal income tax liability. Although such tax
liability is contractually allocated among the members of the Trust's
consolidated group pursuant to the Tax Sharing Agreement, the Internal Revenue
Service (the "IRS") generally may seek payment from any member of the group.
If the Trust (or members of the Trust group) have tax liabilities that are not
paid, the Bank could be required to pay such amounts to the IRS. Such payments
could have an adverse effect on the value of the Bank and, hence, on the value
of the Pledged Bank Stock. Among the transactions that may cause the Trust to
recognize significant taxable income are the sale or other disposition of
assets, including some or all of its partnership interest in Saul Holdings
Partnership, the sale or other disposition by Saul Holdings Partnership or its
subsidiary partnerships of certain of their real properties or a reduction in
the amount of the total indebtedness of Saul Holdings Partnership and its
subsidiary partnerships.
Trust Reimbursement Obligation. If in any year the Bank has net operating
losses and the Trust's consolidated group uses such losses to offset taxable
income of the Trust (or other members of the Trust group), the Trust generally
would be required to make tax sharing payments to the Bank pursuant to the Tax
Sharing Agreement. The sum of any such payments and any payments actually made
to the IRS for such taxable year would not exceed the amount otherwise
required to be paid to the IRS for such year if the Trust group had not been
able to use the Bank's net operating losses. In addition, to the extent that
in any year the Bank has net operating losses that are not used in that year
to offset taxable income of the Trust (or other members of the Trust group),
the Bank generally would carry back such losses to the three immediately
preceding taxable years, obtaining a refund of taxes it paid to the IRS or,
pursuant to the Tax Sharing Agreement, a reimbursement of tax sharing payments
it made to the Trust, or both, depending on the amount of the losses and the
taxable year in which they occur. Any payments made by the Trust to the Bank
pursuant to the Tax Sharing Agreement could have a material adverse effect on
the Trust's liquidity.
EFFECT OF POTENTIAL TRUST REORGANIZATION
The Trust is characterized as a "thrift holding company" for regulatory
purposes as a result of its ownership of the Bank's Common Stock. As a thrift
holding company, the Trust is permitted to engage in certain activities,
including real estate activities, that would not be permitted if the Trust
were characterized as a "bank holding company" as a result of its control of a
commercial bank rather than a thrift. Legislation is currently pending in
Congress that would require federal thrifts like Chevy Chase to convert to
commercial bank charters, which would cause the Trust to become a bank holding
company. Such legislation could make it desirable to have an eventual
separation of the Trust's real estate activities from its banking activities.
Even without such a legislative stimulus, the Trust may find it to be
advantageous in the future to separate its real estate and banking activities.
The ability of the Trust to implement such a separation, however, is subject
to a number of contingencies, including approval of the OTS, and there can be
no assurances that even if the Trust desired such a separation it could be
accomplished.
To facilitate such a separation, the obligations under the Indenture and
Notes may be assumed by a new company, which new company would own the Pledged
Bank Stock and would become the debtor in respect of all obligations under the
Indenture and the Notes (the "Substitution"). Depending on the circumstances
at the time of the Substitution and other factors such as regulatory
approvals, the new company could be separated from the Trust immediately after
it obtains ownership of the Pledged Bank Stock or could remain a subsidiary of
the Trust indefinitely or until some future date prior to being separated from
the Trust. The Notes would continue to be secured by the Pledged Bank Stock
and would be nonrecourse obligations of the new company. In addition, upon the
Substitution the new company would become a party to the Tax Sharing
Agreement, thereby allowing the new company to receive tax sharing payments
that are attributable to the deduction resulting from interest payable on
23
<PAGE>
the Notes. The covenants under the Indenture would be modified in material
respects to take into account the effect of the Substitution. See "Description
of the Notes--Substitution of a New Obligor Under the Indenture" and
"Description of the Notes--Certain Covenants of New Obligor."
Were the Substitution to occur, the only significant assets of the new
company at the time of the Substitution are likely to be the Pledged Bank
Stock, the Bank Contribution Collateral (as defined) , if any, and the right
to receive payments under the Tax Sharing Agreement. In such event, the only
source of cash to pay amounts due on the Notes would be distributions from or
payments by the Bank. There can be no assurances that the new company would
receive an amount sufficient to pay interest or other amounts on the Notes
when due. Moreover, in order to pay the principal amount of the Notes upon
maturity or upon the occurrence of an Event of Default or to redeem the Notes,
the new company would likely be required to borrow funds, sell equity
securities, sell assets or seek capital contributions from affiliates. There
can be no assurance that any of such actions could be effected on satisfactory
terms or that any of the foregoing actions would enable the new company to
make any of the foregoing payments on the Notes. None of the affiliates of the
new company would be required to make any capital contributions or other
payments, whether by loan or purchase of equity securities or assets, to the
new company in respect of the new company's obligations on the Notes, nor is
there any assurance that any of the affiliates of the new company would have
the financial, legal or contractual ability to do so.
All of the risks described herein with respect to the operations of the Bank
will be equally applicable to the new company after it acquires the Pledged
Bank Stock and should be read with consideration given thereto. In addition,
the new company, whether owned by the Trust or distributed to the shareholders
of the Trust, will not have a contractual right to require the Trust to pay
principal and interest on the Notes.
POSSIBLE CONFLICTS OF INTEREST; LIMITATIONS ON AFFILIATE TRANSACTIONS
The Trust may be subject to potential conflicts of interests in its business
relationships with certain entities which are under the common control of B.
Francis Saul II, Chairman and Chief Executive Officer of the Trust.
Mr. Saul and his affiliates own 99.6% of the Trust's common shares of
beneficial interest and thus control the Trust. Mr. Saul also controls the
Saul Company, which in turn controls B. F. Saul Advisory Company (the
"Advisor") and Franklin Property Company ("Franklin"). The Advisor acts as the
Real Estate Trust's investment advisor, while Franklin acts as leasing and
management agent for most of the income-producing properties owned by the Real
Estate Trust and plans and oversees the development of other new properties
and the expansion and renovation of existing properties. The compensation
received by the Advisor and Franklin is determined by the Trust's Board of
Trustees, only a minority of whom are considered independent. The Saul Company
and its affiliated companies actively engage in various activities relating to
the general business of real estate development and finance. No provision in
the Declaration of Trust or the advisory contract with the Advisor prohibits
the Advisor, Franklin, the Saul Company, their affiliates or any officer,
director or employee of such companies from performing investment advisory
services for parties other than the Real Estate Trust, engaging in activities
similar to or competitive with the investment operations of the Real Estate
Trust, or making real estate investments that might be suitable or desirable
for the Real Estate Trust. The advisory contract provides that the Real Estate
Trust has priority with respect to any investment made by the Saul Company,
the Advisor and their directors and officers, for their account or for the
account of any enterprise (other than a savings and loan institution) in which
they have a beneficial interest aggregating 40% or more, although there are no
procedural safeguards to ensure this priority. Potential conflicts of interest
also may arise from Mr. Saul's role as Chairman and Chief Executive Officer of
Saul Centers, the general partner of Saul Holdings Partnership, although Saul
Centers, Saul Holdings Partnership and its subsidiary limited partnerships
have entered into agreements with the Trust, which owns a 21.5% limited
partnership interest in Saul Holdings Partnership, that are intended to
minimize such potential conflicts. See "Business--Real Estate--Investment in
Saul Holdings Limited Partnership--Exclusivity Agreement and Right of First
Refusal" in the Trust 10-K.
RISKS OF CREDIT CARD LENDING BY CHEVY CHASE
At December 31, 1997, Chevy Chase's credit card loans of $1.0 billion
constituted approximately 37.0% of the Bank's loan portfolio. In addition, at
December 31, 1997, the Bank managed $4.1 billion of securitized credit
24
<PAGE>
card loans which were not reflected on the Bank's balance sheet. Credit card
loans entail greater credit risks than residential mortgage loans. Changes in
credit card use and payment patterns by cardholders, including increased
defaults, may result from a variety of social, legal and economic factors.
Chevy Chase currently offers introductory periodic interest rates for varying
initial periods which, at the conclusion of such periods, revert to the Bank's
regular variable interest rate. If account holders choose to use competing
sources of credit, the rate at which new receivables are generated may be
reduced and certain purchase and payment patterns with respect to the
receivables may be affected. Economic factors affecting credit card use
include the rate of inflation and relative interest rates offered for various
types of loans. Adverse changes in economic conditions could have a direct
impact on the timing and amount of payments by borrowers. Default rates on
credit card loans generally may be expected to exceed default rates on
residential mortgage loans.
Primarily reflecting the industry-wide decline in the performance of credit
card loans, credit card delinquencies and net charge-offs on credit card loans
have increased since September 1995. The Bank's delinquency rate on its
portfolio of credit cards loans at December 31, 1997 was 7.09% and its charge-
off rate for the three months ended December 31, 1997 was 8.77% compared to a
delinquency rate at September 30, 1997 of 6.18% and a charge-off rate of 9.02%
for year ended September 30, 1997. Effective June 30, 1997, the Bank conformed
its reporting practices for credit card loans to those of most credit card
issuers and began to exclude credit card loans from non-accrual loans and non-
performing assets. Credit card loans are not placed on non-accrual status, but
continue to accrue interest until the loan is either paid off or charged-off.
At December 31, 1997, the Bank had $71.7 million of credit card loans
classified for regulatory purposes as substandard, of which $56.3 million
related to loans 90 days or more past due. The remainder ($15.4 million)
related to accounts for which the customers have agreed to modified payment
terms, but which were 30-89 days past due.
The Bank regularly reviews the reasons for delinquency and charge-off as
compared to information available at the time an account was originated to
determine if such information should have indicated the propensity for
delinquency and/or loss. The results of these reviews are used to adjust the
Bank's underwriting criteria, as necessary. Although the Bank believes it
currently has in place appropriate underwriting criteria to mitigate the risks
associated with its credit card accounts, there can be no assurance that
charge-offs and delinquencies will not increase. The Bank establishes an
allowance for loss on credit card loans based on a number of factors,
including historical charge-off and repayment experience and the age of the
portfolio. The Bank has developed a roll rate model to extrapolate its
allowance needs based on an analysis of the characteristics of the portfolio
and trends at any particular time. The Bank's actual charge-off experience for
credit card loans may vary from the forecasted levels because credit card
loans typically are more sensitive to general economic conditions than certain
other types of loans. In addition, the Bank's credit card loans and allowance
for losses are subject to review by the OTS and the FDIC upon examination.
Based on such examinations, the Bank could be required to establish additional
valuation allowances or incur additional charge-offs. The Bank increased its
allowance for losses on credit card loans during the first three months of
fiscal 1998 by $5.3 million to $94.8 million at December 31, 1997. An increase
in credit card delinquencies and charge-offs also may affect the Bank's income
from loan servicing fees by reducing the amount earned on securitized credit
card receivables.
Certain jurisdictions and their residents may attempt to require out-of-
state credit card issuers such as the Bank to comply with the consumer
protection laws of those jurisdictions (including laws limiting the charges
imposed by such credit card issuers) in connection with their operations in
such jurisdictions. For example, in recent years a number of lawsuits and
administrative actions have been filed in several states against out-of-state
credit card issuers (including both federally chartered and state chartered
insured depository institutions) challenging various fees and charges (such as
late fees, over-the-limit fees, returned check fees and annual membership
fees) assessed against residents of the states in which such lawsuits were
filed, based on restrictions or prohibitions under the laws of such states.
The Supreme Court has ruled that national banks may export late fees on credit
cards as interest regardless of states' usury laws, however the law is not
settled with respect to all types of fees and charges. If it were determined
that out-of-state credit card issuers must comply with a jurisdiction's laws
limiting the charges imposed by credit card issuers, such an action could have
an adverse impact on the Bank's credit card operations.
25
<PAGE>
The credit card industry is highly competitive and characterized by
increased pricing competition in interest rates and annual membership fees,
use of advertising, target marketing and other features (such as buyer
protection plans), as both established and new card issuers seek to expand or
to enter the market and to retain their existing customers. The Bank has
issued credit cards to customers nationwide, and competes for those customers
with certain money center banks and other large nationwide issuers, as well as
with regional and local depository institutions and other issuers, many of
whom have sizable branch systems or other customer relationships through which
such issuers market their credit cards. The Bank anticipates that competitive
pressures will require adjustments from time to time to the pricing of the
Bank's credit card accounts.
RISKS RELATING TO NON-PERFORMING ASSETS
Chevy Chase's non-performing assets have continued to decrease from their
peak in February 1992. Chevy Chase's level of REO at December 31, 1997, net of
valuation allowances on such assets of $143.7 million, totaled $85.3 million.
The Bank reviews on a quarterly basis the carrying value of its REO in order
to make any adjustments required to present such assets at fair value.
Although the Bank believes it has a reasonable basis for estimating its
allowance for losses, no assurance can be given that the Bank will not sustain
losses in any particular period that exceed the amount of the allowance for
losses at the beginning of that period, or that subsequent evaluations of the
asset portfolio, in light of factors then prevailing (including economic
conditions, the Bank's internal review process and the results of regulatory
examinations), will not require significant increases in the allowance for
losses.
At December 31, 1997, approximately $67.3 million (or 78.9%), after all
valuation allowances, of the Bank's aggregate book value of REO was
attributable to its five planned unit developments (the "Communities"), four
of which are under active development. The Bank obtains updated appraisals on
its REO from time to time and, in the past, has been directed to do so by the
OTS in connection with regulatory examinations. As a result of such updated
appraisals, the Bank could be required to increase its allowance for losses.
At December 31, 1997, the ratio of the Bank's allowance for losses to non-
performing assets and credit card loans past due 90 days was 94.6%.
FLUCTUATION OF NON-INTEREST INCOME OF CHEVY CHASE
In recent years, non-interest income has become an increasingly large
component of the Bank's net income. The Bank has earned non-interest income
primarily from loan servicing and deposit servicing fees, credit card fees and
gains on sales of loans. In fiscal 1997, 1996 and 1995, the Bank recognized
non-interest income of $413.0 million, $344.5 million and $232.6 million,
respectively. Of those amounts, $227.8 million, $264.1 million and $184.3
million, respectively, of total operating income was income from loan
servicing fees and $57.4 million, $30.8 million, and $9.9 million,
respectively, of total operating income was income from credit card fees.
During the three months ended December 31, 1997, the Bank recognized non-
interest income of $129.4 million, of which $64.5 million was income from loan
servicing fees and $13.8 million was income from credit card fees. The Bank's
ability to realize non-interest income is dependent upon market interest
rates, the demand for mortgage and credit card loans, conditions in the loan
sale market, the level of securitized receivables and other factors. The level
of such income, therefore, is subject to substantial fluctuations. An increase
in credit card delinquencies and charge-offs may affect the Bank's income from
loan servicing fees by reducing the amount earned on securitized credit card
receivables. Such charge-offs have increased significantly during recent
periods, although the Bank's income has not been significantly affected to
date as a result of the counterbalancing effects of such items as the
expiration of introductory rates, repricing of existing portfolios and new
fee-based strategies.
Of the $68.5 million increase in non-interest income from fiscal 1996 to
fiscal 1997, $33.1 million was attributable to gains recognized in connection
with the Bank's credit card securitization activity resulting from the
implementation of SFAS 125. Because such gains will be amortized in the
future, the Bank expects that the relative impact of such gains on the Bank
will be less in fiscal 1998 and future years.
26
<PAGE>
SECURITIZATION ACTIVITIES
The Bank relies to a significant degree on the securitization and sale of
credit card, home equity credit line, automobile and home loan receivables to
provide the Bank with additional funding sources at competitive rates, to
assist the Bank in maintaining compliance with regulatory capital
requirements, and to limit its credit risk associated with the securitized
assets while continuing to earn servicing fees and other income associated
with those assets. In addition, the Bank has derived a significant portion of
its income in recent periods from gains recorded in connection with such
securitization activities. See "Risk Factors--Fluctuation of Non-Interest
Income of Chevy Chase." Since 1988, the Bank has securitized approximately
$11.6 billion of loan receivables. At December 31, 1997, the Bank serviced
$4.1 billion, $405.0 million, $1.2 billion and $227.5 million of securitized
credit card, home equity credit line, automobile and home loan receivables,
respectively.
The Bank's ability to continue to access the securitization markets on
favorable terms could be adversely affected by a variety of factors, including
adverse market conditions and adverse performance of the Bank's loan portfolio
or servicing responsibilities. Inability to access the securitization markets
on favorable terms could have a material adverse effect on the Bank's
operations, liquidity and its ability to maintain compliance with regulatory
capital requirements.
In connection with its securitization activities, the Bank records on its
balance sheet the fair value of interest-only strips representing the Bank's
right to receive certain excess cash flows associated with the securitized
assets. The Bank calculates the fair value of those interest-only strips by
first estimating the amount of cash flow expected to be generated over the
life of the receivables sold based on the terms of the loans and various other
factors, the most significant of which are estimated prepayment and default
rates. This expected cash flow is then reduced by the amount of interest
expected to be paid to the investors and any recurring fees and expenses, and
this "expected cash flow" is then discounted using an appropriate market
interest rate. As of December 31, 1997, the Bank's balance sheet reflected
$139.4 million in interest-only strips.
If actual prepayment or default rates significantly exceed the estimates
used to calculate the carrying values of these interests, the actual amount of
future cash flow could be less than the expected amount and the value of the
interest-only strips, as well as the Bank's earnings, could be negatively
impacted. No assurance can be given that the Bank's receivables will not
experience significant increases in prepayment or default rates or that the
Bank may not have to write down the value of its interest-only strips. In
addition, if prevailing interest rates were to increase, the discount rate
used to compute the value of the interest-only strips flows might also
increase, resulting in a reduction of the recorded value of the interest-only
strips. Finally, although certain institutions, including the Bank, have in
the past been able to sell interest-only strips, no assurance can be given
that these assets could be sold in the future or that such assets could be
sold at prices at or near their carrying value on the balance sheet. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Banking" in the Trust's 10-K.
In addition to the risk of loss associated with the interest-only strips,
the Bank also retains a risk of loss relating to the securitized assets to the
extent of any amounts on deposit in certain "spread accounts" owned by the
Bank. These spread accounts provide credit support for the Bank's
securitizations and are funded by certain deposits made by the Bank and by
excess cash flow payments generated by the securitized assets. At December 31,
1997, of the $6.1 billion in securitized assets outstanding at such date,
approximately $132.7 million represented amounts on deposit in such spread
accounts subject to risk of loss if the cash flow generated by the securitized
assets were insufficient to cover payments due in the securitization. Pursuant
to OTS's capital requirements, the Bank maintains dollar-for-dollar capital
against the securitized assets in an amount equal to (i) the amounts on
deposit in such spread accounts, (ii) the amount of any interest-only strips
relating to the securitized assets, and (iii) certain other items representing
recourse for regulatory capital purposes, up to the otherwise applicable
capital requirement on the underlying loans.
In certain circumstances, an "early payout" event could occur, the immediate
consequence of which is that investors would begin to receive payments of
principal from the securitized assets earlier than originally
27
<PAGE>
scheduled. However, in the case of revolving credits such as credit card and
home equity credit line loans, such an event also could adversely affect the
Bank's regulatory capital ratios and liquidity by requiring capital support
and funding for any future advances to customers that would have been
transferred to the securitization entity if an early payout event had not
occurred. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Banking--Liquidity" in
the Trust 10-K.
The Bank also retains risk through the Bank's interest in "seller
certificates." Seller certificates share collections on the securitized assets
on an unsubordinated basis with the investor certificates (unless and to the
extent recourse is retained through an express subordination) and are on-
balance sheet assets against which the Bank must maintain capital.
EFFECT OF AN INCREASE IN INTEREST RATES ON OPERATING RESULTS OF CHEVY CHASE
The Bank's operating results depend to a large extent on its net interest
income, which is the difference between the interest the Bank receives from
its loans, securities and other assets and the interest the Bank pays on its
deposits and other liabilities. Interest rates are highly sensitive to many
factors, including governmental monetary policies and domestic and
international economic and political conditions. Conditions such as inflation,
recession, unemployment, money supply, international disorders and other
factors beyond the control of the Bank may affect interest rates. If generally
prevailing interest rates increase, the "net interest spread" of the Bank,
which is the difference between the rates of interest earned and the rates of
interest paid by the Bank, is likely to contract, resulting in less net
interest income.
Although the Bank pursues an asset-liability management strategy designed to
control its risk from changes in market interest rates, the Bank's liabilities
have shorter terms and are more interest-sensitive than its assets. At
December 31, 1997, the Bank's one-year interest-sensitivity "gap" (the sum of
all interest earning assets to be re-priced within one year minus all
interest-bearing liabilities to be re-priced within one year, as a percentage
of total assets) adjusted for the effect of the Bank's interest rate caps was
1.3%. This gap position indicates that the Bank's net interest spread will
narrow, and its operating results will be adversely affected, during periods
of rising market interest rates if the Bank is unable to reduce its gap. There
can be no assurance that the Bank will be able to adjust its gap sufficiently
to offset any negative effect of changing market interest rates.
RISKS OF OTHER CONSUMER LENDING OF CHEVY CHASE
Chevy Chase is actively diversifying its non-credit card consumer lending
business, focusing on automobile and home improvement loans. While such loans
generally have shorter terms to maturity and carry higher rates than
residential mortgage loans, they generally entail greater risk than
residential mortgage loans, particularly when secured by rapidly depreciable
assets, such as automobiles. In such cases, any collateral repossessed for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability and, thus, are more likely to be affected by adverse
personal circumstances.
The Bank also makes automobile loans through one of its operating
subsidiaries. The underwriting guidelines for this subsidiary apply to a
category of lending in which loans may be made to applicants who have
experienced certain adverse credit events (and, therefore, would not
necessarily meet all of the Bank's guidelines for its traditional loan
program), but who meet certain other creditworthiness tests. The Bank believes
that non-prime lending to lower credit grade borrowers entails a higher risk
of delinquency and higher losses than loans made to prime borrowers who have
better credit histories. Virtually all of the Bank's non-prime loans are made
to borrowers who do not qualify for loans from traditional prime lenders. No
assurance can be given that the Bank's operating strategy, including its
underwriting criteria and loan pricing, will afford adequate protection
against the higher risks associated with loans made to lower credit grade
borrowers.
ECONOMIC CONDITIONS; REGIONAL CONCENTRATION OF LOAN PORTFOLIO
The Bank's principal real estate lending market is the metropolitan
Washington, D.C. area. In addition, a significant portion of the Bank's
consumer loan portfolio, including credit cards, was generated by customers
28
<PAGE>
residing in the metropolitan Washington, D.C. area. Service industries and
federal, state and local governments employ a significant portion of the
Washington, D.C. area labor force. Adverse changes in economic conditions
generally, or in the Washington, D.C. area in particular, could have a direct
impact on the timing and amount of payments by borrowers and, as a result
negatively impact the Bank's financial performance.
COMPETITION IN THE BANKING INDUSTRY
The Bank encounters strong competition both in attracting deposits and
making real estate and other loans. Historically, the Bank's major competition
has come from local depository institutions. However, deregulation of the
financial services industry, the enactment of interstate banking laws, and
changing market demand have eroded distinctions between providers of financial
services and expanded the type of institutions with which the Bank now
competes. As a result, the Bank's competitors now include regional financial
institutions, large money center and regional banks that have acquired
institutions in the Bank's markets, and other national providers of investment
alternatives.
REGULATORY CAPITAL LEVELS OF CHEVY CHASE
As a federal savings association, the Bank is subject to minimum capital
requirements prescribed by federal statute and OTS regulations. At December
31, 1997, the Bank's tangible, core, tier 1 risk-based and total risk-based
regulatory capital ratios were 6.65%, 6.65%, 6.81% and 13.01%, respectively.
The Bank's capital ratios exceeded the requirements under FIRREA as well as
the standards established for "well capitalized" institutions under the prompt
corrective action regulations established pursuant to FDICIA.
The OTS's prompt corrective action regulations establish five capital
categories for thrift institutions: well capitalized, adequately capitalized,
undercapitalized, severely undercapitalized and critically undercapitalized.
The OTS has the discretion under the prompt corrective action regulations to
reclassify an institution from one category to the next lower category, for
example, from "well capitalized" to "adequately capitalized," if, after notice
and an opportunity for a hearing, the OTS determines that the institution is
in an unsafe or unsound condition or has received and has not corrected a less
than satisfactory examination rating for asset quality, management, earnings
or liquidity.
OTS capital regulations provide a five-year holding period (or such longer
period 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. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current
book value of the REO from risk-based capital. In February 1998, the Bank
received from the OTS a further extension through February 17, 1999 of the
five-year holding period for certain of its REO properties acquired through
foreclosure in fiscal 1990, 1991 and 1992. There can be no assurance that the
Bank will be able to dispose of all of its REO properties within the
applicable time period or obtain any necessary further extensions.
In addition, as of December 31, 1997, the Bank had $0.5 million in non-
mortgage servicing assets and $90.6 million in interest-only strips (i.e.,
amounts representing rights to future income from serviced assets in excess of
contractually specified servicing fees) related to non-mortgage assets, net of
any associated deferred tax liability. The OTS and the other federal bank
regulatory agencies have proposed amendments to their regulatory capital
requirements relating to servicing assets that (i) would require deduction
from core capital of non-mortgage servicing assets, and (ii) request comment
on whether to require a similar deduction for interest-only strips relating to
non-mortgage assets. See "Business--General--Banking--Regulation--Regulatory
Capital" in the Trust 10-K. Based on a further review of the proposal, the
Bank believes that even if the agencies were ultimately to decide to require
deduction of non-mortgage interest-only strips, such deduction would not apply
to non-mortgage interest-only strips arising out of the Bank's securitization
activities which are treated as recourse obligations under existing capital
requirements. As of December 31, 1997, all of the Bank's non-mortgage
29
<PAGE>
interest-only strips were being treated as recourse obligations in connection
with the Bank's securitization and sales activities. Accordingly, while the
Bank is unable to predict at this time whether and in what form any final
amendments will be adopted, the Bank does not believe adoption of the proposal
would have a material adverse effect on its regulatory capital ratios.
The Bank's ability to maintain or increase its capital levels in future
periods will be subject to general economic conditions, particularly in the
Bank's local markets. Adverse general economic conditions or a renewed
downturn in local real estate markets could require further additions to the
Bank's allowances for losses and further charge-offs. Any such developments
would adversely affect the Bank's earnings and thus its regulatory capital
levels.
As a result of the foregoing factors, although the Bank's regulatory capital
ratios at December 31, 1997 meet the ratios established for "well capitalized"
institutions, there can be no assurance that the Bank will be able to maintain
levels of capital sufficient to continue to meet the standards for
classification as "well capitalized" under the prompt corrective action
standards.
RISKS RELATING TO THRIFT CHARTER
Legislation passed in 1996 requires the merger of the BIF and the SAIF into
a single Deposit Insurance Fund on January 1, 1999, but only if the thrift
charter is eliminated by that date. Congress is considering legislation in
various forms that would require federal thrifts, like the Bank, to convert
their charters to national or state bank charters. The House Banking Committee
approved a version of such legislation on June 20, 1997 and the House Commerce
Committee approved its version of the legislation on October 30, 1997. While
the last session of Congress adjourned without further action on the bills,
the House has resumed consideration of the legislation in this session. In the
absence of appropriate "grandfather" provisions, such legislation could have
an adverse effect on the Bank and the Trust because, among other things, the
Trust engages in activities that are not permissible for bank holding
companies and the regulatory capital and accounting treatment for banks and
thrifts differs in certain significant respects. While the versions of the
bill approved by the House Banking and Commerce Committees both contain
grandfather provisions that address many of these issues, the Bank cannot
determine at this time whether, or in what form, such legislation may
eventually be enacted, and there can be no assurances that any such
legislation that is enacted will contain adequate grandfather rights for the
Bank or the Trust.
CAPITAL MAINTENANCE AGREEMENT BY THE TRUST
The Trust has entered into an agreement with OTS's predecessor agency to
maintain Chevy Chase's regulatory capital at the level prescribed by
applicable regulatory requirements and, if necessary, to infuse additional
capital to enable Chevy Chase to meet those requirements. If the Bank is
unable to meet its capital requirements in the future, the OTS could seek to
enforce the Trust's obligations under the agreement. To the extent additional
capital infusions may be required pursuant to the Trust's capital maintenance
agreement, the funds available to repay Notes would be reduced.
In addition, if the Bank were to become "undercapitalized" under the prompt
corrective action regulations, it would be required by statute to file a
capital restoration plan with the OTS setting forth, among other things, the
steps the Bank would take to become "adequately capitalized." The OTS could
choose to not accept the plan unless the Trust guaranteed in writing the
Bank's compliance with the plan. The aggregate liability of the Trust under
such a commitment would be limited to the lesser of (i) an amount equal to
5.0% of the Bank's total assets at the time the Bank became "undercapitalized"
and (ii) the amount necessary to bring the Bank into compliance with all
applicable capital standards as of the time the Bank fails to comply with its
capital plan. If the Trust refused to provide the guarantee, the Bank would be
subject to the more restrictive supervisory actions applicable to
"significantly undercapitalized" institutions.
YEAR 2000 CONSIDERATIONS
Some of the Bank's computer systems are designed to process transactions
using two digits to describe the year (e.g., "97" for 1997) rather than four
digits, and therefore such systems may have difficulty accurately
30
<PAGE>
processing transactions and making calculations using dates later than
December 31, 1999. Management has implemented a program to upgrade or replace
its computer systems to address this problem and expects the upgrades and
replacements, along with related testing, to be completed not later than
December 1998. Management does not expect that the cost of converting such
systems will be material to its financial condition or results of operations.
Nevertheless, a failure on the part of the Bank to ensure that its computer
systems are year 2000 compliant could have a material adverse effect on the
Bank's operations. Moreover, if any of the Bank's significant customers or
service providers do not successfully and timely achieve year 2000 compliance
for their computer systems, the Bank also could be adversely affected.
RELIANCE ON B. FRANCIS SAUL II
The success of the Trust is largely dependent upon the efforts and skills of
B. Francis Saul II, the Trust's Chairman and Chief Executive Officer. Mr. Saul
and his family have played a prominent role in the development and management
of real estate in the Washington, D.C. area for over 100 years. The loss of
Mr. Saul's services could materially and adversely affect the Trust.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
There has previously been no public market for the Notes. Although the
Initial Purchasers have informed the Trust that they currently intend to make
a market in the Old Notes and, if issued, the New Notes, they are not
obligated to do so, and any such market-making may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development
or liquidity of any market for the New Notes. The Trust does not intend to
apply for listing of the New Notes on any securities exchange or for quotation
of the New Notes through any automated quotation system.
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered Old Notes that are not exchanged for New Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144 under the Securities Act. Old Notes will continue to be subject to the
following restrictions on transfer: (i) Old Notes may be resold only if
registered pursuant to the Securities Act, or if an exemption from
registration is available thereunder, and (ii) Old Notes will bear a legend
restricting transfer in the absence of registration or an exemption therefrom.
USE OF PROCEEDS
ISSUANCE OF NEW NOTES
The Trust will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as
contemplated in this Prospectus, the Trust will receive in exchange Old Notes
in like principal amount, the terms of which are identical in all material
respects to the terms of the New Notes, except that the New Notes will not
bear legends restricting the transfer thereof or certain provisions with
respect to increases in the interest rate. The Old Notes surrendered in
exchange for New Notes will be retired and canceled and may not be reissued.
Accordingly, issuance of the New Notes will not result in any increase in the
indebtedness of the Trust.
SALE OF OLD NOTES
The net proceeds to the Trust from the sale of the Old Notes were
approximately $194 million after deduction of the Initial Purchasers' discount
and estimated expenses payable by the Trust. The Trust deposited approximately
$185 million of such proceeds for the principal repayment (including premium)
of the Existing Notes. The Trust intends to use the remaining proceeds from
the sale of the Old Notes for general corporate purposes.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Trust at December
31, 1997 and as adjusted to give effect to (i) the sale of the Old Notes and
(ii) the application of the net proceeds of the Offering to payment of the
Existing Notes. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements and the notes thereto
included elsewhere in this Prospectus and in the attached documents.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES:
Real Estate Liabilities
9 3/4% Senior Secured Notes....................... $ -- $ 200,000
11 5/8% Senior Secured Notes...................... 175,000 --
Mortgage notes payable............................ 206,969 206,969
Notes payable--unsecured.......................... 47,252 47,252
Deferred gains--real estate....................... 112,883 112,883
Accrued dividends payable--preferred shares of
beneficial interest.............................. 37,585 37,585
Other liabilities................................. 31,648 31,648
---------- ----------
Total Real Estate Liabilities................... 611,337 636,337
---------- ----------
Banking Liabilities
Deposit accounts.................................. 4,994,545 4,994,545
Borrowings........................................ 86,931 86,931
Federal Home Loan Bank advances................... 139,939 139,939
Other liabilities................................. 170,551 170,551
Capital Note--9 1/4% Subordinated Debentures due
2005............................................. 150,000 150,000
Capital Note--9 1/4% Subordinated Debentures due
2008............................................. 100,000 100,000
---------- ----------
Total Banking Liabilities....................... 5,641,966 5,641,966
---------- ----------
MINORITY INTEREST................................... 272,041 272,041
---------- ----------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares of beneficial interest........... 516 516
Common shares of beneficial interest.............. 6,642 6,642
Paid-in surplus................................... 92,943 92,943
Deficit........................................... (137,140) (146,713)
Net unrealized holding loss....................... (97) (97)
---------- ----------
(37,136) (46,709)
Less cost of common shares of beneficial interest
in treasury...................................... (41,848) (41,848)
---------- ----------
Total Shareholders' Equity (Deficit)............ (78,984) (88,557)(1)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT).......................................... $6,446,360 $6,461,787
========== ==========
</TABLE>
- --------
(1) Total shareholders' deficit will increase by $9.6 million as a result of
the repayment of the 11 5/8% Senior Secured Notes as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Prepayment costs.............................................. $ 9,975
Write-off of unamortized debt issuance costs.................. 4,529
-------
Subtotal.................................................... 14,504
Related income tax effect..................................... (4,931)
-------
$ 9,573
=======
</TABLE>
32
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On March 25, 1998, the date of original issuance of the Old Notes, the Trust
and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Friedman, Billings,
Ramsey & Co., Inc., as the initial purchasers of the Old Notes (the "Initial
Purchasers"), entered into an agreement governing registration rights with
respect to the Old Notes (the "Registration Rights Agreement"). Pursuant to
the Registration Rights Agreement, the Trust agreed to (i) file with the
Commission the Registration Statement of which this Prospectus is a part with
respect to the New Notes within 45 calendar days after the date of original
issuance of the Old Notes, (ii) use its best efforts to cause the Registration
Statement to become effective within 150 calendar days after the date of
original issuance of the Old Notes and (iii) use its best efforts to cause the
Exchange Offer to be consummated within 180 calendar days after the date of
original issuance of the Old Notes. The Trust agreed in the Registration
Rights Agreement that the interest rate borne by the Old Notes would increase
by an additional one-half of one percent per annum upon each of the following
events: (i) failure of the Registration Statement to be filed with the
Commission on or prior to the 45th calendar day following the date of original
issue of the Old Notes, (ii) failure of the Registration Statement to be
declared effective on or prior to the 150th calendar day following the date of
original issue of the Old Notes or (iii) failure of the Exchange offer to be
consummated or a Shelf Registration Statement with respect to the Old Notes to
be declared effective on or prior to the 180th calendar day following the date
of original issue of the Old Notes. The aggregate amount of any such increases
from the original interest rate on the Old Notes may not exceed 1.0% per
annum. The Trust further agreed that, upon (x) the filing of the Registration
Statement in the case of clause (i) above, (y) the effectiveness of the
Registration Statement in the case of clause (ii) above or (z) the
consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, in the case of clause (iii) above,
the interest rate borne by the Old Notes from the date next succeeding the
date of such filing, effectiveness or consummation, as the case may be, would
be reduced in each case by one-half of one percent per annum (but, in any
event, not below the original interest rate) and after the Exchange Offer is
consummated or a Shelf Registration Statement is declared effective, the
interest rate borne by the Old Notes would be reduced to the original interest
rate. The Registration Statement was filed on , within 45 calendar
days following the date of original issue of the Old Notes, and was declared
effective by the Commission on , within 150 calendar days following the
date of original issue of the Old Notes, and thus no increase in the interest
rate borne by the Old Notes has been or will be made under clause (i) or
clause (ii) above.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, the Trust believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any holder thereof (other than
(i) a broker-dealer who purchased such Old Notes directly from the Trust for
resale pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" of the Trust within the
meaning of Rule 405 under the Securities Act), except as described in the
following paragraph, without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the holder is
acquiring the New Notes in its ordinary course of business, is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of the New
Notes. In the event that the Trust's belief is inaccurate, holders of New
Notes that transfer New Notes in violation of the prospectus delivery
provisions of the Securities Act and without an exemption from registration
thereunder may incur liability under the Securities Act. The Trust does not
assume or indemnify holders against such liability, although the Trust does
not believe that any such liability should exist. If any holder does not
satisfy the conditions set forth in the no-action letters referred to above,
it may not rely on the Commission staff position enunciated in such no-action
letters or interpretive letters to similar effect and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer in exchange for Old Notes that were acquired by such
broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes.
33
<PAGE>
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of such New Notes. The Trust has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resales. See "Plan of Distribution."
In the event the Exchange Offer is consummated, the Trust will not be
required to file a Shelf Registration Statement to register any outstanding
Old Notes, and the interest rate on such Old Notes will remain at its initial
level of 9 3/4%. Holders of any Old Notes remaining outstanding after the
Exchange Offer seeking liquidity in their investment would have to rely on
exemptions to registration requirements under applicable securities laws,
including the Securities Act, in connection with any proposed transfer of such
Old Notes. See "Risk Factors and Other Considerations--Consequences of Failure
to Exchange."
This Exchange Offer is not being made to, nor will the Trust accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in
which this Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Trust will accept any and
all Old Notes that are validly tendered prior to the Expiration Date. The
Trust will issue $1,000 principal amount of New Notes in exchange for each
$1,000 principal amount of outstanding Old Notes accepted in the Exchange
Offer. Holders may tender some or all of their Old Notes pursuant to the
Exchange Offer in denominations of $1,000 and integral multiples thereof. As
of the date of this Prospectus, $200,000,000 aggregate principal amount of Old
Notes is outstanding.
The form and terms of the New Notes are identical in all material respects
to the form and terms of the Old Notes, except that the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. In addition, the New Notes will not be
subject to certain provisions regarding an increase in interest rate. The New
Notes will evidence the same indebtedness as the Old Notes and will be issued
under, and will be entitled to the benefits of, the Indenture.
The term "Holder" with respect to the Exchange Offer means (i) any person in
whose name Old Notes are registered on the Trust's books or any other person
who has obtained a properly completed bond power from the registered Holder,
or (ii) any participant in a Book-Entry Transfer Facility whose name appears
on a security position listing as the owner of Old Notes.
The Trust will be deemed to have accepted validly tendered Old Notes when,
as and if the Trust has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving New Notes from the Trust and delivering New Notes to such
Holders. See "--Exchange Agent and Information Agent" below.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such Old Notes will be returned, without expense, to the
tendering Holder thereof as promptly as practicable after the Expiration Date.
Subject to the instructions in the Letter of Transmittal, Holders who tender
in the Exchange Offer will not be required to pay transfer taxes with respect
to the exchange of Old Notes pursuant to the Exchange Offer. The Trust will
pay all charges and expenses, other than certain applicable taxes, in
connection with the Exchange Offer. See "--Fees and Expenses" below.
34
<PAGE>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean p.m., New York City time, on ,
unless and until the Trust, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" will mean the latest time and
date to which the Exchange Offer is extended.
The Trust reserves the absolute right in its sole discretion, at any time or
from time to time, to extend the Expiration Date. In order to extend the
Expiration Date, the Trust will notify the Exchange Agent of any extension by
oral or written notice, and will issue a public announcement thereof no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. Such announcement may state that the
Trust is extending the Exchange Offer for a specified period of time.
The Trust reserves the absolute right in its sole discretion to amend the
terms of the Exchange Offer in any manner by giving oral or written notice of
such amendment to the Exchange Agent. Any such amendment will be followed as
promptly as practicable by public announcement thereof. If the Exchange Offer
is amended in a manner determined by the Trust to constitute a material
change, the Trust will promptly disclose such amendment in a manner reasonably
calculated to inform the Holders of such amendment.
Without limiting the manner in which the Trust may choose to make public
announcements of any extension or amendment of the Exchange Offer, or of any
other matters relating to the Exchange Offer, the Trust shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
INTEREST ON THE NEW NOTES
Interest on the New Notes will accrue from March 25, 1998, payable
semiannually on April 1 and October 1 of each year, commencing on October 1,
1998, at the rate of 9 3/4% per annum. Holders whose Old Notes are accepted
for exchange will be deemed to have waived the right to receive any payment in
respect of interest on the Old Notes accrued from March 25, 1998 until the
date of the issuance of the New Notes. Consequently, Holders who exchange
their Old Notes for New Notes will receive the same interest payment on
October 1, 1998 (the first interest payment date with respect to the New
Notes) that they would have received had they not accepted the Exchange Offer.
PROCEDURES FOR TENDERING
Only a Holder may tender its Old Notes in the Exchange Offer. To tender in
the Exchange Offer, a Holder must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Old Notes (unless
such tender is being effected pursuant to the procedure for book-entry
transfer described below) and any other required documents, to the Exchange
Agent at its address set forth herein and in the Letter of Transmittal prior
to the Expiration Date.
Any financial institution that is a participant in The Depository Trust
Company, the Midwest Securities Trust Company or the Philadelphia Depository
Trust Company (each a "Book-Entry Transfer Facility") may make book-entry
delivery of Old Notes by causing the applicable Book-Entry Transfer Facility
to transfer such Old Notes to the account maintained by the Exchange Agent at
such Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
applicable Book-Entry Transfer Facility, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received or
confirmed by the Exchange Agent at its address set forth herein and in the
Letter of Transmittal prior to the Expiration Date. DELIVERY OF DOCUMENTS TO A
BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
35
<PAGE>
The tender of Old Notes by a Holder will constitute an agreement between
such Holder and the Trust in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF TENDERED OLD NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD
NOTES SHOULD BE SENT TO THE TRUST.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact such registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If a beneficial
owner wishes to tender on its own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering its Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly completed bond power from the
registered Holder. The transfer of record ownership may take considerable time
and may not be able to be completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (an "Eligible Institution") unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered Holder
(including any participant in a Book-Entry Transfer Facility whose name
appears on a security position listing as the owner of Old Notes) who has not
completed the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" in the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
Holder listed therein, the applicable Old Notes must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender
the Old Notes on behalf of the registered Holder, in either case signed as the
name of the registered Holder or Holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Trust,
evidence satisfactory to the Trust of their authority so to act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of the tendered Old Notes pursuant to the
procedures described herein and in the Letter of Transmittal will be
determined in the sole discretion of the Trust, whose determination will be
final and binding. The Trust reserves the absolute right in its sole
discretion to reject any and all Old Notes not properly tendered or any Old
Notes the Trust's acceptance of which would, in the opinion of counsel for the
Trust, be unlawful. The Trust also reserves the absolute right in its sole
discretion to waive any conditions of the Exchange Offer or any defect or
irregularity in any tender with respect to particular Old Notes. The Trust's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding.
Unless waived, any defects or irregularities in connection with tenders of Old
Notes must be cured within such time as the Trust shall determine. None of the
Trust, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities with respect to tenders of Old
Notes, nor will any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering Holder, unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
36
<PAGE>
The Trust reserves the absolute right in its sole discretion to (i) purchase
or make offers for any Old Notes that remain outstanding subsequent to the
Expiration Date, or, as set forth under "Termination," to terminate the
Exchange Offer and (ii) to the extent permitted by applicable law, purchase
Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchase or offers may differ from the terms
of the Exchange Offer.
By tendering, each Holder will represent to the Trust that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, (ii) the person receiving the
New Notes is not participating in and does not intend to participate in a
distribution of the New Notes, (iii) neither the Holder nor any such other
person has an arrangement or understanding with any person to participate in
the distribution of such New Notes and (iv) neither the Holder nor any such
other person is an "affiliate" of the Trust within the meaning of Rule 405
under the Securities Act.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose certificates
representing such Old Notes are not immediately available, (ii) who cannot
deliver their Old Notes, the Letter of Transmittal or any other required
documents to the Exchange Agent prior to the Expiration Date or (iii) who
cannot complete the procedures for book-entry transfer prior to the Expiration
Date, may effect a tender if:
(a) the tender is made by or through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number or
numbers of such Holder's Old Notes, if applicable, and the principal amount
of such Old Notes tendered, stating that the tender is being made thereby,
and guaranteeing that, within five business days after the Expiration Date,
the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing all tendered Old Notes in proper form for
transfer (or a confirmation of book-entry delivery of Old Notes into the
Exchange Agent's account at the applicable Book-Entry Transfer Facility)
and all other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or a confirmation of book-
entry delivery of Old Notes into the Exchange Agent's account at the
applicable Book-Entry Transfer Facility) and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent within
five business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Tenders of Old Notes in the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. No tenders of Old Notes may be withdrawn after
the Expiration Date.
To withdraw a tender of Old Notes, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having deposited the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers, if applicable, and principal
amount of such Old Notes), (iii) be signed by the Depositor in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantee) or be accompanied
by documents of transfer sufficient to permit the registrar and transfer agent
with respect to the Old Notes to register the transfer of such Old Notes into
the name of the Depositor withdrawing the tender, (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor, and (v) contain a statement that the Depositor is withdrawing the
election to have the Old Notes exchanged. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes
37
<PAGE>
of the Exchange Offer and no New Notes will be issued with respect thereto
unless the Old Notes so withdrawn are validly retendered. Properly withdrawn
Old Notes may be retendered by following one of the procedures described above
under "--Procedures for Tendering" at any time prior to the Expiration Date.
Any Old Notes that have been tendered but are not accepted for exchange will
be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer.
All questions as to the form and validity (including time of receipt) of
withdrawal notices will be determined in the sole discretion of the Trust,
whose determination will be final and binding. None of the Trust, the Exchange
Agent or any other person will be under any duty to give notification of any
defects or irregularities in any notice of withdrawal, nor will any of them
incur any liability for failure to give such notification.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Trust will not be
required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange
Offer as provided herein before the acceptance of such Old Notes, if it
determines that (i) the Exchange Offer, or the making of any exchange, would
violate any applicable law or any interpretation of applicable law by the
staff of the Commission or (ii) the Trust's ability to proceed with the
Exchange Offer could be materially impaired due to any pending or threatened
legal or governmental action or proceeding or the enactment of any law,
statute, rule or regulation. The Trust does not expect any of the foregoing
conditions to occur, although there can be no assurances in this regard.
If the Trust determines that it may terminate the Exchange Offer, as set
forth above, the Trust may (i) delay acceptance of any Old Notes, (ii) refuse
to accept any Old Notes and return to the Holders thereof any Old Notes that
have been tendered, (iii) extend the Exchange Offer and retain all Old Notes
tendered prior to the Expiration Date, subject to the rights of the Holders of
tendered Old Notes to withdraw their tendered Old Notes prior to the
Expiration Date, or (iv) waive the termination event with respect to the
Exchange Offer and accept all properly tendered Old Notes that have not been
withdrawn. If such waiver constitutes a material change in the Exchange Offer,
the Trust will disclose such change by means of a supplement to this
Prospectus that will be distributed to each Holder or by any other means
permitted by law which is reasonably calculated to inform the Holders of such
change, and if the Exchange Offer would otherwise expire during such period,
the Trust will extend the Exchange Offer. The length of any such extension
will depend upon the significance of the waiver and the manner in which the
waiver is disclosed to the Holders.
EXCHANGE AGENT AND INFORMATION AGENT
has been appointed as Exchange Agent and Information Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent and Information Agent addressed as follows:
For Information Telephone:
By Mail: By Facsimile Transmission
(for Eligible Institutions only):
By Hand or Overnight
Delivery
Confirm by Telephone:
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Trust. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be
38
<PAGE>
made by officers and regular employees of the Trust and its affiliates in
person, by telegraph, telephone or telecopier.
The Trust has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Trust, however, will
pay reasonable and customary fees for its services as Exchange Agent
and Information Agent and will reimburse the Exchange Agent and Information
Agent for its reasonable out-of-pocket expenses in connection therewith. The
Trust also may pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this Prospectus, Letter of Transmittal and related
documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Information Agent and the Trustee
and accounting and legal fees, will be paid by the Trust.
The Trust will pay all transfer taxes, if any, applicable to the exchange of
Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered Holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Trust upon
the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Trust over the term of the New Notes under generally
accepted accounting principles.
DESCRIPTION OF THE NOTES
The Old Notes were issued, and the New Notes will be issued, under an
indenture dated as of March 25, 1998 (the "Indenture") between the Trust, as
issuer, and Norwest Bank Minnesota, National Association, as trustee (the
"Trustee"), a copy of the form of which will be made available to prospective
purchasers of the Notes upon request. The Indenture is subject to and governed
by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
The following summary of certain provisions of the Indenture does not purport
to be complete and is subject to, and qualified in its entirety by reference
to, the provisions of the Indenture, including the definitions of certain
terms contained therein. For definitions of certain capitalized terms used in
the following summary, see "--Certain Definitions."
As used in the "Description of the Notes," the term "Trust" refers to the
B.F. Saul Real Estate Investment Trust.
GENERAL
The Notes will mature on April 1, 2008, will be limited to $200 million
aggregate principal amount and will be secured as described in the section "--
Security." Except with respect to the Collateral (as hereinafter defined), the
Notes are nonrecourse to the Trust. See "--Nonrecourse." Each Note will bear
interest at the rate set forth on the cover page hereof from March 25, 1998 or
from the most recent interest payment date to which interest has been paid or
duly provided for, payable in arrears on October 1, 1998 and semiannually
thereafter on April 1 and October 1 in each year until the principal thereof
is paid or duly provided for to the Person in
39
<PAGE>
whose name the Note (or any predecessor Note) is registered at the close of
business on the March 15 or September 15 next preceding such interest payment
date. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable (subject to compliance
with transfer restrictions imposed by applicable securities laws with respect
to any Old Notes remaining outstanding after the Exchange Offer), at the
office or agency of the Trustee in The City of New York maintained for such
purposes at Norwest Bank Minnesota, c/o The Depository Trust Company, 55 Water
St., New York, New York 10041, unless the Trust shall designate and maintain
some other office or agency for such purposes; provided, however, that, at the
option of the Trust, interest may be paid by check mailed to the address of
the Person entitled thereto as such address shall appear on the Security
Register. The Notes will be issued only in registered form without coupons and
only in denominations of $1,000 and any integral multiple thereof. No service
charge will be made for any registration of transfer or exchange or redemption
of Notes, but the Trust may require payment in certain circumstances of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.
Old Notes, if any, that remain outstanding after the consummation of the
Exchange Offer and New Notes will be treated as a single class of securities
under the Indenture.
INTEREST AND PRINCIPAL PAYMENTS
Interest on the Old Notes accepted for exchange pursuant to the Exchange
Offer will cease to accrue upon issuance of the New Notes. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the Old Notes
accrued from March 25, 1998 to the date of issuance of the New Notes.
Consequently, holders who exchange their Old Notes for New Notes will receive
the same interest payment on October 1, 1998 (the first interest payment date
with respect to the New Notes) that they would have received had they not
accepted the Exchange Offer.
As described under "The Exchange Offer--Purpose and Effect of the Exchange
Offer," the interest rate borne by the Old Notes will increase by an
additional one-half of one percent per annum if the Exchange Offer is not
consummated or a Shelf Registration Statement is not declared effective on or
prior to the 180th calendar day following March 25, 1998, the date of original
issue of the Old Notes. Upon the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement, as the case may be, after
such 180-day period, the interest rate borne by the Old Notes from the date
next succeeding the date of such consummation or effectiveness, as the case
may be, will be reduced to the original interest rate.
SECURITY
The Old Notes are, and the New Notes will be, secured by a first priority
perfected security interest in 80% (8,000 shares) of the common stock of the
Bank issued and outstanding as of the date of issuance of the Notes (the
"Pledged Bank Stock") and by certain dividends, cash, instruments and other
property and proceeds from time to time distributed with respect to the
Pledged Bank Stock. The ability of the Trustee to obtain and maintain a first
priority perfected security interest in such distributions may be limited to
the extent that the Trustee does not, or is not able to, cause the Pledged
Bank Stock to be registered in its name. See "--Certain Regulatory
Considerations" below.
So long as no Default or Event of Default has occurred and is continuing,
the Trust may require the Trustee to release Pledged Bank Stock from the Lien
of the Indenture by depositing, in the form of cash or U.S. Government
Securities, into a collateral account (the "Collateral Account") $28,000 for
each share of Pledged Bank Stock (adjusted for stock splits and combinations)
that is to be released from such Lien. Any stock so released will no longer be
included in the definition of Pledged Bank Stock. The Trustee will have a
first priority lien on and security interest in the collateral (together with
the Pledged Bank Stock, the "Bank Collateral") deposited in the Collateral
Account as security for the Notes. The Trust has covenanted, whether or not it
obtains the release of any Pledged Bank Stock, that it will ensure that the
Pledged Bank Stock at all times
40
<PAGE>
constitutes at least 66 2/3% of the issued and outstanding shares of common
stock of the Bank and Voting Stock representing at least 66 2/3% of the voting
power of the Voting Stock of the Bank.
The Trust is entitled to receive all cash dividends, other distributions and
interest in respect of the Bank Collateral so long as no Default or Event of
Default has occurred and is continuing. Upon the occurrence and during the
continuance of a Default or Event of Default, the Trustee is entitled to hold
all such dividends, distributions and interest as additional Bank Collateral.
Additionally, upon the occurrence and during the continuance of a Default or
Event of Default, that portion of any Tax Sharing Payment made by the Bank and
its subsidiaries to the Trust and its subsidiaries (other than the Bank and
its subsidiaries), equal to the tax benefit to the Affiliated Group (as
defined in the definition of Tax Sharing Agreement) of the interest expense on
the Notes for the period to which such Tax Sharing Payment relates, will be
deposited into an additional collateral account (the "Additional Collateral
Account"). The Trustee will have a first priority lien on and security
interest in such additional collateral and the Additional Collateral Account
(together with the Bank Collateral, the "Collateral"). If no Default or Event
of Default is continuing and such additional collateral has not been applied
to the payment of the Notes pursuant to the Indenture, such additional
collateral shall be released to the Trust.
The Trust, subject to certain restrictions, may require that the Collateral
(other than the Pledged Bank Stock) be invested in U.S. Government Securities
or Certificates of Deposit. The Trust's rights to direct the sale and
investment of Collateral will be suspended when a Default or an Event of
Default has occurred and is continuing.
So long as no Event of Default has occurred and is continuing, the Trust is
entitled to exercise all voting rights with respect to the Pledged Bank Stock
and other Collateral, provided that no vote is cast that is inconsistent with
the provisions of the Indenture. While an Event of Default has occurred and is
continuing, the Trustee may exercise all such rights with respect to
Collateral other than Pledged Bank Stock and, on five days' notice to the
Trust and subject to the satisfaction of any regulatory requirements, exercise
all such rights with respect to Pledged Bank Stock.
If an Event of Default shall have occurred and be continuing, the Trustee
may exercise certain rights and remedies with respect to the Collateral,
including those of a secured party under the Uniform Commercial Code and the
right to sell some or all of the Collateral at a public or private sale as
provided in the Indenture. The Trustee's exercise of remedies with respect to
the Collateral will be subject to the satisfaction of any regulatory
requirements, and will be limited by bankruptcy law in the event of a
bankruptcy and pursuant to other applicable laws, including antitrust laws and
securities laws.
The Trust will enter into a registration rights agreement with the Trustee
that will obligate the Trust to use its best efforts to cause the Bank to
register the Pledged Bank Stock with the OTS or any other federal and state
regulatory agencies as may be required by law if the Trustee shall so require
in connection with any exercise of remedies with respect thereto, but no
assurance can be given that such a registration will be practicable in the
future.
Under the Indenture and subject to certain limitations set forth therein,
the Holders of not less than a majority in outstanding principal amount of the
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee.
Proceeds from the exercise of remedies with respect to the Collateral shall
be applied first to amounts due the Trustee under the Indenture and second to
the payment of principal, premium, if any, and interest on the Notes, ratably,
without preference or priority. Such proceeds may not be sufficient to satisfy
all amounts owing with respect to the Notes.
Upon satisfaction by the Trust of the conditions to its legal defeasance
option or its covenant defeasance option or the discharge of the Indenture,
the Lien of the Indenture on all the Collateral will terminate and all the
Collateral will be released. Upon any partial redemption of the Notes,
however, the Lien of the Indenture on the Collateral will not terminate.
41
<PAGE>
Certain Regulatory Considerations. Regulatory considerations may affect the
ability of the Trustee to exercise certain remedies upon the occurrence of an
Event of Default, including the registration of the Pledged Bank Stock in its
name. OTS regulations require the Trust, to the extent it remains subject to
the Capital Maintenance Agreement, to file a notice with the OTS prior to
"divestiture" of the Bank so that the OTS may determine if there is any
outstanding obligation under the Capital Maintenance Agreement. If the OTS
were to determine that an outstanding obligation under the Capital Maintenance
Agreement existed, holding a foreclosure sale or exercising voting rights with
respect to the Pledged Bank Stock could be conditioned upon the satisfaction
of such obligation. Under the terms of the Indenture, the Trustee may not take
any action that would expose Holders of the Notes to liability under the
Capital Maintenance Agreement. See "Risk Factors and Other Considerations--
Regulatory Considerations Affecting Enforcement of Remedies Following an Event
of Default."
Certain Bankruptcy Limitations. The right of the Trustee to foreclose on and
dispose of the Collateral or to exercise voting rights with respect to the
Pledged Bank Stock upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Trust prior to the Trustee having
foreclosed on and disposed of the Collateral. Under the Bankruptcy Code, a
secured creditor such as the Trustee is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such debtor, without bankruptcy court approval. Moreover, the
Bankruptcy Code permits the debtor to continue to retain and use collateral
(and the proceeds, products, offspring, rents or profits of such collateral)
even though the debtor is in default under the applicable debt instruments,
provided that the secured creditor is given "adequate protection." The meaning
of the term "adequate protection" may vary according to circumstances, but it
is intended in general to protect the value of the secured creditor's interest
in the collateral and may include, if approved by the court, cash payments or
the granting of additional security for any diminution in the value of the
collateral as a result of the stay of repossession or disposition or any use
of the collateral by the debtor during the pendency of the bankruptcy case. In
view of the lack of a precise definition of the term "adequate protection" and
the broad discretionary powers of a bankruptcy court, it is impossible to
predict how long payments under the Notes could be delayed following
commencement of a bankruptcy case, whether or when the Trustee could repossess
or dispose of the Collateral or whether or to what extent Holders of the Notes
would be compensated for any delay in payment or loss of value of the
Collateral through the requirement of "adequate protection."
NONRECOURSE
The Old Notes are, and the New Notes will be, nonrecourse obligations of the
Trust, and the sole recourse for collection of principal, premium, if any, and
interest on the Notes will be against the Pledged Bank Stock and the other
Collateral. The Trust's obligations under the Notes are not guaranteed
directly or indirectly by the Trust or any of its subsidiaries (including the
Bank and its subsidiaries), and the Trust shall not be liable in any respect
(except to the extent of its interest in the Pledged Bank Stock and the other
Collateral) for the payment of any obligation due under the Notes. See "Risk
Factors and Other Considerations--Security for the Notes; Limited Recourse by
Noteholders," "--Security--Certain Regulatory Considerations" and "--
Security--Certain Bankruptcy Limitations."
A substantial portion of the business operations of the Trust is conducted
through its subsidiaries (including the Bank and its subsidiaries), and the
Trust is dependent on the cash flow of such subsidiaries to meet its
obligations, including its obligations under the Notes. Accordingly, the Notes
will be effectively subordinated to all existing and future liabilities of the
Trust's subsidiaries, including indebtedness and trade payables of the Trust's
subsidiaries and deposit liabilities of the Bank. The Trust is not liable in
any respect (except to the extent of its interest in the Pledged Bank Stock
and the other Collateral) for payment of any obligation due under the Notes.
As of December 31, 1997 on a pro forma basis after giving effect to the
Offering and the use of the proceeds therefrom, the outstanding indebtedness
of the Trust would have been approximately $6.0 billion (including $200
million with respect to the Notes offered hereby), and the Trust's
subsidiaries would have had outstanding liabilities of $5.8 billion (including
$5.6 billion of liabilities of the Bank and its subsidiaries). Subject to
certain limitations, the Trust and its subsidiaries may incur additional
Indebtedness in the future.
42
<PAGE>
SUBSTITUTION OF A NEW OBLIGOR UNDER THE INDENTURE
Requirements of Substitution of Obligor. The Trust may at any time on or
after January 1, 1999, so long as no Default or Event of Default has occurred
and is continuing under the Indenture, without the consent of the Holders of
the Notes and notwithstanding, except as set forth below, the other provisions
of the Indenture, transfer the Capital Stock of the Bank and any other
Collateral (in each case subject to the Lien of the Indenture) owned by the
Trust, make the Bank Contribution and contribute capital in the form of Cash
Equivalents, in each case to a corporation formed by the Trust (the "New
Obligor") and substitute (the "Substitution") the New Obligor as the debtor in
respect of all obligations arising from the Notes and the Indenture (as
amended as described in "--Certain Covenants of New Obligor"), including the
obligation to make a Change of Control Offer (as hereinafter defined) and to
purchase the Notes in connection therewith, if (a) the New Obligor is a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and, at the
time of the Substitution and immediately after giving effect thereto, the New
Obligor has no assets, other than ownership of such Capital Stock, such
Collateral, such Bank Contribution and such Cash Equivalents, no indebtedness
other than the Notes, and no operations, (b) the New Obligor has obtained all
necessary governmental approvals and authorizations for the Substitution,
including with respect to the ownership of the common stock and the Voting
Stock of the Bank, (c) if the Notes have been registered for resale with the
Commission, such Notes will continue to be so registered after the
Substitution, and if the Notes have not been so registered, the New Obligor
will assume the obligations of the Trust under the Registration Rights
Agreement, (d) no "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act), other than Permitted Holders, is or, as
a result of the Substitution, becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 50% of the
total voting power of the Voting Stock of the New Obligor, (e) at the time of
the Substitution, the New Obligor becomes the direct legal and beneficial
owner of all outstanding common stock and Voting Stock of the Bank owned by
the Trust immediately prior thereto, (f) the obligations of the New Obligor
under the Indenture and the Notes are secured by a first priority perfected
security interest in the Pledged Bank Stock and the other Collateral, if any,
(g) legal opinions, in form and substance satisfactory to the Trustee, shall
have been delivered to the Trustee (from whom copies will be available) (in
each case dated the date of the Substitution) from independent legal counsel
selected by the Trust and reasonably satisfactory to the Trustee, confirming,
as appropriate and with respect to applicable law, that upon the Substitution
taking place (1) the requirements of the Indenture and the Notes as to the
giving of notice to the Holders of the Notes have been met, (2) the Notes and
the Indenture (as amended as described in "--Certain Covenants of New
Obligor") and the Registration Rights Agreement are legal, valid and binding
obligations of the New Obligor enforceable in accordance with their terms
under the laws of the State of New York and the jurisdiction of organization
of the New Obligor, (3) the Trustee, on behalf of the Holders of the Notes,
has a valid perfected first priority security interest in the Collateral, (4)
the New Obligor is not required to be registered as an investment company
under the Investment Company Act of 1940, (5) the new Obligor has all
necessary government authorizations and approvals with respect to the
Substitution and no registration with respect to the transfer is required by
any state or federal securities law that has not been obtained, (6) the
Substitution and related transfers described above will not constitute a
fraudulent conveyance, and (7) the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
the Substitution and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
had the Substitution not occurred, (h) immediately after giving effect to the
Substitution on a pro forma basis, no Default or Event of Default under the
Notes or the Indenture (as amended as described in "--Certain Covenants of New
Obligor") will have occurred and be continuing, (i) immediately after giving
effect to the Substitution on a pro forma basis, the Consolidated Net Worth of
the Bank is equal to or greater than the Consolidated Net Worth of the Bank
immediately prior to the Substitution and the Consolidated Net Worth of the
New Obligor is positive (determined, in the case of the New Obligor, excluding
the Bank and its subsidiaries and the Notes), and the Trustee, on behalf of
the Holders of the Notes, will have received a solvency opinion from a
nationally recognized expert as to the solvency of the New Obligor after
giving effect to the Substitution, (j) the New
43
<PAGE>
Obligor expressly assumes, by a supplemental indenture in form satisfactory to
the Trustee, the Trust's obligation for the due and punctual payment of the
principal of, premium, if any, and interest on all the Notes and the
performance and observance of every covenant of the Indenture (as amended as
described in "--Certain Covenants of New Obligor") on the part of the Trust to
be performed or observed and (k) at the time of the Substitution the Trust
will have delivered, or caused to be delivered, in form and substance
reasonably satisfactory to the Trustee, an Officers' Certificate and an
Opinion of Counsel, each stating that the Substitution, and the supplemental
indenture required in connection therewith, comply with the requirements of
the Indenture and that all conditions precedent therein provided for relating
to such transaction have been complied with.
Upon consummation of the Substitution in accordance with the terms of the
Indenture, the New Obligor shall succeed to, and be substituted for, and may
exercise every right and power of, the Trust under the Indenture (as amended
as described in "--Certain Covenants of New Obligor") and the Notes, except as
specifically provided in the Indenture. When the New Obligor assumes all the
obligations of the Trust under the Indenture (as amended as described in "--
Certain Covenants of New Obligor"), the Notes and the Registration Rights
Agreement, the Trust shall be released from those obligations.
Nonrecourse. The Notes will be nonrecourse obligations of the New Obligor
and the sole recourse for collection of principal, premium, if any, and
interest on the Notes will be against the Pledged Bank Stock and the other
Collateral. The New Obligor's obligations under the Notes will not be
guaranteed directly or indirectly by the New Obligor or any of its
subsidiaries (including the Bank and its subsidiaries) or by the Trust, and
the New Obligor shall not be liable in any respect (except to the extent of
its interest in the Pledged Bank Stock and the other Collateral) for the
payment of any obligation due under the Notes. See "Risk Factors and Other
Considerations--Security for the Notes; Limited Recourse by Noteholders," "--
Security--Certain Regulatory Considerations" and "--Security--Certain
Bankruptcy Limitations."
Revision of Covenants. Upon consummation of the Substitution, and pursuant
to the supplemental indenture to be entered into by the New Obligor, the
Trustee and the Trust in connection therewith, each reference in the Indenture
and the Notes to the Trust will be amended to be a reference to the New
Obligor. Additionally, certain covenants and definitions in the Indenture will
be added, deleted or amended and restated in their entirety to read as set
forth under "--Certain Covenants of New Obligor."
Payment of Bank Contribution. On the Substitution Date and immediately prior
to the Substitution, the Trust will, at its option, either (a) make a cash
capital contribution to the Bank or (b) make a cash payment or contribution to
the New Obligor that will be deposited into the Bank Contribution Collateral
Account (the amount referred to in this clause (b) is the "Bank Contribution
Collateral"), in either case in an amount equal to the Bank Contribution. The
Trustee will have a first priority lien on and security interest in the Bank
Contribution Collateral and the Bank Contribution Collateral Account. So long
as no Event of Default has occurred and is continuing, the Bank Contribution
Collateral may be used, at the written direction of the New Obligor, for the
payment of interest on the Notes.
Security Interest in Tax Sharing Payments. On and after the Substitution
Date, the New Obligor will cause the B.F. Saul Real Estate Investment Trust to
deposit, or cause to be deposited, in a collateral account in favor of the New
Obligor (the "Tax Collateral Account"), that portion of any Tax Sharing
Payment made by the Bank and its subsidiaries to the B.F. Saul Real Estate
Trust and its subsidiaries (other than the Bank and its subsidiaries), in an
amount equal to the benefit, if any, under the Tax Sharing Agreement, accruing
to the New Obligor as a result of interest expense on the Notes. The New
Obligor will have a first priority security interest in the Tax Collateral
Account until the time such amounts are paid to the New Obligor. So long as no
Event of Default has occurred and is continuing, the amount on deposit in the
Tax Collateral Account may be used, at the direction of the New Obligor, for
the payment of interest on the Notes.
REDEMPTION
The Notes will be redeemable at the option of the Trust, as a whole or from
time to time in part, at any time on or after April 1, 2003 at the redemption
prices (expressed as percentages of principal amount) set forth below,
44
<PAGE>
together with accrued and unpaid interest, if any, to but excluding the date
of redemption, if redeemed during the 12-month period beginning on April 1 of
the years indicated below (subject to the right of holders of record on
relevant record dates to receive interest due on the related interest payment
date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003............................................................ 104.875%
2004............................................................ 103.250%
2005............................................................ 101.625%
2006 and thereafter............................................. 100.000%
</TABLE>
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date
by the Trustee by such method as the Trustee will deem fair and appropriate;
provided, however, that no such partial redemption will reduce the principal
amount of a Note not redeemed to less than $1,000. Notice of redemption will
be mailed, first-class postage prepaid, at least 30 but not more than 60 days
before the date of redemption to each holder of Notes to be redeemed at its
registered address. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption and accepted for
payment.
In addition, at any time prior to April 1, 2003, the Notes will be
redeemable at the option of the Trust, in whole or in part, on not less than
30 nor more than 60 days' prior written notice to each holder of Notes to be
redeemed at a redemption price equal to the sum of (x) the principal amount
thereof, plus (y) accrued and unpaid interest, if any, to the applicable date
of redemption, plus (z) the Applicable Premium.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness. (a) The Trust will not create, issue, assume,
guarantee or otherwise in any other manner become directly or indirectly
liable for the payment of, or otherwise incur (collectively, "incur") any
Indebtedness (including any Acquired Indebtedness), other than Permitted
Indebtedness, unless at the time of such incurrence the Trust's Operating Cash
Flow Coverage Ratio for the four full fiscal quarters immediately preceding
the incurrence of such Indebtedness, taken as one period and after giving pro
forma effect to (i) the incurrence of such Indebtedness (and all other
Indebtedness incurred since the end of the most recently completed fiscal
quarter of the Trust preceding the date of determination) and (if applicable)
the application of the net proceeds therefrom (and from any such other
Indebtedness), including to refinance other Indebtedness, as if such
Indebtedness (and any such other Indebtedness) had been incurred on the first
day of such four-quarter period and (ii) the acquisition (whether by purchase,
merger or otherwise) or disposition (whether by sale, merger or otherwise) of
any company, entity or business acquired or disposed of by the Trust or its
Restricted Subsidiaries, as the case may be, since the first day of such four
quarter period, as if such acquisition or disposition occurred on the first
day of such four quarter period, would have been greater than or equal to (x)
2.0 to 1.0 prior to April 1, 1999, (y) 2.25 to 1.0 on and after April 1, 1999
and prior to April 1, 2000 and (z) 2.50 to 1.0 thereafter.
(b) The Trust will not permit any of its Restricted Subsidiaries (other than
the Bank and its Subsidiaries) to incur any Indebtedness (including any
Acquired Indebtedness), other than Permitted Subsidiary Indebtedness.
Limitation on Restricted Payments. (a) The Trust will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, take any
of the following actions:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Capital Stock of the Trust (other than dividends or
distributions payable solely in shares of the Qualified Capital Stock of
the Trust or in options, warrants or other rights to acquire such shares of
Qualified Capital Stock);
45
<PAGE>
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any Capital Stock of the Trust or any direct or indirect
parent of the Trust or any options, warrants or other rights to acquire
such Capital Stock;
(iii) declare or pay any dividend on, or make any distribution to holders
of, any Capital Stock of any Restricted Subsidiary (other than with respect
to (A) any such Capital Stock held by the Trust or any of its Wholly Owned
Restricted Subsidiaries, (B) any such Capital Stock of the Bank or any of
its Subsidiaries or (C) to all holders of such Capital Stock of any
Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary on a
pro rata basis or, with respect to such dividend or distribution to the
Trust or a Wholly Owned Restricted Subsidiary, on a more advantageous
basis) or purchase, redeem or otherwise acquire or retire for value, any
Capital Stock of any Subsidiary of the Trust (other than (A) any such
Capital Stock of any Wholly Owned Restricted Subsidiary, (B) any Capital
Stock held by the Bank or its Subsidiaries of any of their Subsidiaries or
(C) any Capital Stock of any Securitization Entity that is a Subsidiary of
the Bank);
(iv) make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Subordinated
Indebtedness;
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Trust (other than with respect to (A) guarantees of
Indebtedness of any Wholly Owned Restricted Subsidiaries of the Trust by
the Trust or by any Restricted Subsidiary (other than the Bank or any of
its Subsidiaries), (B) guarantees of Indebtedness of the Bank or any of its
Subsidiaries by another Subsidiary of the Bank or any guarantee by the Bank
of Indebtedness of its Subsidiaries), (C) guarantees of Indebtedness of the
Trust by any Restricted Subsidiary (other than the Bank and its
Subsidiaries) or (D) guarantees of Indebtedness of the Bank or its
Subsidiaries by any Affiliate of the Trust); or
(vi) make any Investment in any Person
(each of the foregoing actions described in (but not excluded from) clauses
(i) through (vi), other than any such action that is a Permitted Payment (as
defined below), is referred to herein as a "Restricted Payment"), provided
that such Restricted Payments may be made by the Trust or any Restricted
Subsidiary (other than the Bank and its Subsidiaries) if, after giving effect
to the proposed Restricted Payment (the amount of any such Restricted Payment,
if other than cash, as determined in good faith by the Board of Trustees of
the Trust, whose determination shall be conclusive and evidenced by a Board
Resolution), (1) no Default or Event of Default shall have occurred and be
continuing and (2) the aggregate amount of all such Restricted Payments
declared or made after the date of the Indenture shall not exceed the sum
(without duplication) of:
(A) 50% of the aggregate Consolidated Net Income (Loss) of the Trust
accrued on a cumulative basis during the period beginning on October 1,
1997 and ending on the last day of the Trust's last fiscal quarter ending
prior to the Interest Payment Date immediately preceding the date of such
proposed Restricted Payment (or, if such Consolidated Net Income (Loss)
shall be a loss, minus 100% of such loss);
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of shares of Qualified Capital Stock of the Trust or
warrants, options or rights to purchase such shares of Qualified Capital
Stock of the Trust;
(C) the aggregate net cash proceeds received after the date of the
Indenture by the Trust as capital contributions;
(D) the aggregate net cash proceeds received after the date of the
Indenture by the Trust (other than from any of its Subsidiaries) upon the
exercise of options, warrants or rights to purchase shares of Qualified
Capital Stock of the Trust;
(E) the aggregate net cash proceeds received after the date of the
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of debt securities that have been converted into or exchanged
for Qualified Capital Stock of the Trust, together with the aggregate net
cash proceeds received by the Trust at the time of such conversion or
exchange; and
(F) $20 million;
46
<PAGE>
provided that the provisions of paragraph (a) will not restrict the payment of
any dividend within 60 days after the date of declaration thereof if, at such
date of declaration, such declaration and payment were permitted by the
provisions of paragraph (a).
(b) Notwithstanding paragraph (a) above, the Trust and its Restricted
Subsidiaries may take the following actions (each a "Permitted Payment") so
long as (other than with respect to (1) clause (v) below to the extent such
exchange is required by the OTS and (2) clause (ix) below with respect to the
Investment of funds by the Bank and its subsidiaries in the normal course of
business) no Default or Event of Default shall have occurred and be
continuing:
(i) the purchase, redemption or other acquisition or retirement for value
of any shares of Capital Stock of the Trust, in exchange for, or out of the
net cash proceeds of, a substantially concurrent issuance and sale (other
than to any of its Subsidiaries) of, shares of Qualified Capital Stock of
the Trust;
(ii) (A) the repurchase, redemption, defeasance or other acquisition or
retirement for value by the Bank of the 13% Preferred Stock or the Series B
Preferred Stock, in exchange for, or out of the net cash proceeds of, a
substantially concurrent issuance and sale (other than to a Subsidiary of
the Trust) of, shares of Qualified Capital Stock of the Bank or out of the
net cash proceeds of a substantially concurrent incurrence (other than to a
Subsidiary of the Trust) of new Indebtedness of the Bank which has no
Stated Maturity of principal (or any required repurchase, redemption,
defeasance or sinking fund payments, other than as a result of a change of
control provision similar to the Notes) on or prior to the final Stated
Maturity of principal of the Notes or (B) the acquisition by an Affiliate
of the Bank of the 13% Preferred Stock or the Series B Preferred Stock (and
the contribution thereof to the Bank for retirement and cancellation) with
the proceeds of a cash distribution from the Bank out of the net cash
proceeds of a substantially concurrent issuance and sale (other than to a
Subsidiary of the Trust) of shares of Qualified Capital Stock of the Bank
or out of the net cash proceeds of a substantially concurrent incurrence
(other than to a Subsidiary of the Trust) of new Indebtedness of the Bank
which has no Stated Maturity of principal (or any required repurchase,
redemption, defeasance or sinking fund payments, other than as a result of
a change of control provision similar to the Notes) on or prior to the
final Stated Maturity of principal of the Notes; provided that, after
giving effect to such issuance and sale or such incurrence and such
repurchase, redemption, defeasance or other acquisition or retirement, or
such acquisition and contribution and distribution, the Bank has (i) a
leverage (core) capital ratio equal to or in excess of 5.5%, (ii) a tier 1
risk-based capital ratio equal to or in excess of 6.5% and (iii) a total
risk-based capital ratio equal to or in excess of 11%, as such ratios are
calculated in accordance with 12 C.F.R. Section 567 or any successor law or
regulation;
(iii) the repurchase, redemption, defeasance or other acquisition or
retirement for value by the Bank or any of its Subsidiaries of Preferred
Stock of the Bank or its Subsidiaries (other than the 13% Preferred Stock
and the Series B Preferred Stock); provided that, after giving effect to
such repurchase, redemption, defeasance or other acquisition or retirement,
the Bank has (i) a leverage (core) capital ratio equal to or in excess of
5.5%, (ii) a tier 1 risk-based capital ratio equal to or in excess of 6.5%
and (iii) a total risk-based capital ratio equal to or in excess of 11%, as
such ratios are calculated in accordance with 12 C.F.R. Section 567 or any
successor law or regulation;
(iv) the redemption by the Bank of any of the PIK Preferred Stock;
(v) the exchange of the CCPCC Preferred Stock for the Series B Preferred
Stock;
(vi) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness (other than
Redeemable Capital Stock) in exchange for or out of the net cash proceeds
of a substantially concurrent issuance and sale (other than to a Subsidiary
of the Trust) of shares of Qualified Capital Stock of the Trust;
(vii) the repurchase of any Subordinated Indebtedness at a purchase price
not greater than 101% of the principal amount of such Subordinated
Indebtedness in the event of a Change of Control pursuant to a provision
similar to the "Purchase of Notes upon a Change of Control" covenant;
provided that prior to such repurchase the Trust has made the Change of
Control Offer as provided in such covenant with respect
47
<PAGE>
to the Notes and has repurchased all Notes validly tendered for payment in
connection with such Change of Control Offer;
(viii) guarantees by the Trust or its Restricted Subsidiaries of
Indebtedness pursuant to the Reimbursement Agreement in an aggregate amount
not to exceed $150 million;
(ix) Permitted Investments;
(x) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any shares of Qualified Capital Stock of
the Bank (other than Preferred Stock) by the Bank; and
(xi) the repurchase, redemption or other acquisition or retirement for
value of Subordinated Indebtedness (other than Redeemable Capital Stock),
in exchange for, or out of the net cash proceeds of a substantially
concurrent issue and sale (other than to a Subsidiary of the Trust) of new
Subordinated Indebtedness (such a transaction, a "refinancing"); provided
that any such new Indebtedness of the Trust (A) shall be in a principal
amount that does not exceed an amount equal to the sum of (1) 101% of an
amount equal to the principal amount so refinanced less any discount from
the face amount of the Indebtedness to be refinanced expected to be
deducted from the amount payable to the holders of such Indebtedness in
connection with such refinancing, (2) the amount of any premium expected to
be paid in connection with such refinancing pursuant to the terms of the
Subordinated Indebtedness refinanced or the amount of any premium
reasonably determined by the Trust as necessary to accomplish such
refinancing by means of a tender offer, privately negotiated repurchase or
otherwise and (3) the amount of expenses of the Trust incurred in
connection with such refinancing; provided further that for purposes of
this clause (A), the principal amount of any Indebtedness shall be deemed
to mean the principal amount thereof or, if such Indebtedness provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination; (B) (x) if such refinanced Subordinated Indebtedness has an
Average Life to Stated Maturity shorter than that of the Notes or a final
Stated Maturity earlier than the final Stated Maturity of the Notes, such
new Indebtedness shall have an Average Life to Stated Maturity no shorter
than the Average Life to Stated Maturity of such refinanced Indebtedness
and a final Stated Maturity no earlier than the final stated Maturity of
such refinanced Indebtedness or (y) in all other cases, each Stated
Maturity of principal (or any required repurchase, redemption or sinking
fund payments) of such new Indebtedness shall be on or after the final
Stated Maturity of principal of the Notes; and (C) is (x) made expressly
subordinate to the Notes to substantially the same extent as the
Subordinated Indebtedness being refinanced or (y) expressly subordinated to
such refinanced Subordinated Indebtedness.
The actions described in clauses (i), (vi) and (vii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be taken in accordance
with this paragraph (b) but shall reduce the amount that would otherwise be
available for Restricted Payments under clause (2) of paragraph (a) above to
the extent, in the case of clauses (i) and (vi), the Trust receives net cash
proceeds and applies them as described in such clauses (i) and (vi), and the
actions described in clauses (ii), (iii), (iv), (v), (viii), (ix), (x) and
(xi) of this paragraph (b) shall be Restricted Payments that shall be
permitted to be taken in accordance with this paragraph (b) and shall not
reduce the amount that would otherwise be available for Restricted Payments
under clause (2) of paragraph (a).
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Trust (i) will not permit any of its Restricted Subsidiaries
(other than the Bank and its Subsidiaries) to issue any Capital Stock (other
than to the Trust or a Wholly Owned Restricted Subsidiary of the Trust) and
(ii) other than with respect to Capital Stock of the Bank and its
Subsidiaries, will not permit any Person (other than the Trust, a Wholly Owned
Restricted Subsidiary of the Trust or the Bank and its Subsidiaries) to own
any Capital Stock of any of its Restricted Subsidiaries; provided, however,
that this covenant shall not prohibit (1) the issuance and sale of all, but
not less than all, of the issued and outstanding Capital Stock of any
Restricted Subsidiary owned by the Trust or any of its Restricted Subsidiaries
in compliance with the other provisions of the Indenture, (2) the ownership by
directors of director's qualifying shares or the ownership by foreign
nationals of Capital Stock of any Restricted Subsidiary, to the extent
mandated by applicable law or (3) the ownership by any Person of any Capital
Stock of any Restricted Subsidiary of the Trust that is not a Wholly Owned
Restricted Subsidiary on the
48
<PAGE>
date of the Indenture; provided further, however, that the Bank will not, and
will not permit any Subsidiary of the Bank to, create any class of common
stock if such class of common stock provides for, or entitles any holder
thereof to, the payment of dividends or distributions of any kind on any basis
other than on a pro rata basis, consistent with the ownership interests of all
the holders of the common stock of the Bank or such Subsidiary, to the holders
of all classes of common stock of the Bank or such Subsidiary, as the case may
be.
Limitation on Dividends from the Bank and its Subsidiaries. Notwithstanding
anything to the contrary contained herein, neither the Bank nor any of its
Subsidiaries will make any distribution on or with respect to their respective
shares of Capital Stock representing a return of capital to the holder
thereof; provided, however, this provision shall not prohibit (1) any such
distribution from a Wholly Owned Subsidiary of the Bank to the Bank or another
Wholly Owned Subsidiary of the Bank or (2) any such distribution by the Bank
or a Subsidiary of the Bank that is not a Wholly Owned Subsidiary of the Bank
(x) to a Person that is not an Affiliate of the Bank and (y) to a Person that
is an Affiliate of the Bank on a pro rata basis or a less advantageous basis;
provided that this clause (2) shall not prohibit a transaction otherwise
permitted pursuant to clause (b)(x) of the "Limitation on Restricted Payments"
covenant.
Limitation on Transactions with Affiliates. (a) The Trust will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property
or services) with any Affiliate of the Trust (except that the Bank and any of
its Subsidiaries may enter into any transaction or series of related
transactions with any Subsidiary of the Bank, and the Trust and any Wholly
Owned Restricted Subsidiary of the Trust may enter into any transaction or
series of related transactions with any other Wholly Owned Restricted
Subsidiary of the Trust without limitation under this covenant) unless (1)
such transaction or series of related transactions is in writing on terms that
are no less favorable to the Trust or such Restricted Subsidiary, as the case
may be, than would be available in a comparable transaction in an arm's-length
dealing with a Person that is not such an Affiliate or, in the absence of such
a comparable transaction, on terms that in good faith would be offered to a
Person that is not an Affiliate, (2) with respect to any transaction or series
of related transactions in which the Trust and its Restricted Subsidiaries
will receive or render value or incur obligations or make aggregate payments
in excess of $5,000,000, the Trust delivers an Officers' Certificate to the
Trustee certifying that such transaction or series of related transactions
complies with clause (1) above and such transaction or series of related
transactions has been approved by a majority of the Disinterested Trustees of
the Board of Trustees of the Trust and (3) with respect to any transaction or
series of related transactions in which the Trust and its Restricted
Subsidiaries will receive or render value or incur obligations or make
aggregate payments in excess of $20,000,000, or in the event no members of the
Board of Trustees of the Trust are Disinterested Trustees with respect to any
transaction or series of related transactions included in clause (2), the
Trust delivers to the Trustee a written opinion of a nationally recognized
expert with experience in appraising the terms and conditions of the type of
transaction or series of transactions for which approval is required to the
effect that the transaction or series of transactions are fair to the Trust
and its Restricted Subsidiaries from a financial point of view; provided,
however, that this covenant will not restrict (i) residential mortgage, credit
card and other consumer loans to an Affiliate who is an officer, director or
employee of the Trust or any of its Subsidiaries, (ii) any transaction or
series of related transactions in which the total amount involved does not
exceed $100,000, (iii) payment of legal expenses incurred on behalf of the
Trust or its Subsidiaries; provided, however, that such expenses paid by the
Bank and its Subsidiaries for or on behalf of the Trust or any other
Restricted Subsidiary (other than a Subsidiary of the Bank) shall not exceed
$500,000 in any fiscal year, (iv) payment of construction and development fees
incurred on behalf of the Trust or its Restricted Subsidiaries in an aggregate
amount not to exceed $1,000,000 in any fiscal year, after adjustment for
annual increases in the consumer price index, as reported by the United States
Department of Labor, Bureau of Labor Statistics, (v) payment of financing fees
of up to 1% of the aggregate principal amount of Retail Notes issued and sold
after the date of the Indenture, (vi) transactions permitted under the
"Limitation on Restricted Payments" covenant, (vii) payment of up to
$4,200,000 of Advisory Fees in any fiscal year, after adjustment for annual
increases in the consumer price index, as reported by the United States
Department of Labor, Bureau of Labor Statistics, (viii) transactions entered
into pursuant to Management Agreements, (ix) checking or other deposit
products and investment management and advisory
49
<PAGE>
services and insurance products, in each case that the Bank and its
subsidiaries customarily offer to their respective customers in the ordinary
course of business, (x) guarantees under the Reimbursement Agreement, (xi)
payments pursuant to the Tax Sharing Agreement and (xii) payments by the Trust
to the Bank pursuant to the Capital Maintenance Agreement; provided, however,
that Advisory Fees may only be paid so long as (A) the Trust does not hire
employees and (B) no Default or Event of Default shall have occurred and be
continuing.
(b) If the Bank shall fail to comply with any of its Regulatory Capital
Requirements set forth in clauses (i) and (ii)(x) of the definition thereof,
then the Trust shall not and shall not permit any of its Restricted
Subsidiaries (other than the Bank or its Subsidiaries) to, directly or
indirectly, make any payments pursuant to clauses (a)(iii), (iv) or (v) above,
any Restricted Payments otherwise permitted by clause (a)(2) of the
"Limitation on Restricted Payments" covenant, any Permitted Payments, other
than actions permitted by clauses (iv), (v), (viii) and (xi) of paragraph (b)
of the "Limitation on Restricted Payments" covenant, or any Investments in any
Person (other than Permitted Investments permitted by clauses (i), (v), or
(vii) of the definition thereof) or otherwise engage in any activity
(including purchases, acquisition by lease and other acquisitions of
additional real property and buildings) other than operating its then existing
businesses in the ordinary course until the Bank shall have complied with such
Regulatory Capital Requirements.
(c) The Trust will not, and will not permit any of its Restricted
Subsidiaries, to amend, modify or in any way alter the terms of the Management
Agreements, the Reimbursement Agreement or the Advisory Agreement in a manner
adverse to the interests of the Holders of the Notes, except as otherwise
permitted by the Indenture or to change the properties subject to the
Management Agreements.
Limitation on Liens. The Trust will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, for the benefit of any Affiliate of the
Trust (other than the Trust or a Wholly Owned Restricted Subsidiary of the
Trust) create, incur, assume or suffer to exist any Lien of any kind on or
with respect to any of its or their property or assets, including any shares
of stock or indebtedness of any Restricted Subsidiary, whether owned at the
date of the Indenture or thereafter acquired or any income, profits or
proceeds therefrom, or assign or otherwise convey any right to receive income
thereon; provided, however, that the Bank may create, incur, assume or suffer
to exist such Liens for the benefit of its Subsidiaries and Subsidiaries of
the Bank may create, incur, assume or suffer to exist such Liens for the
benefit of the Bank or any other Subsidiary of the Bank.
Restriction on Transfer of Assets to Subsidiaries. The Trust will not sell,
convey, transfer or otherwise dispose of its assets or property to any of its
Subsidiaries except for (i) sales, conveyances, transfers or other
dispositions of assets or property in an amount permitted by the "Limitation
on Restricted Payments" covenant and (ii) sales, conveyances, transfers or
other distributions of Real Estate Property to Single Asset Subsidiaries.
Limitation on Sale of Assets. The Trust will not, and will not permit any of
its Restricted Subsidiaries (other than the Bank and its Subsidiaries) to,
engage in any Asset Sale unless (i) the consideration received by the Trust or
such Restricted Subsidiary for such Asset Sale is not less than the fair
market value of the Capital Stock or assets sold (as determined by the Board
of Trustees of the Trust, whose determination shall be conclusive and
evidenced by a Board Resolution) and (ii) the consideration received by the
Trust or the relevant Restricted Subsidiary in respect of such Asset Sale
consists of (a) at least 75% Cash Equivalents or (b) like-kind property to be
used in the business of the Trust or such Restricted Subsidiary, as the case
may be.
Limitation on Restricted Subsidiaries. The Trust will not (i) permit any of
its Single Asset Subsidiaries to acquire additional Real Estate Property or
make Investments in any other Person other than the Trust, or (ii) create any
new Restricted Subsidiaries other than Single Asset Subsidiaries and, to the
extent permitted by clause (ii) of the definition of Permitted Investments,
Wholly Owned Restricted Subsidiaries; provided, however, that such Single
Asset Subsidiaries may (A) invest current working capital in Cash Equivalents
under clauses (a), (b), (c) and (d) of the definition thereof and (B) to the
extent required by third party lenders under any loan agreement with such
Subsidiary, invest cash balances in investments other than Cash Equivalents
under clause (a), (b), (c) and (d) of the definition thereof to the extent
required by such loan agreement.
50
<PAGE>
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Trust will not, and will not permit any of its Restricted
Subsidiaries (other than (i) the Bank and its Subsidiaries and (ii) any
Restricted Subsidiary that was a subsidiary of the Trust on or before March
30, 1994 and has not received Real Estate Property from the Trust after such
date) to, directly or indirectly, create or otherwise cause or suffer to exist
or become effective any encumbrance or restriction on the ability of any such
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on or in respect of its Capital Stock or any other
interest or participation in, or measured by, its profits, (b) pay any
Indebtedness owed to the Trust or any other Restricted Subsidiary, (c) make
loans or advances to the Trust or any other Restricted Subsidiary, (d)
transfer any of its properties or assets to the Trust or any Restricted
Subsidiary or (e) guarantee any Indebtedness of the Trust or any Restricted
Subsidiary, except for such encumbrances or restrictions existing under or by
reason of (i) any agreement in effect on the date of the Indenture, (ii)
applicable law, (iii) customary non-assignment provisions of any lease
governing a leasehold interest or equipment of the Trust or any Restricted
Subsidiary, (iv) customary due on sale and other restrictions on transfer
contained in mortgages and deeds of trust, (v) any agreement entered into in
connection with the acquisition, development, construction or improvement of
real property so long as such agreement is required by a third party prior to
extending credit, (vi) the Indenture and (vii) any agreement that extends,
renews, refinances or replaces the agreements containing the encumbrances or
restrictions in the foregoing clauses (i) and (v), provided that the terms and
conditions of any such encumbrance or restriction are not materially less
favorable to the Holders of the Notes than those under or pursuant to the
agreement so extended, renewed, refinanced or replaced and, with respect to
clause (v), such encumbrance or restriction is required as a condition of such
third party extending credit pursuant to such extension, renewal, refinancing
or replacement.
Required Stock Ownership. (a) The Trust will at all times be the legal and
beneficial owner of the Pledged Bank Stock and will not sell, transfer or
otherwise dispose of any Capital Stock of the Bank regardless of when
acquired. The Trust will at all times be the legal and beneficial owner in the
aggregate of at least 66 2/3% of the issued and outstanding common stock of
the Bank and Voting Stock representing at least 66 2/3% of the voting power of
the Voting Stock of the Bank. All the Pledged Bank Stock and such shares of
the common stock of the Bank and Voting Stock representing at least 66 2/3% of
the voting power of the Voting Stock of the Bank as are necessary to ensure
that the Trust beneficially and legally owns 66 2/3% of the issued and
outstanding Voting Stock and common stock of the Bank will be referred to as
"Restricted Shares."
(b) The Trust will not create or permit to exist any Lien on any Restricted
Shares directly owned by it, other than the Lien of the Indenture.
(c) The Trust will not create or permit to exist any Lien on the Collateral
other than the Lien of the Indenture.
Purchase of Notes upon a Change of Control. If a Change of Control shall
occur at any time, then each Holder of Notes will have the right to require
that the Trust purchase such Holder's Notes, in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of purchase (the "Change
of Control Purchase Date"), pursuant to the offer described below (the "Change
of Control Offer") and the other procedures set forth in the Indenture.
Within 30 days following any Change of Control, the Trust shall notify the
Trustee thereof and give written notice of such Change of Control to each
Holder of Notes by first-class mail, postage prepaid, at the address of such
Holder appearing in the Security Register, stating, among other things, (i)
the Change of Control Purchase Price and the Change of Control Purchase Date,
which shall be a Business Day no earlier than 30 days nor later than 60 days
from the date such notice is mailed, or such later date as is necessary to
comply with requirements under the Exchange Act or any applicable securities
laws or regulations; (ii) that any Note not tendered will continue to accrue
interest; (iii) that, unless the Trust defaults in the payment of the Change
of Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest
51
<PAGE>
after the Change of Control Purchase Date; and (iv) certain other procedures
that a holder of Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Trust will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by Holders of the
Notes seeking to accept the Change of Control Offer. The failure of the Trust
to make or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due would result in an Event of Default and would give the
Trustee and the Holders of the Notes the rights described under "--Events of
Default."
Neither the Trust's Board of Trustees nor the Trustee would have the
authority to rescind or limit the application of this provision, including in
connection with any transaction initiated or supported by the Trust, its
management or any affiliate.
One of the events which constitutes a Change of Control under the Indenture
is under certain circumstances (other than in connection with the
Substitution) the disposition of "all or substantially all" of the Trust's
assets. This term has not been interpreted under New York law (which is the
governing law of the Indenture) to represent a specific quantitative test. As
a consequence, in the event Holders of the Notes elect to require the Trust to
purchase the Notes upon the occurrence of such a disposition and the Trust
elects to contest such election, there can be no assurance as to how a court
interpreting New York law would interpret this phrase.
The Trust will comply with the applicable tender offer rules, including Rule
14e-1 under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
See "Certain Definitions" for the definition of "Change of Control." A
transaction involving the Trust's management or its affiliates, or a
transaction involving a recapitalization of the Trust, will result in a Change
of Control only if it is the type of transaction specified by such definition.
Notwithstanding anything to the contrary contained herein, under the terms
of the Indenture, the Substitution, made in compliance with the provisions of
the Indenture, will not constitute a Change of Control.
Reports. The Trust will file on a timely basis with the Commission, to the
extent such filings are accepted by the Commission and whether or not the
Trust has a class of securities registered under the Exchange Act, the annual
reports, quarterly reports and other documents that the Trust would be
required to file if it was subject to Section 13(a), 13(c) or 15(d) of the
Exchange Act. The Trust will also be required (a) to file with the Trustee,
and provide to each Holder of Notes upon request, without cost to such Holder,
copies of such reports and documents within 15 days after the date on which
the Trust files such reports and documents with the Commission or the date on
which the Trust would be required to file such reports and documents if the
Trust were so required, and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at the Trust's cost copies of such reports and
documents to any prospective holder of Notes promptly upon written request.
Additionally, upon the request of any Holder or prospective holder of the
Notes, the Trust will provide consolidated financial statements of the Bank
and its subsidiaries on an annual and quarterly basis.
Additional Covenants. The Indenture will also contain covenants with respect
to, among others, the following matters: (i) payment of principal, premium and
interest; (ii) maintenance of an office or agency in The City of New York for
payment or for registration of transfer or exchange of the Notes; (iii)
arrangements regarding the handling of money held in trust; (iv) maintenance
of corporate existence; (v) prohibitions on certain actions that would affect
the ability of holders of the Bank's Capital Stock to effect certain corporate
governance matters; (vi) payment of taxes and other claims; (vii) maintenance
of properties; (viii) maintenance of insurance; (ix) limitation on disposal
of, or liens on, the Collateral; (x) restriction on use of proceeds of the
Offering to purchase securities; and (xi) the Trust's use of its best efforts
to obtain a rating on the Notes by S&P and Moody's. The Indenture will also
restrict payments by the Trust or any of its Restricted Subsidiaries for
consent
52
<PAGE>
to amendments of any terms of the Indenture, unless such payments are made to
all Holders that provide such consent.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Except with respect to the Substitution as set forth under "--Substitution
of New Obligor under the Indenture," the Trust will not, in a single
transaction or through a series of related transactions, consolidate with or
merge with or into any other Person, or sell, assign, convey, transfer, lease
or otherwise dispose of all or substantially all of its properties and assets
to any other Person or Persons or permit any of its Restricted Subsidiaries to
enter into any such transaction or series of related transactions if such
transaction or series of related transactions, in the aggregate, would result
in the sale, assignment, conveyance, transfer, lease or other disposition of
all or substantially all of the properties and assets of the Trust and its
Restricted Subsidiaries on a consolidated basis to any other Person or
Persons, unless at the time and immediately after giving effect thereto (i)
either (a) the Trust will be the continuing Person or (b) the Person (if other
than the Trust) formed by such consolidation or into which the Trust or such
Restricted Subsidiary is merged or the Person that acquires by sale,
assignment, conveyance, transfer, lease or other disposition all or
substantially all the properties and assets of the Trust and its Restricted
Subsidiaries on a consolidated basis (the "Surviving Entity") (1) will be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and (2) will
expressly assume, by a supplemental indenture in form satisfactory to the
Trustee, the Trust's obligation for the due and punctual payment of the
principal of, premium, if any, and interest on all the Notes and the
performance and observance of every covenant of the Indenture on the part of
the Trust to be performed or observed; (ii) immediately before and immediately
after giving effect to such transaction or series of transactions on a pro
forma basis (and treating any obligation of the Trust or any Restricted
Subsidiary incurred in connection with or as a result of such transaction or
series of transactions as having been incurred at the time of such
transaction), no Default or Event of Default will have occurred and be
continuing; and (iii) immediately after giving effect to such transaction or
series of transactions on a pro forma basis (and treating any obligation of
the Trust or any Restricted Subsidiary incurred in connection with or as a
result of such transaction or series of transactions as having been incurred
at the time of such transaction), the Consolidated Net Worth of the Trust (or
of the Surviving Entity if the Trust is not a continuing obligor under the
Indenture) is equal to or greater than the Consolidated Net Worth of the Trust
immediately prior to such transaction or series of transactions less the
aggregate amount of all reasonable transaction costs incurred in connection
with such transaction or series of transactions. The Bank will not, in a
single transaction or through a series of related transactions, consolidate
with or merge with or into any other Person, or sell, assign, convey,
transfer, lease or otherwise dispose of all or substantially all of the
properties and assets of the Bank to any other Person or permit any of its
Subsidiaries to enter into any such transaction or series of related
transactions if such transaction or series of related transactions, in the
aggregate, would result in the sale, assignment, conveyance, transfer, lease
or other disposition of all or substantially all of the properties and assets
of the Bank and its Subsidiaries on a consolidated basis to any other Person.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Trust or the Surviving
Entity shall deliver to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, and if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture, complies with the requirements of the Indenture and that all
conditions precedent therein provided for relating to such transaction have
been complied with.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties
and assets of the Trust in accordance with the immediately preceding
paragraphs in which the Trust is not the continuing obligor under the
Indenture, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Trust under the Indenture with the
same effect as if such successor had been named as the Trust therein. When a
successor assumes all the obligations of its predecessor under the Indenture
and the Notes, the predecessor shall be released from those
53
<PAGE>
obligations; provided that in the case of a transfer by lease, the predecessor
shall not be released from the payment of principal and interest on the Notes.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of any interest on any Note when it becomes
due and payable and continuance of such default for a period of 30 days;
(ii) default in the payment of the principal of or premium, if any, on
any Note at its Maturity (upon acceleration, optional redemption, required
purchase or otherwise);
(iii) failure to make or consummate a Change of Control Offer in
accordance with the provisions of the "Purchase of Notes Upon a Change of
Control" covenant;
(iv) failure by the Trust to perform or observe any other term, covenant
or agreement contained in the Notes or the Indenture (other than a default
specified in clause (i), (ii) or (iii) above or clause (viii) below) for a
period of 45 days after written notice of such failure requiring the Trust
to remedy the same shall have been given (x) to the Trust by the Trustee or
(y) to the Trust and the Trustee by the Holders of 25% in aggregate
principal amount of the Notes then outstanding;
(v) default (other than a default on Nonrecourse Indebtedness or on less
than $10 million of Trust Nonrecourse Indebtedness at any one time) under
any instrument or any other obligation (x) representing indebtedness for
borrowed money of the Trust or any of its Restricted Subsidiaries, (y)
representing indebtedness evidenced by bonds, notes, debentures or other
similar instruments of the Trust or any of its Restricted Subsidiaries or
(z) constituting a guarantee by the Trust or any of its Restricted
Subsidiaries of Guaranteed Indebtedness of any other Person representing
money borrowed or any obligation of such other Person evidenced by bonds,
notes, debentures or other similar instruments, which default (a) consists
of the failure to pay an amount aggregating in excess of $10,000,000 if
such default continues for a period of 30 days after written notice of such
failure requiring the Trust to remedy the same shall have been given (A) to
the Trust by the Trustee or (B) to the Trust and the Trustee by the Holders
of at least 25% in aggregate principal amount of the Notes then
outstanding, or (b) results in the acceleration of such indebtedness or
guarantee in an aggregate principal amount in excess of $10,000,000;
(vi) failure by the Bank to comply with any of its Regulatory Capital
Requirements set forth in clause (ii) of the definition thereof; provided
that an Event of Default under this clause (vi) shall not have occurred
until the expiration of a 90-day period commencing on the date of the
initial submission of a capital plan to the OTS by the Bank (unless such
capital plan is approved by the OTS on or prior to the expiration of such
90-day period or, if the OTS has notified the Bank that it needs additional
time to determine whether to approve such capital plan, and such capital
plan is approved by the OTS on or prior to the expiration of such extended
period); provided further that if the Bank meets the minimum amount of
capital required to meet each of the industry-wide regulatory capital
requirements pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R. Section
567 (and any amendment to either thereof) or any successor law or
regulation, notwithstanding the Bank's failure to meet an individual
minimum capital requirement pursuant to 12 U.S.C. Section 1464(s) and 12
C.F.R. Section 567.3 (and any amendment to either thereof) or any successor
law or regulation, no Event of Default shall have occurred pursuant to this
clause (vi) unless written notice thereof shall have been given (x) to the
Bank by the Trustee or (y) to the Bank and the Trustee by the Holders of
25% in aggregate principal amount of the Notes then outstanding;
(vii) existence of one or more judgments against the Trust or any of its
Subsidiaries for the payment of money in excess of $10 million, either
individually or in the aggregate, which remain undischarged 60 days after
all rights to review directly such judgment or judgments, whether by appeal
or writ, have been exhausted or have expired;
(viii) certain provisions of Article Twelve of the Indenture relating to
the Collateral shall cease, for any reason, to be in full force and effect
in any material respect, or the Trust shall so assert in writing; or the
Trustee shall cease to have a first priority perfected security interest,
for the benefit of the Trustee and
54
<PAGE>
the Holders, in the Collateral (other than by reason of the release of any
such security interest in accordance with the Indenture); or the Trust
shall default in the observance or performance of any of the covenants or
agreements to be performed by it contained in Article Twelve beyond any
applicable grace or cure period provided in the Indenture; and
(ix) occurrence of certain events of bankruptcy, receivership,
conservatorship, insolvency or reorganization with respect to the Trust or
any Material Subsidiary.
If an Event of Default (other than as specified in clause (ix) above) occurs
and is continuing, the Trustee or the Holders of not less than 25% in
aggregate principal amount of the Notes then outstanding may declare all the
Notes to be immediately due and payable by notice to the Trust (and to the
Trustee if given by the Holders). If an Event of Default specified in clause
(ix) above occurs and is continuing, then the principal of, premium, if any,
and accrued interest on all of the outstanding Notes shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder of Notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the Holders of a
majority in aggregate principal amount of the Notes outstanding, by written
notice to the Trust and the Trustee, may rescind and annul such declaration
and its consequences if (a) the Trust has paid or deposited with the Trustee a
sum sufficient to pay (i) all overdue interest on all outstanding Notes, (ii)
all unpaid principal of (and premium, if any, on) any outstanding Notes which
has become due otherwise than by such declaration of acceleration, and
interest on such unpaid principal at the rate borne by the Notes, (iii) to the
extent that payment of such interest is lawful, interest upon overdue interest
at the rate borne by the Notes and (iv) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel; and (b) all
Events of Default, other than the non-payment of amounts of principal of (or
premium, if any, on) or interest on the Notes that have become due solely by
such declaration of acceleration, have been cured or waived. No such
rescission shall affect any subsequent default or impair any right consequent
thereon.
If a Default specified in clause (i), (ii), (iii) or (v), or with respect to
certain events specified in clause (iv) or (viii), occurs and is continuing,
or an Event of Default occurs and is continuing, the interest rate borne by
the Notes will increase by 2% per annum until such time when such Defaults or
Events of Default, as the case may be, have been cured or waived; provided,
however, that if after such Default or Event of Default has been cured or
waived a different Default specified in clause (i), (ii), (iii) or (v), or
with respect to certain events specified in clause (iv) or (viii), occurs and
is continuing, or an Event of Default occurs and is continuing, the interest
rate may again be increased pursuant to the foregoing provision. Such interest
will accrue from the date of such Default or Event of Default, as the case may
be, and will be payable after the time the Trust has knowledge of such Default
or Event of Default. If not paid on any Interest Payment Date, the Trust may
elect to make payment of any such interest to the Persons in whose names the
Notes (or their respective predecessor Notes) are registered at the close of
business on a Special Record Date or in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Notes are listed.
Notwithstanding the preceding paragraph, in the event of any Event of
Default specified in clause (v) above, such Event of Default and all
consequences thereof (including without limitation any acceleration or
resulting payment default) shall be annulled, waived and rescinded,
automatically and without any action by the Trustee or the Holders of the
Notes, if within 30 days after such Event of Default arose (x) the
Indebtedness or guarantee that is the basis for such event of default has been
discharged, or (y) the holders thereof have rescinded or waived the
acceleration, notice or action (as the case may be) giving rise to such Event
of Default, or (z) the default that is the basis for such Event of Default has
been cured.
The Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Indenture at the request or direction of any of the
Holders, unless such Holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might
be incurred by it in compliance with such request or direction. The Trustee
will not be required under the Indenture to expend or risk its own funds or
55
<PAGE>
otherwise incur any financial liability in the performance of any of its
duties or in the exercise of any of its rights or powers thereunder if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
The Trust will covenant in the Indenture to file quarterly with the Trustee
a statement regarding compliance by the Trust with the terms of the Indenture
and specifying any defaults of which the signer may have knowledge. The Trust
is also required to notify the Trustee within five Business Days of the
occurrence of any Default or Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Trust may, at its option and at any time, elect to have all of its
obligations upon the outstanding Notes discharged ("defeasance"). Such
defeasance means that the Trust will be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding Notes and to have satisfied
all of its other obligations under such Notes and the Indenture insofar as
such Notes are concerned, except for (i) the rights of holders of outstanding
Notes to receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (ii) the Trust's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office
or agency for payments in respect of the Notes and segregate and hold such
payments in trust, (iii) the rights, powers, trusts, duties and immunities of
the Trustee and (iv) the defeasance provisions of the Indenture. In addition,
the Trust may, at its option and at any time, elect to have all of the
obligations of the Trust released with respect to certain covenants set forth
in the Indenture, and any omission to comply with such obligations will not
constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the Trust
must irrevocably deposit or cause to be deposited with the Trustee, as trust
funds in trust, specifically pledged as security for, and dedicated solely to,
the benefit of the holders of the Notes, money in an amount, or U.S.
Government Obligations which through the scheduled payment of principal and
interest thereon will provide money in an amount, or a combination thereof, in
sufficient amounts, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of,
premium, if any, and interest on the outstanding Notes on the Stated Maturity
(or upon redemption, if applicable) of such principal, premium, if any, or
installment of interest; (ii) no Default or Event of Default will have
occurred and be continuing on the date of such deposit or, insofar as an event
of bankruptcy under clause (ix) of "Events of Default" above is concerned, at
any time during the period ending on the 91st day after the date of such
deposit; (iii) such defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under, the Indenture or any
material agreement or instrument to which the Trust is a party or by which it
is bound; (iv) in the case of defeasance, the Trust shall have delivered to
the Trustee an Opinion of Counsel stating that the Trust has received from, or
there has been published by, the Internal Revenue Service a ruling, or since
the date of the final Offering Memorandum there has been a change in
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion shall confirm that, the holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred; (v) in the case of covenant
defeasance, the Trust shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Holders of the Notes outstanding will not
recognize income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such covenant defeasance had not occurred; (vi) in the case of defeasance
or covenant defeasance, the Trust shall have delivered to the Trustee an
Opinion of Counsel to the effect that after the 91st day following the deposit
or after the date such opinion is delivered, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) the Trust shall
have delivered to the Trustee an Officers' Certificate stating that the
deposit was not made by the Trust with the intent of preferring the Holders of
the Notes over the other creditors of the Trust with the intent of defeating,
hindering, delaying or defrauding creditors
56
<PAGE>
of the Trust; (viii) no event or condition may exist that would prevent the
Trust from making payments of principal of, and premium, if any, and interest
on the Notes, on the date of such deposit; and (ix) the Trust shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes as expressly
provided for in the Indenture) and the Collateral will be released and the
Trustee, at the expense of the Trust, will execute proper instruments
acknowledging satisfaction and discharge of the Indenture when (i) either (a)
all the Notes theretofore authenticated and delivered (other than destroyed,
lost or stolen Notes which have been replaced or paid and Notes for whose
payment money has been deposited in trust with the Trustee or any paying agent
or segregated and held in trust by the Trust and thereafter repaid to the
Trust or discharged from such trust as provided for in the Indenture) have
been delivered to the Trustee for cancellation or (b) all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable at Stated Maturity within one year or
(z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Trust, and the Trust has
irrevocably deposited or caused to be deposited with the Trustee as trust
funds in trust for such purpose an amount sufficient to pay and discharge the
entire Indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of, premium, if any, and interest on the Notes to
the date of such deposit (in the case of Notes which have become due and
payable) or to the Stated Maturity or redemption date, as the case may be;
(ii) the Trust has paid or caused to be paid all sums payable under the
Indenture by the Trust; and (iii) the Trust has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided in the Indenture relating to the satisfaction
and discharge of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
With certain exceptions, modifications and amendments of the Indenture may
be made by a supplemental indenture entered into by the Trust and the Trustee
with the consent of the Holders of a majority in aggregate outstanding
principal amount of the Notes then outstanding; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby: (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, or reduce the
principal amount thereof, or premium, if any, or the rate of interest thereon
or change the coin or currency in which the principal of any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment after the Stated Maturity thereof
(or, in the case of redemption, on or after the redemption date); (ii) amend,
change or modify the obligation of the Trust to make and consummate a Change
of Control offer in the event of a Change of Control in accordance with the
"Purchase of Notes Upon a Change of Control" covenant, including amending,
changing or modifying any definition relating thereto, in a manner adverse to
the Holders of the Notes; (iii) reduce the percentage in principal amount of
outstanding Notes, the consent of whose Holders is required for any such
amendment, modification or supplemental indenture or the consent of whose
Holders is required for any waiver of compliance with certain provisions of
the Indenture; (iv) modify any of the provisions relating to supplemental
indentures requiring the consent of Holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to increase
the percentage of outstanding Notes required for such actions or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the Holder of each Note affected thereby; (v) except as
otherwise permitted under "--Consolidation, Merger and Sale of Assets" and "--
Substitution of a New Obligor under the Indenture" consent to the assignment
or transfer by the Trust of any of its rights or obligations under the
Indenture; (vi) amend or modify any of the provisions of the Indenture
relating to the Collateral in any manner adverse to the Holders of the Notes;
or (vii) waive a default in payment with respect to any Note (other than a
rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the Notes outstanding as provided in the
Indenture and a waiver of the payment default that resulted from such
57
<PAGE>
acceleration); provided, however, that a majority in aggregate outstanding
principal amount of the Notes may amend the provisions under "--Consolidation,
Merger and Sale of Assets" to permit the Bank to merge or consolidate with
another Person for the sole purpose of obtaining a charter as a commercial
bank or a state chartered thrift, so long as such merger or consolidation does
not adversely affect the rights of the Holders of the Notes.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Trust and the Trustee may modify or amend the Indenture: (a) to
evidence the succession of another Person to the Trust or any other obligor on
the Notes, and the assumption by any such successor of the covenants of the
Trust or such obligor in the Indenture and in the Notes in accordance with "--
Consolidation, Merger and Sale of Assets;" (b) to evidence the substitution of
the New Obligor, and the assumption by the New Obligor of the covenants of the
Trust in the Indenture and in the Notes in accordance with "--Substitution of
a New Obligor under the Indenture;" (c) to add any Events of Default, to add
to the covenants of the Trust or any other obligor upon the Notes for the
benefit of the Holders of the Notes or to surrender any right or power
conferred upon the Trust or any other obligor upon the Notes, as applicable,
in the Indenture or in the Notes; (d) to cure any ambiguity, or to correct or
supplement any provision in the Indenture or the Notes which may be defective
or inconsistent with any other provision in the Indenture or the Notes or make
any other provisions with respect to matters or questions arising under the
Indenture or the Notes; provided that, in each case, such provisions shall not
adversely affect in any material respect the interests of the Holders of the
Notes; (e) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act or any similar federal law hereafter enacted; (f) to secure
further the Notes or add a guarantor under the Indenture; (g) to evidence and
provide the acceptance of the appointment of a successor Trustee under the
Indenture; or (h) to mortgage, pledge, hypothecate or grant a security
interest in favor of the Trustee for the benefit of the Holders of the Notes
as additional security for the payment and performance of the Trust's
obligations under the Indenture, in any property or assets, including any of
which are required to be mortgaged, pledged or hypothecated, or in which a
security interest is required to be granted to the Trustee, pursuant to the
Indenture or otherwise.
The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. If an Event of Default has occurred and is continuing,
the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a
prudent Person would exercise under the circumstances in the conduct of such
Person's own affairs.
The Indenture and provisions of the Trust Indenture Act, incorporated by
reference therein, contain limitations on the rights of the Trustee
thereunder, should it become a creditor of the Trust, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest (as defined) it must eliminate such conflict or resign.
The Trustee also acts as trustee under various pooling and servicing
agreements related to consumer loan receivables securitizations originated by
the Bank, and as trustee for the Bank's 13% Preferred Stock and the CCPCC
Preferred Stock.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in accordance
with, the laws of the State of New York.
58
<PAGE>
CERTAIN DEFINITIONS
"Accumulated Interest" means, as of any date of determination and without
duplication, the aggregate amount of interest on the Notes paid or accrued
since the date of the Indenture.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Subsidiary of any other Person or (b) assumed in
connection with the acquisition of assets from such Person, in each case,
other than Indebtedness incurred in connection with, or in contemplation of,
such Person becoming a Subsidiary of such other Person or such acquisition.
Acquired Indebtedness shall be deemed to be incurred on the date of the
related acquisition of assets from any Person or the date the acquired Person
becomes a Subsidiary of such other Person.
"Advisory Fees" means fees pursuant to that certain Amended and Restated
Advisory Contract, dated as of October 1, 1992, between B.F. Saul Company and
the Trust, as most recently amended by Amendment No. 8 thereto dated as of
October 1, 1993, as the same may be further amended or supplemented in
accordance with the "Limitation on Transactions with Affiliates" covenant.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person and any legal or beneficial
owner, directly or indirectly, of 20% or more of the Voting Stock of such
specified Person. Notwithstanding the foregoing, no Securitization Entity
shall be deemed an Affiliate of the Bank or the Trust or any of their
Subsidiaries. The fact that an Affiliate of any specified Person is a partner
(or a shareholder, director or officer of a partner) of a law firm that
renders services to such specified Person or its Affiliates does not mean that
the law firm is an Affiliate of such specified Person. For the purposes of
this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Applicable Premium" means, with respect to a Note, the greater of (i) 1.0%
of the then outstanding principal amount of such Note and (ii) (a) the present
value of all remaining required interest and principal payments due on such
Note and all premium payments relating thereto assuming a redemption date of
April 1, 2003, computed using a discount rate equal to the Treasury Rate plus
50 basis points minus (b) the then outstanding principal amount of such Notes
minus (c) accrued and unpaid interest paid on the date of redemption.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (a) any Capital
Stock of any Restricted Subsidiary; (b) all or substantially all of the
properties and assets of any division or line of business of the Trust or its
Restricted Subsidiaries; or (c) any other properties or assets of the Trust or
any Restricted Subsidiary other than in the ordinary course of business. For
the purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties or assets or Capital Stock (i) that is governed by the
provisions of the Indenture described under "--Consolidation, Merger and Sale
of Assets," (ii) of the Trust or any of its Restricted Subsidiaries to the
Trust or any Single Asset Subsidiary of the Trust, (iii) in compliance with
the "Limitation on Restricted Payments" covenant or (iv) that is governed by
the provisions of the Indenture described under "--Substitution of a New
Obligor Under the Indenture."
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (a) the
sum of the products of (i) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment
(including, without limitation, any sinking fund requirements) of such
Indebtedness multiplied by (ii) the amount of each such principal payment by
(b) the sum of all such principal payments.
"Bank" means Chevy Chase Bank, F.S.B.
59
<PAGE>
"Bank Contribution" means, as of any date of determination, the dollar
amount, if any, by which (a) the aggregate amount of all dividends paid by the
Bank to the Trust since October 1, 1997, exceeds (b) the sum of (i)
Accumulated Interest, multiplied by (1 (one)--the Bank Tax Rate), plus (ii)
50% of the difference of (A) 80% of the cumulative Consolidated Bank Net
Income (Loss) since October 1, 1997, minus (B) the amount determined pursuant
to clause (b)(i) of this definition, minus (iii) the Bank Stock Purchase
Amount; provided, however, that if at any time between October 1, 1997 and the
date of determination of the Bank Contribution, the Trust shall own more or
less than 80% of the outstanding common stock of the Bank, the Bank
Contribution shall be calculated for each period of varying ownership as set
forth in this definition by substituting the percentage ownership of common
stock of the Bank for the 80% in clause (b)(ii)(A) of this definition;
provided further that if the amount in clause (b) exceeds the amount in clause
(a), the absolute value of such excess shall be referred to herein as the
"Available Amount."
"Bank Stock Purchase Amount" means the aggregate amount paid by the Bank and
its Subsidiaries since the date of the Indenture (other than in shares of
Qualified Capital Stock of the Bank) to purchase, redeem or otherwise acquire
or retire for value any shares of Qualified Capital Stock of the Bank pursuant
to paragraph (b)(x) of the "Limitation on Restricted Payments" covenant.
"Bank Tax Rate" means the weighted average combined effective state and
federal tax rate for the Bank for the period from the date of the Indenture to
the Substitution Date, determined as if the Bank were a stand alone taxpayer.
"Capital Maintenance Agreement" means the May 17, 1988 Agreement between the
B.F. Saul Real Estate Investment Trust, the Saul Company and the FDIC (as
successor to the Federal Savings and Loan Insurance Corporation) under which
the Saul Company and the Trust agreed to maintain the Bank's regulatory
capital at the levels prescribed by applicable regulatory requirements or any
similar agreement required by the FDIC (including in connection with the
Substitution or the subsequent distribution of the Capital Stock of the New
Obligor by the Trust or any owner of Capital Stock of the Trust) or any
guarantee of a capital plan that is submitted by the Bank pursuant to
applicable law.
"Capital Stock" in any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents or interests
in (however designated) capital stock in such Person, including, with respect
to a corporation, common stock, Preferred Stock and other corporate stock,
with respect to a trust, shares or other evidence of beneficial interests,
and, with respect to a partnership, partnership interests, whether general or
limited, and any rights (other than debt securities convertible into corporate
stock, partnership interests or other capital stock), warrants or options
exchangeable for or convertible into such corporate stock, partnership
interests or other capital stock.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required
to be classified and accounted for as a capital lease obligation under GAAP,
and, for the purpose of the Indenture, the amount of such obligation at any
date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (a) cash; (b) any evidence of Indebtedness with a
maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (c) certificates of deposit, time
deposits, deposits in money market accounts or any other deposit accounts or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System that issues (or the parent of
which issues) commercial paper or certificates of deposit rated as described
in clause (d) below and that has combined capital and surplus and undivided
profits of not less than $500 million; (d) commercial paper with a maturity of
180 days or less issued by a corporation that is not an Affiliate of the Trust
and is organized under the laws of any state of the United States or the
District of Columbia and rated at least A-1 by S&P or at least P-l by Moody's;
and (e) Partnership Units and Margin
60
<PAGE>
Securities; provided that for purposes of the "Limitation on Sale of Assets"
covenant, Cash Equivalents will also include (i) the assumption of
Indebtedness of the Trust or any Restricted Subsidiary of the Trust by the
purchaser of the assets sold and the release of the Trust or such Restricted
Subsidiary from all liability on such Indebtedness in connection with the
subject Asset Sale, (ii) securities received by the Trust or any Restricted
Subsidiary from the transferee that can be promptly converted by the Trust or
such Restricted Subsidiary into cash, (iii) limited partnership interests in
real estate partnerships that can be converted promptly and at will by the
holder of such interests into cash or Margin Securities and (iv) a promissory
note from the purchaser of the asset sold, provided that such note is secured
by a first priority perfected security interest in the asset sold and provided
further that such note is converted into Cash Equivalents of a type referred
to in clauses (a) through and including (e) of this definition within one year
after the date of the Asset Sale giving rise thereto.
"Cash Flow--Indenture" means with respect to the Trust, for any period, all
as determined in accordance with GAAP and without duplication, the sum of the
following items for such period: (a) real estate operating income (loss), plus
(b) depreciation and amortization expense, plus (c) interest expense, plus (d)
equity in losses of partnership investments, less (e) equity in earnings of
partnership investments, plus (f) losses on sales of property, less (g) gains
on sales of property, plus (h) non-cash charges, less (i) non-cash gains, plus
(j) cash distributions received from partnership investments, plus (k) tax
sharing payments paid by the Bank to the Trust, plus (l) dividends paid by the
Bank to the Trust.
"CCPCC" means Chevy Chase Preferred Capital Corporation, a Maryland
corporation.
"CCPCC Preferred Stock" means the 3,000,000 shares of 10 3/8% Noncumulative
Exchangeable Preferred Stock, Series A of CCPCC.
"Certificates of Deposit" means certificates of deposit or acceptances with
a maturity of 180 days or less of any financial institution that (a) is a
member of the Federal Reserve System; (b) has combined capital and surplus and
undivided profits of not less than $500,000,000; (c) is not an Affiliate of
the Trust; and (d) has (or the parent of which has) a short-term rating of at
least A-1 by S&P and at least P-1 by Moody's.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a Person shall be deemed to have "beneficial ownership" of all securities
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
Voting Stock representing more than 50% of the voting power of the Voting
Stock of the Trust; (b) the Trust consolidates with, or merges with or into,
another Person or sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any Person, or any
Person consolidates with, or merges with or into, the Trust, in any such event
pursuant to a transaction in which any Voting Stock of the Trust is
reclassified or changed into or exchanged for cash, securities or other
property, other than any such transaction where (i) any Voting Stock of the
Trust is reclassified or changed into or exchanged for Voting Stock (other
than Redeemable Capital Stock) of the surviving or transferee corporation and
(ii) immediately after such transaction no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act), other than
Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total Voting
Stock of the surviving or transferee corporation; (c) during any consecutive
two-year period (or, in the case of the New Obligor, the period since the
Substitution Date if shorter than two years), individuals who at the beginning
of such period constituted the Board of Trustees of the Trust (together with
any new trustees whose election by such Board of Trustees or whose nomination
for election by the stockholders of the Trust was approved by a vote of 66
2/3% of the trustees then still in office who were either trustees at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Trustees of the Trust then in office; or (d) any final order,
61
<PAGE>
judgment or decree of a court of competent jurisdiction shall be entered
against the Trust decreeing the dissolution or liquidation of the Trust.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Commission" means the U.S. Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act, or if at any time after
the execution of the Indenture such Commission is not existing and performing
the duties now assigned to it under the Trust Indenture Act, then the body
performing such duties as such time.
"Consolidated Bank Net Income (Loss)" means, for any period, the
consolidated net income (or loss) of the Bank and its consolidated
Subsidiaries for such period as determined in accordance with GAAP (net of
cash and non-cash dividends due (whether or not declared) on outstanding
(excluding treasury stock) Redeemable Capital Stock or outstanding (excluding
treasury stock) Preferred Stock of the Bank), adjusted, to the extent included
in calculating such net income (loss), by excluding, without duplication, (i)
all extraordinary gains and losses (other than those relating to the use of
net operating losses of the Bank carried forward), less all fees and expenses
relating thereto, net of taxes, (ii) the portion of net income (or loss) of
any Person (other than the Bank and any of its consolidated Subsidiaries) in
which the Bank or any of its Subsidiaries has an ownership interest, except to
the extent of the amount of dividends or other distributions actually paid to
the Bank or its consolidated Subsidiaries in cash by such other Person during
such period, (iii) net income (or loss) of any Person combined with the Bank
or any of its Subsidiaries on a "pooling of interests" basis attributable to
any period prior to the date of combination, (iv) any gain or loss, net of
taxes, realized upon the termination of any employee pension benefit plan or
(v) the net income of any Subsidiary of the Bank to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Subsidiary or its shareholders; provided that, upon the
termination or expiration of such dividend or distribution restrictions, the
portion of net income (or loss) of such Subsidiary allocable to the Bank and
previously excluded shall be added to the Consolidated Bank Net Income (Loss)
of the Bank to the extent of the amount of dividends or other distribution
actually paid to the Bank in cash by such Subsidiary.
"Consolidated Net Income (Loss)" of the Trust means, for any period, the
consolidated net income (or loss) of the Trust and its consolidated Restricted
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (loss), by excluding,
without duplication, (i) all extraordinary gains and losses (other than those
relating to the use of net operating losses of the Trust carried forward),
less all fees and expenses relating thereto, net of taxes, (ii) the portion of
net income (or loss) of any Person (other than the Trust and any of its
consolidated Restricted Subsidiaries) in which the Trust or any of its
Restricted Subsidiaries has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to the Trust or its
consolidated Restricted Subsidiaries in cash by such other Person during such
period, (iii) net income (or loss) of any Person combined with the Trust or
any of its Restricted Subsidiaries on a "pooling of interest" basis
attributable to any period prior to the date of combination, (iv) any gain or
loss, net of taxes, realized upon the termination of any employee pension
benefit plan, (v) the net income of any Restricted Subsidiary of the Trust
(other than the Bank and its Subsidiaries) to the extent that the declaration
or payment of dividends or similar distributions by that Restricted Subsidiary
of that income is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgement,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its shareholders; provided that, upon the termination
or expiration of such dividend or distribution restrictions, the portion of
net income (or loss) of such Restricted Subsidiary allocable to the Trust and
previously excluded shall be added to the Consolidated Net Income (Loss) of
the Trust to the extent of the amount of dividends or other distributions
actually paid to the Trust in cash by such Restricted Subsidiary and (vi) all
gains resulting from the sale of credit card relationships.
62
<PAGE>
"Consolidated Interest Expense" means, with respect to the Trust, for any
period, the amount, as determined in accordance with GAAP, of interest expense
of the Trust and its Restricted Subsidiaries (excluding all amounts relating
to interest expense of the Bank and its Subsidiaries).
"Consolidated Net Worth" means, at any date and with respect to any Person,
the consolidated shareholders' equity of such Person, less the amount of
shareholders' equity attributable to (i) Redeemable Capital Stock or treasury
stock of such Person and its Restricted Subsidiaries (or, in the case of the
Bank, a Surviving Entity or the Pledged Subsidiary resulting from a merger,
such Person and its Subsidiaries), determined on a consolidated basis in
accordance with GAAP, and (ii) in the case of the Trust, extraordinary gains
and any gains resulting from the sale, transfer or other disposition of
Partnership Units, other than Partnership Units that are acquired after the
date of the Indenture as a result of contributing real property to Saul
Holdings Partnership.
"Consolidated Tax Subsidiary" means any Subsidiary of any Person that joins
with such Person in the filing of a consolidated federal income tax return.
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Trust or any of its Restricted Subsidiaries
and designed to protect against or manage exposure to fluctuations in foreign
currency exchange rates.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Trustee" means, with respect to any transaction or series of
related transactions, a member of the Board of Trustees of the Trust or a
member of the board of directors of any successor corporation who does not
have any material direct or indirect financial interest in or with respect to
such transaction or series of related transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the notes issued pursuant to the Exchange Offer.
"Exchange Offer" means an offer by the Trust to exchange the Notes for notes
registered under the Securities Act, with terms identical to the Notes (except
such notes will not contain (i) transfer restrictions or (ii) certain
provisions relating to the increase in the interest rate of such notes).
"Fair Market Value" means the fair market value of property as determined in
good faith by the Board of Trustees, whose determination shall be conclusive
in all circumstances, net of attorney's fees, accountant's fees and brokerage,
consulting, underwriting and other fees and expenses actually incurred in
connection with a transaction and net of taxes paid or payable by the Trust as
a result thereof.
"Generally Accepted Accounting Principles" or "GAAP" means, generally
accepted accounting principles in the United States, consistently applied.
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
Person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make
payment of such Indebtedness or to assure the holder of such Indebtedness
against loss, (iii) to supply funds to, or in any other manner invest in, the
debtor (including any agreement to pay for property or services without
requiring that such property be received or such services be rendered), (iv)
to maintain working capital or equity capital of the debtor, or otherwise to
maintain the net worth, solvency or other financial condition of the debtor or
(v) otherwise to assure a creditor with respect to Indebtedness against loss;
provided that the term "guarantee" shall not include endorsements for
collection or deposit, in either case in the ordinary course of business.
63
<PAGE>
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money (including overdrafts) or
for the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred in the ordinary course
of business, but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, and in connection with any agreement by such Person
to make payment to purchase, redeem, exchange, convert or otherwise acquire
for value any Capital Stock of such Person now or hereafter outstanding, (b)
all obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (c) all indebtedness of such Person created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even if the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (d) all Capitalized Lease Obligations of
such Person, (e) all obligations of such Person under or in respect of
Interest Rate Agreements or Currency Agreements, (f) all Indebtedness referred
to in (but not excluded from) the preceding clauses (a) through (e) of other
Persons and all dividends payable by other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured), (g) all guarantees by such
Person of Guaranteed Indebtedness, (h) all Redeemable Capital Stock of such
Person valued at the greater of its book value and voluntary or involuntary
maximum fixed repurchase price plus accrued and unpaid dividends, and (i) any
amendment, supplement, modification, deferral, renewal, extension, refunding
or refinancing of any liability of the types referred to in clauses (a)
through (h) above. For purposes hereof, (x) the "maximum fixed repurchase
price" of any Redeemable Capital Stock that does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Redeemable
Capital Stock as if such Redeemable Capital Stock were purchased on any date
on which the amount of outstanding Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Redeemable Capital Stock, such fair
market value shall be determined in good faith by the board of directors or
similar governing body (or any duly authorized committee thereof) of the
issuer of such Redeemable Capital Stock, and (y) Indebtedness is deemed to be
incurred pursuant to a revolving credit facility or any other facility
providing for partial advances each time an advance is made thereunder.
"Interest Rate Agreements" means any interest rate protection agreements and
other types of interest rate hedging agreements (including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements)
designed to protect against or manage exposure to fluctuations in interest
rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee or other extension of credit or capital contribution
to (by means of any transfer of cash or other property to others or any
payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued or
owned by, any other Person and all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP. "Investments"
shall exclude (i) extensions of trade credit on commercially reasonable terms
in accordance with normal trade practices and (ii) advances to customers in
the ordinary course of business that are (x) recorded as accounts receivable
on the balance sheet of the Trust or its Restricted Subsidiaries or (y) after
the Substitution credit card receivables, home equity loan receivables,
automobile loans, leases or installment sales contracts, other consumer
receivables, mortgage loans or mortgage notes owned by a Restricted Subsidiary
of the New Obligor.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim,
or preference or priority or other encumbrance upon or with respect to any
property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired. A Person shall be deemed to own subject to a Lien any
property which such Person has acquired or holds subject
64
<PAGE>
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement.
"Management Agreements" means (a) the Amended and Restated Commercial
Property Leasing and Management Agreement dated as of October 1, 1982, as
amended, between the Trust and Franklin Property Company relating to the
leasing and management of real property owned by the Trust and its
subsidiaries (other than the Bank and its Subsidiaries) other than their hotel
properties, and (b) any written hotel management agreement between a
subsidiary of the Trust and Franklin Property Company relating to the
management of such hotel properties entered into in the ordinary course of
business and consistent with past practice, in each case as further amended or
modified in accordance with the terms of the Indenture.
"Margin Securities" means "margin stock" as defined in Regulation G (12
C.F.R. Section 207, as amended) of the Board of Governors of the Federal
Reserve System prior to April 1, 1998 and, on and after April 1, 1998, means
"Margin Stock" as defined in Regulation U (12 C.F.R. Section 221.2, as
amended, or any successor provision); provided that the term "Margin
Securities" shall not include the securities of an Affiliate of the Trust,
other than common stock of Saul Centers, Inc. and the common stock of Persons
less than 20% of the outstanding common stock of which is held by the Trust or
its Affiliates.
"Material Subsidiary" means, at any particular time, (i) any Restricted
Subsidiary of the Trust that, together with the Restricted Subsidiaries of
such Restricted Subsidiary, (a) accounted for more than 10% of the
consolidated revenues or earnings of the Trust and its Restricted Subsidiaries
for the most recently completed fiscal year of the Trust, (b) was the owner of
more than 10% of the consolidated assets of the Trust and its Restricted
Subsidiaries as of the end of such fiscal year (in the case of clause (a) or
clause (b) as shown on the consolidated financial statements of the Trust and
its Restricted Subsidiaries for such fiscal year) or (c) was organized or
acquired since the end of such fiscal year and would have been a Material
Subsidiary if it had been owned during such fiscal year, and (ii) the Bank.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as therein or herein provided, whether at
the Stated Maturity with respect to such principal or by declaration of
acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Nonrecourse Indebtedness" means Indebtedness incurred by any Restricted
Subsidiary of the Trust as to which, under the terms thereof (except with
respect to fraud, willful misconduct, intentional misrepresentation,
misapplication of funds, waste and undertakings with respect to environmental
matters), (i) neither the Trust nor any other Restricted Subsidiary of the
Trust provides credit support or is directly or indirectly liable for such
Indebtedness, (ii) enforcement of obligations on such Indebtedness is limited
only to recourse against interests in specified assets and properties owned by
such Restricted Subsidiary (the "Subject Assets"), accounts, rents, revenues
and proceeds arising therefrom, and rights under purchase agreements or other
agreements relating to such Subject Assets and (iii) no default with respect
to such Indebtedness would permit (upon notice, lapse of time or both) any
holder of other Indebtedness of the Bank or its Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity.
"Operating Cash Flow Coverage Ratio" means, with respect to the Trust, at
any date of determination, the ratio of (i) Cash Flow--Indenture to (ii)
Consolidated Interest Expense.
"OTS" means the Office of Thrift Supervision or any successor thereto.
"Partnership Units" means limited partnership interests in Saul Holdings
Partnership.
"Permitted Holders" means the descendants of Bernard Francis Saul, any of
their spouses or any Person controlled, directly or indirectly, or
beneficially owned by such descendants or spouses.
65
<PAGE>
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the Trust pursuant to the Notes;
(b) Indebtedness of the Trust outstanding on the date of the Indenture
(other than the Existing Notes);
(c) obligations of the Trust pursuant to Interest Rate Agreements
designed to protect the Trust against fluctuations in interest rates in
respect of Indebtedness of the Trust, which obligations do not exceed the
aggregate principal amount of such Indebtedness;
(d) Indebtedness of the Trust consisting of guarantees, indemnities or
obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets;
(e) Indebtedness of the Trust that, together with any other outstanding
Indebtedness incurred pursuant to clause (d) of the definition of
"Permitted Subsidiary Indebtedness," has an aggregate principal amount
outstanding at any one time, without duplication, not in excess of the sum
of $80,000,000 plus 50% of the increase in Consolidated Net Worth of the
Trust from October 1, 1997;
(f) Indebtedness of the Trust consisting of guarantees under the
Reimbursement Agreement that, together with any other guarantees of
Indebtedness incurred pursuant to clause (g) of the definition of
"Permitted Subsidiary Indebtedness," do not exceed an aggregate amount
(without duplication) of $150,000,000 outstanding at any one time;
(g) Indebtedness of the Trust to any of its Wholly Owned Restricted
Subsidiaries, except that any transfer of such Indebtedness by any such
Subsidiary (other than to another such Subsidiary) will be deemed to be an
incurrence of Indebtedness by the Trust; provided that such Indebtedness is
subordinated in right of payment from and after such time as the Notes
shall become due and payable (whether at Stated Maturity, acceleration or
otherwise) to payment of the Notes;
(h) obligations of the Trust under the Capital Maintenance Agreement;
provided, however, that this clause (h) is not intended to include any
Indebtedness incurred by the Trust in connection with complying with its
obligations pursuant to such agreement; and
(i) any renewals, extensions, substitutions, refinancings or replacements
and any successive refinancings (each, for purposes of this clause (i), a
"refinancing") by the Trust of any Indebtedness of the Trust referred to in
clauses (b) or (e) of this definition and any Indebtedness of the Trust
incurred in accordance with the "Limitation on Indebtedness" covenant
(other than Permitted Indebtedness), so long as (i) any such new
Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced, plus the amount of any premium required to be
paid under the terms of the instrument governing such Indebtedness being so
refinanced or the amount of any premium reasonably determined by the Trust
as necessary to accomplish such refinancing through means of a tender offer
or privately negotiated transaction (it being understood that any sales of
the Retail Notes will be considered a refinancing thereof to the extent
that the total principal amount of Retail Notes outstanding at any one time
does not exceed the principal amount thereof outstanding on the date of the
Indenture), (ii) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, (A) such new Indebtedness is made subordinate to
the Notes at least to the same extent as the Subordinated Indebtedness
being refinanced and (B) such new Indebtedness has an Average Life to
Stated Maturity and final Stated Maturity of principal that exceeds the
Average Life to Stated Maturity and final Stated Maturity of the
Subordinated Indebtedness being refinanced); and (iii) in the case of any
refinancing of Trust Nonrecourse Indebtedness, such new Indebtedness is
made nonrecourse to the same extent as the Indebtedness refinanced;
provided that for purposes of determining whether additional Indebtedness
can be incurred pursuant to clause (e) above or clauses (d) and (e) of the
definition of "Permitted Subsidiary Indebtedness," any refinancing of
Indebtedness initially incurred pursuant to such clause (e) of this
definition and refinanced under this clause (i), or any further refinancing
thereof, will be considered to be outstanding under clause (e) of this
definition of "Permitted Indebtedness."
66
<PAGE>
"Permitted Investment" means any Investment (i) in Cash Equivalents, (ii) of
up to $10,000,000 in Wholly Owned Restricted Subsidiaries, (iii) of up to
$50,000,000 in cash in Single Asset Subsidiaries, (iv) in consideration
received, not constituting Cash Equivalents, pursuant to an Asset Sale made in
compliance with the covenant described under the caption "Limitation on Sale
of Assets" in an aggregate amount of up to 25% of the consideration received
with respect to such Asset Sale, (v) in or by the Bank or its Subsidiaries,
(vi) permitted by the "Restriction on Transfer of Assets to Subsidiaries"
covenant, (vii) constituting cash advances on an intercompany open account
basis (A) from the Trust to its Restricted Subsidiaries required for working
capital, the payment of interest and premium, if any, on and principal of any
Indebtedness, expenditures for maintenance and capital improvements, and other
operating expenses, to the extent Restricted Subsidiaries have advanced cash
to the Trust or (B) from any Restricted Subsidiary to the Trust, of excess
cash on hand from time to time, in each case made in the ordinary course of
business and consistent with past practice or (viii) in any Wholly Owned
Restricted Subsidiary of the Trust resulting from the acquisition of such
Subsidiary for Qualified Capital Stock of the Trust, such Subsidiary at the
time of such acquisition owning Qualified Capital Stock of the Bank and having
no other assets in excess of $1 million and no operations.
"Permitted Subsidiary Indebtedness" means any of the following:
(a) Indebtedness of any Restricted Subsidiary outstanding on the date of
the Indenture;
(b) obligations of any Restricted Subsidiary pursuant to Interest Rate
Agreements designed to protect such Restricted Subsidiary against
fluctuations in interest rates in respect of Indebtedness of such
Restricted Subsidiary, which obligations do not exceed the aggregate
principal amount of such Indebtedness;
(c) Indebtedness of any Restricted Subsidiary of the Trust consisting of
guaranties, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets;
(d) Indebtedness of any Restricted Subsidiary that, together with any
other outstanding Indebtedness incurred pursuant to clause (e) of the
definition of "Permitted Indebtedness," has an aggregate principal amount
outstanding at any one time, without duplication, not in excess of the sum
of $80,000,000 plus 50% of the increase in Consolidated Net Worth of the
Trust from October 1, 1997;
(e) Nonrecourse Indebtedness of any Restricted Subsidiary which, together
with any other outstanding Indebtedness incurred pursuant to clause (d)
above and clause (e) of the definition of "Permitted Indebtedness," has an
aggregate principal amount outstanding at any one time not in excess of the
sum of $225,000,000 plus 50% of the increase in Consolidated Net Worth of
the Trust from October 1, 1997; provided, however, that notwithstanding the
definition of Nonrecourse Indebtedness, an aggregate principal amount of
Indebtedness permitted by this clause (e) of up to the sum of $100,000,000
plus 50% of the increase in Consolidated Net Worth of the Trust from
October 1, 1997 may be incurred without regard to clause (ii) of the
definition of Nonrecourse Indebtedness and without regard to any indirect
credit support or direct or indirect liability of any Restricted Subsidiary
by way of any cross-collateralization of assets;
(f) Indebtedness of any Wholly Owned Restricted Subsidiary (other than
the Bank and its Subsidiaries) to the Trust, to the extent permitted by the
"Limitation on Restricted Payments" covenant, except that any transfer of
any such Indebtedness by the Trust to any other Person shall be deemed to
be an incurrence of Indebtedness by such Restricted Subsidiary;
(g) Indebtedness of Restricted Subsidiaries consisting of guarantees
under the Reimbursement Agreement that, together with any other guarantees
of Indebtedness incurred pursuant to clause (f) of the definition of
"Permitted Indebtedness," do not exceed an aggregate amount (without
duplication) of $150,000,000 at any one time outstanding; and
(h) any renewals, extensions, substitutions, refinancings or replacements
and any successive refinancings (each, for purposes of this clause (h) a
"refinancing") by any Restricted Subsidiary of any Indebtedness of such
Restricted Subsidiary referred to in clauses (a), (d) and (e) of this
definition, so long as (i) any such new Indebtedness shall be in a
principal amount that does not exceed the principal amount (or, if such
Indebtedness being refinanced provides for an amount less than the
principal amount thereof to
67
<PAGE>
be due and payable upon a declaration of acceleration thereof, such lesser
amount as of the date of determination) so refinanced, plus the amount of
any premium required to be paid under the terms of the instrument governing
such Indebtedness being so refinanced or the amount of any premium
reasonably determined by such Restricted Subsidiary as necessary to
accomplish such refinancing through means of a tender offer or privately
negotiated transaction (it being understood that any borrowings under lines
of credit will be considered a refinancing thereof to the extent that the
total principal amount outstanding thereunder at any one time does not
exceed the principal amount thereof outstanding on the date of the
Indenture), and (ii) in the case of any refinancing of Nonrecourse
Indebtedness, such new Indebtedness is Nonrecourse Indebtedness; provided
that for purposes of determining whether additional Indebtedness can be
incurred pursuant to clauses (d) and (e) of this definition or clause (e)
of the definition of "Permitted Indebtedness," any refinancing of
Indebtedness initially incurred pursuant to such clauses (d) and (e) of
this definition and refinanced under this clause (h), or any further
refinancing thereof, will be considered to be outstanding under clause (d)
or (e) of this definition, as the case may be.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, estate,
unincorporated organization or government or any agency or political
subdivision thereof.
"PIK Preferred Stock" means any and all payment-in-kind Preferred Stock
issued in lieu of cash dividends on the 13% Preferred Stock or in lieu of cash
dividends on such payment-in-kind Preferred Stock.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of such
Person's preferred or preference stock or other equity interests having a
preference as to dividends or other distributions or on liquidation, whether
now outstanding or issued after the Closing Date, and including, without
limitation, all classes and series of preferred or preference stock of such
Person.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Real Estate Property" means (i) real property, (ii) a building or group of
related buildings or (iii) real property upon which is located a building or
group of related buildings.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity, or is convertible
into or exchangeable for debt securities at any time prior to such final
Stated Maturity at the option of the holder thereof.
"Registration Rights Agreement" means the registration rights agreement
between the Trust and the Initial Purchasers, dated as of March 25, 1998,
between the Trust and the Initial Purchasers.
"Regulatory Capital Requirements" means the minimum amount of capital
required for the Bank (i) to meet each capital ratio necessary for the Bank to
be classified as an "adequately capitalized" savings association pursuant to
12 U.S.C. Section 1831o and 12 C.F.R. Section 565 (and any amendment to either
thereof) or any successor law or regulation and (ii) to meet (x) each of the
industry-wide regulatory capital requirements applicable to the Bank pursuant
to 12 U.S.C. Section 1464(t) and 12 C.F.R. Section 567 (and any amendment to
either thereof) or any successor law or regulation, or (y) such higher amount
of capital as the Bank, individually, is required to maintain in order to meet
any individual minimum capital standard applicable to the Bank pursuant to 12
U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 (and any amendment to
either such Section) or any successor law or regulation.
68
<PAGE>
"Reimbursement Agreement" means the Third Amended and Restated Reimbursement
Agreement dated as of October 1, 1997 among Saul Holdings Partnership and its
subsidiary partnerships, the Trust and certain of its Restricted Subsidiaries
and affiliates, as such agreement may be further amended, restated or
supplemented; provided that the aggregate amount of the contingent
reimbursement obligations assumed by the Trust and its Restricted Subsidiaries
outstanding at any time under this agreement shall not exceed the aggregate
amount of $150,000,000.
"Restricted Subsidiary" means the Bank and its Subsidiaries, the New Obligor
and any other Subsidiary of the Trust that is not an Unrestricted Subsidiary.
"Retail Notes" means the unsecured notes of the Trust sold from time to time
at varying interest rates with maturities of one to ten years.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc. and its successors.
"Saul Holdings Partnership" means Saul Holdings Limited Partnership, a
Maryland limited partnership.
"Securities Act" means the Securities Act of 1933, as amended.
"Securitization Entity" means any pooling arrangement or entity (except for
any entity in corporate or partnership form) formed or originated for the
purpose of holding, and issuing securities representing interests in, one or
more pools of mortgages, leases, credit card receivables, home equity loan
receivables, automobile loans, leases or installment sales contracts, other
consumer receivables or other financial assets of the Bank or any Subsidiary
of the Bank, and shall include, without limitation, any grantor trust, owner
trust or real estate mortgage investment conduit or Financial Asset
Securitization Investment Trust ("FASIT").
"Series B Preferred Stock" means the Bank's noncumulative Preferred Stock,
Series B, issuable in exchange for the preferred stock of CCPCC outstanding on
the date of the Indenture.
"Single Asset Subsidiary" means any Wholly Owned Restricted Subsidiary of
the Trust that owns no more than one Real Estate Property and owns no
Investments other than those permitted to such Subsidiary by the "Limitation
on Restricted Subsidiaries" covenant.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and, when used with respect to any other Indebtedness, means
the date specified in the instrument governing such Indebtedness as the fixed
date on which the principal of such Indebtedness, or any installment of
interest thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Trust that is
expressly, by the terms of the instrument creating or evidencing such
Indebtedness, subordinated in right of payment to the Notes.
"Subsidiary" with respect to any Person, means any other Person a majority
of the equity ownership or majority of the Voting Stock of which is at the
time owned, directly or indirectly, by such Person, or by one or more other
Subsidiaries of such Person or by such Person and one or more other
Subsidiaries of such Person.
"Substitution Date" means the date that the New Obligor assumes the
obligations of the Trust under the Indenture and the Notes (as amended as
described in "--Certain Covenants of New Obligor") and becomes the direct
holder of the outstanding common stock and Voting Stock of the Bank owned by
the Trust, all in accordance with the provisions of the Indenture.
"Tax Sharing Agreement" means (i) the Tax Sharing Agreement dated June 28,
1990, as amended, between the Trust and other members of the affiliated group
of corporations joining with the Trust in the filing of a
69
<PAGE>
consolidated federal income tax return (the "Affiliated Group"), as such Tax
Sharing Agreement may be further amended or modified from time to time,
provided that (A) such further amendments or modifications reflect only the
addition or deletion of parties to such Tax Sharing Agreement, legislative,
judicial or administrative changes in the provisions, rules, application or
effect of the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury regulations promulgated under the Code (the "Regulations") or
applicable state law, or amendments or modifications, requested, required or
approved by the OTS and (B) any such further modification or amendment is
approved by the OTS, to the extent such approval is required by the rules and
regulations of the OTS, and (ii) any other tax sharing agreement to which the
Trust or any Consolidated Tax Subsidiaries may become a party, provided that
such other tax sharing agreement (A) consistently reflects the applicable tax
liabilities of, and the benefit of the use of losses, deductions, credits and
other tax attributes by, the Trust and the other members of the Affiliated
Group pursuant to the Code, the Regulations and applicable state law (except
as otherwise may be requested, required or approved by the OTS or required for
compliance with any guidelines, orders or other authority issued by the OTS)
and (B) is approved by the OTS, to the extent such approval is required by the
rules and regulations of the OTS, and provided further that the Trust shall
have received an opinion of independent counsel to the Trust or of a
nationally recognized accounting firm to the effect that such other tax
sharing agreement satisfies the condition in subclause (A) of the first
proviso of this clause (ii) and that such other tax sharing agreement is not
materially less beneficial to the Bank or the Trust, unless, with respect to
the Trust, otherwise required by the OTS, than the tax sharing agreement
described in clause (i).
"Tax Sharing Payment" means any payment made pursuant to the Tax Sharing
Agreement.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two Business Days prior to the
date fixed for repayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining term to April 1, 2003; provided, however, that if
the then remaining term to April 1, 2003 is not equal to the constant maturity
of a United States Treasury security for which a weekly average yield is
given, the Treasury Rate shall be obtained by linear interpolation (calculated
to the nearest one-twelfth of a year) from the weekly average yields of United
States Treasury securities for which such yields are given, except that if the
then remaining term to April 1, 2003 is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
"13% Preferred Stock" means the 3,000,000 shares of the 13% Noncumulative
Perpetual Preferred Stock, Series A of the Bank.
"Trust Nonrecourse Indebtedness" means Indebtedness of the Trust as to
which, subject to exceptions for fraud and certain environmental violations,
(i) the sole recourse for collection of principal, interest and premium with
respect to such Indebtedness is against the specific property or assets
identified in the instruments evidencing or securing such Indebtedness, (ii)
no other property or assets may be realized upon in collection of principal,
interest or premium of such Indebtedness, (iii) other than as provided in
clause (i) or (ii), the Trust does not provide credit support and is not
directly or indirectly liable for such Indebtedness and (iv) no default with
respect to such Indebtedness would permit (upon notice, lapse of time or both)
any holder of other Indebtedness of the Trust or any Restricted Subsidiary of
the Trust to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Trust that at the
time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Trustees as provided below) and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Trustees may designate (a "Designation")
any Subsidiary of the Trust (other than the Bank or any of its Subsidiaries,
the New Obligor (prior to the Substitution) or a Subsidiary that owns any
Capital Stock of, or owns, or holds any Lien on, any property of the Trust or
any other Restricted Subsidiary of the Trust that is not a Subsidiary of the
Subsidiary to be so designated) to be an Unrestricted Subsidiary if: (a) no
Default or Event of Default shall have occurred and be continuing at the time
of or after giving effect to such Designation; and (b) the Trust could make an
Investment in such Unrestricted Subsidiary at
70
<PAGE>
the time of such Designation (assuming the effectiveness thereof) in an amount
(the "Designation Amount") equal to the Fair Market Value of the Capital Stock
of such Subsidiary on such date. In the event of any such Designation, the
Trust shall be deemed to have made an Investment constituting a Restricted
Payment pursuant to the "Limitation on Restricted Payments" covenant for all
purposes of the Indenture in the Designation Amount. The Board of Directors
may revoke (a "Revocation") any Designation of a Subsidiary as an Unrestricted
Subsidiary if: (a) no Default or Event or Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation; and (b)
all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time, have
been permitted to be incurred under the Indenture. Any Designation or
Revocation must be evidenced by a Board Resolution certifying compliance with
the foregoing provisions.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which
its full faith and credit is pledged or (y) obligations of a Person controlled
or supervised by and acting as an agency or instrumentality of the United
States of America the timely payment of which is unconditionally guaranteed as
a full faith and credit obligation by the United States of America, which, in
either case, are not callable or redeemable at the option of the issuer
thereof, and shall also include a depository receipt issued by a bank (as
defined in Section 3(a)(2) of the Securities Act), as custodian with respect
to any such U.S. Government Obligation or a specific payment of principal of
or interest on any such U.S. Government Obligation held by such custodian for
the account of the holder of such depository receipt; provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal of or interest on the U.S. Government Obligation
evidenced by such depository receipt.
"U.S. Government Securities" means any evidence of Indebtedness with an
initial maturity of 180 days or less issued or directly and fully guaranteed
or insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof) and in which an interest may be
acquired by book-entry pursuant to the regulations of the U.S. Department of
the Treasury and the rules and procedures of the Federal Reserve System for
U.S. Treasury Securities.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have (i) in respect of a corporation, the general voting
power under ordinary circumstances to elect at least a majority of the board
of directors, managers or trustees of such corporation (irrespective of
whether or not, at the time, stock of any other class or classes shall have,
or might have, voting power by reason of the happening of any contingency) and
(ii) in respect of the Trust, the general voting power under ordinary
circumstances to elect the Board of Trustees or other governing board of the
Trust (irrespective of whether or not, at the time, stock of any other class
or classes shall have, or might have, voting power by reason of the happening
of any contingency).
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary of the
Trust all the outstanding Capital Stock (other than directors' qualifying
shares) of which is owned by the Trust, by one or more other Wholly Owned
Restricted Subsidiaries, or by the Trust and one or more other Wholly Owned
Restricted Subsidiaries.
"Wholly Owned Subsidiary" means a Subsidiary of a Person all the outstanding
Capital Stock (other than directors' qualifying shares) of which is owned by
such Person, by one or more Wholly Owned Subsidiaries of such Person, or by
such Person and one or more other Wholly Owned Subsidiaries of such Person.
CERTAIN COVENANTS OF NEW OBLIGOR
Upon consummation of the Substitution and pursuant to the supplemental
indenture to be entered into by the New Obligor, the Trustee and the Trust in
connection therewith, all references in the Indenture and the Notes to the
"Trust" will be read to be references to the "New Obligor." Additionally, the
"Limitation on Restricted
71
<PAGE>
Subsidiaries" covenant and the definitions of "Advisory Fees," "Disinterested
Trustee," "Management Agreements," "Nonrecourse Indebtedness," "Permitted
Subsidiary Indebtedness," "Real Estate Property," "Reimbursement Agreement,"
"Retail Notes" and "Single Asset Subsidiary" will be deleted in their
entirety. Definitions of "Current Interest Loan," "Disinterested Director" and
"Pledged Subsidiary" will be added and the "Limitation on Indebtedness," the
"Limitation on Restricted Payments," the "Limitation on Issuances and Sales of
Capital Stock of Restricted Subsidiaries," the "Limitation on Transactions
with Affiliates," the "Restriction on Transfer of Assets to Subsidiaries," the
"Limitation on Sale of Asset" and the "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenants and the
definitions of "Asset Sale," "Cash Flow--Indenture," "Permitted Indebtedness,"
"Permitted Investment" and "Restricted Subsidiary" will be amended and
restated in their entirety to read as follows:
Limitation on Indebtedness. The New Obligor will not, and will not permit
any Restricted Subsidiary (other than the Bank and its Subsidiaries) to,
create, issue, assume, guarantee or otherwise in any other manner become
directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Indebtedness (including any Acquired
Indebtedness), other than Permitted Indebtedness, unless at the time of such
incurrence the New Obligor's Operating Cash Flow Coverage Ratio for the four
full fiscal quarters immediately preceding the incurrence of such Indebtedness
(or, if the period since the Substitution Date is less than four fiscal
quarters, such shorter period on an annualized basis; provided that in no
event will such shorter period be less than one fiscal quarter), taken as one
period and after giving pro forma effect to (i) the incurrence of such
Indebtedness (and all other Indebtedness incurred by the New Obligor and its
Restricted Subsidiaries since the end of the most recently completed fiscal
quarter of the New Obligor preceding the date of determination) and (if
applicable) the application of the net proceeds therefrom (and from any such
other Indebtedness), including to refinance other Indebtedness, as if such
Indebtedness (and any such other Indebtedness) had been incurred on the first
day of such four-quarter period (or, if the period since the Substitution Date
is less than four fiscal quarters, the first day of such shorter period) and
(ii) the acquisition (whether by purchase, merger or otherwise) or disposition
(whether by sale, merger or otherwise) of any company, entity or business
acquired or disposed of by the New Obligor or its Restricted Subsidiaries, as
the case may be, since the first day of such four quarter period (or, if the
period since the Substitution Date is less than four fiscal quarters, the
first day of such shorter period), as if such acquisition or disposition
occurred on the first day of such four quarter period (or, if the period since
the Substitution Date is less than four fiscal quarters, the first day of such
shorter period), would have been greater than or equal to (x) 2.0 to 1.0 prior
to April 1, 1999, (y) 2.25 to 1.0 on and after April 1, 1999 and prior to
April 1, 2000 and (z) 2.50 to 1.0 thereafter.
Limitation on Restricted Payments. (a) The New Obligor will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, take any of
the following actions:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Capital Stock of the New Obligor (other than
dividends or distributions payable solely in shares of the Qualified
Capital Stock of the New Obligor or in options, warrants or other rights to
acquire such shares of Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any Capital Stock of the New Obligor or any direct or
indirect parent of the New Obligor or any options, warrants or other rights
to acquire such Capital Stock;
(iii) declare or pay any dividend on, or make any distribution to holders
of, any Capital Stock of any Restricted Subsidiary (other than with respect
to (A) any such Capital Stock held by the New Obligor or any of its Wholly
Owned Restricted Subsidiaries or (B) any such Capital Stock of the Bank or
any of its Subsidiaries) or purchase, redeem or otherwise acquire or retire
for value, any Capital Stock of any Subsidiary of the New Obligor (other
than (A) any such Capital Stock of any Wholly Owned Restricted Subsidiary
(other than the Bank and its Subsidiaries), (B) any Capital Stock held by
the Bank or its Subsidiaries of any of their Subsidiaries or (C) any
Capital Stock of any Securitization Entity that is a Subsidiary of the
Bank);
(iv) make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Subordinated
Indebtedness;
72
<PAGE>
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the New Obligor (other than with respect to (A) guarantees of
Indebtedness of any Wholly Owned Restricted Subsidiaries of the New Obligor
by the New Obligor or by any Restricted Subsidiary (other than by the Bank
or any of its Subsidiaries), (B) guarantees of Indebtedness of the Bank or
any of its Subsidiaries by another Subsidiary of the Bank or any guarantee
by the Bank of Indebtedness of any of its Subsidiaries, (C) guarantees of
Indebtedness of the New Obligor by any Restricted Subsidiary (other than
the Bank and its Subsidiaries) or (D) guarantees of Indebtedness of the
Bank or its Subsidiaries by any Affiliate of the New Obligor); or
(vi) make any Investment in any Person
(each of the foregoing actions described in (but not excluded from) clauses
(i) through (vi), other than any such action that is a Permitted Payment (as
defined below), is referred to herein as a "Restricted Payment"), provided
that such Restricted Payments may be made by the New Obligor or any Restricted
Subsidiary (other than the Bank and its Subsidiaries) if, after giving effect
to the proposed Restricted Payment (the amount of any such Restricted Payment,
if other than cash, as determined in good faith by the Board of Directors of
the New Obligor, whose determination shall be conclusive and evidenced by a
Board Resolution), (1) no Default or Event of Default shall have occurred and
be continuing and (2) the aggregate amount of all such Restricted Payments
declared or made after the date of the Indenture shall not exceed the sum
(without duplication) of:
(A) 50% of the aggregate Consolidated Net Income (Loss) of the New
Obligor accrued on a cumulative basis during the period beginning on the
Substitution Date and ending on the last day of the New Obligor's last
fiscal quarter ending prior to the Interest Payment Date immediately
preceding the date of such proposed Restricted Payment (or, if such
Consolidated Net Income (Loss) shall be a loss, minus 100% of such loss);
(B) the aggregate net cash proceeds received after the Substitution Date
by the New Obligor from the issuance or sale (other than to any of its
Subsidiaries) of shares of Qualified Capital Stock of the New Obligor or
warrants, options or rights to purchase shares of such Qualified Capital
Stock of the New Obligor;
(C) the aggregate net cash proceeds received after the Substitution Date
by the New Obligor as capital contributions;
(D) the aggregate net cash proceeds received after the Substitution Date
by the New Obligor (other than from any of its Subsidiaries) upon the
exercise of options, warrants or rights to purchase shares of Qualified
Capital Stock of the New Obligor;
(E) the aggregate net cash proceeds received after the Substitution Date
by the New Obligor from the issuance or sale (other than to any of its
Subsidiaries) of debt securities that have been converted into or exchanged
for Qualified Capital Stock of the New Obligor, together with the aggregate
net cash proceeds received by the New Obligor at the time of such
conversion or exchange; and
(F) the sum of (i) the Available Amount on the Substitution Date, if any,
and (ii) $7.5 million;
provided that the provisions of paragraph (a) will not restrict the payment of
any dividend within 60 days after the date of declaration thereof if, at such
date of declaration, such declaration and payment were permitted by the
provisions of paragraph (a).
(b) Notwithstanding paragraph (a) above, the New Obligor and its Restricted
Subsidiaries may take the following actions (each a "Permitted Payment") so
long as (other than with respect to (1) clause (v) below to the extent such
exchange is required by the OTS and (2) clause (viii) below with respect to
the Investment of funds by the Bank and its Subsidiaries in the normal course
of business) no Default or Event of Default shall have occurred and be
continuing:
(i) the purchase, redemption or other acquisition or retirement for value
of any shares of Capital Stock of the New Obligor, in exchange for, or out
of the net cash proceeds of, a substantially concurrent issuance and sale
(other than to any of its Subsidiaries) of shares of Qualified Capital
Stock of the New Obligor;
73
<PAGE>
(ii) (A) the repurchase, redemption, defeasance or other acquisition or
retirement for value by the Bank of the 13% Preferred Stock or the Series B
Preferred Stock, in exchange for, or out of the net cash proceeds of, a
substantially concurrent issuance and sale (other than to a Subsidiary of
the New Obligor) of, shares of Qualified Capital Stock of the Bank or out
of the net cash proceeds of a substantially concurrent incurrence (other
than to a Subsidiary of the New Obligor) of new Indebtedness of the Bank
which has no Stated Maturity of principal (or any required repurchase,
redemption, defeasance or sinking fund payments, other than as a result of
a change of control provision similar to the Notes) on or prior to the
final Stated Maturity of principal of the Notes or (B) the acquisition by
an Affiliate of the Bank of the 13% Preferred Stock or the Series B
Preferred Stock (and the contribution thereof to the Bank for retirement
and cancellation) with the proceeds of a cash distribution from the Bank
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary of the New Obligor) of shares of Qualified
Capital Stock of the Bank or out of the net cash proceeds of a
substantially concurrent incurrence (other than to a Subsidiary of the New
Obligor) of new Indebtedness of the Bank which has no Stated Maturity of
principal (or any required repurchase, redemption, defeasance or sinking
fund payments, other than as a result of a change of control provision
similar to the Notes) on or prior to the final Stated Maturity of principal
of the Notes; provided that, after giving effect to such issuance and sale
or such incurrence and repurchase, redemption, defeasance or other
acquisition or retirement, or such acquisition and contribution and
distribution, the Bank has (i) a leverage (core) capital ratio equal to or
in excess of 5.5%, (ii) a tier 1 risk-based capital ratio equal to or in
excess of 6.5% and (iii) a total risk-based capital ratio equal to or in
excess of 11%, as such ratios are calculated in accordance with 12 C.F.R.
Section 567 or any successor law or regulation;
(iii) the repurchase, redemption, defeasance or other acquisition or
retirement for value by the Bank or any of its Subsidiaries of Preferred
Stock of the Bank or its Subsidiaries (other than the 13% Preferred Stock
and the Series B Preferred Stock); provided that, after giving effect to
such repurchase, redemption, defeasance or other acquisition or retirement,
the Bank has (i) a leverage (core) capital ratio equal to or in excess of
5.5%, (ii) a tier 1 risk-based capital ratio equal to or in excess of 6.5%
and (iii) a total risk-based capital ratio equal to or in excess of 11%, as
such ratios are calculated in accordance with 12 C.F.R. Section 567 or any
successor law or regulation;
(iv) the redemption by the Bank of any of the PIK Preferred Stock;
(v) the exchange of the CCPCC Preferred Stock for the Series B Preferred
Stock;
(vi) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness (other than
Redeemable Capital Stock) in exchange for or out of the net cash proceeds
of a substantially concurrent issuance and sale (other than to a Subsidiary
of the New Obligor) of shares of Qualified Capital Stock of the New
Obligor;
(vii) the repurchase of any Subordinated Indebtedness at a purchase price
not greater than 101% of the principal amount of such Subordinated
Indebtedness in the event of a Change of Control pursuant to a provision
similar to the "Purchase of Notes upon a Change of Control" covenant;
provided that prior to such repurchase the New Obligor has made the Change
of Control Offer as provided in such covenant with respect to the Notes and
has repurchased all Notes validly tendered for payment in connection with
such Change of Control Offer;
(viii) Permitted Investments;
(ix) the transfer or distribution to the New Obligor or a Wholly Owned
Restricted Subsidiary of the New Obligor (other than the Bank and its
Subsidiaries) of all of the Capital Stock of one and only one Subsidiary of
the Bank (such Subsidiary or, in the event such Subsidiary is merged with
and into such Wholly Owned Restricted Subsidiary, such Wholly Owned
Restricted Subsidiary, is referred to as the "Pledged Subsidiary");
provided that (1) the Fair Market Value of the equity of the Pledged
Subsidiary is not in excess of 5% of the sum of (A) the Fair Market Value
of the equity of such Subsidiary and (B) the Fair Market Value of the
Qualified Capital Stock of the Bank owned by the New Obligor at the time of
such transfer, (2) at the time of such distribution the Trustee receives a
first priority lien on and security interest in the Capital Stock of the
Pledged Subsidiary, (3) any Indebtedness incurred in connection with, or
74
<PAGE>
in contemplation of such transfer or distribution will not exceed the
greater of (x) $10,000,000 or (y) 80% of the Fair Market Value of the
equity of the Pledged Subsidiary, (4) the New Obligor will not, and will
not permit the Pledged Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any kind of Lien on or with respect to the
property or assets of such Pledged Subsidiary or any income, profits or
proceeds therefrom other than a Lien in favor of the Bank or a Lien with
respect to Indebtedness incurred pursuant to clauses (d) and (j) of the
definition of Permitted Indebtedness (which Liens will be permitted
notwithstanding the "Limitation on Liens" covenant), (5) the Pledged
Subsidiary will not have at the time of such transfer or thereafter any
Subsidiaries, and (6) the Pledged Subsidiary will not make loans to or
Investments in any Affiliate of the New Obligor (other than the Bank and
except as otherwise permitted by clause (a)(ii) of the "Transactions with
Affiliates" covenant) or make any distributions on or with respect to, or
redeem, its Capital Stock; provided that the merger permitted by this
clause (ix) will not be a change in Collateral requiring an amendment or
consent under the Indenture so long as the Consolidated Net Worth of the
resulting entity is not less than that of the Subsidiary distributed by the
Bank;
(x) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any shares of Qualified Capital Stock of
the Bank (other than Preferred Stock) by the Bank;
(xi) the making of a Current Interest Loan pursuant to clause (f) of the
definition of Permitted Indebtedness and the repayment of any such Current
Interest Loan so long as at the time of such repayment (a) the New Obligor
has paid the interest on the Notes for the two consecutive Interest Payment
Dates immediately preceding such repayment and (b) during such period the
New Obligor has incurred no additional Indebtedness pursuant to clause (f)
of the definition of Permitted Indebtedness; provided, further, that until
such time as all Current Interest Loans have been repaid, the New Obligor
will not be permitted to make any Restricted Payment in cash pursuant to
clause (a)(i) of this "Limitation on Restricted Payments" covenant;
provided that repayments of Current Interest Loans may only be made
pursuant to the conditions in this clause (b)(xi);
(xii) the making and repayment of any loan from the Pledged Subsidiary
pursuant to clause (k) of the definition of "Permitted Indebtedness"; and
(xiii) the repurchase, redemption or other acquisition or retirement for
value of Subordinated Indebtedness (other than Redeemable Capital Stock),
in exchange for, or out of the net cash proceeds of a substantially
concurrent issue and sale (other than to a Subsidiary) of new Subordinated
Indebtedness of the New Obligor (such a transaction, a "refinancing");
provided that any such new Indebtedness of the New Obligor (A) shall be in
a principal amount that does not exceed an amount equal to the sum of (1)
101% of an amount equal to the principal amount so refinanced less any
discount from the face amount of the Indebtedness to be refinanced expected
to be deducted from the amount payable to the holders of such Indebtedness
in connection with such refinancing, (2) the amount of any premium expected
to be paid in connection with such refinancing pursuant to the terms of the
Subordinated Indebtedness refinanced or the amount of any premium
reasonably determined by the New Obligor as necessary to accomplish such
refinancing by means of a tender offer, privately negotiated repurchase or
otherwise and (3) the amount of expenses of the New Obligor incurred in
connection with such refinancing; provided further that for purposes of
this clause (A), the principal amount of any Indebtedness shall be deemed
to mean the principal amount thereof or, if such Indebtedness provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination; (B) (x) if such refinanced Subordinated Indebtedness has an
Average Life to Stated Maturity shorter than that of the Notes or a final
Stated Maturity earlier than the final Stated Maturity of the Notes, such
new Indebtedness shall have an Average Life to Stated Maturity no shorter
than the Average Life to Stated Maturity of such refinanced Indebtedness
and a final Stated Maturity no earlier than the final Stated Maturity of
such refinanced Indebtedness or (y) in all other cases, each Stated
Maturity of principal (or any required repurchase, redemption or sinking
fund payments) of such new Indebtedness shall be on or after the final
Stated Maturity of principal of the Notes; and (C) is (x) made expressly
subordinate to the Notes to substantially the same extent as the
Subordinated Indebtedness being refinanced or (y) expressly subordinated to
such refinanced Subordinated Indebtedness.
75
<PAGE>
The actions described in clauses (i), (vi) and (vii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be taken in accordance
with this paragraph (b) but shall reduce the amount that would otherwise be
available for Restricted Payments under clause (2) of paragraph (a) above to
the extent, in the case of clauses (i) and (vi), the New Obligor receives net
cash proceeds and applies them as described in such clauses (i) and (vi), and
the actions described in clauses (ii), (iii), (iv), (v), (viii), (ix), (x),
(xi), (xii) and (xiii) of this paragraph (b) shall be Restricted Payments that
shall be permitted to be taken in accordance with this paragraph and shall not
reduce the amount that would otherwise be available for Restricted Payments
under clause (2) of paragraph (a).
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The New Obligor (i) will not permit any of its Restricted
Subsidiaries (other than the Bank and its Subsidiaries) to issue any Capital
Stock (other than to the New Obligor or a Wholly Owned Restricted Subsidiary
of the New Obligor) and (ii) other than with respect to Capital Stock of the
Bank and its Subsidiaries, will not permit any Person (other than the New
Obligor or a Wholly Owned Restricted Subsidiary) to own any Capital Stock of
any of its Restricted Subsidiaries; provided, however, that this covenant
shall not prohibit (A) the issuance and sale of all, but not less than all, of
the issued and outstanding Capital Stock of any Restricted Subsidiary owned by
the New Obligor or any of its Restricted Subsidiaries in compliance with the
other provisions of the Indenture or (B) the ownership by directors of
director's qualifying shares or the ownership by foreign nationals of Capital
Stock of any Restricted Subsidiary, to the extent mandated by applicable law;
provided further, however, that the Bank will not, and will not permit any
Subsidiary of the Bank to, create any class of common stock if such class of
common stock provides for, or entitles any holder thereof to, the payment of
dividends or distributions of any kind on any basis other than on a pro rata
basis, consistent with the ownership interests of all the holders of the
common stock of the Bank or of such Subsidiary, as the case may be, to the
holders of all classes of common stock of the Bank or such Subsidiary, as the
case may be.
Limitation on Transactions with Affiliates. (a) The New Obligor will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of
assets, property or services) with any Affiliate of the New Obligor (except
that the Bank and any of its Subsidiaries may enter into any transaction or
series of related transactions with any Subsidiary of the Bank and the New
Obligor and any Wholly Owned Restricted Subsidiary of the New Obligor (other
than the Bank and its Subsidiaries) may enter into any transaction or series
of related transactions with any other Wholly Owned Restricted Subsidiary
without limitation under this covenant) unless (1) such transaction or series
of related transactions is in writing on terms that are no less favorable to
the New Obligor or such Restricted Subsidiary of the New Obligor, as the case
may be, than would be available in a comparable transaction in an arm's-length
dealing with a Person that is not such an Affiliate or, in the absence of such
a comparable transaction, on terms that in good faith would be offered to a
Person that is not an Affiliate, (2) with respect to any transaction or series
of related transactions in which the New Obligor and its Restricted
Subsidiaries will receive or render value or incur obligations or make
aggregate payments in excess of $5,000,000, the New Obligor delivers an
Officers' Certificate to the Trustee certifying that such transaction or
series of related transactions complies with clause (1) above and such
transaction or series of related transactions has been approved by a majority
of the Disinterested Directors of the Board of Directors of the New Obligor
and (3) with respect to any transaction or series of related transactions in
which the New Obligor and its Restricted Subsidiaries will receive or render
value or incur obligations or make aggregate payments in excess of
$20,000,000, or in the event no members of the Board of Directors of the New
Obligor are Disinterested Directors with respect to any transaction or series
of related transactions included in clause (2), the New Obligor delivers to
the Trustee a written opinion of a nationally recognized expert with
experience in appraising the terms and conditions of the type of transaction
or series of transactions for which approval is required to the effect that
the transaction or series of transactions are fair to the New Obligor and such
Restricted Subsidiary from a financial point of view; provided, however, that
this covenant will not restrict (i) transactions entered into pursuant to any
agreement in effect on the Substitution Date and not made in contemplation of
the Substitution, (ii) residential mortgage, credit card and other consumer
loans to an Affiliate who is an officer, director or employee of the New
Obligor or any of its Subsidiaries, (iii) any transaction or series of related
transactions in which the total amount involved does not exceed $100,000, (iv)
payment of legal expenses incurred on behalf of the New Obligor or its
Subsidiaries; provided, however, that such expenses paid
76
<PAGE>
by the Bank and its Subsidiaries for or on behalf of the New Obligor or any
other Restricted Subsidiary (other than a Subsidiary of the Bank) shall not
exceed $500,000 in any fiscal year, (v) transactions permitted under the
"Limitation on Restricted Payments" covenant, (vi) checking or other deposit
products and investment management and advisory services and insurance
products, in each case that the Bank and its subsidiaries customarily offer to
their respective customers in the ordinary course of business, (vii) payments
pursuant to the Tax Sharing Agreement, (viii) payments by the New Obligor to
the Bank pursuant to the Capital Maintenance Agreement, and (ix) the
contribution of Cash Equivalents to the New Obligor or any Restricted
Subsidiary (other than the Bank and its Subsidiaries) in return for Qualified
Capital Stock of the New Obligor or such Restricted Subsidiary.
(b) If the Bank shall fail to comply with any of its Regulatory Capital
Requirements set forth in clauses (i) and (ii)(x) of the definition thereof,
then the New Obligor shall not and shall not permit any of its Restricted
Subsidiaries (other than the Bank or its Subsidiaries) to, directly or
indirectly, make any payments pursuant to clause (a)(iv) above, any Restricted
Payments otherwise permitted by clause (a)(2) of the "Limitation on Restricted
Payments" covenant, any Permitted Payments, other than actions permitted by
clauses (iv), (v) and (xiii) of paragraph (b) of the "Limitation on Restricted
Payments" covenant, or any Investments in any Person (other than Permitted
Investments permitted by clause (i), (ii), (iv) or (vi) of the definition
thereof) or otherwise engage in any activity (including purchases, acquisition
by lease and other acquisitions of additional real property and buildings)
other than operating its then existing businesses in the ordinary course until
the Bank shall have complied with such Regulatory Capital Requirements.
Restriction on Transfer of Assets to Subsidiaries. The New Obligor will not
sell, convey, transfer or otherwise dispose of its assets or property to any
of its Subsidiaries except for sales, conveyances, transfers or other
dispositions of assets or property in an amount permitted by the "Limitation
on Restricted Payments" covenant.
Limitation on Sale of Assets. The New Obligor will not, and will not permit
any of its Restricted Subsidiaries (other than the Bank and its Subsidiaries)
to, engage in any Asset Sale unless (i) the consideration received by the New
Obligor or such Restricted Subsidiary for such Asset Sale is not less than the
fair market value of the Capital Stock or assets sold (as determined by the
Board of Directors of the New Obligor, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) the consideration received by
the New Obligor or the relevant Restricted Subsidiary in respect of such Asset
Sale consists of at least 75% Cash Equivalents.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The New Obligor will not, and will not permit any of its
Restricted Subsidiaries (other than the Bank and its Subsidiaries) to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any such Restricted
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock or any other interest or
participation in, or measured by, its profits, (b) pay any Indebtedness owed
to the New Obligor or any other Restricted Subsidiary, (c) make loans or
advances to the New Obligor or any other Restricted Subsidiary, (d) transfer
any of its properties or assets to the New Obligor or any Restricted
Subsidiary or (e) guarantee any Indebtedness of the New Obligor or any
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reason of (i) applicable law, (ii) customary non-assignment
provisions of any lease governing a leasehold interest or equipment of the New
Obligor or any Restricted Subsidiary, (iii) customary due on sale and other
restrictions on transfer contained in mortgages and deeds of trust, (iv) the
Indenture and (v) any Indebtedness incurred by the Pledged Subsidiary pursuant
to clause (d) of the definition of "Permitted Indebtedness."
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (a) any Capital
Stock of any Restricted Subsidiary; (b) all or substantially all of the
properties and assets of any division or line of business of the New Obligor
or its Restricted Subsidiaries; or (c) any other properties or assets of the
New Obligor or any Restricted
77
<PAGE>
Subsidiary other than in the ordinary course of business. For the purposes of
this definition, the term "Asset Sale" shall not include any transfer of
properties or assets or Capital Stock (i) that is governed by the provisions
of the Indenture described under "--Consolidation, Merger and Sale of Assets,"
(ii) in compliance with the "Limitation on Restricted Payments" covenant, or
(iii) of any Restricted Subsidiary (other than the Pledged Subsidiary) to the
New Obligor or any other Restricted Subsidiary.
"Cash Flow--Indenture" means with respect to the New Obligor, for any
period, all as determined in accordance with GAAP on a consolidated basis for
the New Obligor and its Restricted Subsidiaries (other than the Bank and its
Subsidiaries) and without duplication, the sum of the following items for such
period: (a) consolidated net income (or loss), plus (b) depreciation and
amortization expense, plus (c) interest expense, plus (d) equity in losses of
investments, less (e) equity in earnings of investments, plus (f) losses on
sales of property, less (g) gains on sales of property, plus (h) non-cash
charges, less (i) non-cash gains, plus (j) cash distributions received from
investments, plus (k) the provision for federal, state, local and foreign
income taxes, plus (l) tax sharing payments received by the New Obligor, plus
(m) dividends received by the New Obligor from the Bank or any Restricted
Subsidiary.
"Current Interest Loan" means unsecured Indebtedness of the New Obligor, the
proceeds of which are used to pay interest on the Notes, made pursuant to a
loan that (a) does not mature prior to 2 years after the final Stated Maturity
of the Notes, (b) requires no payment of principal or interest (except as
provided under clause (b)(xi) of the "Limitation on Restricted Payments"
covenant) prior to the final Stated Maturity of the Notes, (c) will not permit
acceleration or the occurrence of an event of default thereunder prior to the
final Stated Maturity of the Notes and (d) requires the maker of such loan to
agree not to join in any petition for the involuntary bankruptcy of the New
Obligor.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the Board of Directors of the New Obligor
who does not have any material direct or indirect financial interest in or
with respect to such transaction or series of related transactions.
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the New Obligor pursuant to the Notes;
(b) obligations of the New Obligor or any Restricted Subsidiary pursuant
to Interest Rate Agreements designed to protect the New Obligor or such
Restricted Subsidiary, as the case may be, against fluctuations in interest
rates in respect of Indebtedness of the New Obligor or such Restricted
Subsidiary, as the case may be, which obligations do not exceed the
aggregate principal amount of such Indebtedness;
(c) Indebtedness of the New Obligor or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets;
(d) Indebtedness of any Restricted Subsidiary under any warehouse lines
of credit, repurchase agreements or similar facilities that (a) is incurred
for the purpose of funding the origination or purchase of credit card
receivables, home equity loan receivables, automobile loans, leases or
installment sales contracts, other consumer receivables, mortgage loans or
mortgage notes that are initially intended to be sold to investors and (b)
is secured by credit card receivables, home equity loan receivables,
automobile loans, leases or installment sales contracts, other consumer
receivables, mortgage loans, mortgage notes, mortgage-backed securities or
any combination thereof owned by such Restricted Subsidiary;
(e) Indebtedness of the New Obligor or any Restricted Subsidiary in an
aggregate principal amount outstanding at any one time (without
duplication) not in excess of $20,000,000 plus 50% of the increase in
Consolidated Net Worth of the New Obligor from the Substitution Date;
provided, however, that such increase in Consolidated Net Worth of the New
Obligor will exclude the effect of any change in the valuation of the
initial investment in the Bank as recorded on the Substitution Date;
(f) Indebtedness of the New Obligor (at such time as the New Obligor is
not a Wholly Owned Subsidiary of the Trust) to any Person (other than the
Bank or its Subsidiaries) under Current Interest Loans
78
<PAGE>
in an aggregate amount outstanding at any time to all such Persons not in
excess of $40 million (plus any accrued and unpaid interest);
(g) Indebtedness of any Wholly Owned Restricted Subsidiary (other than
the Bank and its Subsidiaries and the Pledged Subsidiary) to the New
Obligor, to the extent permitted by the "Limitation on Restricted Payments"
covenant, except that any transfer of any such Indebtedness by the New
Obligor to any other Person shall be deemed to be an incurrence of
Indebtedness;
(h) obligations of the New Obligor under the Capital Maintenance
Agreement; provided, however, that this clause (h) is not intended to
include any Indebtedness incurred by the New Obligor in connection with
complying with its obligations pursuant to such agreement;
(i) Indebtedness of the Pledged Subsidiary incurred pursuant to clause
(b)(ix) of the "Limitation on Restricted Payments" covenant;
(j) obligations of the Pledged Subsidiary pursuant to hedge transactions
incurred in the ordinary course of business to protect such Restricted
Subsidiary's loan portfolio against fluctuations in prices resulting from
changes in interest rates;
(k) Indebtedness of the New Obligor to the Pledged Subsidiary, the
proceeds of which are used to pay interest on the Notes, except that any
transfer of such Indebtedness by the Pledged Subsidiary will be deemed to
be an incurrence of Indebtedness by the New Obligor; and
(l) any renewals, extensions, substitutions, refinancings or replacements
and any successive refinancings (each, for purposes of this clause (l), a
"refinancing") by the New Obligor or any Restricted Subsidiary of any
Indebtedness of the New Obligor or such Restricted Subsidiary referred to
in clause (e) of this definition and any Indebtedness of the New Obligor or
any Restricted Subsidiary incurred in accordance with the "Limitation on
Indebtedness" covenant (other than Permitted Indebtedness), so long as (i)
any such new Indebtedness shall be in a principal amount that does not
exceed the principal amount (or, if such Indebtedness being refinanced
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, such lesser amount as
of the date of determination) so refinanced, plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness being so refinanced or the amount of any premium reasonably
determined by the New Obligor or such Restricted Subsidiary, as the case
may be, as necessary to accomplish such refinancing through means of a
tender offer or privately negotiated transaction and (ii) in the case of
any refinancing of Indebtedness that is Subordinated Indebtedness, (A) such
new Indebtedness is made subordinate to the Notes at least to the same
extent as the Subordinated Indebtedness being refinanced and (B) such new
Indebtedness has an Average Life to Stated Maturity and final Stated
Maturity of principal that exceeds the Average Life to Stated Maturity and
final Stated Maturity of the Subordinated Indebtedness being refinanced).
"Permitted Investment" means any Investment (i) in cash, (ii) in Cash
Equivalents, (iii) of up to $10,000,000 in Wholly Owned Restricted
Subsidiaries, (iv) in or by the Bank or its Subsidiaries, (v) in
consideration, not constituting Cash Equivalents, received pursuant to an
Asset Sale made in compliance with the covenant described under the caption
"Limitation on Sale of Assets" in an aggregate amount of up to 25% of the
consideration received with respect to such Asset Sale, (vi) constituting cash
advances on an intercompany open account basis (A) from the New Obligor to its
Restricted Subsidiaries required for working capital, the payment of interest
and premium, if any, on and principal of any Indebtedness, expenditures for
maintenance and capital improvements, and other operating expenses, to the
extent Restricted Subsidiaries have advanced cash to the New Obligor or (B)
from any Restricted Subsidiary to the New Obligor, of excess cash on hand from
time to time, in each case made in the ordinary course of business and
consistent with past practice, or (vii) in any Wholly Owned Restricted
Subsidiary of the New Obligor resulting from the acquisition of such
Subsidiary for Qualified Capital Stock of the New Obligor or for Qualified
Capital Stock of the Trust, such Subsidiary at the time of such acquisition
owning Qualified Capital Stock of the Bank and having no other assets in
excess of $1 million and no Indebtedness or operations.
79
<PAGE>
"Restricted Subsidiary" means the Bank and its Subsidiaries, the Pledged
Subsidiary and any other Subsidiary of the New Obligor that is not an
Unrestricted Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
New Notes issued in exchange for the Old Notes currently represented by one
or more fully registered global notes will be represented by one or more fully
registered global notes (collectively, the "Global Securities"), and will be
deposited upon issuance with The Depository Trust Company (the "Depository")
or an agent of the Depository and registered in the name of Cede & Co.
("Cede"), as the Depository's nominee.
New Notes issued in exchange for other Old Notes will be issued in fully
registered, certificated form without interest coupons.
Holders may hold their interests in any Global Securities directly through
the Depository, or indirectly through organizations which are participants in
the Depository ("Participants"). Transfers between Participants will be
effected in accordance with the Depository's rules and will be settled in
immediately available funds. Access to the Depository's system is also
available to other entities such as banks, brokers, dealers, trust companies
and other parties that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly, and have indirect access to the
Depository's system ("Indirect Participants"). Persons who are not
Participants or Indirect Participants may beneficially own securities held by
or on behalf of the Depository only through the Participants or the Indirect
Participants. The ownership interests and transfer of ownership interests of
such persons held by or on behalf of the Depository are recorded on the
records of the Participants and Indirect Participants. So long as Cede, as the
nominee of the Depository, is the registered owner of any Global Security,
Cede for all purposes will be considered the sole holder of such Global
Security. Except as provided below, owners of beneficial interest in a Global
Security will not be entitled to have certificates registered in their names,
will not receive or be entitled to receive physical delivery of certificates
in definitive form and will not be considered the Holder thereof.
The Depository has advised the Trust as follows: the Depository is a limited
purpose trust company organized under the laws of the State of New York, a
"banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Depository was
created to hold securities for its Participants and to facilitate the
clearance and settlement of securities transactions, such as transfers and
pledges, among Participants in deposited securities through electronic book-
entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of securities certificates. Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Certain of such Participants (or their
representatives), together with other entities, own the Depository. The rules
applicable to the Depository and its Participants are on file with the
Commission.
The Depository has also advised the Trust that pursuant to procedures
established by it, (i) upon deposit of the Global Securities, the Depository
will credit the accounts of its Participants with portions of the principal
amount of the Global Securities representing the New Notes issued in exchange
for the Old Notes that each such Participant has instructed the Depository to
surrender for exchange and (ii) ownership of such interests in the Global
Securities will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depository (with respect to
the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Securities).
Under the terms of the Indenture, the Trust and the Trustee will treat the
persons in whose names the New Notes, including the Global Securities, are
registered as the owners thereof for the purpose of receiving payments in
respect of the principal of and premium, if any, and interest on any New Notes
and for any and all other purposes whatsoever. Payments on any New Notes
registered in the name of Cede will be payable by the
80
<PAGE>
Trustee to Cede in its capacity as the registered holder under the Indenture.
Consequently, none of the Trust, the Trustee or any agent of the Trust or the
Trustee has or will have any responsibility or liability for (i) any aspect of
the Depository's records or the records of any Participant or Indirect
Participant relating to or payments made on account of beneficial ownership
interests in the Global Securities, or for maintaining, supervising or
reviewing any of the Depository's records or records of any Participant or
Indirect Participant relating to the beneficial ownership interests in the
Global Securities or (ii) any other matter relating to the actions and
practices of the Depository or any of its Participants or Indirect
Participants. The Depository has advised the Trust that its current practice,
upon receipt of any payment in respect of securities such as the New Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security as shown on the records of the Depository unless the
Depository has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of New Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of the Depository,
the Trustee or the Trust. Neither the Trust nor the Trustee will be liable for
any delay by the Depository or any of its Participants or Indirect
Participants in identifying the beneficial owners of the New Notes, and the
Trust and the Trustee may conclusively rely on and will be protected in
relying on instructions from Cede for all purposes.
The Depository may discontinue providing its services as securities
depositary with respect to the New Notes at any time by giving reasonable
notice to the Trust. In the event that the Depository notifies the Trust that
it is unwilling or unable to continue as depositary for any Global Security or
if at any time the Depository ceases to be a clearing agency registered as
such under the Exchange Act when the Depository is required to be so
registered to act as such depository and no successor depositary shall have
been appointed within 90 days of such notification or of the Trust's becoming
aware of the Depository's ceasing to be so registered, as the case may be,
certificates for the relevant New Notes will be printed and delivered in
exchange for interests in such Global Security. Any Global Security that is
exchangeable pursuant to the preceding sentence shall be exchanged for the
relevant New Notes registered in such names as the Depository shall direct. It
is expected that such instructions will be based upon directions received by
the Depository from its Participants with respect to ownership of beneficial
interests in such Global Security.
The Trust may decide to discontinue use of the system of book-entry
transfers through the Depository (or a successor securities depositary). In
that event, certificates representing the New Notes will be printed and
delivered.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material federal income tax consequences
to holders of the Notes who hold the Notes as an investment and not for sale
to customers in the ordinary course of a trade or business. This discussion is
based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), and regulations, rulings and judicial decisions now in effect,
all of which are subject to change. The following does not discuss all aspects
of federal income taxation that may be relevant to a particular investor in
light of the investor's particular investment circumstances or to certain
types of investors subject to special treatment under the federal income tax
laws (for example, life insurance companies, tax-exempt organizations, broker-
dealers and others who do not hold their Notes as "capital assets" within the
meaning of Section 1221 of the Code, and non-U.S. taxpayers) and does not
discuss any aspects of state, local or foreign tax laws or any estate or gift
tax considerations. Prospective investors should consult their own tax
advisers regarding the federal, state, local, and foreign income and other tax
considerations of owning the New Notes or participating in the Exchange Offer.
EXCHANGE OFFER
The Trust believes that, for federal income tax purposes, the exchange of
New Notes for Old Notes pursuant to the Exchange Offer will be disregarded and
each New Note will be treated as a continuation of the corresponding Old Note
because the terms of the New Notes are not materially different from the terms
of the Old Notes. Accordingly, holders of Old Notes will not realize gain or
loss upon the exchange.
81
<PAGE>
PAYMENT OF INTEREST ON THE NEW NOTES
A holder of a New Note will be required to report as income for federal
income tax purposes interest earned on the New Note in accordance with the
holder's method of tax accounting. A holder of a New Note using the accrual
method of accounting for tax purposes is required to include interest in
ordinary income as such interest accrues, while a cash basis holder must
include interest in income when payments are received (or made available for
receipt) by such holder.
SALE, EXCHANGE OR RETIREMENT OF THE NEW NOTES
A holder of a New Note will generally have a tax basis in the New Note equal
to the price paid for the New Note or the Old Note exchanged therefor,
increased by any market discount included in income and reduced by any
amortized premium. A holder of a New Note generally will recognize gain or
loss on the sale, exchange, redemption or retirement of the New Note, equal to
the difference (if any) between the amount realized from such sale, exchange,
redemption or retirement and the holder's basis in the New Note. The holding
period of a New Note includes any holding period with respect to an Old Note
exchanged therefor. The maximum capital gains tax rates for individual
taxpayers are as follows: (a) 28% for gain on the disposition of assets held
18 months or less but more than one year; (b) 20% for gain on the disposition
of assets held more than 18 months by taxpayers in the 28% or higher ordinary
income tax brackets; and (c) 10% for gain on the disposition of assets held
more than 18 months by taxpayers in the 15% ordinary income tax bracket. With
respect to taxable years beginning after December 31, 2000, the maximum
capital gains tax rates for individual taxpayers are as follows: (a) 28% for
gain on the disposition of assets held 18 months or less but more than one
year; (b) 20% for gain on the disposition of assets held more than 18 months
by taxpayers in the 28% or higher ordinary income tax brackets; (c) 18% for
gain on the disposition of assets held more than 5 years after December 31,
2000 by taxpayers in the 28% or higher ordinary income tax brackets; (d) 10%
for gain on the disposition of assets held more than 18 months by taxpayers in
the 15% ordinary income tax bracket; and (e) 8% for gain on the disposition of
assets held more than 5 years by taxpayers in the 15% ordinary income tax
bracket.
MARKET DISCOUNT
A purchaser of either an Old Note subsequent to its initial issue or a New
Note, in either case, at a price that is less than the stated redemption price
of the Note at maturity generally will be subject to the market discount
provisions of sections 1276 through 1278 of the Code. Market discount is
generally equal to the excess of the stated redemption price of the Note at
maturity over the holder's tax basis in such Note. Market discount will be
considered to be zero if such market discount is less than 0.25% of the stated
redemption price at maturity of the Note times the number of complete years to
maturity that remain after the holder's acquisition of the Note.
If a holder realizes a gain upon disposition of a New Note, the lesser of
(i) the excess of the amount received on such disposition over the holder's
tax basis in the New Note or (ii) the portion of the market discount that
accrued while the New Note was held by such holder (including any holding
period with respect to an Old Note exchanged therefor) and that was not
previously included in income generally will be treated as ordinary interest
income at the time of disposition. If a holder disposes of a New Note in any
transaction other than a sale, exchange or involuntary conversion (e.g., as a
gift), that holder generally will be treated as having realized an amount
equal to the fair market value of the New Note and will be required to
recognize as ordinary income any gain on disposition to the extent of the
accrued market discount. As a result, a holder could be required to recognize
ordinary interest income, even though the disposition would not otherwise be
taxable. Market discount will be considered to accrue ratably during the
period from the date of acquisition to the maturity date of the New Note,
unless the holder elects to accrue on the basis of semiannual compounding.
A holder of a New Note generally will be required to defer the deduction of
all or a portion of the interest paid or accrued on any indebtedness incurred
or maintained to purchase or carry such New Note until the maturity of the New
Note or its earlier disposition in a taxable transaction.
A holder may elect to include market discount in income currently as it
accrues (on either a ratable or a semiannual compounding basis), in which case
the rules described above regarding the treatment as ordinary income of gain
upon the disposition of New Notes and regarding the deferral of interest
deductions will not apply.
82
<PAGE>
AMORTIZABLE BOND PREMIUM
If a holder's tax basis in a Note immediately after such holder acquires it
exceeds the amount payable at maturity, such holder should consult a tax
adviser to determine the availability of an election to deduct the excess as
amortizable bond premium pursuant to section 171 of the Code. If a holder
makes an election to amortize premium on a Note, such election will apply to
all taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
Internal Revenue Service.
BACKUP WITHHOLDING
A holder of a Note may be subject to backup withholding at the rate of 31%
with respect to certain payments of principal, premium, if any, and interest,
on the Notes, and to proceeds of the sale or redemption of the Notes, unless
such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A holder of a Note who does not provide the
Trust with his correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the holder's income tax liability. Information reporting
requirements and backup withholding will not apply to the exchange of Old
Notes for New Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes that
were acquired as a result of market-making activities or other trading
activities. The Trust has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resales.
The Trust will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensations under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Trust has agreed in the Registration Rights Agreement to pay all
expenses incident to the Exchange Offer, other than certain applicable taxes,
and to indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
83
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
New Notes will be passed upon for the Trust by Shaw Pittman Potts &
Trowbridge, Washington, D.C., a partnership including professional
corporations. George M. Rogers, Jr., whose professional corporation is a
member of that firm, is a trustee of the Trust and a director of the Saul
Company and the Bank.
EXPERTS
The financial statements of B.F. Saul Real Estate Investment Trust and
subsidiaries as of September 30, 1997 and 1996 and for each of the three years
in the period ended September 30, 1997, included in the annual report on Form
10-K and included in this Prospectus and the financial statements of Chevy
Chase Bank, F.S.B. and its subsidiaries as of September 30, 1997 and 1996 and
for each of the three years in the period ended September 30, 1997 included in
this Prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their reports appearing herein.
84
<PAGE>
Attachment A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended September 30, 1997
TRANSITION REPORT PURSUANT FOR 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 its 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 offices) (Zip Code)
Registrant's telephone number, including area code: (301) 986-6000
-----------------------------
Securities registered pursuant to Section 12(b) of Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
N/A N/A
- ----------------------------- -------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
N/A
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether 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
requires to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendements to
this Form 10-K. /x/
There were no Common Shares of Beneficial Interest held by non-affiliates of the
registrant as of December 5, 1997.
The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as
of December 5, 1997 was 4,826,910.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
General ...........................................................
Real Estate ..................................................
Banking ......................................................
ITEM 2. PROPERTIES ...................................................
Real Estate ..................................................
Banking ......................................................
ITEM 3. LEGAL PROCEEDINGS ............................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..........
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS .................................
ITEM 6. SELECTED FINANCIAL DATA ......................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...............
Financial Condition ...............................................
Real Estate ..................................................
Banking ......................................................
Liquidity and Capital Resources ...................................
Real Estate ..................................................
Banking ......................................................
Liquidity ...............................................
Capital .................................................
Results of Operations .............................................
Fiscal 1997 Compared to Fiscal 1996 ..........................
Real Estate .............................................
Banking .................................................
Fiscal 1996 Compared to Fiscal 1995 ..........................
Real Estate .............................................
Banking .................................................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................
Management's Statement on Responsibility ..........................
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .........................
PART III
ITEM 10. TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST ................
Executive Officers of the Trust Who Are Not Directors ............
Committees of the Board of Trustees ..............................
ITEM 11. EXECUTIVE COMPENSATION .......................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT .......................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...............
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K .....................................
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
B.F. Saul Real Estate Investment Trust (the "Trust") operates as a Maryland real
estate investment trust. The Trust began its operations in 1964 as an
unincorporated business trust organized under a Declaration of Trust governed by
District of Columbia law. The Trust terminated its status as a qualified real
estate investment trust for federal income tax purposes in 1978 and is now
taxable as a corporation. On October 24, 1988, the Trust amended its Declaration
of Trust to qualify the Trust as a statutory real estate investment trust under
Maryland law.
The principal business activity of the Trust and its real estate 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"), whose assets accounted for 95% of the Trust's consolidated assets
at September 30, 1997. The Trust is a thrift holding company by virtue of its
ownership of a majority interest in Chevy Chase. See "Real Estate - Holding
Company Regulation."
The Trust recorded net income of $18.9 million in the fiscal year ended
September 30, 1997, compared to a net loss of $78,000 in the fiscal year ended
September 30, 1996 and net income of $10.9 million in the fiscal year ended
September 30, 1995.
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The Term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B. F.
Saul Real Estate Trust and its subsidiaries, including Chevy Chase and Chevy
Chase's subsidiaries. "Real Estate Trust" refers to B. F. Saul Real Estate
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by Chevy Chase and its
subsidiaries is identified by "Banking."
The principal offices of the Trust are located at 8401 Connecticut Avenue, Chevy
Chase, Maryland 20815, and the Trust's telephone number is (301) 986-6000.
Real Estate. The Real Estate Trust's long-term objectives are to increase cash
flow from operations and to maximize capital appreciation of its real estate.
The properties owned by the Real Estate Trust are located predominantly in the
Mid-Atlantic and Southeastern regions of the United States and consist
principally of hotels, office and industrial projects, and undeveloped land
parcels.
<PAGE>
Banking. Chevy Chase is a federally chartered and federally insured stock
savings bank which at September 30, 1997 was conducting business from 128
full-service offices and 614 automated teller machines ("ATMs") in Maryland,
Virginia and the District of Columbia. The Bank has its home office in McLean,
Virginia and its executive offices in Chevy Chase, Maryland, both suburban
communities of Washington, D.C. The Bank also maintains 18 mortgage loan
production offices in the mid-Atlantic region, 17 of which are operated by a
wholly-owned mortgage banking subsidiary, and 18 consumer loan production
offices, 10 of which are operated by a wholly-owned finance subsidiary of the
Bank. At September 30, 1997, the Bank had total assets of $6.1 billion and total
deposits of $4.9 billion. Based on total consolidated assets at September 30,
1997, Chevy Chase is the largest bank headquartered in the Washington, D.C.
metropolitan area.
Chevy Chase is a consumer oriented, full service banking institution principally
engaged in the business of attracting deposits from the public and using such
deposits, together with borrowings and other funds, to make loans secured by
real estate, primarily residential mortgage loans, and credit card and other
types of consumer loans. The Bank also has an active commercial lending program.
The Bank's principal deposit and lending markets are located in the Washington,
D.C. metropolitan area. As a complement to its basic deposit and lending
activities, the Bank provides a number of related financial services to its
customers, including securities brokerage and insurance products offered through
its subsidiaries. On November 12, 1997, the Bank acquired ASB Capital
Management, Inc. ("ASB"), one of the largest SEC-registered investment managers
headquartered in the Washington, D.C. metropolitan area, through which the Bank
will provide a variety of investment products and fiduciary services to a
primarily institutional customer base.
Chevy Chase recorded operating income of $80.2 million for the year ended
September 30, 1997, compared to operating income of $46.1 million for the year
ended September 30, 1996. At September 30, 1997, the Bank's tangible, core, tier
1 risk-based and total risk-based regulatory capital ratios were 6.96%, 6.96%,
7.24% and 13.50%, 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
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). In addition, the Bank's capital levels immediately
following the acquisition of ASB discussed above, remained above the levels
established for well-capitalized institutions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Financial Condition -
Banking - Capital."
On December 3, 1996, the Bank sold $100.0 million of 9 1/4% Subordinated
Debentures due 2008 (the "1996 Debentures"), the principal amount of which is
includable in the Bank's supplementary capital. In addition, on December 3,
1996, a new real estate investment trust subsidiary of the Bank sold $150.0
million of its Noncumulative Exchangeable Preferred Stock, Series A (the "REIT
Preferred Stock"), which is eligible for inclusion as core capital of the Bank
in an amount up to 25% of the Bank's total core capital.
<PAGE>
Chevy Chase is subject to comprehensive regulation, examination and supervision
by the Office of Thrift Supervision (the "OTS") and, to a lesser extent, by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank's deposit accounts
are fully insured up to $100,000 per insured depositor by the Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC.
REAL ESTATE
REAL ESTATE INVESTMENTS
The following tables set forth, at and for the periods indicated, certain
information regarding the properties in the Real Estate Trust's investment
portfolio at September 30, 1997.
<TABLE>
<CAPTION>
HOTELS
Average Occupancy (2) Average Room Rate
------------------------ ------------------------
Year Ended September 30, Year Ended September 30,
Available ------------------------ ------------------------
Location Name Rooms(1) 1997 1996 1995 1997 1996 1995
- ------------ -------------------------------- ---------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COLORADO
Pueblo Holiday Inn - Pueblo 193 74% 75% 81% $53.09 $54.84 $50.97
MARYLAND
Gaithersburg Holiday Inn - Gaithersburg 301 65% 61% 65% $70.10 $68.93 $61.76
MICHIGAN
Auburn Hills Holiday Inn - Auburn Hills (3) 190 74% 75% 77% $94.79 $86.52 $75.17
NEW YORK
Rochester Holiday Inn - Rochester Airport 280 71% 68% 73% $68.26 $66.51 $65.38
OHIO
Cincinnati Holiday Inn - Cincinnati 273 58% 49% 52% $63.21 $66.67 $62.37
VIRGINIA
Arlington Howard Johnsons - National Airport 279 66% 71% 66% $67.99 $66.37 $66.08
Herndon Holiday Inn Express 115 74% -- -- $64.70 -- --
McLean Holiday Inn - Tysons Corner 316 74% 73% 72% $87.52 $78.98 $72.23
Sterling Hampton Inn - Dulles Airport (4) 127 77% 77% 75% $71.70 $62.87 $58.06
Sterling Holiday Inn - Dulles Airport 296 75% 76% 71% $72.18 $63.86 $59.53
----- --- --- --- ------ ------ ------
Totals 2,370 70% 68% 69% $72.21 $68.79 $63.79
</TABLE>
- --------------------------------------------------------------------------------
(1) Available rooms as of September 30, 1997.
(2) Average occupancy is calculated by dividing the rooms occupied by the
rooms available.
(3) Acquired November 30, 1994.
(4) Acquired October 30, 1996.
(5) A Real Estate Trust subsidiary owns a 99% interest in this hotel.
<PAGE>
<TABLE>
<CAPTION>
OFFICE AND INDUSTRIAL
Expiring Leases (1)
-------------------
Leasing Percentages Year Ending
Gross ------------------------- -------------------
September 30, September 30,
Leasable ------------------------- -------------------
Location Name Area (1) 1997 1996 1995 1998 1999
- --------------- -------------------------- -------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FLORIDA
Fort Lauderdale Commerce Center - Phase II 60,959 97% 92% 83% 26,295 11,261
GEORGIA
Atlanta 900 Circle 75 Parkway 345,502 98% 95% 94% 106,510 43,837
Atlanta 100 Circle 75 Parkway 89,412 98% 100% 100% 10,084 9,426
Atlanta 1100 Circle 75 Parkway 268,779 99% 100% 100% 39,716 118,520
LOUISIANA
Metairie Metairie Tower 91,372 95% 99% 98% 34,052 10,658
VIRGINIA
Chantilly Dulles South (2) 38,502 100% 100% 74% 6,743 9,433
McLean 8201 Greensboro Drive 353,742 99% 85% 59% 36,573 32,778
Sterling Dulles North (3) 59,886 100% 81% 100% 16,943 42,943
--------- ---- ---- ---- ------- -------
Totals 1,308,154 99% 93% 85% 276,916 278,856
21.2% 21.3%
</TABLE>
- --------------------------------------------------------------------------------
(1) Square feet
(2) A Real Estate Trust subsidiary owns a 50% interest in this office building
(3) A Real Estate Trust subsidiary owns a 99% interest in this office building
<PAGE>
<TABLE>
<CAPTION>
LAND PARCELS
Location Name Acres Zoning
- ---------------- -------------------------------- -------- -----------------------------
<S> <C> <C> <C>
FLORIDA
Boca Raton Arvida Park of Commerce (1) 20 Mixed Use
Fort Lauderdale Commerce Center 14 Office & Warehouse
GEORGIA
Atlanta Circle 75 (2) 133 Office & Industrial
KANSAS
Overland Park Overland Park 162 Residential, Office & Retail
MARYLAND
Gaithersburg Avenel Business Park (3) 8 Commercial
Rockville Flagship Centre 8 Commercial
MICHIGAN
Auburn Hills Holiday Inn - Auburn Hills (4) 3 Commercial
NEW YORK
Rochester Holiday Inn - Rochester Airport 3 Commercial
VIRGINIA
Loudoun County Church Road 40 Office & Industrial
Loudoun County Sterling Boulevard (5) 48 Industrial
---
Total 439
</TABLE>
- ------------------------------------------------------------------------------
(1) A Real Estate Trust subsidiary owns a 50% interest in 11 acres of this
parcel.
(2) Includes land parcel formerly identified as Perimeter Way.
(3) The Real Estate Trust is currently developing a 46,000 square foot office/
research development building on 3.2 acres of this parcel.
(4) Acquired July 11, 1997.
(5) A Real Estate Trust subsidiary owns a 99% interest in this parcel.
<PAGE>
OTHER REAL ESTATE INVESTMENTS
Location Name
--------------- ------------------------------
PURCHASE - LEASEBACK PROPERTIES (1)
APARTMENTS
Number
of Units
--------
LOUISIANA
Metairie Chateau Dijon 336
TENNESSEE
Knoxville Country Club 232
---
Total 568
SHOPPING CENTERS
Gross
Leasable
Area (2)
--------
GEORGIA
Atlanta Old National 160,000
Warner Robbins Houston Mall 264,000
-------
Total 424,000
APARTMENT PROJECT
Number
of Units
TEXAS --------
Dallas San Simeon 124
MISCELLANEOUS PROPERTY (RETAIL)
Gross
Leasable
Area (2)
--------
MARYLAND
Oxon Hill Wheeler Road 24,000
- -----------------------------------------------------------------------------
(1) The Trust owns the ground under certain income-producing properties and
receives fixed ground rent, which is subject to periodic escalation, from
the owners of the improvements. In certain instances, the Real Estate Trust
also receives percentage rent based upon the income generated by the
properties.
(2) Square feet.
<PAGE>
The investment portfolio consists principally of seasoned operating properties.
The Real Estate Trust expects to hold its properties as long-term investments
and has no maximum period for retention of any investment. It may acquire
additional income-producing properties, expand and improve its properties, or
sell such properties, as and when circumstances warrant. The Real Estate Trust
also may participate with other entities in property ownership, through joint
ventures or other types of co-ownership.
INVESTMENT IN SAUL HOLDINGS LIMITED PARTNERSHIP
On August 26, 1993, the Real Estate Trust consummated a series of transactions
(together with related transactions, the "Formation Transactions") in which it
transferred its 22 shopping center properties and one of its office properties
(the "Transferred Properties"), together with the debt associated with such
properties, to a newly organized limited partnership, Saul Holdings Limited
Partnership ("Saul Holdings Partnership"), and one of two newly organized
subsidiary limited partnerships of Saul Holdings Partnership (the "Subsidiary
Partnerships" and, collectively with Saul Holdings Partnership, the
"Partnerships"). In exchange for the Transferred Properties, the Real Estate
Trust received securities representing a 21.5% limited partnership interest in
Saul Holdings Partnership. Entities under common control with the Trust (the
"Trust Affiliates") received limited partnership interests collectively
representing a 5.5% partnership interest in Saul Holdings Partnership in
exchange for the transfer of property management functions (the "Management
Functions") and certain other properties to the Partnerships. Saul Centers, Inc.
("Saul Centers"), a newly organized, publicly held real estate investment trust,
received a 73.0% general partnership interest in Saul Holdings Partnership in
exchange for the contribution of approximately $220.7 million to Saul Holdings
Partnership. The Trust Affiliates received certain cash distributions from Saul
Holdings Partnership and purchased 4.0% of the common stock of Saul Centers in a
private offering consummated concurrently with the initial public offering of
such common stock. B. Francis Saul II, the Chairman of the Board of Trustees and
Chief Executive Officer of the Trust, also serves as Chairman of the Board of
Directors and Chief Executive Officer of Saul Centers.
The Real Estate Trust and the Trust Affiliates own rights (the "Rights")
enabling them to convert their limited partnership interests in Saul Holdings
Partnership into shares of Saul Centers common stock on the basis of one share
of Saul Centers common stock for each partnership unit provided that they do not
own rights to the extent that they collectively would be treated as owning,
directly or indirectly, more than 24.9% of the value of the outstanding equity
securities of Saul Centers. The shares of Saul Centers common stock are listed
on the New York Stock Exchange (trading symbol "BFS").
<PAGE>
In July 1994, Saul Centers established Saul QRS, Inc. and SC Finance
Corporation, as wholly owned subsidiaries of Saul Centers. Saul QRS, Inc. was
established to succeed to the interest of Saul Centers as the sole general
partner of one of the Subsidiary Partnerships, Saul Subsidiary I Limited
Partnership, and SC Finance Corporation was established for the purpose of
issuing $128 million of collateralized floating rate mortgage notes (the
"Mortgage Notes"). In connection with these transactions, Saul Holdings
Partnership transferred ten shopping centers previously owned by it to Saul
Subsidiary I Limited Partnership as a capital contribution and the second
Subsidiary Partnership, Saul Subsidiary II Limited Partnership, transferred one
shopping center previously owned by it to Saul Subsidiary I Limited Partnership
as a capital contribution in return for a limited partnership interest in Saul
Subsidiary I Limited Partnership. As a consequence of these transfers, Saul
Subsidiary I Limited Partnership owned a total of 17 shopping centers (the
"Mortgaged Properties"). The Mortgaged Properties, which continued to be managed
by Saul Holdings Partnership, secured the mortgage purchased with the proceeds
of issuance of the Mortgage Notes.
On October 1, 1997 Saul Centers closed a $147 million mortgage loan secured on
nine of the company's retail properties. The loan term is 15 years and requires
payments based on a fixed rate of 7.67% and 25 year principal amortization. At
the same time Saul Centers closed a new three-year $60 million unsecured
revolving credit line which replaced a secured credit line. Proceeds from the
new loans were used to repay the $128 million of collateralized floating rate
debt mentioned above and the outstanding balance of other floating rate debt.
Saul Centers currently has fixed interest rates on approximately 95% of its
total outstanding debt which has a weighted remaining term of approximately 14
years.
As a consequence of the Formation Transactions and the later transactions
described above undertaken in connection with financings, Saul Centers serves as
the sole general partner of Saul Subsidiary II Limited Partnership, and Saul
QRS, Inc. serves as the sole general partner of Saul Subsidiary I Limited
Partnership. Each such general partner holds a 1% general partnership interest
in the applicable Subsidiary Partnership. The remaining 99% interests in Saul
Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are
held by Saul Holdings Partnership as the sole limited partner.
At September 30, 1997, Saul Holdings Partnership owned, directly or indirectly
through the Subsidiary Partnerships, 30 community and neighborhood shopping
centers (including the 22 shopping centers transferred by the Real Estate Trust)
located in seven states and the District of Columbia, one office property and
one office/retail property located in the District of Columbia and one research
park located in a Maryland suburb of Washington, D.C.(collectively, the
"Portfolio Properties).
Saul Centers. Saul Centers made an election to be treated as a real estate
investment trust ("REIT") for federal income tax purposes under Sections 856
through 860 of the Internal Revenue Code commencing with the year ended December
31, 1993. Under the Internal Revenue Code, REITs are subject to numerous
organizational and operational requirements. If Saul Centers continues to
qualify, it generally will not be subject to federal income tax, provided it
makes certain distributions to its stockholders and meets certain organizational
and other requirements. Saul Centers has announced that it intends to make
regular quarterly dividend distributions to its stockholders.
<PAGE>
Management of the Properties. The Partnerships manage the Portfolio Properties
and any subsequently acquired properties through the Management Functions, which
include personnel and such functions as property management, leasing, design,
renovation, development and accounting. The Management Functions provide the
Partnerships with a fully integrated property management capability through
approximately 150 professionals and staff personnel and with an extensive and
mature network of relationships with tenants and potential tenants as well as
with members of the brokerage and property owners' communities.
Saul Centers shares with the Trust Affiliates certain ancillary functions at
cost, such as computer and payroll services, benefit administration and in-house
legal services, and shares insurance expense on a pro rata basis. The Trust
Affiliates sublease office space to Saul Centers at their cost. The terms of all
sharing arrangements, including payments related thereto, are reviewed
periodically by the independent directors of Saul Centers, who constitute five
of the nine members of the board of directors.
Exclusivity Agreement and Right of First Refusal. The Real Estate Trust has
entered into an Exclusivity Agreement (the "Exclusivity Agreement") with, and
has granted a right of first refusal (the "Right of First Refusal") to, Saul
Centers and the Partnerships (collectively, the "Company"). The purpose of these
agreements is to minimize potential conflicts of interest between the Real
Estate Trust and the Company. The Exclusivity Agreement and Right of First
Refusal generally require the Real Estate Trust to conduct its shopping center
business exclusively through the Company and to grant the Company a right of
first refusal to purchase commercial properties and development sites that
become available to the Real Estate Trust in the District of Columbia or
adjacent suburban Maryland. Subject to the Exclusivity Agreement and Right of
First Refusal, the Real Estate Trust will continue to develop, acquire, own and
manage commercial properties and own land suitable for development as, among
other things, shopping centers and other commercial properties.
Allocations and Distributions of Saul Holdings Partnership. The net income or
net loss of Saul Holdings Partnership for tax purposes generally will be
allocated to Saul Centers and the limited partners in accordance with their
percentage interests, subject to compliance with the applicable provisions of
the Internal Revenue Code and the regulations promulgated thereunder. Net cash
flow after reserves of Saul Holdings Partnership and after reimbursement of
specified expenses will be distributed quarterly to the partners in proportion
to their respective partnership interests.
Reimbursement Agreement. Pursuant to a reimbursement agreement among the
partners of the Partnerships, the Real Estate Trust and two of its subsidiaries
that are partners in the Partnerships have agreed to reimburse Saul Centers and
the other partners in the event the Partnerships fail to make payments with
respect to certain portions of the Partnerships' debt obligations and Saul
Centers or any such other partners personally make payments with respect to such
debt obligations. The maximum potential obligations of the Real Estate Trust and
its subsidiaries under this agreement total $115.5 million. See Note 2 to the
Consolidated Financial Statements in this report. The Real Estate Trust believes
that the Partnerships will be able to make all payments due with respect to
their debt obligations.
<PAGE>
Tax Conflicts. The fair market value of each of the properties contributed to
the Partnerships by the Real Estate Trust and its subsidiaries at the date of
the Formation Transactions (the "FMV" of each such property) exceeded the tax
basis of such property (with respect to each property, such excess is referred
to as the "FMV-Tax Difference"). In the event Saul Centers or Saul QRS, Inc.,
acting as general partner of a Partnership, causes such Partnership to dispose
of, or there is an involuntary disposition of, one or more of such properties, a
disproportionately large share of the total gain for federal income tax purposes
would be allocated to the Real Estate Trust or its subsidiaries as a result of
the property disposition. In general, if the gain recognized by the Partnership
on such a property disposition is less than or equal to the FMV-Tax Difference
for such property (as previously reduced by the amounts of special tax
allocations of depreciation deductions to the partners), all such gain will be
allocated to the Real Estate Trust or its subsidiaries. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of federal income tax liability in respect of gain allocated
to the Real Estate Trust or its subsidiaries in the event of such a property
disposition is likely to exceed, perhaps substantially, the amount of cash, if
any, distributable to the Real Estate Trust or its subsidiaries as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, any release of the guarantees of such debt by the Real
Estate Trust or its subsidiaries (described above under "Reimbursement
Agreement") or any refinancings in which the Real Estate Trust or its
subsidiaries do not assume a comparable obligation to that contained in the
Reimbursement Agreement could cause the Real Estate Trust or its subsidiaries to
have taxable constructive distributions without the receipt of any corresponding
amounts of cash. See Note 2 to the Consolidated Financial Statements in this
report.
Registration Rights. Saul Centers has granted the Real Estate Trust and the
Trust Affiliates certain "demand" and "piggyback" registration rights
(collectively, the "Registration Rights") with respect to the shares of Saul
Centers common stock acquired in connection with the Formation Transactions or
as a consequence of exercise of the Rights (the "Registration Shares"). Subject
to certain limitations, the Registration Rights grant the holders of
Registration Shares the opportunity to cause Saul Centers to register all or any
portion of their respective Registration Shares once in each calendar year and
to have such Shares registered incidentally to any registration, by Saul
Centers, of shares of common stock or other securities substantially similar to
common stock. Except with respect to the Registration Rights incident to a
pledge of Registration Shares or Saul Holdings Partnership interests, the demand
Registration Rights may be exercised only prior to such time, if any, as the
holder is permitted to sell the Registration Shares pursuant to Rule 144 (k)
under the Securities Act of 1933. Saul Centers will bear expenses incident to
its registration obligations upon exercise of the Registration Rights, except
that it will not bear any underwriting discounts or commissions, Securities and
Exchange Commission or state Blue Sky registration fees, or transfer taxes
relating to registration of Registration Shares.
<PAGE>
COMPETITION
As an owner of, or investor in, commercial real estate properties, the Real
Estate Trust is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use.
Management believes that success in such competition is dependent upon the
geographic location of the property, the performance of property managers, the
amount of new construction in the area and the maintenance and appearance of the
property. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities such as parking, and the ability to provide rent concessions
and additional tenant improvements without increasing rent. Management believes
that general economic circumstances and trends and new properties in the
vicinity of each of the Real Estate Trust's properties also will be competitive
factors.
ENVIRONMENTAL MATTERS
The Real Estate Trust's properties are subject to various laws and regulations
relating to environmental and pollution controls. The Real Estate Trust requires
an environmental study to be performed with respect to a property that may be
subject to possible environmental hazards prior to its acquisition to ascertain
that there are no material environmental hazards associated with such property.
Although the effect upon the Real Estate Trust of the application of
environmental and pollution laws and regulations cannot be predicted with
certainty, management believes that their application either prospectively or
retrospectively will not have a material adverse effect on the Real Estate
Trust's property operations.
RELATIONSHIPS WITH THE B. F. SAUL COMPANY
The Real Estate Trust has significant relationships with B. F. Saul Company (the
"Saul Company") and two of the Saul Company's wholly owned subsidiaries, B. F.
Saul Advisory Company (the "Advisor") and Franklin Property Company
("Franklin"). The Saul Company, founded in 1892, specializes in real estate
investment services, including acquisitions, financing, management and leasing,
and insurance. B. Francis Saul II, Chairman of the Board of Trustees and Chief
Executive Officer of the Trust, is Chairman of thr Board and President of the
Saul Company and the Advisor.
The Advisor acts as the Real Estate Trust's investment advisor and manages the
day-to-day financial, accounting, legal and administrative affairs of the Real
Estate Trust. Franklin acts as leasing and management agent for most of the
income-producing properties owned by the Real Estate Trust, and plans and
oversees the development of new properties and the expansion and renovation of
existing properties.
The Trustees, including the two independent Trustees, review the fees and
compensation arrangements between the Real Estate Trust and the Saul Company and
its related entities and affiliates and believe that such fees and compensation
arrangements are as favorable to the Real Estate Trust as would be obtainable
from unaffiliated sources. See "Certain Relationships and Related Transactions."
<PAGE>
HOLDING COMPANY REGULATION
The Trust and the Saul Company, by virtue of their direct and indirect control
of the Bank, and Chevy Chase Property Company ("CCPC") and CCPC's wholly-owned
subsidiary, Westminster Investing Corporation ("Westminster"), by virture of
Westminster's direct and indirect ownership of 24.9% of the common stock of the
Trust (collectively the "Holding Companies"), are "savings and loan holding
companies" subject to regulation, examination and supervision by the OTS. The
Bank is prohibited from making or guaranteeing loans or advances to or for the
benefit of the Holding Companies or other affiliates engaged in activities
beyond those permissible for bank holding companies and from investing in the
securities of the Holding Companies or other affiliates. Further, transactions
between the Bank and the Holding Companies must be on terms substantially the
same, or at least as favorable to the Bank, as those that would be available to
non-affiliates.
The Holding Companies must obtain the prior approval of the OTS before acquiring
by merger, consolidation or purchase of assets any federally insured savings
institution or any savings and loan holding company. As unitary savings and loan
holding companies, the Holding Companies are virtually unrestricted in the types
of business activities in which they may engage, provided the Bank continues to
meet the qualified thrift lender test. See "Banking - Regulation - Qualified
Thrift Lender ("QTL") Test." If the Holding Companies were to acquire one or
more federally insured institutions and operate them as separate subsidiaries
rather than merging them into the Bank, the Holding Companies would become
"multiple" savings and loan holding companies. As multiple savings and loan
holding companies, the Holding Companies would be subject to limitations on the
types of business activities in which they would be permitted to engage, unless
the additional thrifts were troubled institutions acquired pursuant to certain
emergency acquisition provisions and all subsidiary thrifts met the QTL test.
The Holding Companies may acquire and operate additional savings institution
subsidiaries outside of Maryland and Virginia only if the laws of the target
institution's state specifically permit such acquisitions or if the acquisitions
are made pursuant to emergency acquisition provisions.
The Trust and the Saul Company entered into an agreement with OTS's predecessor,
the Federal Savings and Loan Insurance Corporation, to maintain the Bank's
regulatory capital at the required levels, and, if necessary, to infuse
additional capital to enable the Bank to meet those requirements. Since the
execution of this agreement, the OTS has changed its policy and now accepts more
limited agreements from those acquiring thrift institutions. In addition, the
regulatory capital requirements applicable to the Bank have changed
significantly as a result of FIRREA. The OTS has stated that capital maintenance
agreements entered into prior to such modification of OTS policy and the
enactment of FIRREA were not affected by such changes. The Trust and the Saul
Company have not sought to modify the existing agreement. To the extent the Bank
is unable to meet regulatory capital requirements in the future, the OTS could
seek to enforce the obligations of the Trust and the Saul Company under the
agreement. The Bank's business plan does not contemplate any future capital
contributions from the Trust or the Saul Company.
<PAGE>
If the Bank were to become "undercapitalized" under the prompt corrective action
regulations, it would be required to file a capital restoration plan with the
OTS setting forth, among other things, the steps the Bank would take to become
"adequately capitalized." The OTS could not accept the plan unless the Holding
Companies guaranteed in writing the Bank's compliance with that plan. The
aggregate liability of the Holding Companies under such a commitment would be
limited to the lesser of (i) an amount equal to 5.0% of the Bank's total assets
at the time the Bank became "undercapitalized" and (ii) the amount necessary to
bring the Bank into compliance with all applicable capital standards as of the
time the Bank fails to comply with its capital plan. If the holding companies
refused to provide the guarantee, the Bank would be subject to the more
restrictive supervisory actions applicable to "significantly undercapitalized"
institutions.
FEDERAL TAXATION
The Trust terminated its status as a real estate investment trust for federal
income tax purposes in 1978 and is now taxable as a corporation. The Trust's
real estate operations have generated sizable depreciation, interest and other
deductions in excess of its total income and, as a result, the Trust has had
substantial net operating loss carryovers for federal income tax purposes
("NOLs"). The Trust and its subsidiaries join in the filing of a consolidated
federal income tax return using the accrual method of accounting on the basis of
a fiscal year ending September 30.
Since June 28, 1990 the Bank and its subsidiaries have joined in the
consolidated federal income tax returns filed by the Trust on a fiscal year
basis. Prior to June 28, 1990, the Bank and its subsidiaries filed a
consolidated federal income tax return on a calendar-year basis.
Savings institutions such as the Bank generally are taxed in the same manner as
other corporations. There are, however, several special rules that apply
principally to savings institutions (and, in some cases, other financial
institutions). Certain significant aspects of the federal income taxation of the
Bank are discussed below.
The Internal Revenue Service ("IRS") has concluded the audits of the federal
income tax returns of the Trust for the taxable years ended September 30, 1992
and September 30, 1993. The IRS audit adjustments did not have a significant
adverse effect on the Trust's reported earnings under Gaap.
Bad Debt Reserve. Savings institutions that satisfy certain requirements
(so-called "qualifying institutions" as defined by the Internal Revenue Code)
are permitted to establish reserves for bad debts and to deduct each year
reasonable additions to those reserves in lieu of taking a deduction for bad
debts actually sustained during the taxable year. To qualify for this treatment,
at least 60% of a savings institution's assets must be "qualifying assets,"
including cash, certain U.S. and state government securities, obligations of
certain deposit insurance corporations, loans secured by interests in
residential real property and loans made for the improvement of residential real
property.
<PAGE>
The Bank has calculated the bad debt deduction for tax purposes under the
experience method since calendar year 1988. The experience method is based on
the institution's actual loan loss experience over a prescribed period. If the
Bank were not treated as a qualifying institution for any taxable year, it would
be required to recapture its bad debt reserve (for 1997, approximately $111.8
million) into taxable income. In addition, the Bank would be allowed to deduct
only those bad debts that actually were sustained during the taxable year. If
the Bank were no longer permitted to use the reserve method, the change would
not have a significant adverse effect on the Bank's reported earnings under
generally accepted accounting principles.
Provisions that repealed the thrift bad debt provisions of the Internal Revenue
Code were included in the Small Business Act of 1996 and are effective for tax
years beginning after December 31, 1995. As a result, the Bank is no longer able
to use the "reserve method" for computing its bad debt deduction and is allowed
to deduct only those bad debts actually incurred during the taxable year. The
bad debt provisions of this legislation also require thrifts to recapture and
pay tax on bad debt reserves accumulated since 1987 over a six year period,
beginning with a thrift's taxable year starting after December 31, 1995 (or, if
the thrift meets a loan origination test, beginning up to two years later). Bad
debt reserves accumulated prior to 1988 do not have to be recaptured under this
legislation. The tax liability related to the recapture of the bad debt reserves
accumulated since 1987 has been reflected in the Bank's financial statements as
of September 30, 1997.
Consolidated Tax Returns; Tax Sharing Payments. In recent years, the operations
of the Trust have generated significant NOL's. The Bank's taxable income in the
current year was sufficient to fully utilize all NOL carryforwards and the
current year tax loss of the Trust. Under the terms of a tax sharing agreement
dated June 28, 1990 (the "Tax Sharing Agreement"), Chevy Chase is obligated to
make payments to the Trust based on its taxable income, as explained more fully
below. Under the terms of the Bank's board resolution, the Bank is permitted to
make tax sharing payments to the Trust of up to $15.0 million relating to any
fiscal year without OTS approval.
The Tax Sharing Agreement generally provides that each member of the Trust's
affiliated group is required to pay the Trust an amount equal to 100% of the tax
liability that the member would have been required to pay to the IRS if the
member had filed on a separate return basis. These amounts generally must be
paid even if the affiliated group has no tax liability or the group's tax
liability is less than the sum of such amounts. Under the Tax Sharing Agreement,
the Trust, in turn, is obligated to pay to the applicable tax authorities the
overall tax liability, if any, of the group. In addition, to the extent the net
operating losses or tax credits of a particular member reduce the overall tax
liability of the group, the Trust is required to reimburse such member on a
dollar-for-dollar basis, thereby compensating the member for the group's use of
its net operating losses or tax credits.
<PAGE>
The Bank made a tax sharing payment of $20.6 million in fiscal 1990, tax sharing
payments totaling $29.6 million in fiscal 1991 and a tax sharing payment of $5.0
million in fiscal 1993. OTS approval of the $5.0 million payment made in 1993
was conditioned on a pledge by the Trust of certain Trust assets to secure
certain of its obligations under the Tax Sharing Agreement. Following execution
of such a pledge, the OTS approved, and the Bank made during fiscal 1994, 1995,
1996, and 1997 additional tax sharing payments of $9.6, $20.5, $25.0, and
$9.8 million, respectively, to the Trust. At September 30, 1997, no tax sharing
payments were due from the Bank to the Trust. It is expected that the Bank will
have taxable income in future years and additional operating losses will be
utilized to reduce the overall tax liability of the group which would otherwise
arise from such taxable income of the Bank (or from the taxable income of other
members of the Trust's affiliated group).
In general, if the Bank has net operating losses or unused tax credits in any
taxable year, under the Tax Sharing Agreement the Trust is obligated to
reimburse the Bank in an amount generally equal to (i) the tax benefit to the
group of using such tax losses or unused tax credits in the group's consolidated
federal income tax return for such year, plus (ii) to the extent such losses or
credits are not used by the group in such year, the amount of the tax refunds
which the Bank would otherwise have been able to claim if it were not being
included in the consolidated federal income tax return of the group (but not in
excess of the net amount paid by the Bank to the Trust pursuant to the Tax
Sharing Agreement). There is no assurance that the Trust would be able to
fulfill this obligation. If the Trust did not make the reimbursement, the OTS
could attempt to characterize such nonpayment as an unsecured extension of
credit by the Bank to the Trust which, as described above under "Regulation
Holding Company Regulation," is prohibited under current law. The Tax Sharing
Agreement itself does not provide for any remedies upon a breach by any party of
its obligations under the Agreement. As noted above, at September 30, 1997, no
tax sharing payments were due from the Bank to the Trust.
STATE TAXATION
Maryland law does not allow the filing of consolidated income tax returns, and
thus the Trust and its subsidiaries, which includes the Bank, subject to
Maryland income tax are required to file separately in Maryland. The Trust and
its subsidiaries are also subject to income taxes in other states, some of which
allow or require combined or consolidated filing. The Commonwealth of Virginia
is currently conducting audits of the consolidated state income tax returns of
the Trust for the taxable years ended September 30, 1991, September 30, 1992 and
September 30, 1993.
<PAGE>
BANKING
REGULATION
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan
Bank (the "FHLB") of Atlanta. The 12 FHLBs are administered by the Federal
Housing Finance Board, an independent agency within the executive branch of the
federal government. The FHLBs serve as a central credit facility for their
members. Their primary credit mission is to enhance the availability of
residential mortgages. From time to time, the Bank obtains advances from the
FHLB. At September 30, 1997, the Bank had outstanding $188.5 million of advances
from the FHLB of Atlanta. See Note 19 to the Consolidated Financial Statements
in this report and "Deposits and Other Sources of Funds - Borrowings."
As a member of the FHLB of Atlanta, the Bank is required to acquire and hold
shares of capital stock in that bank in an amount equal to the greater of: (i)
1.0% of mortgage-related assets (i.e., home mortgage loans, home-purchase
contracts and similar obligations); (ii) 0.3% of total assets; (iii) $500; or
(iv) 5.0% of outstanding advances. Pursuant to this requirement, the Bank had an
investment of $33.2 million in FHLB stock at September 30, 1997. The Bank earned
dividends of $2.0 million and $2.3 million during the years ended September 30,
1997 and 1996, respectively.
Liquidity Requirements. The Bank is required to maintain a daily average balance
of liquid assets (including cash, federal funds, certain time deposits, certain
bankers' acceptances, certain corporate debt securities and commercial paper,
securities of certain mutual funds and specified U.S. Government, state
government and federal agency obligations) equal to a specified percentage of
its average daily balance of deposits (based upon the preceding month's average
balances), plus borrowings (or portions thereof) payable in one year or less.
Prior to November 24, 1997, this liquidity requirement was 5.0%. Federal
regulations also required that each institution maintain an average daily
balance of short-term liquid assets equal to at least 1.0% of its average daily
balance of deposits, plus borrowings payable in one year or less. If an
institution's liquid assets or short-term liquid assets at any time do not at
least equal (on an average daily basis for the month) the amount required by the
OTS, the institution could be subject to various monetary penalties imposed by
the OTS. At September 30, 1997, the Bank was in compliance with both
requirements, with both a liquid assets ratio and a short-term liquid assets
ratio of 11.1%.
Effective November 24, 1997, the OTS reduced the liquidity requirement from 5%
to 4% and eliminated the 1% short-term liquid asset requirement. In addition,
the OTS added flexibility in calculating the liquidity base, permitting an
institution to use either: (i) its liquidity base at the end of the preceding
quarter or (ii) the average daily balance of its liquidity base during the
preceding quarter. Finally, the OTS expanded the assets that qualify as liquid
assets to include long-term obligations of the United States government and
federal agencies, certain mortgage-related securities, and certain mortgage
loans.
Deposit Insurance Premiums. Under FDIC insurance regulations, the Bank is
required to pay premiums to the Savings Association Insurance Fund (the "SAIF")
for insurance of its accounts. The FDIC utilizes a risk-based premium system in
which an institution pays premiums for deposit insurance on its SAIF-insured
deposits based on supervisory evaluations and on the institution's capital
category under the OTS's prompt corrective action regulations. See "Prompt
Corrective Action."
<PAGE>
Although the FDIC insures commercial banks as well as thrifts, the insurance
reserve funds for commercial banks and thrifts have been segregated into the
Bank Insurance Fund (the "BIF") and the SAIF, respectively. The FDIC is required
to maintain the reserve levels of both the BIF and the SAIF at 1.25% of insured
deposits, which the BIF reached during fiscal 1995. Legislation was enacted on
September 30, 1996 that, among other things, imposed on thrift institutions a
one-time assessment of 65.7 cents for every $100 of SAIF-insured deposits to
recapitalize the SAIF to the 1.25% level. Pursuant to this legislation,
effective January 1, 1997, the FDIC lowered the risk-based schedule for SAIF
assessment rates so that the rates for SAIF members are identical to the rates
for BIF members. Beginning in 1997, commercial banks are required to share in
the payment of interest due on Financing Corporation ("FICO") bonds used to
provide liquidity to the savings and loan industry in the 1980s. Annualized FICO
assessments which were added to deposit insurance premiums equaled 6.49 basis
points for SAIF members and 1.298 basis points for BIF members for the first
semi-annual period of 1997 and 6.31 basis points for SAIF members and 1.262
basis points for BIF members for the second semi-annual period of 1997. This
differential is expected to remain in effect through December 31, 1999, after
which BIF and SAIF members will pay identical FICO assessments, which are
expected to be approximately 2.4 basis points. Thus, the Bank and other
institutions with SAIF-assessable deposits will continue to pay somewhat higher
deposit insurance premiums than institutions with BIF-assessable deposits, which
could lead to a competitive disadvantage in the pricing of loans and deposits.
SAIF insurance may be terminated by the FDIC, after notice and a 30-day
corrective period, upon a finding by the FDIC that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The 30-day period may be eliminated by the FDIC
with the approval of the OTS.
Regulatory Capital. Under OTS regulations implementing the capital requirements
imposed by FIRREA, savings institutions, such as the Bank, are subject to a
minimum tangible capital requirement, a minimum core (or leverage) capital
requirement, and a minimum total risk-based capital requirement. Each of these
requirements generally must be no less stringent than the capital standards for
national banks. At September 30, 1997, the Bank's tangible, core and total
risk-based regulatory capital ratios were 6.96%, 6.96% and 13.50%, respectively,
compared to the minimum requirements under FIRREA of 1.50%, 3.00% and 8.00%,
respectively, in effect at that date.
<PAGE>
Under FIRREA's minimum leverage ratio, Chevy Chase must maintain a ratio of
"core capital" to tangible assets of not less than 3.0%. However, under the OTS
"prompt corrective action" regulations, an institution that is not in the
highest supervisory category must maintain a minimum leverage ratio of 4.0% to
be considered an "adequately capitalized" institution. See "Prompt Corrective
Action." In October 1997, the OTS proposed amendments to its capital regulations
that would establish a minimum leverage ratio of 4.0% for institutions not in
the highest supervisory category. "Core capital" generally includes common
shareholders' equity, noncumulative perpetual preferred stock and minority
interests in consolidated subsidiaries, less investments in certain subsidiaries
and certain intangible assets, except that under interim guidance issued by the
OTS, servicing assets (both mortgage and non-mortgage) and purchased credit card
relationships ("PCCRs") may be included up to an aggregate amount of 50% of core
capital. PCCRs and non-mortgage servicing assets are also subject to a sublimit
of 25% of core capital. For these purposes, servicing assets and PCCRs are
valued at the lesser of 90% of fair market value or 100% of the current
unamortized book value. At September 30, 1997, the Bank had qualifying servicing
assets of $41.4 million, which constituted 9.8% of core capital at that date,
and had no PCCRs.
In August 1997, the OTS and the other federal bank regulatory agencies proposed
amendments to their regulatory capital requirements relating to servicing
assets. Under the proposal, the limitation on the amount of mortgage servicing
assets that can be included in Tier 1 capital would be increased from 50% to
100%. However, all non-mortgage servicing assets would be fully deducted from
core capital. The agencies also requested comment on whether to require
deduction from regulatory capital of amounts representing rights to future
interest income from serviced assets in excess of contractually specified
servicing fees ("interest-only strips") and whether the deduction for servicing
assets should be net of any associated deferred tax liability. The Bank is
unable to predict at this time whether and in what form any amendments will be
adopted. As of September 30, 1997, the Bank had $0.6 million in non-mortgage
servicing assets and $68.8 million in interest-only strips, net of any
associated deferred tax liability that, if the OTS ultimately requires deduction
of all non-mortgage servicing assets and interest-only strips and no
grandfathering is provided for existing transactions, would be required to be
deducted from core capital.
Deductions from capital apply for investments in, and loans to, subsidiaries
engaged in activities not permissible for national banks, for equity investments
that are not permissible for national banks and for the portion of land loans
and non-residential construction loans in excess of an 80% loan-to-value ratio.
The tangible capital requirement adopted by the OTS requires a savings
institution to maintain "tangible capital" in an amount not less than 1.5% of
tangible assets, which is the minimum ratio required by FIRREA. "Tangible
capital" is defined as core capital less investments in certain subsidiaries and
any intangible assets (including supervisory goodwill), plus qualifying
servicing assets valued at the amount includable in core capital.
The risk-based capital requirements issued by the OTS provide that the capital
ratio applicable to an asset is adjusted to reflect the degree of credit risk
associated with that asset and that the asset base for computing a savings
institution's capital requirement includes off-balance-sheet assets. Capital
must be maintained against assets sold with recourse despite the fact that the
assets are accounted for as having been sold. However, the amount of capital
required need not exceed the amount of recourse retained. The amount of recourse
retained in connection with the Bank's securitization activities typically
includes the full amount of any spread account or other asset posted as
collateral and interest-only strips recorded by the Bank.
<PAGE>
On November 5, 1997, the OTS and the other federal bank regulatory agencies
proposed revisions to their risk-based capital regulations to address the
regulatory capital treatment of recourse obligations and direct credit
substitutes involving exposure to credit risk. The proposal (i) would define
recourse to include, among other things, providing credit enhancement beyond any
contractual obligation to support assets sold and providing representations and
warranties other than those that relate to an existing state of facts that the
seller can either control or verify with reasonable due diligence at the time
the assets are sold; (ii) would treat direct credit substitutes and recourse
obligations consistently; and (iii) would use credit ratings and possibly
certain other alternative approaches to match the risk-based capital assessment
more closely to an institution's relative risk of loss in asset securitizations.
The agencies intend that any final rules adopted in connection with the proposal
that result in increased risk-based capital requirements for an institution will
apply only to transactions consummated after the effective date of any final
rules.
There are currently four categories of risk-weightings: 0% for cash and similar
assets, 20% for qualifying mortgage-backed securities, 50% for qualifying
residential permanent real estate loans and 100% for other assets, including
credit card loans, commercial real estate loans and loans more than 90 days past
due and for real estate acquired in settlement of loans. Savings institutions
generally are required to maintain risk-based capital equal to 8.0% of
risk-weighted assets, with at least half of that amount in the form of core
capital.
A savings institution's supplementary capital may be used to satisfy the
risk-based capital requirement only to the extent of the institution's core
capital. Supplementary capital includes cumulative perpetual preferred stock,
qualifying non-perpetual preferred stock, qualifying subordinated debt,
nonwithdrawable accounts and pledged deposits, and allowances for loan and lease
losses (up to a maximum of 1.25% of risk-weighted assets). At September 30,
1997, the Bank had $93.0 million in allowances for loan and lease losses, of
which $73.0 million was includable as supplementary capital.
Subordinated debt may be included in supplementary capital with OTS approval
subject to a phase-out based on its remaining term to maturity. The phase-out
established for such maturing capital instruments by the OTS permits an
institution to include such instruments in supplementary capital under one of
two phase-out options: (i) at the beginning of each of the last five years prior
to the maturity date of the instrument, the institution may reduce the amount
eligible to be included by 20% of the original amount or (ii) the institution
may include only the aggregate amount of maturing capital instruments that
mature in any one year during the seven years immediately prior to an
instrument's maturity that does not exceed 20% of the institution's capital.
Once an institution selects either the first or second option, it must continue
to select the same option for all subsequent issuances of maturing capital
instruments as long as there is any outstanding balance of such instruments for
which an option has been selected. At September 30, 1997, the Bank had $250.0
million in maturing subordinated capital instruments, all of which was
includable as supplementary capital. Of that amount, $150.0 million matures in
2005 and $100.0 million matures in 2008. See "Deposits and Other Sources of
Funds - Borrowings."
<PAGE>
The OTS has indefinitely delayed implementation of an interest-rate risk
component of its risk-based capital regulation pending the testing of an OTS
appeals process. Under that component, an institution that would experience a
change in "portfolio equity" in an amount in excess of 2.0% of the institution's
assets as a result of a 200 basis point increase or decrease in the general
level of interest rates would be required to maintain additional amounts of
risk-based capital based on the lowest interest rate exposure at the end of the
three previous quarters. At September 30, 1997, the Bank would not have been
required to maintain additional amounts of risk-based capital had the
interest-rate risk component of the capital regulations been in effect.
The OTS also considers concentration of credit risk and risks arising from
non-traditional activities, as well as a thrift's ability to manage these risks,
in evaluating whether the thrift should be subject to an individual minimum
capital requirement.
OTS regulations contain special rules affecting savings institutions with
certain kinds of subsidiaries. For purposes of determining compliance with each
of the capital standards, a savings institution's investments in, and extensions
of credit to, subsidiaries engaged in activities not permissible for a national
bank ("non-includable subsidiaries") are, with certain exceptions, deducted from
the savings institution's capital. At September 30, 1997, investments in
non-includable subsidiaries were fully deducted from all three FIRREA capital
requirements. All or a portion of the assets of each of a savings institution's
subsidiaries are generally consolidated with the assets of the savings
institution for regulatory capital purposes unless all of the savings
institution's investments in, and extensions of credit to, such subsidiary are
deducted from capital. Chevy Chase's real estate development subsidiaries are
its only subsidiaries engaged in activities not permissible for a national bank.
At September 30, 1997, the Bank's investments in, and extensions of credit to,
its non-includable subsidiaries totaled approximately $4.0 million, of which
$3.8 million constituted a deduction from tangible capital.
OTS capital regulations also require the 100% deduction from total capital of
all equity investments that are not permissible for national banks and the
portion of land loans and non-residential construction loans in excess of an 80%
loan-to-value ratio. The Bank's equity investments at September 30, 1997 were
certain properties classified as real estate held for sale which the Bank has
agreed to treat as equity investments for regulatory capital purposes. At
September 30, 1997, the book value of these properties after subsequent
valuation allowances, was $15.3 million, of which $14.5 million was required to
be deducted from total capital. The Bank had no land loans or non-residential
construction loans with loan-to-value ratios greater than 80% at September 30,
1997. The Bank has $1.0 million of general valuation allowances maintained
against its non-includable subsidiaries and equity investments which, pursuant
to OTS guidelines, are available as a "credit" against the deductions from
capital otherwise required.
<PAGE>
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for real estate acquired in settlement of
loans ("REO" or "real estate held for sale") 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. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from risk-based capital. In November 1996, the Bank
received from the OTS extensions through November 12, 1997 of the holding
periods for certain of its REO properties acquired through foreclosure in fiscal
1990, 1991 and 1992. The Bank has submitted to the OTS a request for a further
extension of the holding periods through fiscal 1998 for certain of its REO
properties. Based on its capital ratios at September 30, 1997, the Bank's
capital ratios would have remained above the levels required for
well-capitalized institutions even if the book value of REO properties for which
an extension has not yet been received had been deducted from total risk-based
capital as of that date. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Capital - Board
Resolution and Regulatory Requirements."
The Bank's ability to maintain capital compliance is dependent on a number of
factors, including, for example, general economic conditions and the condition
of local real estate markets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition - Capital -
Board Resolution and Regulatory Requirements."
The OTS has the authority to require an institution to maintain capital at
levels above the minimum levels generally required, but has not taken any such
action with respect to the Bank.
Prompt Corrective Action. Pursuant to FDICIA, the OTS and the other federal
agencies regulating financial institutions have adopted regulations which apply
to every FDIC-insured commercial bank and thrift institution a system of
mandatory and discretionary supervisory actions which generally become more
severe as the capital levels of an individual institution decline. The
regulations establish five capital categories to which institutions are assigned
for purposes of determining their treatment under these prompt corrective action
provisions. An institution is categorized as "well capitalized" under the
regulations if (i) it has a leverage 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%, and (ii) is not subject to any written agreement, order, capital
directive or prompt corrective action directive issued by the OTS to meet and
maintain a specific capital level. An institution is considered "adequately
capitalized" if such capital ratios are at least 4.0% (3.0% if rated in the
highest supervisory category), 4.0% and 8.0%, respectively. An institution with
a leverage ratio below 4.0% (3.0% if rated in the highest supervisory category),
a tier 1 risk-based capital ratio below 4.0% or a total risk-based capital ratio
below 8.0% is considered "undercapitalized" and an institution with ratios under
3.0%, 3.0% or 6.0%, respectively, is considered "significantly
undercapitalized." Finally, an institution is considered "critically
undercapitalized," and subject to provisions mandating appointment of a
conservator or receiver, if its ratio of "tangible equity" (generally defined by
the OTS as core capital plus cumulative perpetual preferred stock) to total
assets is 2.0% or less. An institution's classification category could be
downgraded if, after notice and an opportunity for a hearing, the OTS determined
that the institution is in an unsafe or unsound condition or has received and
has not corrected a less than satisfactory examination rating for asset quality,
management, earnings or liquidity.
<PAGE>
At September 30, 1997, the Bank's leverage, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.96%, 7.24% and 13.50%, respectively,
which exceeded the minimum ratios established for "well capitalized"
institutions.
Board Resolution. At the request of the OTS, the Board of Directors of the Bank
adopted a resolution in March 1996 which, among other things, permits the Bank:
(i) to make tax sharing payments without OTS approval to the Trust, which owns
80% of the Bank's Common Stock, of up to $15.0 million relating to any single
fiscal year; and (ii) to declare dividends on its stock in any quarterly period
up to the lesser of (A) 50% of its after tax net income for the immediately
preceding quarter or (B) 50% of the average quarterly after tax net income for
the immediately preceding four quarter period, minus (in either case) dividends
declared on the Bank's preferred stock during that quarterly period. The
resolution also provides that the Bank will present a plan annually to the OTS
detailing anticipated consumer loan securitization activity.
Qualified Thrift Lender ("QTL") Test. Insured savings institutions like the Bank
must meet a QTL test to avoid imposition of certain restrictions. The QTL test
requires thrifts to maintain a "thrift investment percentage" equal to a minimum
of 65%. The numerator of such percentage is the thrift's "qualified thrift
investments" and the denominator is the thrift's "portfolio assets." "Portfolio
assets" is defined as total assets minus (i) the thrift's premises and equipment
used to conduct its business, (ii) liquid assets, as defined up to 20 percent of
total assets, and (iii) intangible assets, including goodwill. The QTL test must
be met on a monthly average basis in nine out of every 12 months.
The Bank had 86.8% of its assets invested in qualified thrift investments at
September 30, 1997, and met the QTL test in each of the previous 12 months.
A thrift's "qualified thrift investments" consist of residential housing loans
(including home equity loans and manufactured housing loans), mortgage-backed
securities, FHLB and Federal National Mortgage Association stock, small business
loans, credit card and educational loans. Portions of other assets are also
includable, provided that the total of these assets does not exceed 20% of
portfolio assets. Assets in this category include consumer loans (other than
credit card and educational loans), 50% of residential housing loans originated
and sold within 90 days, investments in real estate-oriented service
corporations, 200% of mortgage loans for residences, churches, schools, nursing
homes and small businesses in areas with unmet credit needs (low or moderate
income areas where credit demand exceeds supply). Intangible assets, including
goodwill, are specifically excluded from qualified thrift investments.
<PAGE>
An institution that fails to meet the QTL test is subject to significant
penalties. Immediately after an institution ceases to meet the QTL test, it (i)
may not make any new investment or engage directly or indirectly in any other
new activity unless the investment or activity would be permissible for a
national bank, (ii) may not establish any new branch office at any location at
which a national bank could not establish a branch office, (iii) may not obtain
new advances from the applicable FHLB and (iv) may not pay dividends beyond the
amounts permissible if it were a national bank. One year following an
institution's failure to meet the test, the institution's holding company parent
must register and be subject to supervision as a bank holding company. Three
years after failure to meet the QTL test, an institution may not retain any
investments or engage in any activities that would be impermissible for a
national bank, and must repay any outstanding FHLB advances as promptly as
possible consistent with the safe and sound operation of the institution.
Failure to meet the QTL test also could limit the Bank's ability to establish
and maintain branches outside of its home state of Virginia.
Because Chevy Chase is engaged in activities that are not currently permissible
for national banks, such as investing in subsidiaries that engage in real estate
development activities, failure to satisfy the QTL test would require Chevy
Chase to terminate these activities and divest itself of any prohibited assets
held at such time. Based on a review of the Bank's current activities,
management of the Bank believes that compliance with these restrictions would
not have a significant adverse effect on the Bank. In addition, because the
Trust is engaged in real estate ownership and development, which are activities
that are currently prohibited for bank holding companies, failure by Chevy Chase
to meet the QTL test, in the absence of a significant restructuring of the
Trust's operations, would, in effect, require the Trust to reduce its ownership
of Chevy Chase to a level at which it no longer would be deemed to control the
Bank.
The Bank has taken, and will continue to take, steps to meet the QTL test by
structuring its balance sheet to include the required percentage of qualified
thrift investments.
Dividends and Other Capital Distributions. Under OTS regulations, the ability of
thrift institutions such as the Bank to make "capital distributions" (defined to
include payment of dividends, stock repurchases, cash-out mergers and other
distributions charged against the capital accounts of an institution) varies
depending primarily on the institution's earnings and regulatory capital levels.
The regulations do not apply to interest or principal payments on debt,
including interest or principal payments on the Bank's outstanding subordinated
debentures.
Institutions are divided into two tiers for purposes of these regulations. Tier
1 institutions are those in compliance with their capital requirements and which
have not been notified by the OTS that they are "in need of more than normal
supervision." Tier 1 institutions may make capital distributions without
regulatory approval in amounts up to the greater of (i) 100% of net income for
the calendar year to date, plus up to one-half of the institution's surplus
capital (i.e., the excess of capital over the fully phased-in requirements) at
the beginning of the calendar year in which the distribution is made or (ii) 75%
of net income for the most recent four quarters. Tier 1 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to such
distributions. Tier 1 institutions may seek OTS approval to pay dividends beyond
these amounts.
<PAGE>
The definition of Tier 2 institutions is no longer applicable because all
deductions from capital requirements have been fully phased-in as of July 1,
1996. All institutions are classified as either Tier 1 or Tier 3 institutions
since that date.
Tier 3 institutions have capital levels below their current required minimum
levels and may not make any capital distributions without the prior written
approval of the OTS.
At September 30, 1997, the Bank had sufficient levels of capital to be a Tier 1
institution for purposes of the capital distribution regulation. However, the
OTS retains discretion under its capital distribution regulation to treat an
institution that is in need of more than normal supervision (after written
notice) as a Tier 2 or Tier 3 institution.
In December 1994, the OTS proposed to amend its capital distribution regulation
to simplify it and to conform it to the system of "prompt corrective action"
established by FDICIA. The proposal would replace the current "tiered" approach
with one that, in accordance with the OTS's "prompt corrective action" rule,
would allow associations to make only those capital distributions that would not
cause capital to drop below the level required to remain adequately capitalized.
The proposal would delete from the OTS regulations the current numerical
restrictions on the amount of permissible capital distributions, but the OTS
indicated that it would continue to use them as general guidelines. The OTS has
since indicated that it intends to issue a revised proposal that would differ
from the previous proposal.
The OTS retains general discretion to prohibit any otherwise permitted capital
distributions on general safety and soundness grounds and must be given 30 days
advance notice of all capital distributions. The OTS has approved the payment of
dividends on the Bank's outstanding 13% Noncumulative Perpetual Preferred Stock,
Series A (the "13% Preferred Stock"), provided that (i) immediately after giving
effect to the dividend payment, the Bank's core and risk-based regulatory
capital ratios would not be less than 4.0% and 8.0%, respectively; (ii)
dividends are earned and payable in accordance with the OTS capital distribution
regulation; and (iii) the Bank continues to make progress in the disposition and
reduction of its non-performing loans and real estate owned.
Although the Bank believes that dividends paid on the REIT Preferred Stock
issued by Chevy Chase Preferred Capital Corporation (the "REIT Subsidiary")
should not be considered "capital distributions" for this purpose, there can be
no assurances that the OTS would agree with this position. Without addressing
the issue of whether dividends on the REIT Preferred Stock are "capital
distributions" subject to the regulations, the OTS has indicated that it would
not object to the REIT Subsidiary's payment of quarterly dividends on the REIT
Preferred Stock in an amount up to the amount of the REIT Subsidiary's net
income for that quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Capital - Board
Resolution and Regulatory Requirements." The REIT Subsidiary currently expects
that its net income will be in excess of amounts needed to pay dividends on the
REIT Preferred Stock. However, dividends paid on the REIT Preferred Stock in
excess of the REIT Subsidiary's net income could be treated as "capital
distributions" by the OTS, in which case the REIT Subsidiary's payment of such
dividends would be subject to restrictions under the OTS capital distribution
regulations. Moreover, if dividends on the REIT Preferred Stock were treated as
"capital distributions," they would be included, together with dividends paid on
the 13% Preferred Stock and the common stock of the Bank, in calculating the
amount of "capital distributions" that could be paid by the Bank without
obtaining OTS approval.
<PAGE>
In May 1988, in connection with the merger of a Virginia thrift into the Bank,
the B.F. Saul Company (the "Saul Company") and the Trust entered into a capital
maintenance agreement in which they agreed not to cause the Bank without prior
written approval of its federal regulator to pay "dividends" in any fiscal year
in excess of 50% of the Bank's net income for that fiscal year, provided that
any dividends permitted under such limitation could be deferred and paid in a
subsequent year. However, under both the current and the proposed OTS capital
distribution rule, with the approval of the OTS, the Bank could substitute the
requirements of the OTS capital distribution rule for any more stringent
requirements imposed on it by a previous written agreement.
The Bank is subject to other limitations on its ability to pay dividends. The
indenture pursuant to which $150 million principal amount of the Bank's 9 1/4%
Subordinated Debentures due 2005 was issued in 1993 (the "1993 Indenture")
provides that the Bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of a continuing default shall have
occurred and the Bank is in compliance with its regulatory capital requirements.
In addition, the amount of the proposed dividend may not exceed the sum of (i)
$15 million, (ii) 66 2/3% of the Bank's consolidated net income (as defined)
accrued on a cumulative basis commencing on October 1, 1993 and (iii) the
aggregate net cash proceeds received by the Bank after October 1, 1993 from the
sale of qualified capital stock or certain debt securities, minus the aggregate
amount of any restricted payments made by the Bank. Notwithstanding these
restrictions on dividends, provided no event of default has occurred or is
continuing under the 1993 Indenture, the 1993 Indenture does not restrict the
payment of dividends on the 13% Preferred Stock or any payment-in-kind preferred
stock issued in lieu of cash dividends on the 13% Preferred Stock or the
redemption of any such payment-in-kind preferred stock. The indenture pursuant
to which $100 million principal amount of the Bank's 1996 Debentures was issued
provides that the proposed dividend may not exceed the sum of the restrictions
discussed above for the 1993 Indenture and the aggregate liquidation preference
of the Chevy Chase Bank, F.S.B. 10 3/8% Noncumulative Preferred Stock, Series B
(the "Series B Preferred Stock"), if issued in exchange for the outstanding REIT
Preferred Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Capital - Board
Resolution and Regulatory Requirements" and "Security Ownership of Certain
Beneficial Owners and Management."
At the request of the OTS, the Board of Directors of the Bank adopted a
resolution which permits the Bank to declare dividends on its stock in any
quarterly period up to the lesser of (i) 50% of its after tax net income for the
immediately preceding quarter or (ii) 50% of the average quarterly after tax net
income for the immediately preceding four quarter period, minus (in either case)
dividends declared on the Bank's 13% Preferred Stock during that quarterly
period. In connection with the Bank's payment of common dividends, the OTS
advised the Bank that the dividends paid on the REIT Preferred Stock issued by
the new real estate investment trust subsidiary of the Bank also must be
deducted from net income for purposes of calculating the 50% limits under this
board resolution. The Bank disagrees with the OTS's position regarding the REIT
Preferred Stock and intends to seek clarification of this issue from the OTS.
The payment of any dividends on the Bank's common stock and preferred stock will
be determined by the Board of Directors based on the Bank's liquidity, asset
quality profile, capital adequacy and recent earnings history, as well as
economic conditions and other factors deemed relevant by the Board of Directors,
including applicable government regulations and policies. See "Deposits and
Other Sources of Funds - Borrowings."
<PAGE>
Lending Limits. With certain exceptions, the Bank is prohibited from lending to
one borrower (including certain related entities of the borrower) amounts in
excess of 15% of the institution's unimpaired capital and unimpaired surplus,
plus an additional 10% for loans fully secured by readily marketable collateral.
The Bank's loans-to-one-borrower limit was approximately $115.2 million at
September 30, 1997, and no group relationships exceeded this limit at that date.
Safety and Soundness Standards. The federal financial institution regulators
have developed standards to evaluate the operations of depository institutions,
as well as standards relating to asset quality, earnings and compensation. The
operational standards cover internal controls and audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. An institution that fails to meet a standard that is
imposed through regulation may be required to submit a plan for corrective
action within 30 days. If a savings association fails to submit or implement an
acceptable plan, the OTS must order it to correct the deficiency, and may
restrict its rate of asset growth, prohibit asset growth entirely, require the
institution to increase its ratio of tangible equity to assets, restrict the
interest rate paid on deposits to the prevailing rates of interest on deposits
of comparable amounts and maturities, or require the institution to take any
other action the OTS determines will better carry out the purpose of prompt
corrective action. Imposition of these sanctions is within the discretion of the
OTS in most cases, but is mandatory if the savings institution commenced
operations or experienced a change in control during the 24 months preceding the
institution's failure to meet these standards, or underwent extraordinary growth
during the preceding 18 months.
The asset quality standards require that an insured depository institution
establish and maintain a system to identify problem assets and prevent
deterioration in those assets. The earnings standards require that an insured
depository institution establish and maintain a system to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves.
Regulatory Assessments. The OTS imposes the following fees to fund its
operations: (i) asset-based assessments for all savings institutions, (ii)
examination fees for certain affiliates of savings associations, (iii)
application fees, (iv) securities filing fees and (v) publication fees. Of these
fees, the semi-annual asset-based assessments (which for the Bank totaled
$431,000 for the six-month period ending December 31, 1997) are the most
significant.
Other Regulations and Legislation. Chevy Chase must obtain prior approval of the
OTS before merging with another institution or before increasing its insured
accounts through merger, consolidation, purchase of assets or assumption of
liabilities. Also, as a SAIF-insured institution, the Bank is subject to
limitations on its ability to buy or sell deposits from or to, or to combine
with, a BIF-insured institution. Despite these restrictions, SAIF-insured
thrifts may be acquired by banks or by bank holding companies under certain
circumstances.
The federal agencies regulating financial institutions possess broad enforcement
authority over the institutions they regulate, including the authority to impose
civil money penalties of up to $1 million per day for violations of laws and
regulations.
<PAGE>
Federally chartered thrifts like Chevy Chase generally are permitted to
establish new branches anywhere in the United States, provided that they meet
the QTL test and their regulatory capital requirements and have at least a
satisfactory rating under the Community Reinvestment Act ("CRA").
Amounts realized by the FDIC from the liquidation or other resolution of any
insured depository institution must be distributed to pay claims (other than
secured claims to the extent of any such security) in the following order of
priority: (i) administrative expenses of the receiver, (ii) any deposit
liability of the institution, (iii) any other general or senior liability of the
institution (which is not an obligation described in clause (iv) or (v)), (iv)
any obligation subordinated to depositors or general creditors (which is not an
obligation described in clause (v)) and (v) any obligation to stockholders
arising as a result of their status as stockholders.
The OTS and the other federal bank regulatory agencies have requested comment on
possible changes to the existing regulatory classification policies for retail
credit. Among the changes being considered are adoption of: (i) a uniform
charge-off policy for open-end and closed-end credit; (ii) a classification
policy for loans affected by bankruptcy, fraudulent activity, and/or death of a
borrower; (iii) a policy for treatment of partial payments; (iv) a prudent
reaging policy for past due accounts; and (v) a classification policy for
delinquent residential mortgage and home equity loans. After reviewing the
comments received, the agencies plan to issue a revised detailed policy
statement for further comment. The Bank is unable to predict at this time what,
if any, changes will be made to the existing policies.
PENDING LEGISLATION
Thrift Charter Legislation. Legislation passed in 1996 requires the merger of
the BIF and the SAIF into a single Deposit Insurance Fund on January 1, 1999,
but only if the thrift charter is eliminated by that date. Congress is
considering legislation in various forms that would require federal thrifts,
like the Bank, to convert their charters to national or state bank charters. The
House Banking Committee approved a version of such legislation on June 20, 1997
and the House Commerce Committee approved its version of the legislation on
October 30, 1997. The current session of Congress adjourned without further
action on the bills and leadership of the House has announced its intention to
resume consideration of the legislation when Congress returns for the second
session in January 1998. In the absence of appropriate "grandfather" provisions,
such legislation could have an adverse effect on the Bank and the Trust because,
among other things, the Trust engages in activities that are not permissible for
bank holding companies and the regulatory capital and accounting treatment for
banks and thrifts differs in certain significant respects. While the versions of
the bill approved by the House Banking and Commerce Committees both contain
grandfather provisions that address many of these issues, the Bank cannot
determine at this time whether, or in what form, such legislation may eventually
be enacted, and there can be no assurances that any such legislation that is
enacted will contain adequate grandfather rights for the Bank or the Trust.
<PAGE>
FEDERAL RESERVE SYSTEM
The Federal Reserve Board (the "FRB") requires depository institutions,
including federal savings banks, to maintain reserves against their transaction
accounts and certain non-personal deposit accounts. Because reserves generally
must be maintained in cash or non-interest-bearing accounts, the effect of the
reserve requirement is to decrease the Bank's earning asset base. FRB
regulations generally require that reserves be maintained against net
transaction accounts. Prior to December 30, 1997, the first $4.4 million of a
depository institution's transaction accounts were subject to a 0% reserve
requirement. The next $44.9 million in net transaction accounts were subject to
a 3.0% reserve requirement and any net transaction accounts over $49.3 million
were subject to a 10.0% reserve requirement. Effective December 30, 1997, the
FRB increased the amount of transaction accounts subject to a 0% reserve
requirement from $4.4 million to $4.7 million and decreased the "low reserve
tranche" from $44.9 million to $43.1 million. The Bank met its reserve
requirements for each period during the year ended September 30, 1997. The
balances maintained to meet the reserve requirements imposed by the FRB also may
be used to satisfy liquidity requirements which are imposed by the OTS.
Savings institutions may borrow from the FRB "discount window," although FRB
regulations require these institutions to exhaust all reasonable alternate
sources of funds, including FHLB sources, before borrowing from the FRB. FDICIA
imposes additional limitations on the ability of the FRB to lend to
undercapitalized institutions through the discount window.
COMMUNITY REINVESTMENT ACT
Under the CRA and the OTS's regulations, a savings association has a continuing
and affirmative obligation to help meet the credit needs of its local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of the institution. In connection with its
examination of a savings association, the OTS is required to assess the
institution's record in satisfying the intent of the CRA. In addition, the OTS
is required to take into account the institution's record of meeting the credit
needs of its community in determining whether to grant approval for certain
types of applications.
The Bank is committed to fulfilling its CRA obligation by providing access to a
full range of credit-related products and services to all segments of its
community. Based on an OTS examination covering the period from January 1994
through June 1997, the Bank received an "outstanding" CRA rating, the highest
rating given by the OTS.
Recent amendments to the CRA regulations, effective July 1, 1997, are designed
to focus the CRA examination process more on an institution's actual performance
in meeting the credit needs of low- and moderate-income neighborhoods and to
minimize consideration of its CRA related procedures. Institutions like the
Bank, with more than $250 million in assets, are evaluated primarily on the
basis of their lending and investment in, and provision of services, to low- and
moderate-income areas unless they request designation and receive approval as
wholesale or limited purpose institutions or have been approved for evaluation
under a strategic plan. Additionally, large retail banks, such as the Bank, are
required to collect and to report additional data concerning small business
loans.
<PAGE>
In August 1994, Chevy Chase and its subsidiary, B. F. Saul Mortgage Company
(together, the "Companies"), entered into an agreement with the United States
Department of Justice (the "Department") which committed them to continue the
types of lending practices, branching strategies and promotional programs that
are designed to increase the level of banking services available to
traditionally underserved areas of the Washington, D.C. metropolitan area.
Specifically, the Companies agreed to invest $11.0 million in the
African-American community of the Washington, D.C. metropolitan area over a
five-year period. This commitment obligated the Companies to (i) provide $7.0
million over the five-year period in subsidies for below-market mortgage loans
to residents of designated majority African-American neighborhoods in
Washington, D.C. and Prince George's County, Maryland; (ii) open two additional
mortgage offices in majority African-American neighborhoods in the metropolitan
Washington, D.C. area; and (iii) open one new deposit branch in the Anacostia
area of Washington, D.C. The Companies also agreed over the same five-year
period, among other things, to continue efforts to increase their promotional
efforts targeted to residents of African-American neighborhoods, to continue
efforts to recruit African-Americans for loan production positions, and to
continue various employee training programs. The Companies view these efforts as
continuations of their existing programs.
OTHER ASPECTS OF FEDERAL LAW
The Bank is also subject to federal statutory provisions covering other items,
including security procedures, currency transactions reporting, insider and
affiliated party transactions, management interlocks, truth-in-lending,
electronic funds transfers, funds availability and equal credit opportunity.
YEAR 2000 CONSIDERATIONS
Some of the Bank's computer systems are designed to process transactions using
two digits to describe the year (e.g., "97" for 1997) rather than four digits
and therefore such systems may have difficulty accurately processing
transactions and making calculations using dates later than December 31, 1999.
Management has implemented a program to upgrade or replace its computer systems
to address this problem and expects the upgrades and replacements, along with
related testing to be completed not later than December 1998. Management does
not expect that the cost of converting such systems will be material to its
financial condition or results of operations. Nevertheless, a failure on the
part of the Bank to ensure that its computer systems are year 2000 compliant
could have a material adverse affect on the Bank's operations. Moreover, if any
of the Bank's significant customers or service providers do not successfully and
timely achieve year 2000 compliance as to their computer systems, the Bank also
could be adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") establishes standards for
disclosing information about an entity's capital structure. SFAS 129 supersedes
capital structure disclosure requirements found in previous accounting
pronouncements and consolidates them into one statement for ease of retrieval
and greater visibility for non-public entities. SFAS 129 is effective for
financial statements for periods ending after December 15, 1997. Because SFAS
129 addresses only disclosure related issues, its adoption will not have an
impact on the Bank's financial condition or its results of operations.
<PAGE>
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued in June
1997 and establishes accounting standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 also requires an enterprise to classify
items of other comprehensive income by their nature in a financial statement and
to display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), was also issued in June 1997. SFAS 131 establishes
accounting standards for the way business enterprises report information about
operating segments in annual and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
that a business enterprise report financial and descriptive information,
including profit or loss, certain specific revenue and expense items, and
segment assets, about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. Because SFAS 131 addresses only disclosure related issues,
its adoption will not have an impact on the Bank's financial condition or its
results of operations.
MARKET AREA
The Bank's principal deposit and lending markets are located in the Washington,
D.C. metropolitan area. Service industries and federal, state and local
governments employ a significant portion of the Washington, D.C. area labor
force, while a substantial number of the nation's 500 largest corporations have
some presence in the area. The Washington, D.C. area's seasonally unadjusted
unemployment rate is generally below the national rate and was 3.5% in September
1997, compared to the national rate of 4.7%.
Chevy Chase historically has relied on retail deposits originated in its branch
network as its primary funding source. See "Deposits and Other Sources of
Funds." Chevy Chase's principal market for deposits consists of Montgomery and
Prince George's Counties in Maryland and Fairfax County in Virginia.
Approximately 19.4% of the Bank's deposits at September 30, 1997 were obtained
from depositors residing outside of Maryland and Northern Virginia. Chevy Chase
had the largest market share of deposits in Montgomery County and ranked third
in market share of deposits in Prince George's County at June 30, 1996,
according to the most recently published industry statistics. The per capita
income of each of Montgomery and Fairfax Counties ranks among the highest of
counties and equivalent jurisdictions nationally. These two counties are also
the Washington, D.C. area's largest suburban employment centers, with a
substantial portion of their labor force consisting of federal, state and local
government employees. Private employment is concentrated in services and retail
trade centers. Unemployment in Montgomery and Fairfax Counties in September 1997
(2.4% and 2.5%, respectively) was below the national rate (4.7%) and state rates
(4.7% for Maryland and 4.1% for Virginia) for the same month.
<PAGE>
The Bank historically has concentrated its lending activities in the Washington,
D.C. metropolitan area. See "Lending Activities."
INVESTMENT AND OTHER SECURITIES
The Bank is required by OTS regulations to maintain a specific minimum amount of
liquid assets and short-term liquid assets invested in certain qualifying types
of investments. See "Regulation - Liquidity Requirements." To meet these
requirements, the Bank maintains a portfolio of cash, federal funds and
mortgage-backed securities with final maturities of five years or less. The
balance of investments in excess of regulatory requirements reflects
management's objective of maintaining liquidity at a level sufficient to assure
adequate funds to meet expected and unexpected balance sheet fluctuations.
The Bank classifies its investment and mortgage-backed securities as either
"held-to-maturity", "available-for-sale" or "trading" at the time such
securities are acquired. At September 30, 1997 and 1996, all such securities are
classified as held-to-maturity.
Prior to fiscal 1995, the Bank classified all of its investment and
mortgage-backed securities as available-for-sale. During fiscal 1995, the Bank
transferred at fair value all of such securities to held-to-maturity. Net
unrealized holding losses, net of the related income tax effect, continue to be
reported as a separate component of stockholders' equity and are being amortized
to income over the remaining lives of the securities.
OTS guidelines require that investments in securities be accounted for in
accordance with generally accepted accounting principles ("GAAP"), summarize the
applicable accounting principles and provide guidance regarding the application
of GAAP in determining whether securities are properly classified as
held-to-maturity, available-for-sale or trading.
As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage- backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. There were no mortgage securities classified as
trading securities at September 30, 1997.
At September 30, 1997, the Bank held one automobile loan-backed security which
was classified as trading. The security was issued in conjunction with an
automobile loan securitization transaction and represents a separate class of
certificates, all of which was retained by the Bank. See "Consumer Lending."
LENDING ACTIVITIES
Loan Portfolio Composition. At September 30, 1997, the Bank's loan portfolio
totaled $2.5 billion, which represented 41.6% of its total assets. (All
references in this report to the Bank's loan portfolio refer to loans, whether
they are held for sale and/or securitization or for investment, and exclude
mortgage-backed securities.) Loans collateralized by single-family residences
constituted 37.2% of the loan portfolio at that date.
The following table sets forth information concerning the Bank's loan portfolio
(net of unfunded commitments) for the periods indicated.
<PAGE>
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- -------------------- --------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
------------ ------ ------------ ------ ------------ ------ ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single family
residential (1) $ 849,955 33.5% $ 1,601,483 47.4% $ 1,391,694 47.3% $ 1,369,571 53.7% $ 1,287,333 53.6%
Home equity (1) 94,088 3.7 32,052 0.9 29,024 1.0 34,708 1.4 60,549 2.5
Commercial real estate
and multifamily 53,551 2.1 78,866 2.3 85,781 2.9 84,210 3.3 94,079 3.9
Real estate construction
and ground 54,998 2.2 63,907 1.9 32,652 1.1 52,350 2.1 62,637 2.6
Commercial 98,346 3.9 57,023 1.7 13,986 0.5 3,950 0.2 4,116 0.2
Credit card (1) 1,077,149 42.6 1,118,271 33.1 1,012,548 34.4 650,199 25.5 754,520 31.4
Automobile (1) 217,111 8.6 297,560 8.8 239,217 8.1 289,346 11.4 106,725 4.4
Home improvement and
related loans (1) 49,551 2.0 94,316 2.8 112,705 3.8 37,526 1.5 8,255 0.3
Overdraft lines of
credit and other
consumer 36,029 1.4 37,954 1.1 26,206 0.9 25,375 0.9 25,677 1.1
------------ ------ ------------ ------ ------------ ------ ------------ ------- ------------ -------
2,530,778 100.0% 3,381,432 100.0% 2,943,813 100.0% 2,547,235 100.0% 2,403,891 100.0%
------------ ====== ------------ ====== ------------ ====== ------------ ======= ------------ =======
Less:
Unearned premiums
and discounts 449 836 1,103 1,438 1,543
Deferred loan
origination fees
(costs) (2,339) (13,958) (13,687) (10,604) (3,472)
Allowance for loan
losses 105,679 95,523 60,496 50,205 68,040
------------ ------------ ------------ ------------ ------------
103,789 82,401 47,912 41,039 66,111
------------ ------------ ------------ ------------ ------------
Total loans
receivable $ 2,426,989 $ 3,299,031 $ 2,895,901 $ 2,506,196 $ 2,337,780
============ ============ ============ ============ ============
- -------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization, if any.
</TABLE>
<PAGE>
The Bank adjusts the composition of its loan portfolio in response to a variety
of factors, including regulatory requirements and asset and liability management
objectives. See "Regulation - Regulatory Capital," "- Qualified Thrift Lender
("QTL") Test" and "Federal Taxation - Bad Debt Reserve" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Asset and Liability Management."
Contractual Principal Repayments of Loans. The following table shows the
scheduled contractual principal repayments of the Bank's loans at September 30,
1997. The entire balance of loans held for sale and/or securitization is shown
in the year ending September 30, 1998, because such loans are expected to be
sold in less than one year.
<PAGE>
<TABLE>
<CAPTION>
CONTRACTUAL PRINCIPAL REPAYMENTS
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Balance Approximate Principal Repayments
Outstanding Due in Years Ending September 30,
at ---------------------------------------------------------------------------------------
September 30, 2013 and
1997 (1) 1998 1999 2000 2001-2002 2003-2007 2008-2012 Thereafter
------------- ----------- ----------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single family residential $ 747,070 $ 13,703 $ 14,429 $ 18,431 $ 33,682 $ 76,366 $ 117,795 $ 472,664
Home equity 44,088 -- -- -- 3,028 2,289 8,633 30,138
Commercial real estate and
multifamily 53,551 4,493 -- 10,790 30,018 6,309 1,941 --
Real estate construction
and ground 54,998 15,594 10,641 1,296 6,640 20,827 -- --
Commercial 98,346 39,416 9,045 3,108 21,565 24,632 310 270
Credit card (2) 987,149 41,431 39,692 38,026 71,331 153,726 124,062 518,881
Automobile 137,111 22,039 25,465 29,493 60,114 -- -- --
Home improvement and related
loans 49,551 2,460 2,782 3,145 7,579 29,511 4,074 --
Overdraft lines of credit and
other consumer 36,029 2,840 3,318 3,887 9,944 16,040 -- --
Loans held for sale 102,885 102,885 -- -- -- -- -- --
Loans held for securitization
and sale 220,000 220,000 -- -- -- -- -- --
------------- ----------- ----------- ------------ ------------ ------------ ----------- ------------
Total loans receivable (3) $ 2,530,778 $ 464,861 $ 105,372 $ 108,176 $ 243,901 $ 329,700 $ 256,815 $ 1,021,953
============= =========== =========== ============ ============ ============ =========== ============
Fixed-rate loans $ 336,185 $ 36,766 $ 44,578 $ 47,578 $ 108,119 $ 72,152 $ 16,848 $ 10,144
Adjustable-rate loans 1,871,708 105,210 60,794 60,598 135,782 257,548 239,967 1,011,809
Loans held for sale 102,885 102,885 -- -- -- -- -- --
Loans held for securitization
andd sale 220,000 220,000 -- -- -- -- -- --
------------- ----------- ----------- ------------ ------------ ------------ ----------- ------------
Total loans receivable (3) $ 2,530,778 $ 464,861 $ 105,372 $ 108,176 $ 243,901 $ 329,700 $ 256,815 $ 1,021,953
============= =========== =========== ============ ============ ============ =========== ============
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Of the total amount of loans outstanding at September 30, 1997 which were due after one year, an aggregate principal balance of
approximately $299.4 million had fixed interest rates and an aggregate principal balance of approximately $1.7 billion had
adjustable interest rates.
(2) Estimated repayments of credit card loans reflect the required minimum payments.
(3) Before deduction of allowance for loan losses, unearned discounts and deferred loan origination fees (costs).
</TABLE>
<PAGE>
Actual payments may not reflect scheduled contractual principal repayments due
to the effect of loan refinancings, prepayments and enforcement of due-on-sale
clauses, which give the Bank the right to declare a "conventional loan" -- one
that is neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Veterans' Administration ("VA") -- immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. Although the Bank's
single-family residential loans historically have had stated maturities of
generally 30 years, such loans normally have remained outstanding for
substantially shorter periods because of these factors. At September 30, 1997,
principal repayments of $142.0 million are contractually due within the next
year. Of this amount, $36.8 million is contractually due on fixed-rate loans and
$105.2 million is contractually due on adjustable-rate loans.
Origination, Purchase and Sale of Real Estate Loans. As a federally chartered
savings institution, the Bank has general authority to make loans secured by
real estate located throughout the United States. The following table shows
changes in the composition of the Bank's real estate loan portfolio and the net
change in mortgage-backed securities.
<PAGE>
<TABLE>
<CAPTION>
ORIGINATION, PURCHASE AND SALE OF REAL ESTATE LOANS
(In thousands)
For the Year Ended September 30,
----------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Real estate loan originations and purchases: (1)
Single family residential $ 1,392,341 $ 1,098,099 $ 522,846
Home equity 365,076 223,852 219,714
Commercial real estate and multifamily 29 345 4,023
Real estate construction and ground 64,430 72,655 37,510
--------------- --------------- ---------------
Total originations and purchases 1,821,876 1,394,951 784,093
--------------- --------------- ---------------
Principal repayments (444,375) (381,365) (245,376)
Sales (2) (529,545) (407,200) (374,414)
Loans transferred to real estate acquired
in settlement of loans (4,706) (5,972) (9,822)
--------------- --------------- ---------------
(978,626) (794,537) (629,612)
Transfers to mortgage-backed securities (3) (1,566,966) (363,257) (156,169)
--------------- --------------- ---------------
Increase (decrease) in real estate loans $ (723,716) $ 237,157 $ (1,688)
=============== =============== ===============
(1) Excludes unfunded commitments.
(2) Includes securitization and sale of home equity credit line receivables of $286.4 million, $96.5 million and $150.5 million
for the years ended September 30, 1997, 1996 and 1995, respectively.
(3) Represents real estate loans which were pooled and exchanged for Credit Suisse, First Boston, FHLMC and FNMA
mortgage-backed securities.
</TABLE>
<PAGE>
Single-Family Residential Real Estate Lending. The Bank originates a variety of
loans secured by single-family residential structures. At September 30, 1997,
$0.9 billion (or 37.2%) of the Bank's loan portfolio consisted of loans secured
by first or second mortgages on such properties, including $13.4 million of
FHA-insured or VA-guaranteed loans. Approximately 77.0% of the Bank's
single-family residential real estate loans at September 30, 1997 by principal
balance were secured by properties located in Maryland, Virginia or the District
of Columbia.
The Bank originates VA, FHA and a wide variety of conventional residential
mortgage loans through its wholly-owned mortgage banking subsidiary, B.F. Saul
Mortgage Company, and through Chevy Chase Mortgage, a division of the Bank.
Chevy Chase currently offers fixed-rate loans with maturities of 15 to 30 years
and adjustable-rate residential mortgage loans ("ARMs"), principally with
maturities of 30 years.
The Bank maintains a wholesale network of correspondents, including loan brokers
and financial institutions, in order to supplement its direct origination of
single-family residential mortgage loans. The Bank determines the specific loan
products and rates under which the correspondents originate the loans, and
subjects the loans to the Bank's underwriting criteria and review. During the
year ended September 30, 1997, approximately $754.5 million of loans settled
under the correspondent program.
At September 30, 1997, 79.8% of the Bank's residential mortgage loans consisted
of ARMs scheduled to have interest rate adjustments within five years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Asset and Liability Management." Interest
rates on the majority of the Bank's ARMs are adjusted based on changes in yields
on U.S. Treasury securities of varying maturities. The interest rate adjustment
provisions of the Bank's ARMs contain limitations on the frequency and maximum
amount of interest rate adjustments, although such limitations are not required
by law. These limitations are determined by a variety of factors, including
mortgage loan competition in the Bank's markets. The ARMs currently offered by
the Bank are generally subject to a limitation on the annual increase in the
interest rate of 2.0% and a limitation on the increase in the interest rate over
the term of the loan ranging from 6.0% to 9.0%.
During the current fiscal year, the Bank continued to fulfill its $1.0 billion
five-year mortgage loan commitment made in 1994 to meet the credit needs of low-
and moderate-income borrowers in the various communities which it serves. As
part of this commitment, the Community Development Fund is providing $140.0
million of mortgage financing over a five-year period, with $7.0 million in
subsidies for below-market mortgage loans, to families in minority neighborhoods
in the District of Columbia and Prince George's County, Maryland.
<PAGE>
Loan sales provide the Bank with liquidity and additional funds for lending,
enabling the Bank to increase the volume of loans originated and thereby
increase loan interest and fee income, and in recent periods have produced
additional non-interest income in the form of gains on sales of loans. In fiscal
1997, sales of mortgage loans originated or purchased for sale by the Bank
totaled $243.1 million. The marketability of loans, loan participations and
mortgage-backed securities depends on purchasers' investment limitations,
general market and competitive conditions, mortgage loan demand and other
factors. The Bank originates fixed-rate, single-family loans on terms which
conform to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") guidelines in order to ensure the salability of
the loan in the public secondary mortgage market. In order to manage its
interest-rate exposure, the Bank hedges its fixed-rate mortgage loan pipeline by
entering into whole loan and mortgage-backed security forward sale commitments.
Sales of residential mortgage loans are generally made without recourse to the
Bank. At September 30, 1997, the Bank had $102.7 million of single-family
residential loans held for sale to investors.
From time to time, as part of its capital and liquidity management plans, the
Bank may consider exchanging loans held in its portfolio for lower risk-weighted
mortgage-backed securities and retaining those securities in its portfolio
rather than selling them in the secondary mortgage market. In September 1997,
the Bank exchanged $1.1 billion of single-family residential loans held in its
portfolio for mortgage-backed securities which the Bank retained for its own
portfolio.
When the Bank sells a residential whole loan or loan participation and retains
servicing, or purchases mortgage servicing assets from third parties, it
continues to collect and remit loan payments, inspect the properties, make
certain insurance and tax payments on behalf of borrowers and otherwise service
the loans. The servicing fee, generally ranging from 0.25% to 0.50% of the
outstanding loan principal amount per annum, is recognized as income over the
life of the loans. The Bank also typically derives income from temporary
investment for its own account of loan collections pending remittance to the
participation or whole loan purchaser. At September 30, 1997, the Bank was
servicing residential permanent loans totaling $3.9 billion for other investors.
See "Loan Servicing."
Sales of Mortgage-Backed Securities. A significant portion of the Bank's sales
of mortgage-backed securities involve sales pursuant to the Bank's normal
mortgage banking operations. Generally, the Bank's policy is to sell its
fixed-rate mortgage production which, in the case of most conforming fixed-rate
loans, is accomplished by first pooling such loans into mortgage-backed
securities. The mortgage-backed securities sold as part of the Bank's mortgage
banking operations are generally issued in the same month as the sale of such
securities. The securities are formed from conforming fixed-rate loans
originated for sale or from conforming fixed-rate loans resulting from the
borrower's election to convert from a variable-rate loan to a fixed-rate loan.
Mortgage-backed securities held for sale in conjunction with mortgage banking
activities are classified as trading securities. As a result of the sale of
trading securities in the month such securities are formed, the Consolidated
Statements of Cash Flows in this report reflect significant proceeds from the
sales of trading securities, even though there are no balances of such
securities at September 30, 1997. Fixed-rate loans are designated as held for
sale in the Consolidated Balance Sheets in this report.
<PAGE>
Home Equity Lending. The Bank's home equity credit line loan provides revolving
credit secured principally by a second mortgage on the borrower's home. Such
loans are originated directly by the Bank. Home equity credit line loans bear
interest at a variable rate that adjusts monthly based on changes in the
applicable interest rate index and generally are subject to a maximum annual
interest rate of between 18.0% and 24.0%. Except for any amortization of
principal that may occur as a result of monthly payments, there are no required
payments of principal until maturity. In order to promote its home equity credit
line loan program, the Bank currently offers prospective borrowers a
below-market interest rate for an introductory period and settlement without
closing costs.
In December 1996, the Bank purchased $119.2 million of home equity credit line
loans at a premium. The Bank may make additional purchases of such loans in the
future as a way to supplement its direct origination of such loans.
Securitizations of home equity credit line receivables have been an important
element of the Bank's strategies to enhance liquidity and to maintain compliance
with regulatory capital requirements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition." The
Bank transferred $286.4 million, $96.5 million and $150.5 million of home equity
credit line receivables in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively, to trusts for securitization and sale to investors. Gains of $11.7
million, $4.7 million and $7.6 million were recognized by the Bank as a result
of these transactions. The Bank continues to service the underlying accounts.
Commercial Real Estate and Construction Lending. Commercial, real estate
construction and ground loans are originated directly by the Bank. Aggregate
balances of residential construction, commercial construction, ground and
commercial real estate and multifamily loans decreased 24.0% in fiscal 1997 to
$108.5 million at September 30, 1997, from $142.8 million at September 30, 1996.
The Bank provides financing, generally at market rates, to certain purchasers of
its REO. Additionally, the Bank finances the construction of residential real
estate, principally single-family detached homes and townhouses, but generally
only when a home is under contract for sale by the builder to a consumer.
Commercial Lending. In July 1994, the Bank began developing an active commercial
lending program. Commercial loans are defined as any loans made to a business
entity for commercial purposes. Such purposes may include the financing of
working capital, the acquisition of machinery and equipment or other assets, and
the financing of cash flow needs. Loans for acquisition, construction or
permanent financing of real estate used in the borrower's business are
considered commercial loans. All commercial loans are underwritten, originated
and managed by the Bank's Business Banking Group. A wide variety of products is
offered, including revolving lines of credit for working capital or seasonal
needs; term loans for the financing of fixed assets; letters of credit;
corporate credit cards; cash management services; and other deposit and
investment products. Business development efforts have been concentrated in the
major industry groups in the metropolitan Washington, D.C. area, as well as a
broad base of small businesses and community service organizations. Commercial
loans increased $41.3 million during fiscal 1997 to $98.3 million at September
30, 1997 and are expected to continue to grow as the Bank continues to expand
this aspect of its business. The recent acquisition of ASB Capital Management,
Inc., should enhance the operations of the Business Banking Group by allowing
the Bank to offer a broader variety of investment products and fiduciary
services to institutional customers.
<PAGE>
Under legislation signed into law on September 30, 1996, the authority of
federal thrifts, like Chevy Chase, to make commercial loans was increased from
10% to 20% of assets, provided that the additional 10% consists of small
business loans.
Credit Card Lending. Chevy Chase provides consumer credit through its credit
card program, which offers VISA(R) and MasterCard(R) credit cards and includes
Platinum, Gold and Classic cards. Chevy Chase issues the credit cards and
receives interest income on credit extended, a fee based on a percentage of
credit sales paid by merchants accepting card purchases, and generally, an
annual membership fee for use of the cards, as well as certain other fees. Chevy
Chase's credit card loan portfolio accounted for 42.6% of Chevy Chase's total
loans at September 30, 1997. According to statistics published in the American
Banker, Chevy Chase is the third largest issuer of credit cards among thrift
institutions, based on managed credit card loans outstanding at June 30, 1997.
At September 30, 1997, credit card loans outstanding totaled $1.1 billion and
managed credit card receivables, including receivables owned by the Bank and
receivables securitized, sold and serviced by the Bank, totaled $5.1 billion.
The Bank emphasizes credit card lending because the shorter term and normally
higher interest rates on such loans help it maintain a profitable spread between
the average loan yield and the cost of funds. In addition, credit card accounts
typically may be sold at a premium over their receivables balances, thus further
enhancing their potential value to the Bank. Chevy Chase also believes its
credit card program contributes to market share growth in its local markets by
attracting new depositors, promoting a high degree of customer loyalty and
providing opportunities to cross-market other products of the Bank.
Chevy Chase's internal data processing systems are capable of handling a broad
range of credit card program operations, including processing of credit
applications and collection functions. Certain data processing and
administrative functions associated with the servicing of the credit card
accounts are performed on behalf of the Bank by First Data Resources
Incorporated from its facilities in Omaha, Nebraska.
Changes in credit card use and payment patterns by cardholders, including
increased defaults, may result from a variety of social, legal and economic
factors. Chevy Chase currently offers introductory and promotional periodic
interest rates, which are generally fixed for varying initial and promotional
periods and, which at the conclusion of such periods, revert to a variable
interest rate. If account holders choose to utilize competing sources of credit,
the rate at which new receivables are generated may be reduced and certain
purchase and payment patterns with respect to the receivables may be affected.
Economic factors affecting credit card use include the rate of inflation and
relative interest rates offered for various types of loans. Adverse changes in
economic conditions could have a direct impact on the timing and amount of
payments by borrowers. During times of economic recession, default rates on
credit card loans generally may be expected to exceed default rates on
residential mortgage loans. During 1996 and 1997, the Bank, as well as other
credit card issuers, experienced an increase in the level of individuals
declaring bankruptcy. Although the Bank cannot predict with certainty the level
of bankruptcies that may occur among cardholders, management has implemented
more stringent underwriting and other lending policies and has become more
proactive in managing its accounts and in monitoring its portfolio in an attempt
to mitigate losses incurred as a result of a cardholder declaring bankruptcy.
The Bank can make no assurances as to the level of bankruptcies that may occur
among cardholders in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition - Asset
Quality - Delinquent Loans" and "- Allowances for Losses."
<PAGE>
Certain issuers of credit cards have adjusted their pricing to provide for the
different credit risks among customers based upon card usage, repayment habits
and other criteria. The Bank has implemented such risk-based pricing by
increasing the interest rates charged to high-risk customers and by continuing
to allow low-risk customers a more favorable rate. Periodically, the Bank
offers promotional discounts to certain customers to encourage increased usage
of the Bank's credit cards.
Certain jurisdictions and their residents may attempt to require out-of-state
credit card issuers to comply with such jurisdictions' consumer protection laws
that impose requirements on the making, enforcement and collection of consumer
loans. For example, in recent years, a number of lawsuits and administrative
actions have been filed in several states against out-of-state credit card
issuers (including both federally and state chartered insured institutions)
challenging various fees and charges (such as late fees, over-the-limit fees,
returned check fees and annual membership fees) assessed against residents of
the states in which such lawsuits were filed, based on restrictions or
prohibitions under the laws of such states. The Supreme Court recently ruled
that national banks may export late fees on credit cards as interest regardless
of states' usury laws, however the law is not settled with respect to all types
of fees and charges. If it were determined that out-of-state credit card issuers
must comply with a jurisdiction's laws limiting the charges imposed by credit
card issuers, such action could have an adverse impact on the Bank's credit card
results.
Securitizations of credit card receivables has been an integral element of the
Bank's strategy to enhance liquidity, to further asset and liability management
objectives and to maintain compliance with regulatory capital requirements. The
Bank transferred $1.1 billion, $919.0 million, $1.6 billion, $1.4 billion and
$350.0 million of credit card receivables in fiscal 1997, fiscal 1996, fiscal
1995, fiscal 1994 and fiscal 1993, respectively, to trusts for securitization
and sale to investors. Prior to January 1, 1997, no gain or loss was recognized
by the Bank as a result of these transactions as retained cash flows were
recognized over the lives of the transactions when earned. Subsequent to January
1, 1997, as a result of the adoption of SFAS 125, the Bank recognized gains of
$33.1 million. The Bank continues to service the underlying loans in each of
trusts. See Note C to the Consolidated Financial Statements in this report.
Chevy Chase plans to securitize an additional $615.0 million of credit card
receivables during the first and second quarters of fiscal 1998. Certain of
these receivables at September 30, 1997 were classified as loans held for
securitization and sale in the Consolidated Balance Sheets in this report.
Credit card loans are not subject to those provisions of federal laws and
regulations that limit to 35% of an institution's total assets the amount of
consumer loans that a federally chartered savings institution may make.
<PAGE>
Other Consumer Lending. Chevy Chase currently offers a variety of consumer loans
other than credit card loans, including automobile loans, overdraft lines of
credit, home improvement loans and other unsecured loans for traditional
consumer purchases and needs. In addition, through a wholly-owned subsidiary,
the Bank offers "non-prime" automobile loans. "Non-prime" refers to a category
of loans made to applicants who have experienced certain adverse credit events,
but who meet certain other creditworthiness tests. See "Other Consumer Loan
Underwriting." The Bank's portfolio of automobile loans, home improvement and
related loans and other consumer loans totaled $217.1 million, $49.6 million and
$36.0 million, respectively, at September 30, 1997, which accounted for a
combined 12.0% of total loans at that date. The largest areas of recent growth
have been in automobile loans and home improvement loans. During fiscal 1997,
the Bank purchased or originated $890.0 million and $138.5 million of automobile
loans and home improvement loans, respectively, which was more than offset by
the transfers of $938.9 million and $224.0 million, respectively, of receivables
to trusts for securitization and sale to investors.
Federal laws and regulations permit a federally chartered savings institution to
make secured and unsecured consumer loans up to 35% of the institution's total
assets. In addition, a federally chartered savings institution has lending
authority above the 35% limit for certain consumer loans which include, in
addition to credit card loans, home improvement, secured deposit account and
educational loans.
Real Estate Loan Underwriting. In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security. Credit approval is vested with the
Board of Directors and delegated to the Executive Loan Committee and certain
senior officers in accordance with the credit authorizations approved by the
Board of Directors. Generally, all construction and commercial real estate loans
are reviewed and approved by the Executive Loan Committee. Any significant loan
not conforming to the Bank's approved policies must be approved by the Executive
Loan Committee or the Chief Executive Officer. All loans of $15 million or more
are presented to the Board of Directors for final approval.
The approval process for all types of real estate loans includes appraisals or
evaluations of the properties securing such loans and a review of the
applicant's financial statements and credit, payment and banking history,
financial statements of any guarantors, and tax returns of guarantors of
construction and commercial real estate loans.
In an effort to minimize the increased risk of loss associated with construction
and development loans, Chevy Chase considers the reputation of the borrower and
the contractor, reviews pre-construction sale and leasing information, and
requires an independent inspecting engineer or architect to review the progress
of multifamily and commercial real estate projects. In addition, the Bank
generally requires personal guarantees of developers for all development loans
and, if a general contractor is used by the developer, may require the posting
of a performance bond.
<PAGE>
The Bank generally lends up to 95% of the appraised value of single-family
residential dwellings to be owner-occupied. The Bank also lends up to 85% of the
appraised value of the completed project to finance the construction of such
dwellings, and, on a case-by-case basis, the Bank occasionally may lend up to
90% of such appraised value when such financing is limited to pre-sold units.
The loan-to-value ratio generally applied by the Bank to commercial real estate
loans and multifamily residential loans has been 80% of the appraised value of
the completed project. Currently, the Bank generally does not originate a second
mortgage loan (excluding home equity credit line loans) if the aggregate
loan-to-value ratio of the second loan and the related first mortgage loan
exceeds 80% of the appraised value of the property. In some circumstances, the
Bank originates a first and second mortgage loan simultaneously where the total
loan value does not exceed 90% of the appraised value of the property.
Currently, the Bank offers home equity credit line loans up to a 125% maximum
loan-to-value ratio. Private mortgage insurance is generally obtained for the
amount over 80% of the value of the underlying property. Loan-to-value ratios
are determined at the time a loan is originated. Consequently, subsequent
declines in the value of the loans' collateral could expose the Bank to losses.
OTS regulations require institutions to adopt internal real estate lending
policies, including loan-to-value limitations conforming to specific guidelines
established by the OTS. The Bank's current lending policies conform to these
regulations.
On all loans secured by real estate (other than certain home equity credit line
loans), Chevy Chase requires title insurance policies protecting the priority of
the Bank's liens. The Bank requires fire and casualty insurance for permanent
loans (including home equity credit line loans) and fire, casualty and builders'
risk insurance for construction loans. The borrower selects the insurance
carrier, subject to Chevy Chase's approval. Generally, for any residential loan
(including home equity credit line loans) in an amount exceeding 80% of the
appraised value of the security property, Chevy Chase currently requires
mortgage insurance from an independent mortgage insurance company. The majority
of the Bank's mortgage insurance is placed with four carriers.
Substantially all fixed-rate mortgage loans originated by the Bank contain a
"due on sale" clause providing that the Bank may declare a loan immediately due
and payable in the event, among other things, that the borrower sells the
property securing the loan without the consent of the Bank. The Bank's ARMs
generally are assumable.
Commercial Loan Underwriting. All commercial loan requests are underwritten and
approved under authorities granted to specified committees and individuals as
outlined in the Bank's credit policies. The scope and depth of the underwriting
for a particular request are generally dictated by the size of the proposed
transaction. All commercial loans greater than $100,000 are assigned a risk
rating at inception, utilizing a risk-rating system as defined in the Bank's
credit policies.
Credit Card Loan Underwriting. The Bank generates new credit card accounts
through various methods, including telemarketing, direct mail and other
distribution channels. The Bank identifies potential cardholders for
solicitation by supplying a list of credit criteria to a credit bureau, which
generates a list of individuals who meet such criteria. An individual receiving
a solicitation provides all the necessary application information to the Bank
which then obtains a credit report (on such individual) from an
independent credit reporting agency. The credit limit and terms of the account
are subject to certain post-screening underwriting reviews performed by the
Bank.
<PAGE>
The Bank's underwriting approach to account approval supplements a computerized
credit scoring system with an individual evaluation of each complete application
for creditworthiness. Cardholder credit limits are adjusted from time to time
based on the Bank's continuing evaluation of the cardholder's repayment ability
as evidenced by the cardholder's payment history and other factors. The Bank
also may increase the credit limit at the cardholder's request after completion
of an evaluation comparable to that performed during the initial underwriting.
Management reviews credit losses on a monthly basis and adjusts the Bank's
underwriting standards as appropriate.
Other Consumer Loan Underwriting. Other consumer loans (which include automobile
loans and home improvement loans) are originated or purchased by the Bank after
a review by the Bank in accordance with its established underwriting procedures.
The underwriting procedures are designed to provide a basis for assessing the
borrower's ability and willingness to repay the loan. In conducting this
assessment, the Bank considers the borrower's ratio of debt to income and
evaluates the borrower's credit history through a review of a written credit
report compiled by a recognized consumer credit reporting bureau. The borrower's
equity in the collateral and the terms of the loan are also considered. The
Bank's guidelines are intended only to provide a basis for lending decisions,
and exceptions to such guidelines may, within certain limits, be made based upon
the credit judgment of the Bank's lending officer. The Bank periodically
conducts quality audits to ensure compliance with its established policies and
procedures.
The Bank also makes automobile loans through one of its operating subsidiaries.
The underwriting guidelines for this subsidiary apply to a category of lending
in which loans may be made to applicants who have experienced certain adverse
credit events (and therefore would not necessarily meet all of the Bank's
guidelines for its traditional loan program), but who meet certain other
creditworthiness tests. Such loans may experience higher rates of delinquencies,
repossessions and losses, especially under adverse economic conditions, compared
with loans originated pursuant to the Bank's traditional lending program. See
"Subsidiaries - Operating Subsidiaries."
Loan Servicing. In addition to interest earned on loans, the Bank receives
income through servicing of loans and fees in connection with loan origination,
loan modification, late payments, changes of property ownership and
miscellaneous services related to its loans. Loan servicing income, principally
servicing income earned on single-family residential mortgage loans owned by
third parties and the Bank's securitized credit card, home equity credit line,
automobile and home loan receivables portfolios, has been a source of
substantial earnings for the Bank in recent periods. Income from these
activities varies with the volume and type of loans originated and sold.
The following table sets forth certain information relating to the Bank's
servicing income as of or for the years indicated.
<PAGE>
<TABLE>
<CAPTION>
As of or For the Year Ended September 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Residential $ 3,930,371 $ 3,045,650 $ 1,350,423
Credit Card 4,015,172 3,889,704 3,226,316
Home Equity 459,130 416,365 455,791
Automobile 1,083,026 505,638 218,287
Home Loans 244,140 141,106 --
----------- ----------- -----------
Total amount of loans
serviced for others (1) $ 9,731,839 $ 7,998,463 $ 5,250,817
=========== =========== ===========
Loan servicing fee
income (2) $ 227,817 $ 264,139 $ 184,275
=========== =========== ===========
</TABLE>
- ---------------------
(1) The Bank's basis in its servicing assets and interest-only strips at
September 30, 1997, 1996 and 1995 was $147.4 million, $75.4 million and
$54.2 million, respectively.
(2) In each of the years ended September 30, 1997, 1996 and 1995, loan
servicing fee income as a percentage of net interest income before
provision for loan losses was 108.2%, 132.9% and 104.6%, respectively.
The Bank earns fees in connection with the servicing of home equity credit line
loans, credit card loans, home loans, automobile loans and single-family
residential mortgage loans. The Bank's level of servicing fee income varies
based in large part on the amount of the Bank's securitization activities with
respect to these loan types. As the Bank securitizes and sells assets, acquires
servicing assets either through purchase or origination, or sells mortgage loans
and retains the servicing rights on those loans, the level of servicing fee
income generally increases. During fiscal 1997, the Bank securitized and sold
$1.1 billion of credit card receivables, $286.4 million of home equity credit
line receivables, $938.9 million of automobile loan receivables and $224.0
million of home loan receivables. Although the Bank's securitization activity
increased during fiscal 1997, loan servicing fee income decreased from the level
achieved in fiscal 1996 principally because of an increase in charge-offs on
securitized credit card receivables. See "Management's Discussion and Analysis -
Financial Condition - Allowance for Losses." The Bank's level of servicing fee
income also declines upon repayment of assets previously securitized and sold
and repayment of mortgage loans serviced for others.
<PAGE>
The Bank's investment in loan servicing assets (including servicing assets and
interest-only strips), and the amortization of such assets, are periodically
evaluated for impairment. Interest-only strips are evaluated quarterly based on
the discounted value of estimated future net cash flows to be generated by the
underlying loans. The difference between the book value of these assets and the
discounted value is recorded as a valuation adjustment and recognized as an
unrealized gain or loss in the period in which the change occurs. Several
estimates are used when determining the discounted value, the most significant
of which is the estimated rate of repayment of the underlying loans. The Bank
evaluates its servicing assets for impairment based on fair value. To measure
fair value of its servicing assets, the Bank uses either quoted market prices or
discounted cash flow analyses using appropriate assumptions for servicing fee
income, servicing costs, prepayment rates and discount rates. Additionally, the
Bank stratifies its capitalized servicing assets for purposes of evaluating
impairment by taking into consideration relevant risk characteristics, including
loan type, note rate and date of acquisition. See Note C to the Consolidated
Financial Statements in this report.
The Bank prices its single-family mortgage loans to achieve a competitive yield.
Loan origination and commitment fees, and the related costs associated with
making the loans, are deferred. For fully amortizing loans originated for the
Bank's portfolio, the net deferred fees are accreted to interest income over the
estimated life of the loans using the level-yield method. Fees deferred on
revolving credit lines or loans which have no scheduled amortization originated
for the Bank's portfolio are accreted to income over the estimated lives of the
underlying loans using the straight-line method. Fees deferred on loans
originated and held for sale are not accreted to income but instead are used in
determining the gain or loss on the sale of the loans.
DELINQUENCIES, FORECLOSURES AND ALLOWANCES FOR LOSSES
Delinquencies and Foreclosures. When a borrower fails to make a required payment
on a mortgage loan, the loan is considered delinquent and, after expiration of
the applicable cure period, the borrower is charged a late fee. The Bank follows
practices customary in the banking industry in attempting to cure delinquencies
and in pursuing remedies upon default. Generally, if the borrower does not cure
the delinquency within 90 days, the Bank initiates foreclosure action. If the
loan is not reinstated, paid in full or refinanced, the security property is
sold. In some instances, the Bank may be the purchaser. Thereafter, such
acquired property is listed in the Bank's account for real estate acquired in
settlement of loans until the property is sold. Deficiency judgments generally
may be enforced against borrowers in Maryland, Virginia and the District of
Columbia, but may not be available or may be subject to limitations in other
jurisdictions in which loans are originated by the Bank.
The total outstanding balance of a credit card loan (the largest category of the
Bank's consumer loans) is considered contractually delinquent if the minimum
payment indicated on the cardholder's statement is not received by the due date
indicated on such statement. Efforts to collect contractually delinquent credit
card receivables currently are made by the Bank's service center personnel or
the Bank's designees. Collection activities include statement messages, formal
collection letters and telephone calls. The Bank may, at its option, enter into
arrangements with cardholders to extend or otherwise change payment schedules.
Delinquency levels are monitored by collection managers, and information is
reported regularly to senior management. Accounts are charged off when they
become 180 days contractually delinquent, although the Bank continues to attempt
to collect balances due and, in some cases, may refer the accounts to outside
collection agencies.
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Asset Quality - Delinquent Loans" for a
discussion of the Bank's delinquent loan portfolio at September 30, 1997.
Allowances for Losses. It is the Bank's policy to maintain adequate allowances
for estimated losses on loans and real estate. Generally, the allowances are
based on, among other things, historical loan loss experience, evaluation of
economic conditions in general and in various sectors of the Bank's customer
base, and periodic reviews of loan portfolio quality by Bank personnel.
Allowances for losses on loans and real estate are based on current events or
facts that may ultimately lead to future losses. The Bank's actual losses may
vary from management's current estimates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
- - Asset Quality - Allowances for Losses."
The Bank's specific methods for establishing the appropriate levels of
allowances vary depending upon the assets involved. The Bank's allowance on
credit card loans is based on a number of factors, including historical
charge-off and repayment experience and the age of the portfolio. The Bank has
developed a roll rate model to extrapolate its allowance needs based on an
analysis of the characteristics of the portfolio and trends at any particular
time. In this regard, the Bank considers various historical information relative
to origination date, borrower profiles, age of accounts, geographic
concentration, creditworthiness of recent applicants, delinquencies,
bankruptcies and other factors. Although industry standards are considered, they
are given comparatively less weight due to management's belief that comparisons
among different institutions' portfolios are potentially misleading because of
significant differences in underwriting standards, curing and re-aging
procedures and charge-off policies. Chevy Chase's policy is to charge off credit
card receivables at the earlier of when they become 180 days contractually
delinquent or during the month following receipt of notice of the death or
bankruptcy filing of the borrower. The Bank's actual charge-off experience for
credit card loans may vary from the levels forecasted by the Bank's roll rate
model because credit card loans typically are more sensitive to general economic
conditions than certain other types of loans. For example, an unforeseen decline
in economic activity may result in increased bankruptcy losses which the model
is unable to forecast. Nevertheless, because the Bank's model utilities a
rolling 6-month and 12-month base, such unforeseen losses are incorporated into
the model as they occur and allowances are adjusted accordingly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Asset Quality - Allowances for Losses."
The Bank's methods for determining the allowance on loans secured by real estate
vary depending on whether the loans are secured by residential homes or by other
real estate. For residential mortgage loans, management computes the allowance
by stratifying residential permanent loans on a state by state and ownership
(i.e., investor or homeowner) basis. After the residential permanent portfolio
has been stratified by state, historical loss ratios (as adjusted for
predictable or quantifiable trends, if known) for the specific states are
applied to delinquent loans. The sum of these calculations is the component
assigned to residential permanent loans. In the Bank's experience, this approach
has resulted in timely recognition of necessary allowances, which has been
generally supported by the Bank's favorable results on the ultimate disposition
of the underlying collateral.
<PAGE>
The Bank assesses the adequacy of its general valuation allowances on
non-residential (i.e., other than single-family residential) mortgage loans, REO
and real estate held for investment based primarily on an ongoing evaluation of
individual assets. This evaluation takes into consideration a variety of
factors, including cash flow analyses, independent appraisals, market studies,
economic trends and management's knowledge of the market and experience with
particular borrowers. The Bank obtains current appraisals when properties are
classified as REO. The Bank periodically reviews appraisals and orders new
appraisals as appropriate based on a number of factors, including the date of
the previous appraisal, changes in market conditions and regulatory
requirements.
The Bank regularly reviews its overall loan portfolio consisting of performing
non-classified assets and, based on such review, establishes additional
allowances for losses.
In addition to the general valuation allowances described above, valuation
allowances are provided for individual loans where the ultimate collection is
considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the collateral or guarantees, if applicable.
Beginning October 1, 1994, the Bank has been providing additional general
valuation allowances, which are equal to, or exceed, the net earnings generated
by the development and sale of land in the Communities. See "Managements'
Discussion and Analyses of Financial Condition and Results of Operations -
Financial Condition - Asset Quality - Allowances for Losses."
REO is carried at the lower of cost or fair value, less selling costs. To date,
sales of REO, non-residential mortgage loans and loans classified as investments
in real estate have resulted in no material additional aggregate loss to the
Bank above the amounts already reserved. However, these results do not
necessarily assure that the Bank will not suffer losses in the future beyond its
level of allowances.
The Bank's individualized asset review takes place within its Asset Review
Committee and the Asset Classification Committee (the "Committee"). The Asset
Review Committee accumulates and analyzes data relating to classified and
potential problem assets of $5.0 million or more and makes appropriate
recommendations regarding asset classifications to the Committee. The Committee
meets on a regular basis to discuss classifications of such assets and to review
the allowances for losses. The Committee generally reviews the status of various
projects, including, for example, data on recent lot sales for residential
development projects. Actual progress is compared to projections made when the
related loan was underwritten. Local economic conditions and known trends are
also reviewed. The Committee also considers steps being taken by borrowers to
address problems, and reviews financial information relating to borrowers and
guarantors as well as reports by loan officers who are responsible for
continually evaluating the projects. The actions of the Committee are reported
to the Board of Directors.
The Federal Financial Institution Examination Council, which is composed of the
OTS and the other federal banking agencies, has issued guidelines regarding the
appropriate levels of general valuation allowances that should be maintained by
insured institutions. The Bank believes that its levels of general valuation
allowances at September 30, 1997 comply with the guidelines.
The Bank's assets are subject to review and classification by the OTS and the
FDIC upon examination. Based on such examinations, the Bank could be required to
establish additional valuation allowances or incur additional charge-offs.
<PAGE>
DEPOSITS AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for use in lending
and for other general business purposes. In addition to deposits, Chevy Chase
receives funds from loan repayments and loan sales. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
influenced by general interest rates and money-market conditions. Borrowings may
be used to compensate for reductions in normal sources of funds, such as deposit
inflows at less than projected levels or deposit outflows, or to support the
Bank's operating or investing activities.
Deposits. Chevy Chase currently offers a variety of deposit accounts with a
range of interest rates and maturities designed to attract both long-term and
short-term deposits. Deposit programs include Super Statement Savings, Super
NOW, Insured Money Fund, Checking, Simple Statement Savings, Young Savers,
Certificate, and special programs for Individual Retirement and Keogh
self-employed retirement accounts. All jumbo certificates of deposit are sold
directly by the Bank to depositors, either through its branches or through its
money desk operation.
Chevy Chase attracts deposits through its branch network and advertisements, and
offers depositors access to their accounts through 614 ATMs, including 189 ATMs
located in grocery stores. The Bank also has the right to install ATMs in
certain additional grocery stores in the greater Washington,
D.C./Baltimore/Richmond area which do not currently have ATM service. These ATMs
and installation rights significantly enhance the Bank's position as a leading
provider of convenient ATM service in its primary market area. The Bank is a
member of the regional "HONOR"(R) ATM network which offers over 250,000
locations worldwide. The Bank is also a member of the "PLUS"(R) ATM network,
which offers over 368,000 locations worldwide.
The Bank obtains deposits primarily from customers residing in Montgomery and
Prince George's Counties in Maryland and Northern Virginia. Approximately 33.9%
of the Bank's deposits at September 30, 1997 were obtained from depositors
residing outside of Maryland, with approximately 14.5% of the Bank's deposits
being obtained from depositors residing in Northern Virginia.
The following table shows the amounts of Chevy Chase's deposits by type of
account at the dates indicated.
<PAGE>
DEPOSIT ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------- --------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW
accounts $ 1,120,375 22.9% $ 1,007,902 24.2% $ 950,118 22.8% $ 918,227 22.9% $ 835,084 21.6%
Money market deposit
accounts 983,016 20.1 1,002,688 24.1 984,257 23.7 1,104,730 27.6 1,196,690 30.9
Statement savings
accounts 907,141 18.5 881,285 21.2 872,366 21.0 1,201,141 30.0 941,289 24.3
Jumbo certificate
accounts 358,737 7.3 125,847 3.0 219,304 5.3 85,110 2.1 56,218 1.5
Other certificate
accounts 1,445,416 29.6 1,077,828 25.9 1,072,196 25.8 641,857 16.0 790,465 20.4
Other deposit
accounts 79,071 1.6 68,487 1.6 61,011 1.4 57,696 1.4 50,277 1.3
------------- ------ ------------- ------ ------------- ------ ------------- ------ --------------------
Total deposits $ 4,893,756 100.0% $ 4,164,037 100.0% $ 4,159,252 100.0% $ 4,008,761 100.0% $ 3,870,023 100.0%
============= ====== ============= ====== ============= ====== ============= ====== ============= ======
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE COST OF DEPOSITS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Demand and NOW
accounts 2.47% 2.73% 2.86%
Money market accounts 3.90% 3.87% 3.96%
Statement savings and
other deposit
accounts 3.39% 3.38% 3.35%
Certificate accounts 5.29% 5.48% 5.17%
Total deposit accounts 3.95% 4.02% 3.88%
======== ======== ========
</TABLE>
<PAGE>
The range of deposit account products offered by the Bank through its extensive
branch and ATM network allows the Bank to be competitive in obtaining funds from
its local retail deposit market. At the same time, however, as customers have
become increasingly responsive to changes in interest rates, the Bank has
experienced some fluctuations in deposit flows. Chevy Chase's ability to attract
and maintain deposits and its cost of funds will continue to be significantly
affected by market conditions and its pricing strategy. At September 30, 1997,
the Bank had $378.8 million in brokered deposits which the Bank began accepting
in fiscal 1997 as a way to diversify the Bank's funding sources. However, the
Bank does not currently anticipate significant reliance on brokered deposits as
a key source of funding. Under FDIC regulations, the Bank is permitted to accept
brokered deposits as long as it meets the capital standards established for
"well-capitalized" institutions or with a waiver from the FDIC,
"adequately-capitalized" institutions, under the prompt corrective action
regulations.
<PAGE>
The following table sets forth Chevy Chase's deposit flows during the periods
indicated.
<TABLE>
<CAPTION>
Deposit Flows
Year Ended September 30,
----------------------------------------------
(In thousands)
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Deposits $ 18,915,801 $ 15,312,125 $ 14,086,575
Withdrawals from accounts (18,348,494) (15,475,215) (14,089,444)
------------ ------------ ------------
Net cash to (from)
accounts 567,307 (163,090) (2,869)
Interest credited to
accounts 162,412 167,875 153,360
------------ ------------ ------------
Net increase in
deposit balances $ 729,719 $ 4,785 $ 150,491
============ ============ ============
</TABLE>
Deposit growth may be moderated by the Bank from time to time either to take
advantage of lower cost funding alternatives or in response to more modest
expectations for loan and other asset growth.
The following table sets forth, by weighted average interest rates, the types
and amounts of deposits as of September 30, 1997 which will mature during the
fiscal years indicated.
<PAGE>
WEIGHTED AVERAGE INTEREST RATES OF DEPOSITS
As of September 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Demand, NOW
and Money Market Statement Passbook and Other Certificate
Deposit Accounts Savings Accounts Core Accounts Accounts Total
--------------------- --------------------- --------------------- --------------------- ---------------------
Maturing During Weighted Weighted Weighted Weighted Weighted
Year Ending Average Average Average Average Average
September 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- -------------- ----------- --------- ----------- --------- ----------- --------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $ 2,103,391 2.90% $ 907,141 3.48% $ 79,071 2.97% $ 1,514,252 5.53% $ 4,603,855 3.88%
1999 - - - - - - 139,458 5.28 139,458 5.28
2000 - - - - - - 104,298 6.51 104,298 6.51
2001 - - - - - - 19,459 5.52 19,459 5.52
2002 - - - - - - 26,686 5.81 26,686 5.81
----------- ----------- ----------- ------------ -----------
Total $ 2,103,391 2.90% $ 907,141 3.48% $ 79,071 2.97% $ 1,804,153 5.57% $ 4,893,756 3.99%
=========== =========== =========== ============ ===========
</TABLE>
<PAGE>
The following table summarizes maturities of certificate accounts in amounts of
$100,000 or greater as of September 30, 1997.
<TABLE>
<CAPTION>
Year Ending Weighted
September 30, Amount Average Rate
- -------------- ----------- ------------
<S> <C> <C>
1998 $ 620,291 5.88%
1999 9,676 5.57%
2000 12,984 6.72%
2001 1,573 5.50%
2002 2,905 5.70%
-----------
Total $ 647,429 5.69%
=========== =====
</TABLE>
The following table represents the amounts of deposits by various interest rate
categories as of September 30, 1997 maturing during the fiscal years indicated.
<PAGE>
MATURITIES OF DEPOSITS BY INTEREST RATES
As of September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Accounts Maturing During Year Ending September 30,
-----------------------------------------------------------------------------------------------------------
Interest Rate 1998 1999 2000 2001 2002 Total
- -------------------- --------------- --------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits (0%) $ 215,678 $ - $ - $ - $ - $ 215,678
0.01% to 1.99% 260 - - - - 260
2.00% to 2.99% 936,652 - - - - 936,652
3.00% to 3.99% 1,242,652 - - - - 1,242,652
4.00% to 4.99% 839,225 21,385 1,250 429 - 862,289
5.00% to 5.99% 1,076,537 109,836 16,753 19,006 12,644 1,234,776
6.00% to 7.99% 292,817 8,237 86,295 24 14,042 401,415
8.00% to 9.99% 34 - - - 34
--------------- --------------- -------------- -------------- -------------- ---------------
Total $ 4,603,855 $ 139,458 $ 104,298 $ 19,459 $ 26,686 $ 4,893,756
=============== =============== ============== ============== ============== ===============
</TABLE>
<PAGE>
Borrowings. The FHLB system functions as a central reserve bank providing credit
for member institutions. As a member of the FHLB of Atlanta, Chevy Chase is
required to own capital stock in the FHLB of Atlanta and is authorized to apply
for advances on the security of such stock and certain of its mortgages and
other assets (principally securities which are obligations of, or guaranteed by,
the United States or its agencies), provided certain standards related to
creditworthiness have been met.
Under the credit policies of the FHLB of Atlanta, credit may be extended to
creditworthy institutions based upon the financial condition, and the adequacy
of collateral pledged to secure the extension of credit. Such extensions of
credit or borrowings may be obtained pursuant to several different credit
programs, each of which has its own rate and range of maturities. Advances from
the FHLB of Atlanta must be secured by certain types of collateral with a value,
as determined by the FHLB of Atlanta, at least equal to 100% of the borrower's
outstanding advances. The Bank had outstanding FHLB advances of $188.5 million
at September 30, 1997.
From time to time, the Bank enters into repurchase agreements, which are treated
as financings. The Bank sells securities (usually mortgage-backed securities) to
a dealer and agrees to buy back the same securities at a specified time
(generally within seven to 90 days). The Bank pays a stated interest rate for
the use of the funds for the specified time period to the dealer. The obligation
to repurchase the securities sold is reflected as a liability and the securities
underlying the agreements are included in assets in the Consolidated Balance
Sheets in this report. These arrangements are, in effect, borrowings by the Bank
secured by the securities sold. The Bank had outstanding repurchase agreements
of $2.6 million at September 30, 1997.
The following table sets forth a summary of the repurchase agreements of the
Bank as of the dates and for the years indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
(Dollars in thousands)
Securities sold under repurchase agreements:
Balance at year-end $ 2,606 $576,823
Average amount outstanding at any
month-end 483,076 59,687
Maximum amount outstanding at any
month-end 946,090 576,823
Weighted average interest rate during
the year 5.48% 5.50%
Weighted average interest rate on
year-end balances 5.35% 5.41%
</TABLE>
<PAGE>
In December 1986, the Bank issued an unsecured ten-year subordinated capital
note in the original principal amount of $10.0 million to BACOB Bank, s.c., a
foreign private savings bank. On November 15, 1996, the Bank redeemed this note
at par.
On November 23, 1993, the Bank sold $150 million principal amount of its 9 1/4%
Subordinated Debentures due 2005 (the "1993 Debentures"). Interest on the 1993
Debentures is payable semiannually on December 1 and June 1 of each year. The
OTS approved the inclusion of the principal amount of the 1993 Debentures in the
Bank's supplementary capital for regulatory capital purposes. On or after
December 1, 1998, the 1993 Debentures will be redeemable, in whole or in part,
at any time at the option of the Bank.
On December 3, 1996, the Bank sold $100 million principal amount of its 9 1/4%
Subordinated Debentures due 2008. Interest on the 1996 Debentures is payable
semiannually on December 1 and June 1 of each year. The OTS approved the
inclusion of the principal amount of the 1996 Debentures in the Bank's
supplementary capital for regulatory capital purposes. On or after December 1,
2001, the 1996 Debentures will be redeemable, in whole or in part, at any time
at the option of the Bank.
Under the OTS capital regulations, redemption of the 1993 Debentures or the 1996
Debentures prior to their stated maturity would be subject to prior approval of
the OTS unless the debentures are redeemed with the proceeds of, or replaced by,
a like amount of "a similar or higher quality" capital instrument.
SUBSIDIARIES
OTS regulations generally permit the Bank to make investments in service
corporation subsidiaries in an amount not to exceed 3.0% of the Bank's assets,
provided that any investment in excess of 2.0% of assets serves primarily
community, inner city or community development purposes. Such regulations also
permit the Bank to make "conforming loans" to such subsidiaries and joint
ventures in an amount not to exceed 50% of the Bank's regulatory capital. At
September 30, 1997, 2.0% and 3.0% of the Bank's assets was equal to $121.9
million and $182.9 million, respectively, and the Bank had $9.3 million invested
in its service corporation subsidiaries, $5.0 million of which was in the form
of conforming loans.
The Bank is required to provide 30 days advance notice to the OTS and to the
FDIC before establishing a new subsidiary or conducting a new activity in an
existing subsidiary. With prior written approval from the OTS, the Bank may also
establish operating subsidiaries to engage in any activities in which the Bank
may engage directly. The Bank engages in a variety of other activities through
its subsidiaries, including those described below.
Real Estate Development Activities. Manor Investment Company ("Manor") was
engaged in certain real estate development activities commenced prior to the
enactment of FIRREA and continues to manage the two remaining properties it
holds. As a result of the stringent capital requirements that FIRREA applies to
investments in subsidiaries, such as Manor, that engage in activities
impermissible for national banks, Manor has not entered, and does not intend to
enter, into any new real estate development arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition - Asset Quality."
<PAGE>
Securities Brokerage Services. Chevy Chase Securities, Inc., is a subsidiary of
Chevy Chase Financial Services Corporation ("CCFS"), a wholly-owned subsidiary
of Chevy Chase. Chevy Chase Securities, Inc. is a licensed broker-dealer,
selling securities on a retail basis to the general public, including customers
and depositors of the Bank.
Insurance Services. Chevy Chase Insurance Agency, Inc., a subsidiary of CCFS, is
a licensed insurance broker offering a variety of "personal line" insurance
programs in the property and casualty field (primarily homeowner and automobile
insurance) and in the life insurance field (primarily mortgage and credit card
life and disability programs).
Special Purpose Subsidiaries. At September 30, 1997, Chevy Chase Real Estate
Corporation ("CCRC"), a subsidiary of Chevy Chase, held 100% of the common stock
of 25 subsidiaries (14 of which are active) that were formed for the sole
purpose of acquiring title to various real estate projects pursuant to
foreclosure or deed-in-lieu of foreclosure. The Bank's investment in the
subsidiaries was $131.8 million at September 30, 1997. The Bank's investment in
CCRC is not subject to the 3.0% service corporation investment limit discussed
above.
Operating Subsidiaries. Chevy Chase engages in significant mortgage lending
activities through B.F. Saul Mortgage Company ("BFSMC"). See "Lending
Activities". CCB Holding Corporation ("CCBH") is a Delaware corporation created
by the Bank as an operating subsidiary in September 1994 in connection with its
asset securitization activities. CCBH owns certain certificates issued by two
credit card trusts formed by the Bank and certain other related assets. Consumer
Finance Corporation was formed as an operating subsidiary in December 1994 to
engage in automobile lending. Chevy Chase Preferred Capital Corporation was
formed as an operating subsidiary to issue the REIT Preferred Stock.
On November 12, 1997, a newly formed operating subsidiary of the Bank acquired
ASB Capital Management, Inc. through which the Bank will offer investment,
management and fiduciary services to primarily institutional customers.
EMPLOYEES
The Bank and its subsidiaries had 3,424 full-time and 776 part-time employees at
September 30, 1997. The Bank provides its employees with a comprehensive range
of employee benefit programs, including group health benefits, life insurance,
disability insurance, paid sick leave and an employee loan program. The Bank
offers home mortgage and credit card loans to employees at prevailing market
rates, but waives up to one point of any loan origination fees on home mortgage
loans and the annual fee on credit card loans, and provides a yearly rebate
equal to 0.5% of the outstanding loan balance of home mortgage loans at calendar
year-end. The Bank also offers employees a one percent discount on the interest
rate on overdraft lines of credit. See "Executive Compensation" for a discussion
of certain compensation programs available to the Bank's executive officers.
None of the Bank's employees is represented by a collective bargaining agent.
The Bank believes that its employee relations are good.
<PAGE>
COMPETITION
Chevy Chase encounters strong competition both in attracting deposits and making
real estate and other loans in its markets. The Bank's most direct competition
for deposits has come from other thrift institutions, commercial banks and
credit unions, as well as from money market funds and corporate and government
securities. In addition to offering competitive interest rates, Chevy Chase
offers a variety of services, convenient ATM locations and convenient office
locations and hours to attract deposits. Competition for real estate and other
loans comes principally from other thrifts, banks, mortgage banking companies,
insurance companies and other institutional lenders. Chevy Chase competes for
loans through interest rates, loan fees and the variety and quality of services
provided to borrowers and brokers.
The Bank's major competition historically has come from local depository
institutions, but deregulation of the financial services industry and changing
market demands in recent years have eroded distinctions between providers of
financial services. In addition, both depository and non-depository institutions
have greater nationwide access to attractive markets, such as the Washington,
D.C. area, than they have had in past years. Chevy Chase now competes with
regional financial institutions and national providers of investment
alternatives, as well as with a number of large money center and regional banks
that have acquired institutions in the area.
The Bank estimates that it competes principally with approximately eight
depository institutions in its deposit-taking activities in the Washington, DC
metropolitan area. The Bank also competes with such institutions in the
origination of single-family residential mortgage loans and home equity credit
line loans. According to the most recently published industry statistics, Chevy
Chase had the largest market share (approximately 20.9%) of deposits in
Montgomery County, Maryland, and ranked third in market share of deposits in
Prince George's County, Maryland at June 30, 1996. Based on publicly available
information, Chevy Chase estimates that, in the Washington, DC metropolitan
area, it maintains the leading market share of single-family residential
mortgage and home equity credit line loans.
The credit card industry is highly competitive and characterized by increasing
use of advertising, target marketing, pricing competition in interest rates and
annual membership fees, and other features (such as buyer protection plans), as
both established and new credit card issuers seek to expand or to enter the
market. Management anticipates that competitive pressures will continue to
require adjustments, from time to time, to the pricing of the Bank's credit card
products.
Interstate banking laws enacted by Congress and various states have intensified
the competition faced by the Bank in attracting deposits and making loans. A
number of large out-of-state financial institutions have established or acquired
banking operations in Maryland, Virginia and the District of Columbia pursuant
to these provisions.
<PAGE>
ITEM 2. PROPERTIES
REAL ESTATE
A list of the investment properties of the Real Estate Trust is set forth under
"Business - Real- Estate - Real Estate Investments."
The Trust conducts its principal business from its executive offices at 8401
Connecticut Avenue, Chevy Chase, Maryland. The Trust sells its unsecured notes
due one year to ten years from date of issue from a sales office located at 7200
Wisconsin Avenue, Suite 903, Bethesda, Maryland. The Saul Company leases both
office facilities on behalf of the Trust.
BANKING
At September 30, 1997, the Bank conducted its business from its home office at
7926 Jones Branch Drive, McLean, Virginia and its executive offices at 8401
Connecticut Avenue, Chevy Chase, Maryland; its operations centers at 6151 and
6200 Chevy Chase Drive, Laurel, Maryland, and 5202 President's Court, Frederick,
Maryland; its office facilities at 7700 Old Georgetown Road, Bethesda, Maryland;
and 128 full-service offices located in Maryland, Virginia and the District of
Columbia. On that date, the Bank owned the building and land for 24 of its
branch offices and leased its remaining 104 branch offices. Chevy Chase leases
the office facilities at 8401 Connecticut Avenue, 6200 Chevy Chase Drive and the
land at 7700 Old Georgetown Road. Chevy Chase owns the building at 7700 Old
Georgetown Road. In addition, the Bank leases office space in which its
subsidiaries are housed. The office facility leases have various terms expiring
from 1998 to 2019 and the ground leases have terms expiring from 2029 to 2080.
See Note 16 to the Consolidated Financial Statements in this report for lease
expense and commitments. As of November, 1997, the Bank has received OTS
approval to open four branches and is awaiting OTS approval to open another two
branches. The branches, two in Virginia, two in Maryland and two in the District
of Columbia, are scheduled to open during fiscal 1998.
As of November 1997, the Bank has received OTS approval to open four branches
and is awaiting OTS approval to open another two branches. The branches, two
in Virginia, two in Maryland and two in the District of Columbia, are
scheduled to open during fiscal 1998.
The following table sets forth the location of the Bank's 128 full-service
offices at September 30, 1997.
1 Catoctin Circle 14245-R Centreville Square
Leesburg, VA 22075 Centreville, VA 20121
8201 Greensboro Drive 1100 W. Broad Street
McLean, VA 22102 Falls Church, VA 22046
234 Maple Avenue East 3941 Pickett Road
McLean, VA 22180 Fairfax, VA 22031
8436 Old Keene Mill Road 1439 Chain Bridge Road
Springfield, VA 22152 McLean, VA 22101
75 West Lee Highway 8120 Sudley Road
Warrenton, VA 22186 Manassas, VA 22110
6367 Seven Corners Center 1100 S. Hayes Street
Falls Church, VA 22044 Arlington, VA 22202
11800 Sunrise Valley 13344-A Franklin Farms
Drive Road
Reston, VA 22091 Herndon, VA 22071
2952-H Chain Bridge Road 20970 Southbanks Street
Oakton, VA 22124 Sterling, VA 20165
6756 Richmond Highway 21800 Towncenter Plaza
Alexandria, VA 22306 Sterling, VA 20164
5613 Stone Road 7030 Little River Turnpike
Centreville, VA 22020 Annandale, VA 22003
44151 Ashburn Village Way 3095 Nutley Street
Ashburn, VA 22011 Fairfax, VA 22031
<PAGE>
3690-A King Street 4700 Lee Highway
Alexandria, VA 22302 Arlington, VA 22207
6609 Springfield Mall 5851 Crossroads Center Way
Springfield, VA 22150 Falls Church, VA 22041
500 South Washington
Street 7340 Westlake Terrace
Alexandria, VA 22314 Bethesda, MD 20817
3499 S. Jefferson Street 11261 New Hampshire Avenue
Baileys Crossroads, VA Silver Spring, MD 20904
22041
6025-A Burke Town Center
Parkway 1327 Lamberton Drive
Burke, VA 22015 Silver Spring, MD 20902
3046 Gatehouse Plaza 1609-B Rockville Pike
Falls Church, VA 22042 Rockville, MD 20852
7935 L Tysons Corner
Center 2215 Bel Pre Road
McLean, VA 22102 Wheaton, MD 20906
1621 B Crystal Square 2807 University Boulevard
Arcade West
Arlington, VA 22202 Kensington, MD 20895
1100 Wilson Boulevard 11301 Rockville Pike
Arlington, VA 22209 Kensington, MD 20895
5230-A Port Royal Road 7500 Old Georgetown Road
Springfield, VA 22151 Bethesda, MD 20814
4299 Merchant Plaza 26001 Ridge Road
Woodbridge, VA 22192 Damascus, MD 20872
8628 Richmond Highway 5370 Westbard Avenue
Alexandria, VA 22309 Bethesda, MD 20816
11874 Spectrum Center 3601 St. Barnabas Road
Reston, VA 20190 Silver Hill, MD 20746
46160 Potomac Run Plaza 17831 Georgia Avenue
Sterling, VA 20164 Olney, MD 20832
8401 Connecticut Avenue 6107 Greenbelt Road
Chevy Chase, MD 20815 Berwyn Heights, MD 20740
5424 Western Avenue 4 Bureau Drive
Chevy Chase, MD 20815 Gaithersburg, MD 20878
<PAGE>
13641 Connecticut Avenue 19610 Club House Road
Wheaton, MD 20906 Gaithersburg, MD 20879
8315 Georgia Avenue 812 Muddy Branch Road
Silver Spring, MD 20910 Gaithersburg, MD 20878
4701 Sangamore Road 10211 River Road
Bethesda, MD 20816 Potomac, MD 20854
Landover Mall 12331-C Georgia Avenue
Landover, MD 20785 Wheaton, MD 20906
11325 Seven Locks Road 14113 Baltimore Avenue
Potomac, MD 20854 Laurel, MD 20707
6200 Annapolis Road 7290-A Cradlerock Way
Landover Hills, MD 20784 Columbia, MD 21045
33 West Franklin Street 1151 Maryland Route 3 North
Hagerstown, MD 21740 Gambrills, MD 21054
6400 Belcrest Road 12228 Viers Mill Road
Hyattsville, MD 20782 Silver Spring, MD 20906
8740 Arliss Street 317 Kentlands Boulevard
Silver Spring, MD 20901 Gaithersburg, MD 20878
2409 Wootton Parkway 215 N. Washington Street
Rockville, MD 20850 Rockville, MD 20850
8889 Woodyard Road 1336 Crain Highway South
Clinton, MD 20735 Mitchellville, MD 20716
1181 University Boulevard 543 Ritchie Highway
Langley Park, MD 20783 Severna Park, MD 21146
12921 Wisteria Drive 4745 Dorsey Hall Drive
Germantown, MD 20874 Ellicott City, MD 21042
1009 West Patrick Street 1130 Smallwood Drive
Frederick, MD 21701 Waldorf, MD 20603
7937 Ritchie Highway 10800 Baltimore Avenue
Glen Burnie, MD 21061 Beltsville, MD 20705
19781-83 Frederick Road 1040 Largo Center Drive
Germantown, MD 20876 Landover, MD 20785
16827 Crabbs Branch Way 6335 Marlboro Pike
Rockville, MD 20855 District Heights, MD 20747
2331-A Forest Drive 7530 Annapolis Road
Annapolis, MD 21401 Lanham, MD 20784
<PAGE>
15460 Annapolis Road 11241 Georgia Avenue
Bowie, MD 20715 Wheaton, MD 20902
20000 Goshen Road 13484 New Hampshire Avenue
Gaithersburg, MD 20879 Silver Spring, MD 20904
12097 Rockville Pike 2401 Cleanleigh Drive
Rockville, MD 20852 Baltimore, MD 21234
10159 New Hampshire
Avenue 7101 Democracy Boulevard
Hillandale, MD 20903 Bethesda, MD 20814
6264 Central Avenue 4825 Cordell Avenue
Seat Pleasant, MD 20743 Bethesda, MD 20814
7700 Old Georgetown Road 7515 Greenbelt Road
Bethesda, MD 20814 Greenbelt, MD 20770
15777 Columbia Pike 2722 N. Salisbury Boulevard
Burtonsville, MD 20866 Salisbury, MD 21801
18104 Town Center Drive 509 N. Frederick Avenue
Olney, MD 20832 Gaithersburg, MD 20877
6197 Oxon Hill Road 504 Ridgeville Boulevard
Oxon Hill, MD 20745 Mt. Airy, MD 21771
10821 Connecticut Avenue 5823 Eastern Avenue
Kensington, MD 20895 Chillum, MD 20782
18006 Mateny Road 3355 Corridor Market Place
Germantown, MD 20874 Laurel, MD 20724
7406 Baltimore Avenue 4860 Massachusetts Avenue, NW
College Park, MD 20740 Washington, DC 20016
10400 Old Georgetown Road 4000 Wisconsin Avenue, NW
Bethesda, MD 20814 Washington, DC 20016
980 E. Swan Creek Road 210 Michigan Avenue, NE
Fort Washington, MD 20744 Washington, DC 20017
115 University Boulevard West 4455 Connecticut Avenue, NW
Silver Spring, MD 20901 Washington, DC 20008
<PAGE>
3828 International Drive 2831 Alabama Avenue, SE
Silver Spring, MD 20906 Washington, DC 20020
9707 Old Georgetown Road 1800 M Street, NW
Bethesda, MD 20814 Washington, DC 20036
3400 Crain Highway 1545 Wisconsin Avenue, NW
Bowie, MD 20716 Washington, DC 20007
5714 Connecticut Avenue, NW 1717 Pennsylvania Avenue, NW
Washington, DC 20015 Washington, DC 20006
At September 30, 1997, the net book value of the Bank's office facilities
(including leasehold improvements) was $193.9 million. See Note 15 to the
Consolidated Financial Statements in this report.
During fiscal 1997, the Bank completed the construction of a facility in
Frederick, Maryland and consolidated the Bank's employees and operations in that
area. At September 30, 1997, the Bank had invested $4.0 million in the land and
$27.4 million for capital expenditures relating to this facility.
During fiscal 1995, the Bank transferred an office building, which was
previously classified as real estate held for investment, to property and
equipment and the Bank began to occupy a portion of the building during fiscal
1996 in order to satisfy its need for additional office space.
In fiscal 1991, the Bank purchased an office building and the underlying land in
downtown Washington, D.C. with plans to establish a deposit branch office and a
trust office in the building. Although the Bank has no current plans to
establish a trust office there, it is currently seeking OTS approval to
establish a branch in the building during fiscal 1998.
The Bank owns additional assets, including furniture and data processing
equipment. At September 30, 1997, these other assets had a net book value of
$79.6 million. The Bank also has operating leases, primarily for certain data
processing equipment and software. Such leases have month-to-month or
year-to-year terms.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Trust is involved in certain litigation,
including litigation arising out of the collection of loans, the enforcement or
defense of the priority of its security interests, the continued development and
marketing of certain of its real estate properties, and certain employment
claims. In the opinion of management, litigation which is currently pending will
not have a material adverse impact on the financial condition or future
operations of the Trust.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There currently is no established public trading market for the Trust's Common
Shares of Beneficial Interest (the "Common Shares"). At December 5, 1997, there
were nine corporate or individual holders of record of Common Shares. All
holders of Common Shares at such date were affiliated with the Trust. See
"Security Ownership of Certain Beneficial Owners and Management."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Trust herein have been derived from the
Consolidated Financial Statements of the Trust. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements included
elsewhere in this report.
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
===================================================================================================================================
Year Ended September 30
------------------------------------------------------------------------
(In thousands, except per share amounts and other data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Real Estate:
Revenues $ 84,569 $ 76,839 $ 77,285 $ 66,044 $ 93,245
Operating expenses 108,601 104,321 109,971 102,087 137,256
Equity in earnings (losses) of partnership investments 4,150 3,374 3,681 1,738 (668)
Gain (loss) on sales of property 895 (68) 1,664 -- 184
------------------------------------------------------------------------
Real estate operating loss (18,987) (24,176) (27,341) (34,305) (44,495)
------------------------------------------------------------------------
Banking:
Interest income 450,480 387,511 365,315 334,464 348,814
Interest expense 239,815 188,836 189,114 165,544 167,518
------------------------------------------------------------------------
Net interest income 210,665 198,675 176,201 168,920 181,296
Provision for loan losses (125,115) (115,740) (54,979) (29,222) (60,372)
------------------------------------------------------------------------
Net interest income after provision for loan losses 85,550 82,935 121,222 139,698 120,924
------------------------------------------------------------------------
Other income:
Credit card, loan servicing and deposit service fees 327,091 324,804 218,572 111,279 91,216
Earnings (loss) on real estate held for investment or
sale, net (18,688) (24,413) (5,549) 835 (12,722)
Gain on sales of assets 75,025 24,400 12,282 32,217 40,270
Net unrealized gain on valuation of interest-only
strips 6,976 -- -- -- --
Other 22,573 19,713 7,320 15,718 11,989
------------------------------------------------------------------------
Total other income 412,977 344,504 232,625 160,049 130,753
------------------------------------------------------------------------
Operating expenses 418,346 381,328 298,164 246,560 187,828
------------------------------------------------------------------------
Banking operating income 80,181 46,111 55,683 53,187 63,849
------------------------------------------------------------------------
Total Company:
Operating income before income taxes, 61,194 21,935 28,342 18,882 19,354
extraordinary items, cumulative effect of change in
accounting principle, and minority interest
Provision for income taxes 12,810 8,301 2,021 7,025 11,703
------------------------------------------------------------------------
Income before extraordinary items, cumulative
effect of change in accounting principle and
minority interest 48,384 13,634 26,321 11,857 7,651
Extraordinary items:
Adjustment for tax benefit of operating loss
carryovers -- -- -- -- 7,738
Loss on early extinguishment of debt, net of taxes -- -- -- (11,315) --
------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle and minority interest 48,384 13,634 26,321 542 15,389
Cumulative effect of change in accounting principle -- -- -- 36,260 --
------------------------------------------------------------------------
Income before minority interest 48,384 13,634 26,321 36,802 15,389
Minority interest held by affiliates (6,848) (3,962) (5,721) (3,963) (6,582)
Minority interest -- other (22,676) (9,750) (9,750) (9,750) (4,334)
------------------------------------------------------------------------
Total company net income (loss) $ 18,860 $ (78) $ 10,850 $ 23,089 $ 4,473
========================================================================
Net income (loss) available to common shareholders $ 13,442 $ (5,498) $ 5,430 $ 17,669 $ (947)
Net income (loss) per common share:
Income before extraordinary items, cumulative
effect of change in accounting principle and
minority interest $ 8.90 $ 1.70 $ 4.33 $ 1.33 $ 0.46
Extraordinary items:
Adjustment for tax benefit of operating loss
carryovers -- -- -- -- 1.60
Loss on early extinguishment of debt, net of taxes -- -- -- (2.34) --
------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle and minority interest 8.90 1.70 4.33 (1.01) 2.06
Cumulative effect of change in accounting principle -- -- -- 7.51 --
------------------------------------------------------------------------
Income before minority interest 10.03 1.70 4.33 6.50 2.06
Minority interest held by affiliates (1.42) (0.82) (1.19) (0.82) (1.36)
Minority interest -- other (4.70) (2.02) (2.02) (2.02) (0.90)
------------------------------------------------------------------------
Total company net income (loss) $ 2.78 $ (1.14) $ 1.12 $ 3.66 $ (0.20)
========================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
(Continued)
==================================================================================================================================
Year Ended September 30
------------------------------------------------------------------------
(In thousands, except per share amounts and other data) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Real estate assets $ 300,573 $ 294,503 $ 313,412 $ 327,739 $ 220,556
Income-producing properties, net 156,535 156,115 163,787 159,529 162,356
Land parcels 42,160 41,580 38,458 38,455 38,411
Banking assets 6,057,413 5,693,074 4,911,536 4,666,298 4,872,771
Total company assets 6,357,986 5,987,577 5,224,948 4,994,037 5,093,327
Liabilities:
Real estate liabilities 590,910 578,092 555,814 558,109 450,153
Mortgage notes payable 180,204 173,345 184,502 185,730 264,776
Notes payable - secured 175,000 177,500 175,500 175,000 --
Notes payable - unsecured 46,633 42,367 41,057 40,288 38,661
Banking liabilities 5,582,167 5,388,444 4,619,451 4,413,832 4,634,001
Minority interest held by affiliates 51,388 46,065 43,556 35,632 34,495
Minority interest - other 218,306 74,307 74,307 74,307 74,307
Total company liabilities 6,442,771 6,086,908 5,293,128 5,081,880 5,192,956
Shareholders' deficit (84,785) (99,331) (68,180) (87,843) (99,629)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA:
Net cash flows provided by (used in) operating activities:
Real estate $ 6,911 $ 9,032 $ 4,324 $ (10,859) $ (3,149)
Banking 2,358,691 1,739,505 2,088,022 2,218,262 1,137,686
------------------------------------------------------------------------
Total Company 2,365,602 1,748,537 2,092,346 2,207,403 1,134,537
------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities:
Real estate (11,664) (4,907) (17,143) (29,118) (2,999)
Banking (2,266,569) (2,559,381) (2,261,803) (1,777,281) (879,178)
------------------------------------------------------------------------
Total Company (2,278,233) (2,564,288) (2,278,946) (1,806,399) (882,177)
------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities:
Real estate 7,485 (5,964) (271) 75,723 3,230
Banking 293,344 727,019 160,966 (260,094) (190,850)
------------------------------------------------------------------------
Total Company 300,829 721,055 160,695 (184,371) (187,620)
------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 388,198 (94,696) (25,905) 216,633 64,740
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Hotels:
Number of hotels 10 9 10 9 9
Number of guest rooms 2,370 2,261 2,608 2,415 2,356
Average occupancy 70% 68% 67% 62% 68%
Average room rate $72.21 $68.79 $60.82 $57.57 $54.02
Shopping centers:
Number of properties N/A N/A N/A N/A 23
Leasable area (square feet) N/A N/A N/A N/A 4,408,000
Average occupancy N/A N/A N/A N/A 95%
Office properties:
Number of properties (1) 8 8 9 9 10
Leasable area (square feet) (1) 1,308,000 1,308,000 1,368,000 1,363,000 1,537,000
Leasing percentages (1) 99% 93% 84% 93% 85%
Land parcels:
Number of parcels 10 9 10 10 12
Total acreage 439 446 433 433 1,496
(1) Includes Dulles South Office Building which is owned
by a subsidiary in which the Trust has a 50% interest.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B. F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B. F. Saul Real
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 Real Estate Trust's investment portfolio at September 30, 1997 consisted
primarily of hotels, office and industrial projects, and land parcels. See
"Business - Real Estate - Real Estate Investments." In the first quarter of
fiscal 1997, the Real Estate Trust purchased a 115-room Holiday Inn Express in
Herndon, Virginia. In the last quarter of fiscal 1997, the Real Estate Trust
sold its purchase-leaseback property in Casper, Wyoming.
Office space in the Real Estate Trust's office property portfolio was 99% leased
at September 30, 1997, compared to a leasing rate of 93% at September 30, 1996.
At September 30, 1997, the Real Estate Trust's office property portfolio had a
total gross leasable area of approximately 1.3 million square feet, of which
277,000 square feet (21.2%) and 279,000 square feet (21.3%) are subject to
leases whose terms expire in fiscal 1998 and fiscal 1999, respectively.
Overall, the hotel portfolio experienced an average occupancy rate of 70% and
average room rate of $72.21 during the year ended September 30, 1997. For the
eight hotels owned by the Real Estate Trust throughout fiscal 1997 and fiscal
1996, the average occupancy rates were 69% and 68%, respectively, and the
average room rates were $70.41 and $66.98, respectively. Five of these hotels
registered improved occupancies and six registered higher average room rates in
the current fiscal year.
BANKING
General. The Bank recorded operating income of $80.2 million during fiscal 1997,
compared to operating income of $46.1 million in fiscal 1996. The increase in
income for fiscal 1997 was primarily attributable to a $68.5 million increase in
other (non-interest) income and an $11.9 million increase in net interest income
before provision for loan losses, the effect of which was partially offset by a
$9.4 million increase in the provision for loan losses and a $37.0 million
increase in operating (non-interest) expense. See "Results of Operations."
<PAGE>
Gain on sales of loans of $73.8 million, which increased 217.6% over fiscal
1996, was a large component of the Bank's non-interest income during the current
year and resulted primarily from the Bank's securitization activity. During
fiscal 1997, the Bank securitized and sold $2.4 billion of receivables, of which
$1.1 billion, $286.4 million, $938.9 million and $224.1 million, related to
securitizations and sales of credit card, home equity, automobile and home loan
receivables, respectively, and recognized gains of $33.1 million, $11.8 million,
$26.9 million and $10.0 million, respectively. In addition, the Bank securitized
and sold $144.2 million of amounts on deposit in certain spread accounts
established in connection with certain of the Bank's outstanding credit card
securitizations. See Note C and Note 14 to the Consolidated Financial Statements
in this report. See "Liquidity."
Real estate owned, net of valuation allowances, declined 24.4% during fiscal
1997 to $90.7 million at September 30, 1997, from $119.9 million at September
30, 1996. This reduction was primarily due to sales in the Communities and other
residential properties and additional valuation allowances. See "REO."
During fiscal 1997, the Bank experienced a decline in the performance of its
credit card portfolio which resulted in increased delinquent amounts and net
charge-offs recorded for the year and reflects the trends that are affecting the
credit card industry as a whole. See "Business - Lending Activities - Credit
Card Lending" and "Asset Quality - Allowances for Losses."
At September 30, 1997, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.96%, 6.96%, 7.24% and 13.50%,
respectively. The Bank's capital ratios exceeded the requirements under FIRREA
as well as the standards established for "well-capitalized" institutions under
the prompt corrective action regulations issued pursuant to FDICIA. See
"Capital."
On December 3, 1996, the Bank sold $100 million principal amount of its 9 1/4%
Subordinated Debentures due 2008, the principal amount of which is includable in
the Bank's supplementary capital. In addition, on December 3, 1996, the REIT
Subsidiary sold $150 million of REIT Preferred Stock, which is eligible for
inclusion as core capital of the Bank in an amount up to 25% of the Bank's total
core capital. Minority interest in the amount of $12.9 million was recorded
during fiscal 1997 as a reduction to net income.
On November 12, 1997 the Bank purchased ASB Capital Management, Inc. ("ASB"), a
wholly-owned subsidiary of NationsBank Corporation and one of the largest
SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area, through which the Bank will provide a variety of investment
products and fiduciary services to a primarily institutional customer base. The
Bank anticipates that the acquisition will provide an additional source of
fee-based revenues. Although the acquisition generated additional goodwill which
reduced the Bank's regulatory capital levels, the Bank's capital levels
immediately following the acquisition remained above the levels established for
well-capitalized institutions.
During fiscal 1997, the Bank declared and paid, out of the retained earnings of
the Bank, cash dividends on its Common Stock in the amount of $900 per share.
The Bank's assets are subject to review and classification by the OTS upon
examination. The OTS concluded its most recent annual examination of the Bank in
June 1997.
<PAGE>
Asset Quality. Non-Performing Assets. The Bank's level of non-performing assets
continued to decline during fiscal 1997. The following table sets forth
information concerning the Bank's non-performing assets at the dates indicated.
The figures shown are after charge-offs and, in the case of real estate acquired
in settlement of loans, after all valuation allowances.
<PAGE>
<TABLE>
NON-PERFORMING ASSETS AND PAST DUE CREDIT CARD LOANS
(Dollars in thousands)
September 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 9,617 $ 8,200 $ 8,593 $ 8,306 $ 9,108
Commercial real estate and multifamily -- -- 194 -- --
------------ ------------ ------------- ------------ ------------
Total non-accrual real estate loans 9,617 8,200 8,787 8,306 9,108
Credit card (1) -- 25,350 18,569 16,229 20,557
Consumer and other 4,226 1,239 595 498 314
------------ ------------ ------------- ------------ ------------
Total non-accrual loans (2) 13,843 34,789 27,951 25,033 29,979
------------ ------------ ------------- ------------ ------------
Non-accrual real estate held for investment (2) -- -- -- 8,915 8,898
------------ ------------ ------------- ------------ ------------
Real estate acquired in settlement of loans 231,407 246,380 354,277 387,024 434,616
Allowance for losses on real estate acquired in
settlement of loans (140,738) (126,519) (135,043) (109,074) (101,462)
------------ ------------ ------------- ------------ ------------
Real estate acquired in settlement of loans, net 90,669 119,861 219,234 277,950 333,154
------------ ------------ ------------- ------------ ------------
Total non-performing assets $ 104,512 $ 154,650 $ 247,185 $ 311,898 $ 372,031
============ ============ ============= ============ ============
Accruing credit card loans past due 90 days (3) $ 25,700 -- -- -- --
============ ============ ============= ============ ============
Total non-performing assets and accruing credit card
loans past due 90 days $ 130,212 $ 154,650 $ 247,185 $ 311,898 $ 372,031
============ ============ ============= ============ ============
Allowance for losses on loans $ 105,679 $ 95,523 $ 60,496 $ 50,205 $ 68,040
Allowance for losses on real estate held for investment 198 191 193 9,899 10,182
Allowance for losses on real estate acquired in settlement
of loans 140,738 126,519 135,043 109,074 101,462
------------ ------------ ------------- ------------ ------------
Total allowances for losses $ 246,615 $ 222,233 $ 195,732 $ 169,178 $ 179,684
============ ============ ============= ============ ============
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Effective June 30, 1997, the Bank no longer places credit card loans on non-accrual status.
(2) Before deduction of allowances for losses.
(3) Loans which are both past due 90 days or more and not deemed nonaccrual due to an assessment of collectibility are specifically
excluded from the definition of non-performing.
</TABLE>
<PAGE>
<TABLE>
NON-PERFORMING ASSETS AND PAST DUE CREDIT CARD LOANS (CONTINUED)
September 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ratios:
Non-performing assets and credit card loans past due 90 days,
net to total assets (1) (2) 0.40% 1.04% 3.80% 5.40% 5.97%
Allowance for losses on real estate loans to non-accrual
real estate loans (3) 103.60% 134.44% 123.82% 169.58% 219.29%
Allowance for losses on consumer and other loans to
non-accrual consumer and other loans (3) 148.37% 388.86% 553.11% 319.28% 376.11%
Allowance for losses on loans to non-accrual loans (1) (3) 763.41% 274.58% 216.44% 200.56% 226.96%
Allowance for losses on loans to total loans receivable (4) 4.17% 2.81% 2.05% 1.97% 2.83%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Prior to 1997, non-performing asset ratios do not include loans more than 90
days past due and still accruing.
(2) Non-performing assets is presented after all allowances for losses on loans
and real estate held for investment or sale.
(3) Before deduction of allowances for losses.
(4) Includes loans receivable and loans held for sale and/or securitization,
before deduction of allowance for losses.
</TABLE>
<PAGE>
Non-performing assets include non-accrual loans (loans contractually past due 90
days or more or with respect to which other factors indicate that full payment
of principal and interest is unlikely), non-accrual real estate held for
investment ("non-accrual REI"), and REO, acquired either through foreclosure or
deed-in-lieu of foreclosure, or pursuant to in-substance foreclosure (prior to
the adoption of SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," in fiscal 1994).
Effective June 30, 1997, the Bank conformed its reporting practices for credit
card loans to that of most credit card issuers and excluded credit card loans
from non-accrual loans and non-performing assets. Credit card loans are not
placed on non-accrual status, but continue to accrue interest until the loan is
either paid-off or charged-off.
Non-performing assets totaled $104.5 million, after valuation allowances on REO
of $140.7 million, at September 30, 1997, compared to $154.7 million, after
valuation allowances on REO of $126.5 million, at September 30, 1996. In
addition to the valuation allowances on REO, the Bank maintained $1.4 million
and $26.1 million of valuation allowances on its non-accrual loans at September
30, 1997, and September 30, 1996, respectively. The $50.2 million decrease in
non-performing assets was comprised of a net decrease in REO of $29.2 million
and a decrease in non-accrual loans of $21.0 million resulting from the change
in the Bank's reporting practices.
Non-accrual Loans. The Bank's non-accrual loans totaled $13.8 million at
September 30, 1997, compared to $34.8 million at September 30, 1996. At
September 30, 1997, non-accrual loans consisted primarily of $9.6 million of
non-accrual real estate loans and $4.2 million of non-accrual consumer and other
loans. The $21.0 million decrease in non-accrual loans, from fiscal 1996 was
primarily due to the change in reporting practices for credit card loans
discussed above. Non-accrual credit card loans were $25.4 million at September
30, 1996.
At September 30, 1997, the Bank had $61.3 million of credit card loans
classified for regulatory purposes as substandard, of which $47.8 million
related to loans 90 days or more past due. The remainder ($13.5 million) related
to accounts for which the customers have agreed to modified payment terms, but
which were 30-89 days past due. All delinquent amounts are included in the table
of delinquent loans under "Delinquent Loans."
REO. At September 30, 1997, the Bank's REO totaled $90.7 million, after
valuation allowances on such assets of $140.7 million as set forth in the
following table.
<PAGE>
Balance Balance
Number Before All After Percent
of Valuation Valuation Valuation of
Properties Allowances Allowances Allowances Total
---------- ---------- ---------- ---------- ------
(Dollars in thousands)
Communities 5 $200,505 $132,907 $ 67,598 74.5%
Residential ground 3 6,993 1,039 5,954 6.6%
Commercial ground 7 20,999 6,792 14,207 15.7%
Single-family
residential
properties 19 2,910 -- 2,910 3.2%
-- -------- -------- -------- ------
Total REO 34 $231,407 $140,738 $ 90,669 100.0%
== ======== ======== ======== ======
<PAGE>
During fiscal 1997, REO decreased $29.2 million, which was attributable to $15.0
million of sales in the Communities and other residential properties, partially
offset by additional capitalized costs, and $14.2 million of additional
valuation allowances.
During fiscal 1997, the Bank received revenues of $36.3 million from
dispositions of 245 residential lots or units in the Communities ($14.6
million), approximately 38 acres of commercial land in two of the Communities
and one residential ground property ($15.5 million), a portion of commercial
and residential ground properties ($0.6 million) and various single-family
residential properties ($5.6 million).
At September 30, 1997, the Bank had executed contracts to sell two of the
commercial ground properties and one of the residential ground properties at
their aggregate book value of $6.1 million at that date.
The Bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in a manner which will best preserve the value of
the Bank's assets. In accordance with this objective, management of the Bank
continues to pursue several strategies. First, the Bank has focused its efforts
on marketing residential building lots directly to homebuilders, and is
proceeding with lot development to meet the requirements of existing and new
contracts with builders. Second, the Bank continues to seek and negotiate with
potential purchasers of remaining retail and commercial ground. Third, the Bank
continues to seek potential investors concerning the possibility of larger scale
or bulk purchases of remaining ground at the Communities. The Bank's ability to
achieve this objective will depend on a number of factors, some of which are
beyond its control, such as the general economic conditions in the Washington,
D.C. metropolitan area.
The principal component of REO consists of the five Communities, four of which
are under active development. At September 30, 1997, two of the active
Communities had 2,330 remaining residential lots, of which 438 lots (18.8%) were
under contract and pending settlement. Four of the active Communities had
approximately 259 remaining acres of land designated for commercial use, of
which 27.4 acres (10.6%) were under contract and pending settlement. In
addition, at September 30, 1997, the Bank was engaged in discussions with
potential purchasers regarding the sale of additional residential units and
retail land.
<PAGE>
In addition to the four active Communities, REO includes a fifth Community,
consisting of approximately 2,400 acres, in Loudoun County, Virginia, which is
in the pre-development stage and was to be developed into approximately 6,200
residential units. At September 30, 1997, this property had a book value of
$12.0 million, after valuation allowances.
The Bank has continued to make financing available to homebuilders, purchasers
of retail ground and home purchasers in an attempt to facilitate sales of lots
in the Communities. The following table presents, at the periods indicated, the
outstanding balances of loans provided by the Bank (subsequent to its
acquisition of title to the properties) to facilitate sales of lots in such
Communities.
Year Ended September 30,
------------------------------------
1997 1996 1995
----------- ---------- ---------
(In thousands)
Construction loans $ 36,504 $ 49,623 $12,615
Single-family permanent loans (1) 20,598 43,297 50,096
----------- ---------- ---------
Total $ 57,102 $ 92,920 $62,711
=========== ========== =========
- --------------------------
(1) Includes $4.0 million, $1.2 million and $2.3 million of loans classified
as held for sale at September 30, 1997, September 30, 1996 and September
30, 1995, respectively.
The Bank anticipates that it will provide construction financing for a portion
of the remaining unsold lot inventory in the Communities. The Bank also expects
that it will provide permanent financing for a portion of the homes to be sold
in the Communities. The Bank's current policy is to sell all such single-family
loans for which it provides permanent financing. At September 30, 1997, $4.0
million of such loans are classified as held for sale and generally are expected
to be sold in the first quarter of fiscal 1998.
In furtherance of its objective of facilitating sales, the Bank has continued
development efforts in the Communities. The following table presents the net
decrease in the balances of the five Communities for the periods indicated.
<PAGE>
Year Ended September 30,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
(In thousands)
Sales proceeds $ 34,318 $ 71,023 $ 65,211
Development costs 23,462 17,931 32,626
---------- ---------- ---------
Net cash flow 10,856 53,092 32,585
Increase in reserves and
other non-cash items
16,656 13,870 16,884
---------- ---------- ---------
Net decrease in balances of the
Communities $ 27,512 $ 66,962 $ 49,469
========== ========== =========
The Bank currently anticipates that sales proceeds will continue to exceed
development costs in future periods. In the event development costs exceed sales
proceeds in future periods, the Bank believes that adequate funds will be
available from its primary liquidity sources to fund such costs. See
"Liquidity."
The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
During fiscal 1997, the Bank capitalized interest in the amount of $2.2 million
relating to its four active Communities.
In accordance with the OTS extensions of the holding periods for certain of its
REO, the Bank is required to submit a quarterly status report on its large REO
properties. See "Capital - Regulatory Action and Requirements."
The Bank will continue to monitor closely its major non-performing and potential
problem assets in light of current and anticipated market conditions. The Bank's
asset workout group focuses its efforts in resolving these problem assets as
expeditiously as possible. The Bank does not anticipate any significant
increases in non-performing and potential problem assets.
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.
At September 30, 1997, none of the Bank's assets were deemed by management to be
potential problem assets. At September 30, 1996, potential problem assets
totaled $5.9 million, before valuation allowances of $1.1 million. The decline
in potential problem assets was primarily attributable to the improved status of
one residential construction loan with a principal balance of $2.3 million
following lot sales which reduced the principal balance of the loan.
<PAGE>
Delinquent Loans. At September 30, 1997, delinquent loans totaled $84.6 million
(or 3.5% of loans) compared to $51.6 million (or 1.6% of loans) at September 30,
1996. The following table sets forth information regarding the Bank's delinquent
loans at September 30, 1997.
Principal Balance Total
------------------------------------ as a
Non- Percentage
Mortgage Mortgage of
Loans Loans Total Loans(1)
------- ------- ------- ----------
(Dollars in thousands)
Loans delinquent for:
30-59 days $ 6,095 $32,288 $38,383 1.6%
60-89 days 2,378 18,091 20,469 0.8%
90 days or more and
still accruing -- 25,700 25,700 1.1%
------- ------- ------- ----
Total $ 8,473 $76,079 $84,552 3.5%
======= ======= ======= ====
- ------------------------
(1) Includes loans held for sale and/or securitization, before deduction of
valuation allowances.
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 to $8.5 million at September
30, 1997, from $5.9 million at September 30, 1996.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $50.4 million at September 30, 1997 from $45.7 million at September
30, 1996, and increased as a percentage of total non-mortgage loans outstanding
to 3.6% at September 30, 1997 from 2.9% at September 30, 1996. The increased
percentage of delinquent non-mortgage loans to total non-mortgage loans
outstanding resulted primarily from the increase in delinquent credit card
loans, which reflects the industry-wide decline in the performance of such loans
in recent periods.
Non-mortgage loans delinquent 90 days or more and still accruing consists
entirely of credit card loans. Effective June 30, 1997, the Bank conformed its
reporting practices for credit card loans to that of most credit card issuers
and continues to accrue interest until the loan is either paid or charged-off.
Troubled Debt Restructurings. A troubled debt restructuring occurs when the Bank
agrees to modify significant terms of a loan in favor of the borrower when the
borrower is experiencing financial difficulties. In aggregate, troubled debt
restructurings were $11.9 million and $13.6 million at September 30, 1997 and
1996, respectively.
At September 30, 1997, loans accounted for as troubled debt restructurings
included one commercial permanent loan with a principal balance of $11.7 million
and one commercial collateralized loan with a principal balance of $0.2 million.
The $1.8 million decrease in loans accounted for as troubled debt restructurings
from September 30, 1996, was a result of net principal reductions. At September
30, 1997, the Bank had commitments to lend $0.1 million of additional funds on
loans that have been restructured.
<PAGE>
Real Estate Held for Investment. At September 30, 1997 and 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 years indicated and may include
charge-offs taken against assets which the Bank disposed of during such years.
<PAGE>
<TABLE>
ANALYSIS OF ALLOWANCE FOR AND CHARGE-OFFS OF LOANS
(Dollars in thousands)
Year Ended September 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 95,523 $ 60,496 $ 50,205 $ 68,040 $ 78,818
------------ ------------ ------------- ------------ ------------
Provision for loan losses 125,115 115,740 54,979 29,222 60,372
------------ ------------ ------------- ------------ ------------
Increase due to acquisition of loans 118 -- -- -- --
------------ ------------ ------------- ------------ ------------
Charge-offs:
Residential 1,014 867 1,174 1,641 45
Commercial real estate and multifamily -- -- -- 112 766
Real estate construction and ground -- -- 1,768 2,474 4,274
Credit card 115,835 84,805 50,172 55,754 76,141
Consumer and other 9,657 6,375 3,463 1,058 3,664
------------ ------------ ------------- ------------ ------------
Total charge-offs 126,506 92,047 56,577 61,039 84,890
------------ ------------ ------------- ------------ ------------
Recoveries:
Residential 34 32 20 -- --
Credit card 10,365 10,720 11,219 13,525 13,438
Consumer and other 1,030 582 650 457 302
------------ ------------ ------------- ------------ ------------
Total recoveries 11,429 11,334 11,889 13,982 13,740
------------ ------------ ------------- ------------ ------------
Charge-offs, net of recoveries 115,077 80,713 44,688 47,057 71,150
------------ ------------ ------------- ------------ ------------
Balance at end of year $ 105,679 $ 95,523 $ 60,496 $ 50,205 $ 68,040
============ ============ ============= ============ ============
Provision for loan losses to average loans (1) 3.50% 3.94% 1.85% 1.08% 2.83%
Net loan charge-offs to average loans (1) 3.22% 2.75% 1.51% 1.74% 3.33%
Ending allowance for losses on loans to total
loans (1) (2) 4.17% 2.81% 2.05% 1.97% 2.83%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization.
(2) Before deduction of allowances.
</TABLE>
<PAGE>
<TABLE>
COMPONENTS OF ALLOWANCE FOR LOSSES ON LOANS BY TYPE
(Dollars in thousands)
September 30,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- --------------------- ------------------ -------------------- -------------------
Percent Percent Percent Percent Percent
of of of of of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------ ------- ------------ ------- ----------- ------ ------------ ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of year
allocated to:
Single family residential $ 661 33.5% $ 925 47.4% $ 929 47.3% $ 1,384 53.7% $ 4,235 53.6%
Home equity 683 3.7 446 0.9 164 1.0 133 1.4 250 2.5
Commercial real estate
and multifamily 7,705 2.1 8,398 2.3 8,523 2.9 8,506 3.3 9,606 3.9
Real estate construction
and ground 550 2.2 1,255 1.9 1,264 1.1 4,062 2.1 5,882 2.6
Commercial 364 3.9 223 1.7 65 0.5 505 0.2 0.2
Credit card 89,446 42.6 79,681 33.1 46,325 34.4 34,530 25.5 46,886 31.4
Automobile 3,080 8.6 3,965 8.8 3,226 8.1 1,085 11.4 1,181 4.4
Home improvement and
related loans 2,415 2.0 229 2.8 -- 3.8 -- 1.5 -- 0.3
Overdraft lines of credit
and other consumer 775 1.4 401 1.1 -- 0.9 -- 0.9 -- 1.1
------------ ------------ ----------- ------------ ------------
Total $ 105,679 $ 95,523 $ 60,496 $ 50,205 $ 68,040
============ ============ =========== ============ ============
</TABLE>
<PAGE>
<TABLE>
ANALYSIS OF ALLOWANCE FOR AND CHARGE-OFFS OF
REAL ESTATE HELD FOR INVESTMENT OR SALE
(In thousands)
Year ended September 30,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year:
Real estate held for investment $ 191 $ 193 $ 9,899 $ 10,182 $ 14,919
Real estate held for sale 126,519 135,043 109,074 101,462 94,125
------------ ------------ ------------ ------------ ------------
Total 126,710 135,236 118,973 111,644 109,044
------------ ------------ ------------ ------------ ------------
Provision for real estate losses:
Real estate held for investment 7 (2) (6,974) (283) 1,470
Real estate held for sale 19,616 26,343 33,295 14,335 28,945
------------ ------------ ------------ ------------ ------------
Total 19,623 26,341 26,321 14,052 30,415
------------ ------------ ------------ ------------ ------------
Charge-offs:
Real estate held for investment:
Commercial ground -- -- 2,732 -- --
Commercial construction -- -- -- -- 6,207
------------ ------------ ------------ ------------ ------------
Total -- -- 2,732 -- 6,207
------------ ------------ ------------ ------------ ------------
Real estate held for sale:
Residential construction -- -- 1,924 911 79
Residential ground 5,397 34,867 103 -- 259
Commercial ground -- -- 2,827 -- 1,353
Commercial permanent -- -- -- 5,812 761
Commercial construction -- -- 2,472 -- 19,156
------------ ------------ ------------ ------------ ------------
Total 5,397 34,867 7,326 6,723 21,608
------------ ------------ ------------ ------------ ------------
Total charge-offs on real estate
held for investment or sale 5,397 34,867 10,058 6,723 27,815
------------ ------------ ------------ ------------ ------------
Balance at end of year:
Real estate held for investment 198 191 193 9,899 10,182
Real estate held for sale 140,738 126,519 135,043 109,074 101,462
------------ ------------ ------------ ------------ ------------
Total $ 140,936 $ 126,710 $ 135,236 $ 118,973 $ 111,644
============ ============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
COMPONENTS OF ALLOWANCE FOR LOSSES
ON REAL ESTATE HELD FOR INVESTMENT OR SALE
(In thousands)
September 30,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for losses on real estate
held for investment:
Commercial real estate and multifamily $ -- $ -- $ -- $ 7,793 $ 7,945
Ground -- -- -- 1,975 1,972
Other 198 191 193 131 265
------------ ------------ ------------ ------------ ------------
Total 198 191 193 9,899 10,182
------------ ------------ ------------ ------------ ------------
Allowance for losses on real estate
held for sale:
Single family residential -- 112 184 66 102
Home equity -- 8 2 4 53
Commercial real estate and multifamily -- -- -- 142 4,678
Residential construction -- -- -- 1,942 2,924
Commercial construction -- -- -- 1,216 1,387
Ground 140,738 126,399 134,857 105,704 92,318
------------ ------------ ------------ ------------ ------------
Total 140,738 126,519 135,043 109,074 101,462
------------ ------------ ------------ ------------ ------------
Total allowance for losses on real
estate held for investment or sale $ 140,936 $ 126,710 $ 135,236 $ 118,973 $ 111,644
============ ============ ============ ============ ============
</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 $24.4 million from the level at
September 30, 1996, to $246.6 million at September 30, 1997. The $24.4 million
increase was primarily attributable to increased valuation allowances on credit
card loans and the Communities.
The following table shows valuation allowances for losses on performing and
non-performing assets at the dates indicated.
September 30, 1997
---------------------------------------------
Performing Non-performing Total
------------ --------------- -----------
(In thousands)
Allowances for losses on:
Loans:
Real estate $ 8,626 $ 972 $ 9,599
Credit card 89,446 -- 89,446
Consumer and other 6,212 423 6,634
------------ --------------- -----------
Total allowance for losses
and loans 104,284 1,395 105,679
------------ --------------- -----------
Real estate held for
investment 198 -- 198
Real estate held for sale -- 140,738 140,738
------------ --------------- -----------
Total allowance for losses
on real estate held for
investment for sale
198 140,738 140,936
------------ --------------- -----------
Total allowance for losses $ 104,482 $ 142,133 $ 246,615
============ =============== ===========
<PAGE>
September 30, 1996
-----------------------------------------
Performing Non-performing Total
----------- -------------- ----------
(In thousands)
Allowances for losses on:
Loans:
Real estate $ 10,293 $ 731 $ 11,024
Credit card 54,331 25,350 79,681
Consumer and other 4,802 16 4,818
----------- -------------- ----------
Total allowance for losses and
loans
69,426 26,097 95,523
----------- -------------- ----------
Real estate held for investment 191 -- 191
Real estate held for sale -- 126,519 126,519
----------- -------------- ----------
Total allowance for losses on
real estate held for investment
for sale 191 126,519 126,710
----------- -------------- ----------
Total allowance for losses $ 69,617 $ 152,616 $ 222,233
=========== ============== ==========
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $150.5 million at September 30, 1997, which
constituted 62.5% of total non-performing real estate assets, before valuation
allowances. This amount represented a $12.8 million increase from the September
30, 1996 level of $137.7 million, or 54.1% of total non-performing real estate
assets, before valuation allowances at that date.
During fiscal 1997, the Bank provided an additional $3.1 million of general
valuation allowances pursuant to its policy of providing additional general
valuation allowances which are equal to, or exceed, the amount of the net
earnings generated by the development and sale of land in the Communities.
When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change,
it may be necessary to provide additional valuation allowances based on new
information. The allowance for losses on real estate held for sale at September
30, 1997 is in addition to approximately $50.5 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at September
30, 1997.
The Bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans. As a result of such updated appraisals, the
Bank could be required to increase its valuation allowances.
<PAGE>
Net charge-offs of credit card loans for fiscal 1997 were $105.5 million,
compared to $74.1 million for fiscal 1996. The increase in net charge-offs
generally reflects the trends that are affecting the credit card industry as a
whole. Management has implemented more stringent underwriting and other lending
policies designed to reduce such losses in future periods. The allowance at any
balance sheet date relates only to receivable balances that exist as of that
date. Because of the nature of a revolving credit card account, the cardholder
may enter into transactions (such as retail purchases and cash advances)
subsequent to a balance sheet date which increase the outstanding balance of the
account. Accordingly, charge-offs in any fiscal period relate both to balances
and conditions or events that existed at the beginning of the period and to
balances created during the period, and may therefore exceed the levels of
valuation allowances established at the beginning of the fiscal period.
The allowance for losses on credit card loans increased to $89.4 million at
September 30, 1997 from $79.7 million at September 30, 1996, primarily because
of a $7.8 million increase in the provision for losses on such loans. The
increase in the provision was primarily attributable to an unallocated allowance
established by the Bank due to general uncertainties about future bankruptcies.
Also contributing to the increase was the reclassification of allowances
maintained for delinquent interest that were previously presented net of the
credit card loan balance in the accompanying Consolidated Statement of Financial
Condition, substantially all of which related to prior periods. The ratio of the
allowance for such losses to outstanding credit card loans increased to 8.3%, at
September 30, 1997, from 7.1% at September 30, 1996.
The allowance for losses on consumer and other loans (automobile, home
improvement, overdraft lines of credit and other consumer loans) increased to
$6.3 million at September 30, 1997 from $4.6 million at September 30, 1996,
primarily because of the increased volume of consumer and other loans. The
ratios of the allowances for losses on consumer and other loans to
non-performing consumer and other loans and to outstanding consumer and other
loans were 157.0% and 1.7%, respectively, at September 30, 1997 compared to
388.9% and 1.0%, respectively, at September 30, 1996.
Asset and Liability Management. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mix, volume and maturity 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 Bank's assets and liabilities are inherently sensitive to changes in
interest rates. These movements can result in variations to the overall level of
income and market value of equity. Based on the characteristics of a specific
asset or liability (including maturity, repricing frequency and interest caps) a
change in interest rates can significantly affect the contribution to net income
and market value for the instrument. If, in the aggregate, the Bank's assets
mature or reprice more quickly or to a greater extent than its liabilities, the
Bank is termed "asset sensitive" and will tend to experience increased income
and market value during periods of rising interest rates and declining income
and value during periods of falling interest rates. Conversely, if the Bank's
liabilities mature or reprice more quickly or to a greater extent than its
assets, the Bank is termed "liability sensitive" and will tend to experience
decreased income and market value during periods of rising interest rates and
increased income and value during periods of falling interest rates.
<PAGE>
The Bank is pursuing an asset-liability management strategy to control risk from
changes in market interest rates principally by originating interest-sensitive
loans for its portfolio. In furtherance of this strategy, the Bank emphasizes
the origination and retention of ARMs, adjustable-rate home equity credit line
loans and adjustable-rate credit card loans. At September 30, 1997,
adjustable-rate loans accounted for 79.5% of total loans, of which 75.7% will
adjust in one year or less.
In recent periods, the Bank's policy has generally been to sell all of its
long-term fixed-rate mortgage production, thereby reducing its exposure to
market interest rate fluctuations typically associated with long-term fixed-rate
lending.
A traditional measure of interest-rate risk within the banking industry is the
interest sensitivity "gap," which is the sum of all interest-earning assets
minus all interest-bearing liabilities subject to repricing within the same
period. Gap analysis is a tool used by management to evaluate interest-rate risk
which results from the difference between repricing and maturity characteristics
of the Bank's assets and those of the liabilities that fund them. By analyzing
these differences, management can attempt to estimate how changes in interest
rates affect the Bank's future net interest income.
The Bank views control over interest rate sensitivity as a key element in its
financial planning process and monitors interest rate sensitivity through its
forecasting system. The Bank manages interest rate exposure and will narrow or
widen its gap, depending on its perception of interest rate movements and the
composition of its balance sheet. For the reasons discussed above, the Bank
might take action to narrow its gap if it believes that market interest rates
will experience a significant prolonged increase, and might widen its gap if it
believes that market interest rates will decline or remain relatively stable.
A number of asset and liability management strategies are available to the Bank
in structuring its balance sheet. These include selling or retaining certain
portions of the Bank's current residential mortgage loan production; altering
the Bank's pricing on certain deposit products to emphasize or de-emphasize
particular maturity categories; altering the type and maturity of securities
acquired for the Bank's investment portfolio when replacing securities following
normal portfolio maturation and turnover; lengthening or shortening the maturity
or repricing terms for any current period asset securitizations; and altering
the maturity or interest rate reset profile of borrowed funds, if any, including
funds borrowed from the FHLB of Atlanta.
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 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 September 30, 1997 Real estate loans:
Adjustable-rate $ 356,409 $ 344,822 $ 83,716 $ 1,614 $ 156 $ 786,717
Fixed-rate 8,307 2,843 15,354 16,875 12,452 55,831
Loans held for sale 102,749 -- -- -- -- 102,749
Home equity credit lines and second
mortgages 52,688 801 2,787 2,222 8,190 66,688
Credit card and other 1,087,804 35,795 93,842 60,085 23,157 1,300,683
Loans held for securitization and sale 220,000 -- -- -- -- 220,000
Mortgage-backed securities 745,171 689,014 223,036 124,444 204,042 1,985,707
Trading securities 7,899 -- -- -- -- 7,899
Other investments 573,498 -- 4,998 -- -- 578,496
------------ ------------ ------------- ------------ ------------ -------------
Total interest-earning assets 3,154,525 1,073,275 423,733 205,240 247,997 5,104,770
Total non-interest earning assets -- -- -- -- 952,643 952,643
------------ ------------ ------------- ------------ ------------ -------------
Total assets $ 3,154,525 $ 1,073,275 $ 423,733 $ 205,240 $ 1,200,640 $ 6,057,413
============ ============ ============= ============ ============ =============
Deposits:
Fixed maturity deposits $ 1,098,963 $ 415,345 $ 243,699 $ 46,145 $ -- $ 1,804,152
NOW, statement and passbook accounts 1,408,525 42,209 140,581 95,683 203,911 1,890,909
Money market deposit accounts 983,016 -- -- -- -- 983,016
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 227,493 1,476 4,357 21,274 15,751 270,351
------------ ------------ ------------- ------------ ------------ -------------
Total interest-bearing liabilities 3,717,997 459,030 388,637 163,102 469,662 5,198,428
Total non-interest bearing liabilities -- -- -- -- 527,739 527,739
Stockholders' equity -- -- -- -- 331,246 331,246
------------ ------------ ------------- ------------ ------------ -------------
Total liabilities & stockholders' equity $ 3,717,997 $ 459,030 $ 388,637 $ 163,102 $ 1,328,647 $ 6,057,413
============ ============ ============= ============ ============ =============
Gap $ (563,472) $ 614,245 $ 35,096 $ 42,138 $ (221,665)
Cumulative gap $ (563,472) $ 50,773 $ 85,869 $ 128,007 $ (93,658)
Adjustment for interest rate caps (1) $ 327,778 $ 219,444 $ 75,000 $ -- $ --
Adjusted cumulative gap $ (235,694) $ 270,217 $ 160,869 $ 128,007 $ (93,658)
Adjusted cumulative gap as a percentage
of total assets (3.9%) 4.5% 2.7% 2.1% (1.5)%
(1) At September 30, 1997, the Bank had $372,222 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 one-year gap, adjusted for the effect of the Bank's interest rate caps, as a
percentage of total assets, was 4.5% at September 30, 1997, compared to a
negative 4.8% at September 30, 1996. The improvement in the Bank's one-year gap
was primarily attributable to an increase in short-term assets at September 30,
1997 resulting from the scheduled maturity of mortgage-backed balloon securities
as well as an increase in one year ARM mortgage-backed securities.
During fiscal 1995, the Bank purchased a series of interest rate caps which
management believes will significantly limit its exposure to rising short-term
interest rates during a four-year period which began July 1, 1995 and will end
June 30, 1999. The Bank's Interest Rate Sensitivity Table reflects the reduction
in risk provided by these caps. The initial level of the protection was a
notional principal amount of $600 million, and such protection declined to $300
million at September 30, 1997, and will decline to $200 million by March 31,
1998. The remaining $200 million of protection will expire on June 30, 1999. In
the event that the one-month London Inter-Bank Offered Rate ("LIBOR") exceeds
7.00% on certain predetermined dates, the Bank is entitled to receive
compensatory payments from the cap provider, which is a counterparty receiving
the highest investment rating from Standard & Poor's Corporation. Such payments
would be equal to the product of (a) the amount by which one-month LIBOR exceeds
7.00% and (b) the then outstanding notional principal amount for a predetermined
period of time. The Bank has no obligation to make payments to the provider of
the cap or any other party.
During fiscal 1997, an additional interest rate cap agreement with a notional
amount of $72.2 million at September 30, 1997, was transferred and assigned to
the Bank at the termination of one of the Bank's credit card securitization
transactions. This interest rate cap agreement has a termination date of October
15, 1998 and entitles the Bank to receive compensatory payment from the cap
provider, which is a AA-rated (for long term debt as rated by Standard & Poor's)
counterparty, equal to the product of (a) the amount by which the one-month
LIBOR exceeds 9.00% and (b) the then outstanding notional principal amount for
the predetermined period of time.
In addition to gap measurements, the Bank measures and manages interest-rate
risk with the extensive use of computer simulation. This simulation includes
calculations of Market Value of Portfolio Equity and Net Interest Margin as
promulgated by the OTS's Thrift Bulletin 13 ("TB 13"). Under this regulation,
institutions are required to establish limits on the sensitivity of their net
interest income and net portfolio value ("NPV") to parallel changes in interest
rates. Such changes in interest rates are defined as instantaneous and sustained
movements to rates in 100 basis point increments. The following table shows the
estimated impact of parallel shifts in interest rates at September 30, 1997,
calculated in a manner consistent with the requirements of TB 13.
<PAGE>
Change In
------------------------------------
Change in Interest Net Net
Rates Interest Portofolio
(Basis Points) Income(1) Value(2)
---------------- -----------------
% $ Amount % $ Amount
- ------------------------------- ----- --------- ----- ---------
+ 200 (4.0) (28,837) (0.4) (3,510)
+ 100 (1.6) (11,287) (0.3) (2,452)
- 100 9.1 66,557 2.0 17,507
- 200 17.3 125,818 1.9 16,882
- ---------------------------------------------------------------------
(1)Represents the difference between net interest income for 12 months in a
stable interest rate environment and the various interest rate scenarios.
(2)Represents the difference between net portfolio value (NPV) of the Bank's
equity in a stable interest rate environment and the NPV in the various rate
scenarios. The OTS defines NPV as the present value of expected net cash flows
from existing assets minus the present value of expected net cash flows from
existing liabilities plus the present value of expected net cash flows from
existing off-balance sheet contracts.
While the Bank cannot predict future interest rates or their effects on NPV or
net interest income, the analysis under TB 13 indicates that a change in
interest rates of plus or minus 200 basis points is unlikely to have a material
adverse effect on the Bank's NPV or net interest income in future periods.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain limitations are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgage loans, generally have features which restrict changes in their interest
rates on a short term basis and over the life of the asset. In the event of a
change in interest rates, loan prepayments and early deposit withdrawal levels
could deviate significantly from those assumed in making the calculations set
forth above. Additionally, credit risk may increase if an interest rate increase
adversely affects the ability of many borrowers to service their debt.
At September 30, 1997, the Bank would not have been required to maintain
additional amounts of risk-based capital had the interest-rate risk component of
the OTS capital regulations been in effect. See "Business - Regulation -
Regulatory Capital."
<PAGE>
Inflation. The impact of inflation on the Bank is different from the impact on
an industrial company, because substantially all of the assets and liabilities
of the Bank are monetary in nature. The most direct impact of an extended period
of inflation would be to increase interest rates, and to place upward pressure
on the operating expenses of the Bank. However, the actual effect of inflation
on the net interest income of the Bank would depend on the extent to which the
Bank was able to maintain a spread between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities, which would depend
to a significant extent on its asset-liability sensitivity. The effect of
inflation on the Bank's results of operations for the past three fiscal years
has been minimal.
Deferred Tax Asset. At September 30, 1997, the Bank recorded a net deferred tax
asset of $26.0 million, which generally represents the cumulative excess of the
Bank's actual income tax liability over its income tax expense for financial
reporting purposes.
Tax Sharing Payments. During fiscal 1997, after receiving OTS approval, the Bank
made tax sharing payments totaling $9.8 million to the Trust. See Note 25 to the
Consolidated Financial Statements in this report.
Capital. At September 30, 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 September 30,
1997, in relation to the regulatory requirements in effect at that date. The
information below is based upon the Bank's understanding of the regulations and
interpretations currently in effect and may be subject to change.
<PAGE>
<TABLE>
REGULATORY CAPITAL
(Dollars in thousands)
Minimum Excess
Actual Capital Requirement Capital
-------------------------- ------------------------ -------------------------
As a % As a % As a %
Amount of Assets Amount of Assets Amount of Assets
------------ ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity per financial statements $ 363,246
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding losses (2) 493
------------
507,739
Adjustments for tangible and core capital:
Intangible assets (44,251)
Non-allowable minority interest in
REIT Subsidiary (1) (38,758)
Non-includable subsidiaries (3) (3,762)
------------
Total tangible capital 420,968 6.96% $ 90,715 1.50% $ 330,253 5.46%
------------ ========== ============= ========== ============= ==========
Total core capital (4) 420,968 6.96% $ 241,907 4.00% $ 179,061 2.96%
------------ ========== ============= ========== ============= ==========
Tier 1 risk-based capital (4) 420,968 7.24% $ 232,713 4.00% $ 188,255 3.24%
------------ ========== ============= ========== ============= ==========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 92,962
------------
Total supplementary capital 342,962
Excess allowance for loan losses (19,989)
------------
Adjusted supplementary capital 322,973
--
----------
Total available capital 743,941
Equity investments (3) (14,556)
------------
Total risk-based capital (4) $ 729,385 13.50% $ 465,426 8.00% $ 263,959 5.50%
============ ========== ============= ========== ============= ==========
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(3) Reflects an aggregate offset of $1.0 million representing the allowance for
general loan losses maintained against the Bank's equity investments
and non-includable subsidiaries which, pursuant to OTS guidelines, is
available as a "credit" against the deductions from capital otherwise
required for such investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least
6.0% and a total risk-based capital ratio of at least 10.0%.
</TABLE>
<PAGE>
Board Resolution and Regulatory Requirements. At the request of the OTS, the
Board of Directors of the Bank adopted a resolution in March 1996 which, among
other things, permits the Bank: (i) to make tax sharing payments without OTS
approval to the Trust of up to $15.0 million relating to any single fiscal year;
and (ii) to declare dividends on its stock in any quarterly period up to the
lesser of (A) 50% of its after tax net income for the immediately preceding
quarter or (B) 50% of the average quarterly after tax net income for the
immediately preceding four quarter period, minus (in either case) dividends
declared on the Bank's preferred stock during that quarterly period. The
resolution also provides that the Bank will present a plan annually to the OTS
detailing anticipated consumer loan securitization activity.
The Bank has been able to maintain capital compliance in recent periods despite
the deduction of various assets from regulatory capital. As of September 30,
1997, the Bank had $36.2 million in supervisory goodwill, all of which was
excluded from core capital, $15.3 million in equity investments, after
subsequent valuation allowances, all of which were fully deducted from total
risk-based capital, and $4.0 million, after subsequent valuation allowances, of
extensions of credit to, and investments in, non-includable subsidiaries, all of
which were fully deducted from all three FIRREA capital requirements. Pursuant
to OTS guidelines, $1.0 million of general valuation allowances maintained
against the Bank's non-includable subsidiaries and equity investments are
available as a "credit" against the deduction from capital otherwise required
for such investments.
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. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In November 1996, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties through November 12, 1997. In addition, the Bank has
submitted to the OTS a request for a further extension of the holding periods
through fiscal 1998 for certain of its REO properties. Based on its capital
ratios at September 30, 1997, the Bank's capital ratios would have remained
above the levels required for well-capitalized institutions even if the book
value of REO properties for which an extension has not yet been received had
been deducted from total risk-based capital as of that date. The following table
sets forth the Bank's REO at September 30, 1997, after valuation allowances of
$140.7 million, by the fiscal year in which the property was acquired through
foreclosure.
<PAGE>
Fiscal Year (In thousands)
----------- --------------
1990 $ 22,667 (1)(2)
1991 47,724 (2)
1992 3,280 (2)
1993 4,050
1994 2,002
1995 8,036
1996 --
1997 2,910
--------------
Total REO $ 90,669
==============
- -------------------------
(1) Includes REO with an aggregate net book value of $14.6 million, which the
Bank treats as equity investments for regulatory capital purposes.
(2)Includes REO, with an aggregate net book value of $59.1 million, for which
the Bank received an extension of the holding periods through November 12, 1997.
Under the OTS prompt corrective action regulations, an institution is
categorized as "well capitalized" if it has a leverage (or core capital) ratio
of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total
risk-based capital ratio of at least 10.0% and is not subject to any written
agreement, order, capital directive or prompt corrective action directive to
meet and maintain a specific capital level. At September 30, 1997, the Bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 6.96%,
7.24% and 13.50%, respectively, which exceeded the ratios established for "well
capitalized" institutions. The OTS has the discretion to reclassify an
institution from one category to the next lower category, for example from "well
capitalized" to "adequately capitalized," if, after notice and an opportunity
for a hearing, the OTS determines that the institution is in an unsafe or
unsound condition or has received and has not corrected a less than satisfactory
examination rating for asset quality, management, earnings or liquidity.
On December 3, 1996, the Bank sold $100.0 million principal amount of its 9 1/4%
Subordinated Debentures due 2008. The Bank received net proceeds of $96.1
million from the sale of the 1996 Debentures which 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.
<PAGE>
In addition, on December 3, 1996, the REIT Subsidiary sold $150.0 million of its
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 10 3/8%. 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 Series B Preferred Stock
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.
The Bank's acquisition of ASB Capital Management in November 1997 reduced the
Bank's regulatory capital ratios below the levels existing at September 30,
1997. See "Financial Condition - General." Failure to obtain the REO extensions
discussed above also could adversely affect those ratios. In addition, depending
on the outcome of a pending regulatory proposal relating to the regulatory
capital treatment of non-mortgage servicing assets and associated interest-only
strips, the Bank could be required to deduct additional amounts from its
regulatory capital. See "Business -- Regulation -- Regulatory Capital."
The Bank's ability to maintain or increase its capital levels in future periods
also will be subject to general economic conditions, particularly in the Bank's
local markets. Adverse general economic conditions or a renewed downturn in
local real estate markets could require further additions to the Bank's
allowances for losses and further charge-offs. Any such developments would
adversely affect the Bank's earnings and thus its regulatory capital levels.
<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, and the payment of capital improvement
costs. In the past, the Real Estate Trust funded such shortfalls through a
combination of external funding sources, primarily new financings (including the
sale of Unsecured Notes), refinancings of maturing mortgage debt, asset sales
and tax sharing payments from the Bank. See the Consolidated Statements of Cash
Flows included in the Consolidated Financial Statements in this report.
Liquidity. The Real Estate Trust's ability to meet its liquidity needs,
including debt service payments in fiscal 1998 and subsequent years, will depend
in significant part on its receipt of dividends from the Bank and tax sharing
payments from the Bank pursuant to the tax sharing agreement among the Trust,
the Bank, and their subsidiaries. The availability and amount of tax sharing
payments and dividends in future periods is dependent upon, among other things,
the Bank's operating performance and income, regulatory restrictions on such
payments, including availability of Trust collateral to support 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.
See also the discussion of potential limitations on the payment of dividends by
the Bank contained in "Business - Banking - Regulation - Dividends and Other
Capital Distributions."
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
(see "Banking Regulation - Regulatory Capital") should enhance prospects for the
Real Estate Trust to receive tax sharing payments and dividends from the Bank.
During fiscal 1997, the Bank made tax sharing payments totalling $9.8 million
and dividend payments totalling $7.2 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 it were not being included in the consolidated federal
income tax return of the group.
The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, it will finance such
repayments from other sources of funds.
<PAGE>
In fiscal 1994, the Real Estate 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"). See Note 4 to the Consolidated Financial Statements in
this report. The Indenture pursuant to which the Senior Secured Notes were
issued contains convenants 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 September 30, 1997, the Trust has purchased either in the open market or
through dividend reinvestment 1,810,104 shares of common stock of Saul Centers
(representing 14.7% of such company's outstanding common stock). Most of these
shares have been deposited with the Trustee for the Senior Secured Notes to
satisfy in part the collateral requirements for those securities, thereby
permitting release to the Trust of a portion of the cash on deposit with the
Trustee.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an inital
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At September 30, 1997, there were no borrowings under the facility
and unrestricted availability was $10.0 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for an additional year. Interest is computed by reference to a
floating rate index. At September 30, 1997, there were no borrowings under the
facility and unrestricted availability was $4.8 million.
During fiscal 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 September
30, 1997 for fiscal years commencing October 1, 1997 is set forth in the
following table:
<PAGE>
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------------------
Notes Notes
Mortgage Payable- Payable-
Fiscal Year Notes Secured Unsecured Total
- ------------ --------- ----------- ----------- ------------
1998 $ 11,092 $ -- $ 7,610 $ 18,702
1999 9,736 -- 16,079 25,815
2000 20,095 -- 8,804 28,899
2001 9,790 -- 4,165 13,955
2002 11,343 175,000 5,081 191,424
Thereafter 118,148 -- 4,894 123,042
--------- ----------- ----------- ------------
Total $180,204 $ 175,000 $ 46,633 $ 401,837
========= =========== =========== ============
- -------------------------------------------------------------------------------
Of the $180.2 million of mortgage debt outstanding at September 30, 1997, $137.1
million was nonrecourse to the Real Estate Trust.
As the owner, directly and through two wholly-owned subsidiaries, of a
limited partnership interest in Saul Holdings Partnership, the Real Estate Trust
shares in cash distributions from operations and from capital transactions
involving the sale of properties. The partnership agreement of Saul Holdings
Partnership provides for quarterly cash distributions to the partners out of net
cash flow. See "Business - Real Estate Investment in Saul Holdings Limited
Partnership." In fiscal 1997, the Real Estate Trust received total cash
distributions $5.5 million from Saul Holdings Partnership.
Development and Capital Expenditures
During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3.2 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland. The project is 100% pre-leased. The Real Estate Trust
has obtained a construction/permanent loan which is expected to cover all costs
except for the land and fees to related parties.
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay lodging facility located on a 2.7 acre parcel adjacent to its
Hampton Inn and Holiday Inn in Sterling, Virginia. The new facility will be
franchised as a TownePlace Suites by Marriott and is expected to be completed
by July 1998. The Real Estate Trust has obtained a construction loan which is
expected to cover all costs except for the land, fees to related parties, taxes
and insurance.
On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near Washington National Airport and the Real
Estate Trust's Howard Johnsons Hotel. The purchase price was $25.8 million. Also
on December 10, 1997, the Real Estate Trust refinanced five other hotels in its
portfolio. Funds for the two transactions were provided by a lender in the
amount of $53.0 million. The new loans will have a 15 year term, a fixed
interest rate of 7.57%, and amortization based on a 25 year schedule.
The Real Estate Trust believes that its capital improvement costs in the next
several fiscal years will be in range of $6.0 to $7.0 million per year.
<PAGE>
BANKING
Liquidity. The standard measure of liquidity in the savings industry is the
ratio of cash and short-term U.S. Government and other specified securities to
net withdrawable accounts and borrowings payable in one year or less.
The OTS has established a minimum liquidity requirement, which may vary from
time to time depending upon economic conditions and deposit flows. The required
liquidity level under OTS regulations in effect until November 24, 1997 was
5.0%. The Bank's average liquidity ratio for the month ended September 30, 1997
was 11.1%, compared to 13.1% for the month ended September 30, 1996. The Bank
met the liquidity level requirements for each month of fiscal 1997. The OTS
reduced the liquidity requirements effective November 24, 1997. See "Business --
Regulation -- Liquidity Requirements."
The Bank's primary sources of funds historically have consisted of (i) principal
and interest payments on loans and mortgage-backed securities, (ii) savings
deposits, (iii) sales of loans and trading securities (iv) securitizations and
sales of loans and (v) borrowed funds (including funds borrowed from the FHLB of
Atlanta). The Bank's holdings of readily marketable securities constitute
another important source of liquidity. At September 30, 1997, the Bank's
portfolio included mortgage loans, U.S. Government securities and
mortgage-backed securities with outstanding principal balances of $188.6
million, $5.0 million and $2.0 billion, respectively. The estimated borrowing
capacity against mortgage loans, U.S. Government securities and mortgage-backed
securities that are available to be pledged to the FHLB of Atlanta and various
security dealers totaled $2.0 billion at September 30, 1997, after market-value
and other adjustments.
Chevy Chase has accessed the capital markets as an additional means of funding
its operations and managing its capital ratios and asset growth. Specifically,
the Bank has securitized financial assets, including credit card, home equity
credit line, home loan and automobile loan receivables, as well as single-family
residential loans, because such securitizations provide the Bank with a source
of financing at competitive rates and assist the Bank in maintaining compliance
with regulatory capital requirements. Additionally, the securitizations have
permitted the Bank to limit the credit risk associated with these assets while
continuing to earn servicing fees and other income associated with the
securitized assets.
Since 1988, the Bank has securitized approximately $10.6 billion of credit card,
home equity credit line, automobile and home loan receivables. These
transactions depend on sophisticated back-office systems to service complex
securitization structures and on personnel with the experience to design,
install and manage those systems. At September 30, 1997, the Bank serviced $4.0
billion, $459.1 million, $1.1 billion and $244.1 million of securitized credit
card, home equity credit line, automobile and home loan receivables,
respectively. Chevy Chase derives fee-based income from servicing these
securitized portfolios. However, such fee-based income has been adversely
affected in recent periods by increases in delinquencies and charge-offs related
to the receivables placed in these securitized pools.
<PAGE>
The Bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust which holds the receivables and issues the
asset-backed certificates and ultimately the risk of repayment is transferred to
the holders of those certificates. The Bank retains risk with respect to the
assets transferred to the trust only to the extent that it retains recourse
based on the performance of the assets or holds certificates issued by the trust
(such as a "seller certificate"). In its securitizations, the Bank typically
retains a limited amount of recourse through one or more means. Most often,
limited recourse is retained through the establishment of "spread accounts."
Occasionally other structures, such as overcollateralization, are used. Spread
accounts are funded by initial deposits, if required, and by amounts generated
by the securitized assets over and above the amount required to pay interest,
defaults and other charges and fees on the investors' interest in the
securitization transaction. Because amounts on deposit in the spread accounts
are at risk depending upon performance of the securitized receivables, those
amounts represent recourse to the Bank.
Pursuant to OTS's "low level recourse rule" (which sets capital requirements for
assets sold with recourse at the lower of the applicable capital requirement or
the amount of recourse retained), the Bank maintains dollar-for-dollar capital
against the securitized assets in the amount of the recourse retained up to the
otherwise applicable capital requirement. Even if defaults on outstanding
receivables significantly exceed projected and historical levels so that a "pay
out event" is triggered, the immediate consequence is that investors will begin
receiving payments of principal from the securitized assets earlier than
originally scheduled. Even if payments are insufficient to repay investors in
full, the Bank's assets are not exposed to risk of loss beyond the relevant
amount of recourse retained (including amounts outstanding in the spread
accounts and the amount of any subordinated interest), which, as noted above,
constitute a dollar-for-dollar capital requirement for the Bank. The Bank also
retains risk through the Bank's interest in any seller certificate. Seller
certificates share collections on the securitized assets on an unsubordinated
basis with the investor certificates (unless and to the extent recourse is
retained through an express subordination) and are on-balance sheet assets
against which the Bank must maintain capital.
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
$1.1 billion of credit card receivables, $938.9 million of automobile loan
receivables, $139.8 million of home equity credit line receivables, $154.4
million of home loan receivables and $216.3 million of mortgage loan
receivables, consisting of home equity credit line and home loan receivables,
during fiscal 1997. Additionally, during fiscal 1997, the Bank securitized and
sold $144.2 million of amounts on deposit in certain spread accounts established
in connection with certain of the Bank's outstanding credit card
securitizations. At September 30, 1997, the Bank was considering the
securitization and sale of (i) approximately $615.0 million of credit card
receivables, including $90.0 million of receivables outstanding at September 30,
1997 and $525.0 million of receivables which the Bank expects to become
available, either through additional fundings or amortization of existing
trusts, during the six months ending March 31, 1997; (ii) approximately $450.0
million of automobile loan receivables, including $80.0 million of receivables
outstanding at September 30, 1997 and $370.0 million of receivables which the
Bank expects to become available through additional fundings during the six
months ending March 31, 1997; and (iii) approximately $185.0 million of home
equity credit line receivables; including $50.0 million of receivables
outstanding at September 30, 1997 and $135.0 million of receivables which the
Bank expects to become available through additional fundings during the six
months ending March 31, 1997.
<PAGE>
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.
The Bank uses its liquidity primarily to meet its commitments to fund maturing
savings certificates and deposit withdrawals, fund existing and continuing loan
commitments, repay borrowings and meet operating expenses. For fiscal 1997, the
Bank used the cash provided by operating, investing and financing activities
primarily to meet its commitments to fund maturing savings certificates and
deposit withdrawals of $18.2 billion, repay borrowings of $9.0 billion, fund
existing and continuing loan commitments (including real estate held for
investment or sale) of $3.0 billion, purchase investments and loans of $1.1
billion and meet operating expenses, before depreciation and amortization, of
$454.6 million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $18.9 billion,
proceeds from borrowings of $8.4 billion, proceeds from sales of loans, trading
securities and real estate of $3.1 billion, and principal and interest collected
on investments, loans, and securities of $1.6 billion.
The Bank is obligated under various recourse provisions related to the
securitization and sale of credit card, home equity credit line, automobile and
home loan receivables and amounts on deposit in certain spread accounts through
the asset-backed securitizations. Of the $6.0 billion of outstanding trust
certificate balances at September 30, 1997, the primary recourse to the Bank was
approximately $142.0 million.
The Bank also is obligated under various recourse provisions related to the swap
of single-family residential loans for participation certificates issued to the
Bank by FHLMC. At September 30, 1997, recourse to the Bank under these
arrangements was approximately $1.0 million.
<PAGE>
The Bank's commitments at September 30, 1997 are set forth in the following
table:
(In thousands)
Commitments to originate loans $ 74,999
------------
Loans in process (collateralized loans):
Home equity 564,785
Real estate construction 51,815
Commercial and multifamily 265
------------
616,865
------------
Loans in process (unsecured loans):
Credit cards 16,556,107
Overdraft lines 77,770
Commercial 54,137
------------
16,688,014
------------
Total commitments to extend credit 17,379,878
Letters of credit 29,186
Recourse arrangements on asset-backed
securitizations 141,992
Recourse arrangements on mortgage-backed
securities 989
------------
Total commitments $17,552,045
============
Based on historical experience, the Bank expects to fund substantially less than
the total amount of its outstanding credit card and home equity credit line
commitments, which together accounted for 97.5% of commitments at September 30,
1997.
At September 30, 1997, repayments of borrowed money scheduled to occur during
the next 12 months were $227.2 million. Certificates of deposit maturing during
the next 12 months amounted to $1.2 billion, of which a substantial portion is
expected to remain with the Bank.
There were no material commitments for capital expenditures at September 30,
1997.
The Bank's liquidity requirements in years subsequent to fiscal 1997 will
continue to be affected both by the asset size of the Bank, the growth of which
may 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
The Real Estate Trust's ability to generate revenues from property ownership and
development is significantly influenced by a number of factors, including
national and local economic conditions, the level of mortgage interest rates,
governmental actions (such as changes in real estate tax rates) and the type,
location, size and stage of development of the Real Estate Trust's properties.
Debt service payments and most of the operating expenses associated with
income-producing properties are not decreased by reductions in occupancy or
rental income. Therefore, the ability of the Real Estate Trust to produce net
income in any year from its income-producing properties is highly dependent on
the Real Estate Trust's ability to maintain or increase the properties' levels
of gross income. The relative illiquidity of real estate investments tends to
limit the ability of the Real Estate Trust to vary its portfolio promptly in
response to changes in economic, demographic, social, financial and investment
conditions.
The Bank's operating results historically have depended primarily on its "net
interest spread," which is the difference between the rates of interest earned
on its loans and securities investments and the rates of interest paid on its
deposits and borrowings. In the last three fiscal years, non-interest income
from securitizations of credit card and home equity credit line receivables and
income from gains on sales of credit card accounts (or "relationships"), loans
and mortgage-backed securities have had a significant effect on net income. In
addition to interest paid on its interest-bearing liabilities, the Bank's
principal expenses are operating expenses.
FISCAL 1997 COMPARED TO FISCAL 1996
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
debt expense of $7.8 million and an operating loss of $19.0 million for fiscal
1997, compared to a loss before depreciation and amortization of debt expense of
$13.5 million and an operating loss of $24.2 million for fiscal 1996. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office and industrial properties, increased income from
Saul Holdings Partnership and other partnership investments, and recognition of
gains on sales of properties.
Income after direct operating expenses from hotel properties increased
$2,771,000 (15.3%) in fiscal 1997 over the level achieved in fiscal 1996. In the
current period, room sales increased $4,542,000 (11.7%), while food and beverage
sales increased $565,000 (4.6%). The increase in total revenue of $5,219,000
(9.6%) exceeded the increase of $2,448,000 (6.8%) in direct operating expenses.
The revenue increases were 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 acquired a new hotel in the
current period.
Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $2,992,000 (28.9%) in
fiscal 1997 compared to such income in fiscal 1996. Gross income increased
$3,507,000 (19.9%) in fiscal 1997, while expenses increased $515,000 (7.1%). The
improvement was the direct result of a higher leasing rate in the most recent
year. Expenses in fiscal 1997 were above the prior year's principally due to
higher property taxes and higher operating expenses.
<PAGE>
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, declined by $996,000 (19.9%) in the
current fiscal year primarily due to lower cash balances on which interest was
earned. Other income in fiscal 1996 also included $695,000 received as refunds
of transfer taxes paid in a preceding year.
Land parcels and other expense increased $46,000 (2.8%) in fiscal 1997 as the
result of higher real estate taxes.
Interest expense increased $315,000 (0.8%) in fiscal 1997, primarily because of
the higher level of borrowings in the current period. The average balance of
outstanding borrowings increased to $400.3 million for fiscal 1997 from $395.6
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and unsecured note sales. The average cost
of borrowings was 10.30% in fiscal 1997 and 10.31% in fiscal 1996.
Depreciation increased $523,000 (5.2%) in fiscal 1997 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 $572,000
(7.7%) in fiscal 1997. The advisory fee in fiscal 1997 was $311,000 per month,
compared to $301,000 per month for the first six months of fiscal 1996 and
$306,000 per month for the second six months of fiscal 1996, which resulted in
an aggregate increase of $93,000 (2.6%). Management and leasing fees were higher
by $479,000 (12.7%) in the current fiscal year as a result of increased gross
income on which fees are based.
General and administrative expense decreased $129,000 (9.2%) in fiscal 1997, as
a result of lower administrative costs.
Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1997, the Real
Estate Trust recorded earnings of $4,150,000 from such investments compared to
earnings of $3,374,000 in the prior year.
Gain on sale of property in fiscal 1997 represents the gain on the sale of a
purchase-leaseback investment located in Casper, Wyoming and the gain on the
condemnation of a portion of a land parcel located in Atlanta, Georgia.
<PAGE>
BANKING
Overview. The Bank recorded operating income of $80.2 million for the year ended
September 30, 1997 ("fiscal 1997"), compared to operating income of $46.1
million for the year ended September 30, 1996 ("fiscal 1996"). The increase in
income for fiscal 1997 was primarily attributable to a $68.5 million increase in
other (non-interest) income and an $11.9 million increase in net interest income
before provision for loan losses, the effect of which was partially offset by a
$9.4 million increase in the provision for loan losses and a $37.0 million
increase in operating (non-interest) expense reflecting in part additional
expenses associated with steps taken by management to improve credit quality
and expand the Bank's core businesses, including the consumer loan program and
deposit franchise.
Net Interest Income. Net interest income, before the provision for loan losses,
increased $11.9 million (or 6.0%) in fiscal 1997. The Bank would have recorded
additional interest income of $6.9 million in fiscal 1997 if the Bank's
nonaccrual assets and restructured loans had been current in accordance with
their original terms. Interest income of $0.7 million was actually recorded on
non-accrual assets and restructured loans during the fiscal year. 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)
Year Ended September 30,
--------------------------------------------------------------------------------
1997 1996 1995
September 30, -------------------------- -------------------------- --------------------------
1997 Average Yield/ Average Yield/ Average Yield/
Yield/Rate Balances Interest Rate Balances Interest Rate Balances Interest Rate
------------- ---------- -------- ------ ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) 12.83% $3,578,639 $360,842 10.08% $2,940,242 $317,847 10.81% $2,968,376 $294,554 9.92%
Mortgage-backed securities 5.41 1,204,839 72,209 5.99 834,198 50,955 6.11 981,253 60,623 6.18
Federal funds sold and
securities purchased
under agreements to resell 5.97 128,268 7,066 5.51 185,794 10,195 5.49 65,865 3,756 5.70
Trading securities 9.00 15,436 1,530 9.91 13,477 953 7.07 4,843 373 7.70
Investment securities 6.07 8,346 481 5.76 6,033 315 5.22 4,405 194 4.40
Other interest-earning assets 5.56 196,444 8,352 4.25 164,783 7,246 4.40 126,792 5,815 4.59
---------- -------- ---------- -------- ---------- --------
Total 9.12 5,131,972 450,480 8.78 4,144,527 387,511 9.35 4,151,534 365,315 8.80
------------- -------- ------ -------- ------ --------- ------
Non-interest earning assets:
Cash 191,626 161,925 131,345
Real estate held for
investment or sale 115,948 161,092 287,564
Property and equipment, net 249,104 197,351 161,109
Cost in excess of net assets
acquired, net 1,728 3,289 5,470
Other assets 399,365 248,870 156,172
---------- ---------- ----------
Total assets $6,089,743 $4,917,054 $4,893,194
========== ========== ==========
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits 2.42 $ 890,204 21,977 2.47 $ 846,796 23,137 2.73 $ 829,255 23,721 2.71
Savings deposits 3.44 975,264 33,106 3.39 944,211 31,936 3.38 1,048,783 35,125 3.35
Time deposits 5.57 1,420,613 75,180 5.29 1,261,685 69,179 5.48 1,025,111 53,033 5.17
Money market deposits 3.97 992,066 38,644 3.90 990,392 38,317 3.87 1,070,531 42,420 3.96
---------- -------- ---------- -------- ---------- --------
Total deposits 4.18 4,278,147 168,907 3.95 4,043,084 162,569 4.02 3,973,680 154,299 3.84
Borrowings 7.43 1,134,754 70,908 6.25 369,831 26,267 7.10 496,938 34,815 7.01
---------- -------- ---------- -------- ---------- --------
Total liabilities 4.50 5,412,901 239,815 4.43 4,412,915 188,836 4.28 4,470,618 189,114 4.19
------------- -------- ------ -------- ------ --------- ------
Non interest-bearing items:
Non-interest bearing deposits 196,620 149,158 116,030
Other liabilities 53,037 51,338 48,702
Minority interest 119,376 0 0
Stockholders' equity 307,809 303,643 257,844
---------- ---------- ----------
Total liabilities and
stockholders' equity $6,089,743 $4,917,054 $4,893,194
========== ========== ==========
Net interest income $210,665 $198,675 $176,201
======== ======== ========
Net interest spread (2) 4.35% 5.07% 4.61%
====== ====== ======
Net yield on interest-earning
assets (3) 4.10% 4.79% 4.24%
====== ====== ======
Interest-earning assets to
interest-bearing
liabilities 94.81% 93.92% 91.91%
====== ====== ======
(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. Includes ($9,659), ($7,980),
and ($10,062) of amortized loan fees, premiums and discounts in
interest income for the years ended September 30, 1997, 1996 and 1995.
(2) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.
(3) Equals net interest income divided by the average balances of total
interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities information
is provided on changes attributable to changes in volume (change in volume
multiplied by old rate); changes in rate (change in rate multiplied by old
volume); and changes in rate and volume.
<PAGE>
<TABLE>
VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(In thousands)
Year Ended September 30, 1997 Year Ended September 30, 1996
Compared to Compared to
Year Ended September 30, 1996 Year Ended September 30, 1995
Increase (Decrease) Increase (Decrease)
Due to Change in (1) Due to Change in (1)
---------------------------------------------- -----------------------------------------------
Total Total
Volume Rate Change Volume Rate Change
--------------- -------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (2) $ 65,539 $ (22,544) $ 42,995 $ (2,823) $ 26,116 $ 23,293
Mortgage-backed securities 22,272 (1,018) 21,254 (8,989) (679) (9,668)
Federal funds sold and securities
purchased under agreements
to resell (3,166) 37 (3,129) 6,582 (143) 6,439
Trading securities 153 424 577 613 (33) 580
Investment securities 131 35 166 80 41 121
Other interest-earning assets 1,359 (253) 1,106 1,681 (250) 1,431
--------------- -------------- --------------- --------------- --------------- ---------------
Total interest income 86,288 (23,319) 62,969 (2,856) 25,052 22,196
--------------- -------------- --------------- --------------- --------------- ---------------
Interest expense:
Deposit accounts 9,233 (2,895) 6,338 2,697 5,573 8,270
Borrowings 48,142 (3,501) 44,641 (8,991) 443 (8,548)
--------------- -------------- --------------- --------------- --------------- ---------------
Total interest expense 57,375 (6,396) 50,979 (6,294) 6,016 (278)
--------------- -------------- --------------- --------------- --------------- ---------------
Increase in net interest income $ 28,913 $ (16,923) $ 11,990 $ 3,438 $ 19,036 $ 22,474
=============== ============== =============== =============== =============== ===============
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has been allocated in proportion to the absolute value
of the change due to volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
Interest income in fiscal 1997 increased $62.9 million from the level in fiscal
1996, primarily as a result of higher average balances of loans receivable and,
to a lesser extent, mortgage-backed securities. The effect on interest income of
higher average balances was offset in part by lower average yields earned by the
Bank on its loan portfolio.
The Bank's net yield on interest-earning assets decreased to 4.10% in fiscal
1997 from 4.80% in fiscal 1996. The decrease in the net yield primarily
reflected lower yields earned on certain of the Bank's interest-earning assets
resulting from a decline in market rates as well as lower introductory and
promotional rates on certain products which the Bank has offered to new and
existing customers in an effort to stimulate usage.
Interest income on loans, the largest category of interest-earning assets,
increased by $42.9 million (or 13.5%) from fiscal 1996 primarily because of
higher average balances, which were partially offset by lower average yields on
the loan portfolio.
Higher average balances on credit card loans, which increased $159.5 million
(15.8%). The increase was primarily responsible for a $3.4 million (or 2.2%)
increase in interest income from credit card loans. Higher average balances of
automobile loans, which increased $64.2 million (or 35.1%), resulted primarily
from the higher origination volume of such loans, and was largely responsible
for a $16.2 million (or 75.3%) increase in interest income on automobile loans.
Interest income on the Bank's single-family residential loans increased by $15.8
million (or 15.6%) primarily because of increased originations, which resulted
in an increase of $355.8 million (or 25.2%) in the average balances of such
loans. Average balances of home equity credit line loans increased by $60.0
million (or 74.8%) primarily because of the $119.2 million purchase of such
loans in December 1996. Interest income on home equity credit line loans
increased by $5.7 million (or 124.4%) in the current year.
The average yield on the loan portfolio in fiscal 1997 decreased by 73 basis
points (to 10.08% from 10.81%) from the average yield in fiscal 1996. The lower
net yield was primarily due to a 182 basis point decrease in the average net
yield on credit card loans from 15.50% to 13.68%, the effect of which partially
offset the positive effect that the higher average balances had on income. The
decline in the net yield was primarily a result of marketing strategies to
introduce lower introductory rates to new customers, as well as a new program
offering reduced interest rates to previously risk-repriced accounts in an
attempt to encourage payments from delinquent customers. Also contributing to
the decreased average yield on the loan portfolio was a decrease in the average
yield on single-family residential loans from 7.21% to 6.65%. An increase in the
average yield on automobile loans from 11.75% to 15.24%, primarily due to higher
yields earned on loans originated by one of the Bank's operating subsidiaries,
partially offset the negative effect of the lower average yields discussed
above.
Interest income on mortgage-backed securities increased $21.3 million (or 41.7%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in fiscal 1997 reflected the purchase of $649.7 million of
mortgage-backed securities near the end of fiscal year 1996 and the $1.1 billion
securitization of single-family residential loans in September 1997. The
positive effect of the higher average balances was partially offset by a
decrease in the average interest rates on these securities from 6.11% to 5.99%.
<PAGE>
Interest expense increased $51.0 million (or 27.0%) for fiscal 1997 primarily
because of an increase of $764.9 million (or 206.8%) in the average balances of
the Bank's borrowings. The increase in the average balances of borrowings
resulted in an increase of $44.6 million in interest expense for fiscal 1997 for
such liabilities. The increase in interest expense on borrowings is primarily
due to a $22.8 million, a $13.7 million and a $6.9 million increase in interest
expense on securities sold under repurchase agreements, Federal Home Loan Bank
advances and subordinated debentures, respectively, resulting primarily 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 6.25% from 7.10%), which reflected an
increase in lower-yielding FHLB advances and securities sold under repurchase
agreements.
An increase of $6.3 million in interest expense on deposits, the largest
category of interest-bearing liabilities, also contributed to the increased
interest expense. Interest expense on deposits increased primarily because of a
$160.2 million increase in the average balances.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$125.1 million in fiscal 1997 from $115.7 million in fiscal 1996. The $9.4
million increase over the prior year was primarily attributable to a $7.8
million increase in the provision for losses on credit card loans. See
"Financial Condition - Asset Quality - Allowances for Losses."
Other Income. The $68.5 million (or 19.9%) increase in other (non-interest)
income to $413.0 million in fiscal 1997 from $344.5 million in fiscal 1996 was
primarily attributable to increases in gain on sales of loans, credit card fees,
deposit servicing fees and a decrease in loss on real estate held for investment
or sale. In addition, the Bank recognized a net unrealized gain on the valuation
of interest-only strips during fiscal 1997 resulting from the implementation of
SFAS 125, as discussed below. The positive effect of these items on other income
was partially offset by a decrease in loan servicing fees. Management expects
that the relative impact of gains recognized under SFAS 125 on the Bank's
earnings will diminish as the gains associated with these and other transactions
are amortized.
Gain on sales of loans increased by $50.6 million (or 217.6%) primarily because
of additional gains recognized on the securitization and sales of automobile,
home equity credit line and home loan receivables during fiscal 1997. In
addition, in accordance with the adoption of SFAS 125, the Bank also recognized
gains on the securitization and sales of credit card loan receivables during the
current year. See Notes to the Consolidated Financial Statements.
Credit card fees, consisting of membership fees, late charges, over-the-limit
fees, interchange fees and cash advance charges, increased $26.6 million (or
86.5%) in fiscal 1997 from the level in fiscal 1996. The increase was primarily
attributable to the impact of changes in the fee structure for the Bank's credit
card programs which were implemented in fiscal 1996 and 1997.
The $12.0 million (or 40.1%) increase in deposit servicing fees resulted
primarily from the additional fees generated through the Bank's ATM network,
and, to a lesser extent, an increase in the number of deposit accounts
outstanding during fiscal 1997.
The $5.7 million (or 23.5%) decrease in loss on real estate held for investment
or sale was primarily attributable to a decrease of $6.7 million in the
provision for losses on such assets, which was partially offset by a decrease of
$1.1 million in the gain recorded on sales of the Bank's real estate held for
investment or sale.
<PAGE>
In accordance with SFAS 125, the Bank recognized a $7.0 million net unrealized
gain on the valuation of its interest-only strips. This gain represents the
September 30, 1997 market-value adjustment on the interest-only strips related
to the credit card securitized assets. See Notes to the Consolidated Financial
Statements.
The decrease of $36.3 million (or 13.8%) in loan servicing fees was primarily
due to a decrease of $49.0 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 fiscal 1997 resulted primarily from an increase in
charge-offs on securitized credit card loans which is consistent with
management's expectations and generally reflects the trends that are affecting
the credit card industry as a whole. See "Financial Condition - Asset Quality -
Allowance for Losses."
Operating Expenses. Operating expenses for fiscal 1997 increased $37.0 million
(9.7%) from the level in fiscal 1996. The main components of the higher
operating expenses were increases in salaries and employee benefits, marketing
and data processing. The $33.6 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card, consumer lending, branch and systems operations. The $20.8 million
increase in marketing expenses was primarily attributable to a $14.4 million
increase in marketing expenses associated with the credit card program as the
Bank continues to focus on increased originations of such loans, as well as a
$5.3 million increase in marketing expenses associated with the Bank's deposit
base. The $6.9 million increase in data processing expenses was principally
attributable to an increase in the number of credit card accounts outstanding
and the activity generated by such accounts during fiscal 1997. The $32.3
million decrease in deposit insurance premiums, which partially offset the
expense increases discussed above, was primarily because of the one-time SAIF
assessment recorded by the Bank in fiscal 1996. See "Business - Regulation
Deposit Insurance Premiums."
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
debt expense of $13.5 million and an operating loss of $24.2 million for fiscal
1996, compared to a loss before depreciation and amortization of debt expense of
$17.2 million and an operating loss of $27.3 million for fiscal 1995. Of the
$3.1 million positive variance in the operating loss, approximately $2.1 million
was due to improved results from operations in fiscal 1996, and $1.0 million
reflected the net change from fiscal 1995 results which included a $2.7 million
writedown of real estate to net realizable value and a $1.7 gain on sale of
property.
Income after direct operating expenses from hotel properties increased
$2,104,000 (13.1%) from such income in fiscal 1995. Room sales increased by
$948,000 (2.5%) as a result of higher room rates. Food, beverage, and
miscellaneous sales were down by a total of $807,000 and payroll expense was
lower by $1,547,000, largely due to the sale of the Norfolk hotel early in
October 1995. Other operating expenses reflected decreases of $416,000, also due
to the sale.
Income after direct operating expenses from commercial properties decreased
$1,064,000 (9.9%) in fiscal 1996. Gross income declined $1,222,000 (6.8%)
largely due to vacancies at 8201 Greensboro Drive. Partially offsetting this
reduction in income was a decline in operating expenses of $158,000 (2.2%). The
leasing percentage of 8201 Greensboro Drive at September 30, 1996, was 85%.
Other income, which includes interest income, income from other real estate
properties, and miscellaneous receipts increased $635,000 (14.5%), primarily due
to $695,000 received as refunds of transfer taxes paid in a preceding year.
Land parcels and other expense increased $289,000 (21.4%) in fiscal 1996 as a
result of higher real estate taxes.
Interest expense decreased $724,000 (1.8%) in fiscal 1996 as a result of lower
average borrowings, which were $395.6 million in fiscal 1996 as compared to the
prior year's average borrowings of $403.7 million. The average cost of
borrowings increased slightly to 10.31% in fiscal 1996 from 10.25% during the
prior year.
Amortization of debt expense increased $198,000 (41.6%) due to the expense of a
new $8.0 million line of credit which was obtained in fiscal 1996 and the first
full year of expense for the $15.0 million line of credit which had been
obtained during fiscal 1995.
Depreciation increased $306,000 (3.2%) in fiscal 1996 as a result of new tenant
improvements and property renovations in excess of the reduction in depreciation
caused by the sale of a hotel.
Advisory, management and leasing fees paid to related parties increased $47,000
(0.6%) in fiscal 1996. The monthly advisory fee in fiscal 1996 was $301,000 for
the period October 1995 through March 1996 and $306,000 for the period April
1996 through September 1996 as compared to $292,000 throughout fiscal 1995,
which represented an aggregate increase of $141,000 (4.0%). Management and
leasing fees were lower in the current year by $94,000 (2.4%) as a result of
lower gross income on which fees are based.
<PAGE>
General and administrative expense decreased $918,000 (39.6%) in fiscal 1996,
principally as a result of high legal costs incurred in fiscal 1995 in
litigation with a tenant.
The fiscal 1995 write-down of real estate to net realizable value reflected as
$1.2 million reduction in the carrying value of a hotel property and a $1.5
million write-off of restaurant assets. The Real Estate Trust sold the hotel
property on October 6, 1995. There were no comparable write-downs or write-offs
during fiscal 1996.
Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1996, the Real
Estate Trust recorded earnings of $3,374,000 from such investments compared to
earnings of $3,681,000 in the prior year.
The loss on sale of property of $68,000 in fiscal 1996 represented additional
costs incurred on the sale of a hotel in Norfolk, Virginia. The gain on sale of
property of $1,664,000 in fiscal 1995 represented the gain on the condemnation
of a portion of a land parcel an Atlanta, Georgia.
BANKING
Overview. The Bank recorded operating income of $46.1 million for the year ended
September 30, 1996 ("fiscal 1996"), compared to operating income of $55.7
million for the year ended September 30, 1995 ("fiscal 1995"). The decrease in
operating income for fiscal 1996 was primarily attributable to a $60.8 million
increase in the provision for loan losses and an $83.1 million increase in
non-interest expenses (which included the $26.5 million SAIF assessment
discussed previously - see "Business Regulation - Deposit Insurance Premiums"),
the effect of which was partially offset by a $111.5 million increase in
non-interest income and a $22.5 million increase in net interest income.
Net Interest Income. Net interest income, before the provision for loan losses,
increased $22.5 million (or 12.8%) in fiscal 1996. The Bank would have recorded
additional interest income of $9.1 million in fiscal 1996 if the Bank's
non-accrual assets and restructured loans had been current in accordance with
their original terms. Interest income of $1.3 million was actually recorded on
non-accrual assets and restructured loans during the fiscal year. 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."
Interest income in fiscal 1996 increased $22.2 million from the level in fiscal
1995, primarily as a result of higher average yields earned by the Bank on its
loan portfolio. Higher average balances of federal funds sold and securities
purchased under agreements to resell and other interest-earning assets also
contributed to the increase in interest income. The effect on interest income of
higher average yields on the loan portfolio and higher average balances was
offset in part by lower average balances of mortgage-backed securities and loans
receivable.
The Bank's net yield on interest-earning assets increased to 4.79% in fiscal
1996 from 4.24% in fiscal 1995. 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. The positive effect of the increase
on the Bank's net yield was offset in part by increased interest rates on the
Bank's interest-bearing liabilities.
<PAGE>
Interest income on loans, the largest category of interest-earning assets,
increased by $23.3 million (or 7.9%) from fiscal 1995 primarily because of
higher average yields on the loan portfolio, which were partially offset by
lower average balances. The average yield on the loan portfolio in fiscal 1996
increased by 89 basis points (to 10.81% from 9.92%) from the average yield in
fiscal 1995. The higher yields were primarily due to increases in the average
net yield on credit card loans from 13.94% to 15.50% and on automobile loans
from 8.84% to 11.75%. The increase in the net yield on credit card loans was
primarily a result of risk management strategies that have repriced upward the
yield on higher risk credit card accounts and the expiration of promotional
introductory rates. The increase was primarily responsible for a $17.0 million
(or 12.2%) increase in interest income from credit card loans. 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. Higher average
balances of consumer loans other than automobile loans, which increased $61.3
million (or 50.9%), also contributed to the increase in interest income on
loans. The increased average balances of other consumer loans resulted primarily
from the higher origination volume of home improvement and commercial loans
during fiscal 1996, and was largely responsible for an $11.2 million (or 102.5%)
increase in interest income on other consumer loans. The effect on interest
income of higher average net yields and higher average balances of certain
consumer loans was offset in part by an $84.3 million decrease in the average
balances of automobile loan receivables due to the securitization and sale of
$475.3 million of such receivables during fiscal 1996.
Interest income on mortgage-backed securities decreased $9.7 million (or 15.9%)
primarily because of lower average balances. The reduced mortgage-backed
securities balances in fiscal 1996 reflected the effects of scheduled principal
paydowns and unscheduled principal prepayments. The negative effect of the lower
average balances was compounded by a decrease in the average interest rates on
these securities from 6.18% to 6.11%.
Other interest income increased $7.9 million (or 82.2%) in fiscal 1996 primarily
as a result of higher average balances on federal funds sold and securities
purchased under agreements to resell which increased by $119.9 million (or
182.1%) and, to a lesser extent, higher average balances on other
interest-earning assets.
<PAGE>
Interest expense decreased $0.3 million in fiscal 1996 primarily because of a
decrease of $127.1 million (or 25.6%) in the average balances of the Bank's
borrowings, which resulted in an $8.5 million decrease in interest expense
during fiscal 1996 for such liabilities. The decrease in interest expense on
borrowings is primarily due to a $6.2 million, a $1.3 million and a $0.7 million
decrease in interest expense on securities sold under repurchase agreements,
bonds payable and FHLB advances, respectively, resulting from lower average
balances. The decrease in interest expense on securities sold under repurchase
agreements was primarily a result of a $101.9 million decrease in the average
balances of such liabilities as the Bank's deposit base has increased in recent
periods. The decrease in interest expense on bonds payable was due to the
assumption of bonds payable in April 1995 by the purchaser of two residential
apartment buildings that were securing the bonds. A $6.6 million decline in the
average balances of FHLB advances contributed to the $0.7 million decrease in
the interest expense on such liabilities. The positive effect of such lower
average balances was offset in part by an increase in the average borrowing rate
(to 7.10% from 7.01%).
The decrease in interest on borrowings was partially offset by an $8.3 million
increase in interest expense on deposits, the largest category of
interest-bearing liabilities. Interest expense on deposits increased primarily
as a result of an increase in average rates (to 4.02% from 3.88%), which
reflected a shift in the composition of the Bank's deposits to higher yielding
certificates of deposit and, to a lesser extent, an increase in average deposit
balances of $69.4 million.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$115.7 million in fiscal 1996 from $55.0 million in fiscal 1995. The $60.8
million increase over the prior year was primarily attributable to a $56.7
million increase in the provision for losses on credit card loans primarily
because of increased charge-offs of such loans, reflecting an industry-wide
decline in the performance of credit card loans. See "Financial Condition -
Asset Quality - Allowances for Losses."
Other Income. The increase in other (non-interest) income to $344.5 million in
fiscal 1996 from $232.6 million in fiscal 1995 was primarily attributable to
increases in loan servicing fees, credit card fees and gain on sales of loans.
The positive effect of these items on other income was partially offset by an
increase in loss on real estate held for investment or sale.
An increase of $49.0 million in excess spread income and $20.8 million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $79.8 million (or 43.3%) in loan
servicing fees. Such excess spread income and servicing fees have increased in
recent periods as a result of greater securitization activity by the Bank.
Credit card fees, consisting of membership fees, late charges, over-the-limit
fees, interchange fees and cash advance charges, increased $20.9 million (or
212.2%) in fiscal 1996 from the level in fiscal 1995. The increase was primarily
attributable to changes in the fee structure for the Bank's credit card programs
during fiscal 1996.
Gain on sales of loans increased by $10.4 million (or 80.4%) primarily because
of additional gains recognized on the securitization and sales of automobile,
home equity credit line and home loan receivables during fiscal 1996.
<PAGE>
The $19.2 million increase in loss on real estate held for investment or sale
was primarily attributable to a decrease of $4.5 million in the equity earnings
in partnership income and a decrease of $12.5 million in the gain recorded on
sales of the Bank's real estate held for investment or sale.
Operating Expenses. Operating expenses for fiscal 1996 increased $83.1 million
(27.9%) from the level in fiscal 1995. The primary reason for the increase was
the $26.5 million SAIF assessment included in deposit insurance premiums. Other
expense categories with increases include salaries and employee benefits, loan
and data processing. The $19.2 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card, consumer lending and branch operations. The $12.5 million increase in loan
expenses was primarily attributable to an increase in the amortization of
capitalized mortgage servicing rights, which resulted from acquisitions of
single-family residential mortgage servicing rights in recent periods, and a
$3.1 million valuation allowance against mortgage servicing rights. The $7.0
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 fiscal 1996.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Trust and its consolidated subsidiaries are
included in this report on the pages indicated and are incorporated herein by
reference:
(a) Report of Independent Public Accountants.
(b) Consolidated Balance Sheets - As of September 30,
1997 and 1996.
(c) Consolidated Statements of Operations - For the
years ended September 30, 1997, 1996 and 1995.
(d) Consolidated Statements of Shareholders' Deficit - For the
years ended September 30, 1997, 1996 and 1995.
(e) Consolidated Statements of Cash Flows - For the
years ended September 30, 1997, 1996 and 1995.
(f) Notes to Consolidated Financial Statements.
The selected quarterly financial data included in Note 33 of Notes to the
Consolidated Financial Statements referred to above are incorporated herein by
reference.
Summary financial information with respect to the Bank is also included in Part
I, Item 1.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust
We have audited the accompanying consolidated balance sheets of B.F. Saul Real
Estate Investment Trust (the "Trust") and subsidiaries as of September 30, 1997
and 1996, and the related consolidated statements of operations, shareholders'
deficit, and cash flows for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of B.F. Saul Real Estate
Investment Trust and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
December 9, 1997
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
September 30
------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 128,557 $ 121,417
Office and industrial 109,628 106,496
Other 4,265 4,715
-------------- --------------
242,450 232,628
Accumulated depreciation (85,915) (76,513)
-------------- --------------
156,535 156,115
Land parcels 42,160 41,580
Construction in progress 2,480 --
Cash and cash equivalents 18,248 15,516
Other assets 81,150 81,292
-------------- --------------
Total real estate assets 300,573 294,503
- -----------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks 238,169 213,394
Interest-bearing deposits 48,722 53,031
Federal funds sold and securities purchased under agreements to resell 365,000 --
Loans held for sale 102,749 76,064
Loans held for securitization and sale 220,000 450,000
Investment securities (market value $5,012 and $9,820, respectively) 4,998 9,818
Trading securities 7,899 --
Mortgage-backed securities (market value $1,984,667 and $1,307,838, respectively) 1,985,707 1,306,417
Loans receivable (net of allowance for losses of $105,679 and $95,523, respectively) 2,104,240 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 $140,936 and $126,710,
respectively) 94,290 123,489
Property and equipment, net 273,562 225,135
Goodwill and other intangible assets, net 8,846 2,399
Interest only strips, net 105,812 --
Excess-spread assets, net -- 42,602
Servicing assets, net 41,579 32,790
Other assets 422,670 353,028
-------------- --------------
Total banking assets 6,057,413 5,693,074
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,357,986 $ 5,987,577
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable $ 180,204 $ 173,345
Notes payable - secured 175,000 177,500
Notes payable - unsecured 46,633 42,367
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred shares of beneficial interest 36,231 31,563
Other liabilities and accrued expenses 39,959 40,434
-------------- --------------
Total real estate liabilities 590,910 578,092
- -----------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 4,893,756 4,164,037
Securities sold under repurchase agreements and other short-term borrowings 74,821 637,141
Notes payable 7,019 7,277
Federal Home Loan Bank advances 188,511 269,065
Custodial accounts 2,809 7,415
Amounts due to banks 44,835 44,423
Other liabilities and accrued expenses 120,416 99,086
Capital notes -- subordinated 250,000 160,000
-------------- --------------
Total banking liabilities 5,582,167 5,388,444
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 51,388 46,065
Minority interest -- other 218,306 74,307
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,442,771 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 (142,642) (156,084)
Net unrealized holding loss (396) (1,500)
-------------- --------------
(42,937) (57,483)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (84,785) (99,331)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,357,986 $ 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
===================================================================================================================================
For the Year Ended September 30
----------------------------------------------
(In thousands, except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 59,464 $ 54,245 $ 54,104
Office and industrial properties 21,097 17,590 18,812
Other 4,008 5,004 4,369
-------------- -------------- --------------
Total income 84,569 76,839 77,285
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
Hotels 38,523 36,075 38,038
Office and industrial properties 7,766 7,251 7,409
Land parcels and other 1,683 1,637 1,348
Interest expense 40,155 39,840 40,564
Amortization of debt expense 664 674 476
Depreciation 10,543 10,020 9,714
Advisory, management and leasing fees - related parties 7,995 7,423 7,376
General and administrative 1,272 1,401 2,319
Write-down of real estate to net realizable value -- -- 2,727
-------------- -------------- --------------
Total expenses 108,601 104,321 109,971
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities 4,150 3,374 3,681
Gain (loss) on sale of property 895 (68) 1,664
- -----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $ (18,987) $ (24,176) $ (27,341)
- -----------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans $ 360,842 $ 317,847 $ 294,554
Mortgage-backed securities 72,209 50,955 60,623
Trading securities 1,530 953 373
Investment securities 481 315 194
Other 15,418 17,441 9,571
-------------- -------------- --------------
Total interest income 450,480 387,511 365,315
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 168,907 162,569 154,299
Short-term borrowings 47,378 10,407 18,094
Long-term borrowings 23,530 15,860 16,721
-------------- -------------- --------------
Total interest expense 239,815 188,836 189,114
-------------- -------------- --------------
Net interest income 210,665 198,675 176,201
Provision for loan losses (125,115) (115,740) (54,979)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 85,550 82,935 121,222
- -----------------------------------------------------------------------------------------------------------------------------------
Other income
Loan servicing fees 227,817 264,139 184,275
Credit card fees 57,381 30,765 9,855
Deposit servicing fees 41,893 29,900 24,442
Gain (loss) on sales of trading securities, net 1,203 1,158 (600)
Loss on real estate held for investment or sale, net (18,688) (24,413) (5,549)
Gain on sales of loans, net 73,822 23,242 12,882
Net unrealized gain on valuation of interest-only strips 6,976 -- --
Other 22,573 19,713 7,320
-------------- -------------- --------------
Total other income 412,977 344,504 232,625
- -----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
For the Year Ended September 30
----------------------------------------------
(In thousands, except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 160,949 $ 127,370 $ 108,218
Loan 29,943 28,284 15,745
Property and equipment 24,626 20,930 16,512
Marketing 74,504 53,705 46,117
Data processing 48,138 41,270 34,310
Depreciation and amortization 28,479 24,410 21,461
Deposit insurance premiums 5,033 37,362 10,749
Amortization of goodwill and other intangible assets 2,615 1,775 2,411
Other 44,059 46,222 42,641
-------------- -------------- --------------
Total operating expenses 418,346 381,328 298,164
- -----------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME $ 80,181 $ 46,111 $ 55,683
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Operating income $ 61,194 $ 21,935 $ 28,342
Income tax provision 12,810 8,301 2,021
-------------- -------------- --------------
Income before minority interest 48,384 13,634 26,321
Minority interest held by affiliates (6,848) (3,962) (5,721)
Minority interest -- other (22,676) (9,750) (9,750)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME (LOSS) $ 18,860 $ (78) $ 10,850
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 13,442 $ (5,498) $ 5,430
NET INCOME (LOSS) PER COMMON SHARE
Income before minority interest $ 8.90 $ 1.70 $ 4.33
Minority interest held by affiliates (1.42) (0.82) (1.19)
Minority interest -- other (4.70) (2.02) (2.02)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 2.78 $ (1.14) $ 1.12
- -----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Deficit
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
For the Year Ended September 30
----------------------------------------------
(Dollars in thousands, except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of year (516,000 shares) $ 516 $ 516 $ 516
-------------- -------------- --------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of year (6,641,598 shares) 6,642 6,642 6,642
-------------- -------------- --------------
PAID-IN SURPLUS
Beginning and end of year 92,943 92,943 92,943
-------------- -------------- --------------
DEFICIT
Beginning of year (156,084) (123,943) (134,793)
Net income (loss) 18,860 (78) 10,850
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions ($0.97 per share in 1996) -- (500) --
Distributions payable ($10.50 and $61.17 per share in 1997 and 1996,
respectively) (5,418) (31,563) --
-------------- -------------- --------------
End of year (142,642) (156,084) (123,943)
-------------- -------------- --------------
Net unrealized holding losses (396) (1,500) (2,490)
-------------- -------------- --------------
TREASURY SHARES
Beginning and end of year (1,814,688 shares) (41,848) (41,848) (41,848)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT $ (84,785) $ (99,331) $ (68,180)
- -----------------------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================================
For the Year Ended September 30
----------------------------------------------
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (8,531) $ (15,924) $ (12,032)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 10,543 10,020 9,714
(Gain) loss on sale of property (895) 68 (1,654)
Write-down of real estate to net realizable value -- -- 2,727
(Increase) decrease in accounts receivable and accrued income 17 (4,869) (224)
(Increase) decrease in deferred tax asset (3,252) 1,881 10,836
Increase in accounts payable and accrued expenses 1,058 430 317
(Increase) decrease in tax sharing receivable 2,492 14,533 (5,685)
Amortization of debt expense 664 674 476
Equity in earnings of unconsolidated entities (4,150) (3,374) (3,681)
Other 8,965 5,593 3,530
-------------- -------------- --------------
6,911 9,032 4,324
-------------- -------------- --------------
Banking
Net income 27,391 15,846 28,603
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 7,130 (163) (435)
Depreciation and amortization 28,708 24,635 21,690
Amortization of goodwill and other intangible assets 2,633 1,795 2,436
Provision for loan losses 125,115 115,740 54,979
Capitalized interest on real estate held for investment or sale (2,212) (3,462) (4,512)
Purchases of trading securities (7,899) -- --
Proceeds from sales of trading securities 430,938 363,364 239,147
Net fundings of loans held for sale (697,593) (690,589) (390,634)
Proceeds from sales of loans held for sale and/or securitization 2,599,860 1,984,484 2,188,531
Proceeds from sales of spread accounts 144,200 42,140 59,200
Earnings on real estate (1,156) (2,278) (18,882)
Provision for losses on real estate held for investment or sale 19,623 26,341 26,321
(Gain) loss on sales of trading securities, net (1,203) (1,158) 600
Gain on sales of loans, net (73,822) (23,242) (12,882)
Unrealized gain on valuation of interest-only strips (6,976) -- --
Increase in interest-only strips (105,812) -- --
(Increase) decrease in excess spread assets 42,602 (16,962) (442)
Increase in servicing assets (8,806) (4,238) (13,294)
Increase in other assets (207,883) (103,211) (145,918)
Increase in other liabilities and accrued expenses 21,741 23,724 34,903
Increase (decrease) in tax sharing payable (2,492) (14,533) 5,685
Minority interest held by affiliates 6,848 3,962 --
Minority interest - other 9,750 9,750 9,750
Other 8,006 (12,440) 3,176
-------------- -------------- --------------
2,358,691 1,739,505 2,088,022
-------------- -------------- --------------
Net cash provided by operating activities 2,365,602 1,748,537 2,092,346
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (10,120) (7,408) (6,270)
Property acquisitions (4,709) -- (10,193)
Property sales 1,399 1,812 --
Equity investment in unconsolidated entities 1,723 639 (733)
Other 43 50 53
-------------- -------------- --------------
(11,664) (4,907) (17,143)
-------------- -------------- --------------
Banking
Net proceeds from maturities of investment securities 5,000 4,410 100
Net proceeds from redemption of Federal Home Loan Bank stock 9,482 -- --
Net proceeds from sales of real estate 23,624 58,874 133,300
Net fundings of loans receivable (1,898,904) (1,702,926) (2,295,069)
Principal collected on mortgage-backed securities 771,095 221,698 183,166
Purchases of Federal Home Loan Bank stock (10,712) -- --
Purchases of investment securities -- (9,725) --
Purchases of mortgage-backed securities (311,554) (649,688) (107,127)
Purchases of loans receivable (754,515) (391,878) (88,518)
Purchases of property and equipment (77,859) (69,749) (55,924)
Acquisition of other intangible assets (9,063) -- --
Disbursements for real estate held for investment or sale (14,199) (14,447) (32,834)
Other 1,036 (5,950) 1,103
-------------- -------------- --------------
(2,266,569) (2,559,381) (2,261,803)
-------------- -------------- --------------
Net cash used in investing activities (2,278,233) (2,564,288) (2,278,946)
- -----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
For the Year Ended September 30
----------------------------------------------
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 27,072 $ -- $ 11,400
Principal curtailments and repayments of mortgages (19,977) (8,573) (12,424)
Proceeds from secured note financing -- 2,500 500
Repayments of secured notes (2,500) (500) --
Proceeds from sales of unsecured notes 5,822 3,708 4,428
Repayments of unsecured notes (1,556) (2,398) (3,659)
Costs of obtaining financings (626) (201) (516)
Dividends paid - preferred shares of beneficial interest (750) (500) --
-------------- -------------- --------------
7,485 (5,964) (271)
-------------- -------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 18,915,801 15,312,125 14,086,575
Customer withdrawals of deposits and payments for maturing certificates of deposit (18,186,082) (15,307,340) (13,936,084)
Net increase (decrease) in securities sold under repurchase agreements (574,217) 574,400 777
Advances from the Federal Home Loan Bank 877,483 429,459 992,073
Repayments of advances from the Federal Home Loan Bank (958,037) (315,446) (937,021)
Proceeds from other borrowings 6,271,193 2,469,675 793,261
Repayments of other borrowings (6,259,554) (2,417,606) (816,755)
Cash dividends paid on preferred stock (9,750) (9,750) (9,750)
Cash dividends paid on common stock (9,000) (8,500) --
Repayment of capital notes - subordinated (10,000) -- --
Net proceeds received from capital notes - subordinated 96,112 -- --
Net proceeds from issuance of preferred stock 144,000 -- --
Other (4,605) 2 (12,110)
-------------- -------------- --------------
293,344 727,019 160,966
-------------- -------------- --------------
Net cash provided by financing activities 300,829 721,055 160,695
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 388,198 (94,696) (25,905)
Cash and cash equivalents at beginning of period 281,941 376,637 402,542
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 670,139 $ 281,941 $ 376,637
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest (net of amount capitalized) $ 267,758 $ 237,568 $ 217,186
Income taxes paid (refunded) (2,552) 4,356 (1,327)
Shares of Saul Centers, Inc. common stock 6,111 4,864 7,757
Cash received during the year from:
Dividends on shares of Saul Centers, Inc. common stock 2,539 1,952 1,380
Distributions from Saul Holdings Limited Partnership 5,453 5,453 5,453
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 4,195 3,725 3,588
Loans held for sale exchanged for trading securities 430,786 363,257 133,014
Mortgage-backed securities available-for-sale transferred to mortgage-backed
securities held-to-maturity -- -- 942,085
Investment securities available-for-sale transferred to investment securities
held-to-maturity -- -- 4,354
Real estate held for investment transferred to real estate held for sale -- -- 9,273
Loans receivable transferred to loans held for sale and/or securitization 2,026,478 1,594,262 2,387,690
Loans made in connection with the sale of real estate 7,769 46,537 10,826
Loans receivable transferred to real estate acquired in settlement of loans 4,706 5,972 9,822
Loans receivable exchanged for mortgage-backed securities held-to-maturity 1,136,180 -- 23,155
Loans held for sale and/or securitization transferred to loans receivable -- -- 50,000
Loans held for sale transferred to loans receivable -- 3,146 --
- -----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
B.F. Saul Real Estate Investment Trust and its wholly owned subsidiaries
(collectively, the "Real Estate Trust") operate as a Maryland real estate
investment trust. The principal business activity of the Real Estate Trust is
the ownership and development of income-producing properties. The properties
owned by the Real Estate Trust are located predominantly in the Mid-Atlantic and
Southeastern regions of the United States and consist principally of hotels,
office projects, and various undeveloped land parcels.
B.F. Saul Real Estate Investment Trust also owns 80% of the outstanding common
stock of Chevy Chase Bank, F.S.B. and its subsidiaries (collectively the "Bank"
or the "Corporations"), whose assets accounted for approximately 95% of the
consolidated assets of the B.F. Saul Real Estate Investment Trust and its
consolidated subsidiaries (the "Trust") at September 30, 1997. The Bank is a
federally chartered and federally insured stock savings bank. The B. F. Saul
Real Estate Investment Trust is a thrift holding company by virtue of its
ownership of a majority interest in the Bank and is subject to regulation by the
Office of Thrift Supervision ("OTS"). The accounting and reporting practices of
the Trust conform to generally accepted accounting principles and, as
appropriate, predominant practices within the real estate and banking
industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Real Estate
Trust and its subsidiaries. Accordingly, the accompanying financial statements
reflect the assets, liabilities, operating results, and cash flows for two
business segments: Real Estate and Banking. Entities in which the Trust holds a
non-controlling interest (generally 50% or less) are accounted for on the equity
method. See Note 2.
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the balance sheet and revenues and expenses for
the reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, the Trust recognizes an impairment loss.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that the Trust expects to hold and use is based on the fair value of
the asset. Long-lived assets and certain identifiable intangibles to be disposed
of are generally reported at the lower of carrying amount or fair value less the
cost to sell.
<PAGE>
INCOME TAXES
The Trust files a consolidated federal income tax return which includes
operations of all 80% or more owned subsidiaries. It voluntarily terminated its
qualification as a real estate investment trust under the Internal Revenue Code
during fiscal 1978.
The Trust uses an asset and liability approach in accounting for income taxes.
Deferred income taxes are recorded using currently enacted tax laws and rates.
To the extent that realization of deferred tax assets is more likely than not,
such assets are recognized.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is determined by dividing net income (loss),
after deducting preferred share dividend requirements, by the weighted average
number of common shares outstanding during the year. For fiscal years 1997, 1996
and 1995, the weighted average number of shares used in the calculation was
4,826,910.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 1996 and 1995 to conform with the
presentation used for the year ended September 30, 1997.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129")
establishes standards for disclosing information about an entity's capital
structure. SFAS 129 supersedes capital structure disclosure requirements found
in previous accounting pronouncements and consolidates them into one statement
for ease of retrieval and greater visibility for non-public entities. SFAS 129
is effective for financial statements for periods ending after December 15,
1997. Because SFAS 129 addresses only disclosure related issues, its adoption
will not have an impact on the Trust's financial condition or its results of
operations.
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued in June
1997 and establishes accounting standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 also requires an enterprise to classify
items of other comprehensive income by their nature in a financial statement and
to display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 will not have an
impact on the Trust's financial condition or its results of operations.
<PAGE>
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), was also issued in June 1997. SFAS 131 establishes
accounting standards for the way business enterprises report information about
operating segments in annual and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
that a business enterprise report financial and descriptive information,
including profit or loss, certain specific revenue and expense items, and
segment assets, about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997. Because
SFAS 131 addresses only disclosure related issues, its adoption will not have an
impact on the Trust's financial condition or its results of operations.
<PAGE>
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - REAL ESTATE TRUST
CASH EQUIVALENTS
The Real Estate Trust considers all highly liquid, temporary investments with an
original maturity of three months or less to be cash equivalents.
PROPERTIES
Income-producing properties are stated at the lower of depreciated cost (except
those which were acquired through foreclosure or equivalent proceedings, the
carrying amounts of which are based on the lower of cost or fair value at the
time of acquisition) or net realizable value.
Interest, real estate taxes and other carrying costs are capitalized on projects
under construction. Once construction is completed and the assets are placed in
service, rental income, direct operating expenses, and depreciation associated
with such properties are included in current operations. The Real Estate Trust
considers a project to be substantially complete and held available for
occupancy upon completion of tenant improvements, but no later than one year
from the cessation of major construction activity. Substantially completed
portions of a project are accounted for as separate projects. Expenditures for
repairs and maintenance are charged to operations as incurred.
Depreciation is calculated using the straight-line method and estimated useful
lives of 31.5 to 47 years for buildings and up to 20 years for certain other
improvements. Tenant improvements are amortized over the lives of the related
leases using the straight-line method.
INCOME RECOGNITION
The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. The Real Estate Trust derives rental income under
noncancelable long-term leases from tenants at its commercial properties.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term maturity
of these instruments.
Liabilities
The carrying amount of mortgage notes payable and notes payable - secured
approximates their fair value since most of the debt has been financed in recent
periods at prevailing market interest rates. The fair value of Notes payable -
unsecured is based on the rates currently offered by the Real Estate Trust for
similar notes. At September 30, 1997 and 1996 the fair value of Notes payable -
unsecured was $47.9 and $43.8 million, respectively.
<PAGE>
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK
The Bank is a federally chartered and federally insured stock savings bank and,
as such, is subject to comprehensive regulation, examination and supervision by
the Office of Thrift Supervision ("OTS") and by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is principally engaged in the business of
attracting deposits from the public and using such deposits, together with
borrowings and other funds, to make loans secured by real estate, primarily
residential mortgage loans, and various types of consumer loans, primarily
credit card and automobile loans. The Bank's principal deposit market is the
Washington, D.C. metropolitan area.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, interest - bearing deposits, federal funds sold and securities
purchased under agreements to resell.
Regulation D of the Federal Reserve Act requires the Bank to maintain reserves
in the form of cash and deposits at the Federal Reserve Bank. The total average
reserve balances maintained by the Bank, which consisted primarily of cash, were
$114.6, $105.2, and $87.8 million during the years ended September 30, 1997,
1996, and 1995, respectively.
LOANS HELD FOR SALE
The Bank engages in mortgage banking activities. At September 30, 1997 and 1996,
loans held for sale are composed of single-family residential loans originated
or purchased for sale in the secondary market and are carried at aggregate cost
which is lower than aggregate market value. Single-family residential loans held
for sale will either be sold or will be exchanged for mortgage-backed securities
and then sold. Gains and losses on sales of whole loans held for sale are
determined using the specific identification method. See "Trading Securities."
LOANS HELD FOR SECURITIZATION AND SALE
The Bank periodically securitizes and sells certain pools of loan receivables in
the public and private markets. These securitizations are recorded as sales.
Gains on the sale of loans are limited to amounts related to loans existing at
the date of sale and do not include amounts related to loans expected to be sold
during any future reinvestment period.
Loans held for securitization and sale are the lesser of loans eligible for
securitization or loans that management contemplates to securitize within six
months. Such loans held for securitization and sale are reported at the lower of
aggregate cost or aggregate market value for each asset type.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. Prior to fiscal 1995, the Bank classified all of its
investment and mortgage-backed securities as available-for-sale.
<PAGE>
During fiscal 1995, the Bank transferred all of its investment securities and
mortgage-backed securities previously classified as available-for-sale to
held-to-maturity. These securities were transferred at their fair value. Net
unrealized holding losses, net of the related income tax effect, amounting to
$3.5 million as of the date of the transfer, and $493,000 as of September 30,
1997, continue to be reported as a separate component of stockholders' equity
and are being amortized to income over the remaining lives of the securities
using the level-yield method. All investment securities and mortgage-backed
securities are classified as held-to-maturity at September 30, 1997 and 1996.
Premiums and discounts on investment securities and mortgage-backed securities
are amortized or accreted using the level-yield method. Realized gains and
losses are determined using the specific identification method.
TRADING SECURITIES
As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $430.9,
$363.4 and $239.1 million during the years ended September 30, 1997, 1996 and
1995, respectively. The Bank realized net gains of $1.2 and $1.2 million on the
sales of trading securities for the years ended September 30, 1997 and 1996,
respectively. The Bank realized net losses of $600,000 on the sales of trading
securities for the year ended September 30, 1995. Gains and losses on sales of
trading securities are determined using the specific identification method.
There were no mortgage securities classified as trading securities at September
30, 1997 and 1996.
At September 30, 1997, the Bank held one automobile loan-backed security in the
amount of $7.9 million, which was classified as trading. Such security was
established in conjunction with an automobile loan securitization transaction
and represents a separate class of certificates, all of which was retained by
the Bank. See Note 14.
LOAN ORIGINATION AND COMMITMENT FEES
Nonrefundable loan fees, such as origination and commitment fees, and
incremental loan origination costs relating to loans originated or purchased are
deferred. Net deferred fees (costs) related to loans held for investment are
amortized over the life of the loan using the level-yield or straight-line
method. Net fees (costs) related to loans held for sale are deferred until such
time as the loan is sold, at which time the net deferred fees (costs) become a
component of the gain or loss on sale.
CREDIT CARD FEES AND COSTS
Credit card membership fees are deferred and recognized as income on a
straight-line basis over the period the fee entitles the cardholder to use the
card, which is one year. Credit card origination costs are deferred and
recognized as a reduction of income on a straight-line basis over the privilege
period which is generally one year.
<PAGE>
IMPAIRED LOANS
A loan is considered impaired when, based on all current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the agreement, including all scheduled principal and
interest payments. Such impaired loans are measured based on the present value
of expected future cash flows, discounted at the loan's effective interest rate
or, as a practical expedient, impairment may be measured based on the loan's
observable market price, or, if the loan is collateral-dependent, the fair value
of the collateral. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance. Loans for which foreclosure is probable continue to be accounted for
as loans. Certain credit card loans for which customers have agreed to modified
payment terms are also classified as impaired loans.
Each impaired real estate loan is evaluated individually to determine the income
recognition policy. Generally, payments received are applied in accordance with
the contractual terms of the note or as a reduction of principal. Interest
income on impaired credit card loans is recognized using the current interest
rate of the loan and the accrual method. Interest income continues to accrue on
delinquent credit card loans until such loan is either paid or charged off.
At September 30, 1997 and 1996, the Bank had two impaired real estate loans with
aggregate book values of $1.0 and $1.3 million, respectively, before the related
allowance for losses of $545,000 and $364,000, respectively. At September 30,
1997, the Bank had impaired credit card loans with a carrying value of $116.9
million, before the related allowance for losses of $18.9 million. At September
30, 1996, the Bank had impaired credit card loans with a carrying value of $55.9
million, before the related allowance for losses of $4.0 million. The average
recorded investment in impaired credit card and real estate loans for the years
ended September 30, 1997, 1996 and 1995 was $99.0, $49.8, and $33.5 million,
respectively. The Bank recognized interest income of $13.1, $7.3, and $5.3
million on its impaired loans for the years ended September 30, 1997, 1996 and
1995, respectively.
TROUBLED DEBT RESTRUCTURINGS
At September 30, 1997 and 1996, the Bank had $11.9 and $13.6 million,
respectively, of loans accounted for as troubled debt restructurings, all of
which were performing loans. At September 30, 1997, the Bank had commitments to
lend $85,000 of additional funds on loans which have been restructured.
ALLOWANCES FOR LOSSES
Management reviews the loan, real estate held for investment and real estate
held for sale portfolios to establish allowances for estimated losses. The
allowances for losses are reviewed periodically, and allowances are provided
after consideration of the borrower's financial condition and/or the estimated
value of collateral or real estate, including estimated selling and holding
costs. Allowances are also provided by management after considering such factors
as the economy in lending areas, delinquency statistics, past loss experience
and estimated future losses.
The allowances for losses are based on estimates, and ultimate losses may vary
from current estimates. As adjustments to the allowances become necessary,
provisions for losses are reported in operations in the periods they are
determined to be necessary.
<PAGE>
ACCRUED INTEREST RECEIVABLE ON LOANS
Loans, other than credit card loans, are reviewed on a monthly basis and are
placed on non-accrual status when, in the opinion of management, the full
collection of principal or interest has become unlikely. Uncollectible accrued
interest receivable on non-accrual loans is charged against current period
interest income.
Effective June 30, 1997, the Bank conformed its reporting practices for credit
card loans to that of most credit card issuers and has excluded credit card
loans from non-performing assets. Credit card loans are not placed on
non-accrual status, but continue to accrue interest until the loan is either
paid or charged-off.
REAL ESTATE HELD FOR INVESTMENT OR SALE
Real Estate Held for Investment
At September 30, 1997 and 1996, real estate held for investment consists of
developed land owned by one the Bank's subsidiaries. Real estate held for
investment is carried at the lower of aggregate cost or net realizable value.
See Note 12.
Real Estate Held for Sale
Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value. Costs relating
to the development and improvement of property, including interest, are
capitalized, whereas costs relating to the holding of property are expensed.
Capitalized interest amounted to $2.2, $3.5 and $4.5 million for the years ended
September 30, 1997, 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method which allocates the cost of the applicable assets over their estimated
useful lives. Major improvements and alterations to office premises and
leaseholds are capitalized. Leasehold improvements are amortized over the
shorter of the terms of the respective leases (including renewal options that
are expected to be exercised) or 20 years. Maintenance and repairs are charged
to operating expenses as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is stated net of accumulated amortization and is being amortized using
the straight-line method generally over a period of 15 years. At September 30,
1997 and 1996, goodwill totaled $1.1 and $2.4 million, respectively. During
fiscal 1997, the Bank purchased approximately $138.0 million of home equity
loans. The amount of the premium attributable to the value of the home equity
relationships has been included in goodwill and other intangible assets in the
Consolidated Balance Sheets. This premium is being amortized over the estimated
lives of the underlying loans. Other intangible assets totaled $7.7 million at
September 30, 1997. Accumulated amortization of goodwill and other intangible
assets was $37.8 and $35.1 million at September 30, 1997 and 1996, respectively.
<PAGE>
SERVICING ASSETS
Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," (described below under
the caption "Adoption of Recently Issued Accounting Standards") which
supersedes, but generally retains, the requirements of SFAS No. 122, "Accounting
for Mortgage Servicing Rights" ("SFAS 122"). Both statements require that
entities that acquire servicing assets through either purchase or origination of
loans and sell or securitize those loans with servicing assets retained must
allocate the total cost of the loans to the servicing assets and the loans
(without the servicing assets) based on their relative fair values.
Servicing assets, which are stated net of accumulated amortization, are
amortized in proportion to the remaining net servicing revenues estimated to be
generated by the underlying loans. Amortization of these assets amounted to
$9.0, $7.8 and $2.2 million for the years ended September 30, 1997, 1996 and
1995, respectively. Accumulated amortization was $56.7 and $47.7 million at
September 30, 1997 and 1996, respectively. During fiscal 1997, 1996 and 1995,
the Bank recorded $15.8, $16.1 and $16.3 million respectively, of servicing
assets related to the sale and/or securitization of loans.
The Bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the Bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets at
September 30, 1997 was $46.0 million.
Activity in the valuation allowance for servicing assets is summarized as
follows. No valuation allowances were recorded during fiscal 1995.
Year Ended
September 30,
-----------------------------------
(In thousands) 1997 1996
- -------------------------------- --------------- ---------------
Balance at beginning of year $ 3,142 $ -
Additions charged / (reductions)
credited to loan expenses (2,013) 3,142
--------------- ---------------
Balance at end of year $ 1,129 $ 3,142
=============== ===============
During fiscal 1996, the Bank sold $947,000 of rights to service mortgage loans
with principal balances of $59.7 million, which were originated by the Bank in
connection with its mortgage banking activities. In fiscal 1995, the Bank sold
the rights to service mortgage loans with principal balances of $148.1 million,
which were originated by the Bank in connection with its mortgage banking
activities, and recognized a gain of $1.4 million. There were no sales of rights
to service mortgage loans during fiscal 1997.
<PAGE>
INTEREST-ONLY STRIPS
Upon the Bank's adoption of SFAS 125, effective January 1, 1997, previously
recognized excess spread assets were reclassified as interest-only strips.
Interest-only strips represent rights to certain future net cash flows from
securitized assets that are available after all expenses of the transaction have
been paid ("residual cash flow"). Interest-only strips are amortized using the
effective yield method over the estimated lives of the underlying loans.
Amortization of these assets amounted to $26.1 million for the nine months ended
September 30, 1997. Accumulated amortization was $129.2 million at September 30,
1997. Interest-only strips capitalized in the nine months ended September 30,
1997 of $80.1 million were related to the securitization and sale of credit
card, home equity, automobile and home loan receivables. See Note 14.
Prior to January 1, 1997, when loans (other than credit card) were sold with the
residual cash flow retained by the Bank, the net present value of such residual
cash flow was recorded as an adjustment to the sales price of the loans. See
"Accounting Standards Issued but not yet Adopted." Estimated future losses were
deducted in the computation of such residual cash flows. The resulting excess
spread assets were amortized using the level-yield ("interest") method over the
estimated lives of the underlying loans. Amortization of these assets amounted
to $4.9, $17.8 and $14.5 million for the three months ended December 31, 1996
and for the years ended September 30, 1996 and 1995, respectively. Accumulated
amortization was $103.2 and $98.3 million at December 31, 1996 and September 30,
1996, respectively. Excess spread assets capitalized in the three months ended
December 31, 1996 and in fiscal 1996 and 1995 of $14.0, $34.7 and $15.0 million,
respectively, were the result of the residual cash flow retained upon the
securitization and sale of home equity credit line, automobile and home loan
receivables.
SFAS 125 requires a periodic assessment of the carrying value of interest-only
strips. Because these assets can be contractually prepaid or otherwise settled
such that the Bank would not recover substantially all of its recorded
investment, the assets are being measured like available-for-sale securities or
trading securities, under SFAS No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." At September 30, 1997, the Bank
accounted for its interest-only strips as trading securities, and accordingly
carries them at fair value.
The Bank estimates the fair value of the interest-only strips on a discounted
cashflow basis using appropriate discount rates. Adjustments to the fair market
value are recognized as unrealized gains or losses. Unrealized gains in the
aggregate amount of $7.0 million, are included in the Consolidated Statements of
Operations and represent the September 30, 1997 adjustment on the interest-only
strips related to the credit card securitized assets.
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank uses various strategies to minimize interest-rate risk, including
interest-rate cap agreements and forward sale or purchase commitments. Premiums
paid for interest-rate cap agreements are included in other assets in the
Consolidated Balance Sheets and are amortized to expense over the terms of the
interest-rate caps on a straight-line basis. Funds payable to the Bank are
recognized as income in the month such funds are earned. At September 30, 1997
and 1996, unamortized premiums amounted to $3.1 and $6.2 million, respectively.
Gains and losses on forward sale or purchase commitments are deferred and
recorded as a component of the gain on sales of loans at the time the forward
sale or purchase commitment matures. See Note 26. The Bank does not hold any
derivative financial instruments for trading purposes.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1997, the Bank adopted 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. Under SFAS 125, a transfer of financial assets in
which the transferor surrenders control over those assets is accounted for as a
sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. SFAS 125 requires that liabilities
and derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value, if practicable. It also
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their relative fair
values at the date of the transfer. As a result of the adoption of SFAS 125, the
Bank recognized gains of $33.1 million during fiscal 1997 (of which a portion
represents the unrealized gains recognized), upon the securitization and sale of
credit card receivables based upon the estimated fair value of the expected cash
flows to be generated by the underlying receivables.
Under SFAS 125, the Bank records a gain on the securitization and sale of credit
card receivables based on the estimated fair value of assets obtained and
liabilities incurred in the sale. The gain recognized at the time of the sale
principally represents the estimated fair value of the interest-only strip
retained reduced by the estimated fair value of future losses. During the
revolving period of each transaction, gains are recorded on the sale of new
receivables to the trusts to replenish the investors' interest in trust
receivables. See Note 14.
Prior to January 1, 1997, no gain or loss was recorded on the securitization and
sale of credit card receivables; rather, loan servicing fees were recognized
over the life of the transaction when earned.
SFAS 125 amends and extends to all servicing assets and liabilities the
accounting standards for mortgage servicing rights now in SFAS 65, and
supersedes, but generally retains, the requirements of SFAS 122. 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>
1. LIQUIDITY AND CAPITAL RESOURCES - REAL ESTATE TRUST
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. As described below, this condition persisted
in 1997 and is expected to continue for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding Unsecured Notes sold to the public, the payment of interest on the
Senior Secured Notes (as defined below), and the payment of capital improvement
costs. In the past, the Real Estate Trust funded such shortfalls through a
combination of external funding sources, primarily new financings (including the
sale of Unsecured Notes), refinancings of maturing mortgage debt, asset sales
and tax sharing and dividend payments from the Bank.
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 1998 and subsequent years, will depend in significant
part on its receipts of tax sharing payments and dividends from the Bank. The
availability and amount of dividends and tax sharing payments 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 Trust for federal
income tax purposes.
The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods, as well as the Bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the Bank. During fiscal 1997, the Bank made tax
sharing payments totalling $9.8 million and dividend payments totalling $7.2
million to the Real Estate Trust. During fiscal 1996 and fiscal 1995, the Bank
made tax sharing payments of $25.0 and $20.5 million, respectively, to the Real
Estate Trust. During fiscal 1996, the Bank made dividend payments of $6.8
million to the Real Estate Trust. No dividends were paid in fiscal 1995.
In recent years, the operations of the Trust have generated net operating losses
while the Bank has reported net income. It is anticipated that the Trust's
consolidation of the Bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the Bank would otherwise owe. If in any future year, the
Bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the Bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated federal income
tax returns or (ii) the amount of tax refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.
The Real Estate Trust is currently selling Unsecured Notes, with maturities
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, it will finance such
repayments from other sources of funds.
<PAGE>
In fiscal 1994, the Real Estate 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"). See Note 4. The Indenture pursuant to which the Senior
Secured Notes were issued contains convenants 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 September 30, 1997, the Trust purchased either in the open market or
through dividend reinvestment 1,810,104 shares of common stock of Saul Centers,
Inc. (representing 14.7% of such company's outstanding common stock). Most of
these shares have been deposited with the Trustee for the Senior Secured Notes
to satisfy in part the collateral requirements for those securities, thereby
permitting release to the Trust of a portion of the cash on deposit with the
Trustee.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility is for a two-year
period and may be extended for additional one-year terms. Interest is computed
by reference to a floating rate index. At September 30, 1997, the Trust had
pledged as collateral for this credit line approximately 30.5% of its investment
in Saul Holdings. At that date there were no borrowings under the facility and
based on the collateral pledged, unrestricted availability was $10.0 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility is for a one-year
term, after which any outstanding loan amount amortizes over a two-year period.
Interest is computed by reference to a floating rate index. During fiscal 1997,
the line of credit was increased to $10.0 million. At September 30, 1997, the
Trust had pledged as collateral for this credit line approximately 14.5% of its
investment in Saul Holdings. At that date there were no borrowings under the
facility and based on the collateral pledged, unrestricted availability was $4.8
million.
During fiscal 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.
As the owner, directly and through a wholly owned subsidiary, of a 21.5% limited
partnership interest in Saul Holdings Limited Partnership, the Real Estate Trust
shares in cash distributions from operations and from capital transactions
involving the sale of properties. See Note 2. The partnership agreement provides
for quarterly cash distributions to the partners out of net cash flow. During
each of the fiscal years 1995 - 1997, the Real Estate Trust received
distributions in the amount of $5.5 million from Saul Holdings Limited
Partnership.
During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3.2 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland. The project is 50% pre-leased. Construction is expected
to be completed by December 1997 and leasing by mid-year 1998. The Real Estate
Trust has obtained a construction/permanent loan which is expected to cover all
costs except for the land and fees to related parties. See Note 7.
<PAGE>
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay lodging facility located on a 2.7 acre parcel adjacent to its
Hampton Inn and Holiday Inn in Sterling, Virginia. The new facility will be
franchised as a TownePlace Suites by Marriott and is expected to be completed
by July 1998. The Real Estate Trust has obtained a construction loan which is
expected to cover all costs except for the land, fees to related parties, taxes
and insurance. See Note 7.
In September 1997, the Real Estate Trust entered into a contract to purchase a
308-room Holiday Inn located in Arlington, Virginia, near Washington National
Airport and the Real Estate Trust's Howard Johnson Hotel. The purchase price is
$25.8 million and settlement is projected for December 1997. The Real Estate
Trust has obtained a lenders' commitment in the amount of $53 million which will
provide funds for the new acquisition and the refinancing of five other hotels
in the Real Estate Trust's portfolio. The six new loans will have a 15 year
term, a fixed interest rate of 7.9%, and amortization based on a 25 year
schedule.
While the Real Estate Trust's ability to satisfy its liquidity requirements is
contingent on future events, which include the sale of new Unsecured Notes in
amounts sufficient to finance most of the scheduled maturities of outstanding
Unsecured Notes and the Bank's ability to pay tax sharing payments and
dividends, the Real Estate Trust believes it will be able to consummate the
transactions described above as well as explore other financing opportunities in
order to raise sufficient proceeds to fund its liquidity requirements.
2. SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST
In fiscal 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The Real
Estate Trust transferred its 22 shopping centers and one of its office
properties together with the debt associated with such properties to a newly
formed partnership, Saul Holdings Limited Partnership ("Saul Holdings"), in
which the Real Estate Trust owns (directly or through one of its wholly owned
subsidiaries) a 21.5% interest, other entities affiliated with the Real Estate
Trust own a 5.5% interest, and Saul Centers owns a 73.0% interest. B. Francis
Saul II, Chairman of the Board of Trustees of the Trust, is also Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers, which is the
sole general partner of Saul Holdings. As of September 30, 1997, the Real Estate
Trust had pledged 36% of its interest in Saul Holdings to the Bank related to
payments under the Tax Sharing Agreement.
In connection with the transfer of its properties to Saul Holdings, the Real
Estate Trust was relieved of approximately $196 million in mortgage debt and
deferred interest. Pursuant to a reimbursement agreement among the partners of
Saul Holdings and its subsidiary limited partnerships (collectively, the
"Partnerships"), the Real Estate Trust and its subsidiaries that are partners in
the Partnerships have agreed to reimburse Saul Centers and the other partners in
the event the Partnerships fail to make payments with respect to certain
portions of the Partnerships' debt obligations and Saul Centers or any such
other partners personally make payments with respect to such debt obligations.
At September 30, 1997, the maximum potential obligations of the Real Estate
Trust and its subsidiaries under this agreement totaled approximately $115.5
million.
<PAGE>
The fair market value of each of the properties contributed to the Partnerships
by the Real Estate Trust at the date of transfer (the FMV of each such property)
exceeded the tax basis of such property (with respect to each property, such
excess is referred to as the FMV-Tax Difference). In the event Saul Centers, as
general partner of the Partnerships, causes the Partnerships to dispose of one
or more of such properties, a disproportionately large share of the total gain
for federal income tax purposes would be allocated to the Real Estate Trust or
its subsidiaries. In general, if the gain recognized by the Partnerships on a
property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of
depreciation deductions to the partners), a gain equal to the FMV-Tax Difference
(as adjusted) will be allocated to the Real Estate Trust. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all the
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of gain allocated to the Real Estate Trust in the event of
such a property disposition is likely to exceed, perhaps substantially, the
amount of cash, if any, distributable to the Real Estate Trust as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, or any release of the guarantees of such debt by the Real
Estate Trust, could cause the Real Estate Trust to have taxable constructive
distributions without the receipt of any corresponding amounts of cash.
Currently, management does not intend to seek a release of or a reduction in the
guarantees or to convert its limited partner units in Saul Holdings into shares
of Saul Centers common stock.
At the date of transfer of the Real Estate Trust properties to Saul Holdings,
liabilities exceeded assets transferred by approximately $104.3 million on an
historical cost basis. The assets and liabilities were recorded by Saul Holdings
and Saul Centers at their historical cost rather than market value because of
affiliated ownership and common management and because the assets and
liabilities were the subject of the business combination between Saul Centers
and Saul Holdings, newly formed entities with no prior operations.
Immediately subsequent to the business combination and initial public offering
of common stock by Saul Centers, Saul Centers had total owners' equity of
approximately $16.4 million of which approximately $3.5 million related to the
Real Estate Trust's 21.5% ownership interest. Recognition by the Real Estate
Trust of the change in its investment in the properties of approximately $107.8
million has been deferred due to the Real Estate Trust's guarantee of $115.5
million under the Saul Centers reimbursement agreement. The deferred gain of
$107.8 million is included in "Deferred gains - real estate" in the financial
statements. The gain will be recognized in future periods to the extent the Real
Estate Trust's obligations are terminated under the reimbursement agreement.
The management of Saul Centers has adopted a strategy of maintaining a ratio of
total debt to total asset value, as estimated by management, of fifty percent or
less. The management of Saul Centers has concluded at September 30, 1997 that
the total debt of Saul Centers remains below fifty percent of total asset value.
As a result, the management of the Real Estate Trust has concluded that fundings
under the reimbursement agreement are remote.
<PAGE>
In addition to the deferred gains, as of September 30, 1997, the Real Estate
Trust's investment in the consolidated entities of Saul Centers, which is
accounted for under the equity method, consisted of the following.
(In thousands)
- ------------------------------------------------------------------------------
Saul Holdings:
Distributions in excess of allocated net income $ (6,656)
Saul Centers:
Acquisition of common shares 29,030
Distributions in excess of allocated net income (3,731)
-----------
Total $ 18,643
===========
The $18.6 million balance is included in "Other assets" in the financial
statements.
As of September 30, 1997, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of common shares of Saul
Centers, effectively owns 31.8% of the consolidated entities of Saul Centers.
Most of these shares and/or units have been deposited as collateral for the
Senior Secured Notes and the Trust's revolving lines of credit. See Note 4.
The Condensed Consolidated Balance Sheet at September 30, 1997 and 1996, and the
Condensed Consolidated Statements of Operations for the twelve-month periods
ended September 30, 1997, 1996 and 1995 of Saul Centers follow.
<PAGE>
Saul Centers, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
September 30,
-------------------------
(In thousands) 1997 1996
------------ ------------
Assets
Real estate investments $ 346,253 $ 335,137
Accumulated depreciation (102,186) (99,349)
Other assets 25,182 33,986
------------ ------------
Total assets $ 269,249 $ 269,774
============ ============
Liabilities and stockholders' equity (deficit)
Notes payable $ 283,370 $ 276,981
Other liabilities 16,184 15,583
------------ ------------
Total liabilities 299,554 292,564
Total stockholders' equity (deficit) (30,305) (22,790)
------------ ------------
Total Liabilities and stockholders' equity (deficit) $ 269,249 $ 269,774
============ ============
Saul Centers, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
For the Twelve Months Ended September 30
--------------------------------------
(In thousands) 1997 1996 1995
------------ ------------ ------------
Revenue
Base rent $ 51,157 $ 49,646 $ 46,606
Other revenue 15,613 13,727 14,173
------------ ------------ ------------
Total revenue 66,770 63,373 60,779
------------ ------------ ------------
Expenses
Operating expenses 14,624 14,407 13,703
Interest expense 19,404 18,200 17,271
Amortization of deferred debt expense 2,286 2,921 2,254
Depreciation and amortization 10,839 10,978 9,996
General and administrative 3,250 3,071 2,967
------------ ------------ ------------
Total expenses 50,403 49,577 46,191
------------ ------------ ------------
Operating income 16,367 13,796 14,588
Non-operating item
Sales of interest rate protection
agreements (972) -- --
------------ ------------ ------------
Net income before extraordinary
item and minority interest 15,395 13,796 14,588
Extraordinary item - loss on early
extinguishment of debt (956) (998) --
------------ ------------ ------------
Net income before minority interest 14,439 12,798 14,588
Minority interest (6,854) (6,852) (6,855)
------------ ------------ ------------
Net income $ 7,585 $ 5,946 $ 7,733
============ ============ ============
<PAGE>
3. INVESTMENT PROPERTIES - REAL ESTATE TRUST
The following table summarizes the cost basis of income-producing properties and
land parcels together with their related debt.
Buildings
and Leasehold Related
(Dollars in thousands) No. Land Improvements Interests Total Debt
- ---------------------- --- ------- ---------------- --------- -------- --------
September 30, 1997:
Income-producing
properties
Hotels 10 $10,843 $ 117,714 $ -- $128,557 $ 82,914
Commercial 7 4,469 105,159 -- 109,628 79,597
Other 6 3,075 1,041 149 4,265 --
--- ------- ---------------- --------- -------- --------
23 $18,387 $ 223,914 $ 149 $242,450 $162,511
=== ======= ================ ========= ======== ========
Land Parcels 10 $42,160 $ -- $ -- $ 42,160 $ 19,201
=== ======= ================ ========= ======== ========
September 30, 1996:
Income-producing
properties
Hotels 9 $ 9,662 $ 111,755 $ -- $121,417 $ 75,654
Commercial 7 4,469 102,027 -- 106,496 77,888
Other 7 3,575 991 149 4,715 --
--- -------- --------------- --------- -------- --------
23 $ 17,706 $ 214,773 $ 149 $232,628 $153,542
=== ======== =============== ========= ======== ========
Land Parcels 9 $ 41,580 $ -- $ -- $ 41,580 $ 23,662
=== ======== =============== ========= ======== ========
4. DEBT - REAL ESTATE TRUST
Mortgage notes payable are secured by various income-producing properties and
land parcels. Almost all mortgage notes are payable in monthly installments,
have maturity dates ranging to 2009 and accrue interest at annual rates from
6.3% to 10.0%. Certain mortgages contain a number of restrictions, including
cross default provisions.
Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization, but are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates at
September 30, 1997 and 1996 were 10.4%. During fiscal 1997 and 1996, the Real
Estate Trust sold notes amounting to approximately $10.0 and $7.4 million,
respectively.
<PAGE>
On March 30, 1994, the Real Estate Trust issued $175.0 million aggregate
principal amount of its Senior Secured Notes. The Senior Secured Notes are
general obligations of the Real Estate Trust ranking pari passu with all other
unsubordinated obligations of the Trust and are secured by a first priority
perfected security interest in 80% (8,000 shares) of the issued and outstanding
common stock of the Bank and by certain other assets of the Trust as described
herein. After paying offering expenses of $8.9 million, third-party mortgage
indebtedness of $74.1 million, and affiliate indebtedness of $8.9 million, the
Real Estate Trust retained $83.1 million of the net proceeds of the offering for
application to general corporate purposes, including a loan to an affiliate of
$15.0 million. Of the remaining amount, approximately $25.8 million was
deposited with the Trustee for the Senior Secured Notes to satisfy one of the
initial collateral requirements with respect to such securities. This collateral
requirement, which will remain in effect as long as any Senior Secured Notes are
outstanding, is recalculated each calendar quarter based on the estimated amount
of one year's interest payments on then outstanding Senior Secured Notes and
Unsecured Notes and may be satisfied through deposits of cash or marketable
securities. Concurrently with the application of the net proceeds of the
offering to repay third-party mortgage indebtedness, the terms of certain of the
mortgage loans repaid in part were modified to waive deferred interest, reduce
interest rates and extend maturities. After the application of such net proceeds
and the modification of such loans, the final maturity of loans with total
balances of $111.1 million was 12 years and the final maturity of a loan with a
balance of $15.1 million was 15 years. As of September 30, 1997, the Real Estate
Trust was required to maintain deposits of $25.2 million and had deposited
1,535,104 shares of common stock of Saul Centers (See Note 1) with the Trustee
for the Senior Secured Notes to satisfy in part the collateral requirements for
those deposits. The common stock of Saul Centers is reflected in other assets in
the accompanying balance sheets. The Senior Secured Notes may be redeemed in
whole or in part at any time on or after April 1, 1998, subject to, among other
things, prepayment premiums.
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 September 30, 1997, the
Trust had pledged as collateral for this credit line approximately 30.5% of its
investment in Saul Holdings. At that date there were no borrowings under the
facility and based on the collateral pledged, unrestricted availability was
$10.0 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility is for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. Interest is computed by reference to a floating rate index. During
fiscal 1997, the line of credit was increased to $10.0 million. At September 30,
1997, the Trust had pledged as collateral for this credit line approximately
14.5% of its investment in Saul Holdings. At that date there were no borrowings
under the facility and based on the collateral pledged, unrestricted
availability was $4.8 million.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1997 for the fiscal years commencing October 1, 1997 is set forth in the
following table.
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable - Payable -
Year Notes Secured Unsecured Total
- ------------ ------------ ------------ ------------ -----------
1998 $ 11,092 $ -- $ 7,610 $ 18,702
1999 9,736 -- 16,079 25,815
2000 20,095 -- 8,804 28,899
2001 9,790 -- 4,165 13,955
2002 11,343 175,000 5,081 191,424
Thereafter 118,148 -- 4,894 123,042
------------ ------------ ------------ -----------
Total $ 180,204 $ 175,000 $ 46,633 $ 401,837
- -------------------------------------------------------------------------------
Of the $180.2 million of mortgage debt outstanding at September 30, 1997, $137.1
million was nonrecourse to the Real Estate Trust.
5. LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST
The Real Estate Trust has one noncancelable long-term lease which provides for
periodic adjustments of the basic annual rent. This lease will expire in 2061.
The minimum future rental commitments under this lease amount to $101,000 per
year for the next five fiscal years; thereafter, the total commitment is $5.8
million.
The Real Estate Trust paid minimum ground rent expense of $101,000 each year in
fiscal 1997, 1996 and 1995. In addition to the minimum ground rent payments,
real estate taxes on the land are an obligation of the Real Estate Trust.
6. INCOME FROM COMMERCIAL PROPERTIES - REAL ESTATE TRUST
Income from commercial properties consists of minimum rent arising from
noncancelable commercial leases. Minimum rent for fiscal years 1997, 1996, and
1995 amounted to $19.7, $16.8 and $17.9 million, respectively. Future minimum
rentals as of September 30, 1997 under noncancelable leases are as follows:
Fiscal
Year (In thousands)
---------------------------------------------------------------------
1998 $ 18,817
1999 15,962
2000 12,247
2001 9,130
2002 6,184
Thereafter 12,281
-------------------------------------------------------------------
<PAGE>
7. TRANSACTIONS WITH RELATED PARTIES - REAL ESTATE TRUST
TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES
The Real Estate Trust is managed by B. F. Saul Advisory Company (the Advisor), a
wholly-owned subsidiary of B. F. Saul Company ("Saul Co."). All of the Real
Estate Trust officers and three Trustees of the Trust are also officers and/or
directors of Saul Co. The Advisor is paid a fixed monthly fee which is subject
to annual review by the Trustees. The monthly fee was $292,000 during the period
October 1994 through September 1995, $301,000 during the period October 1995
through March 1996, $306,000 during the period April 1996 through September
1996, and $311,000 during the period October 1996 through September 1997. The
advisory contract has been extended until September 30, 1998, and will continue
thereafter unless canceled by either party at the end of any contract year.
Certain loan agreements prohibit termination of this contract.
Saul Co. and Franklin Property Company ("Franklin"), a wholly-owned subsidiary
of Saul Co., provide services to the Real Estate Trust through commercial
property management and leasing, hotel management, development and construction
management, and acquisitions, sales and financings of real property. Fees paid
to Saul Co. and Franklin amounted to $5.1, $4.8 and $4.8 million in fiscal 1997,
1996 and 1995, respectively.
The Real Estate Trust reimburses the Advisor and Franklin for costs and expenses
incurred on behalf of the Real Estate Trust, in-house legal expenses, and for
all travel expenses incurred in connection with the affairs of the Real Estate
Trust.
The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of the unsecured notes as they are issued to offset its costs of administering
the program. These payments amounted to $102,000, $74,000 and $80,000 in fiscal
1997, 1996 and 1995, respectively.
A subsidiary of Saul Co. is a general insurance agency which receives
commissions and countersignature fees in connection with the Real Estate Trust's
insurance program. Such commissions and fees amounted to approximately $158,000,
$152,000 and $158,000 in fiscal 1997, 1996 and 1995, respectively.
In April 1994 the Real Estate Trust made an unsecured loan to the Saul Company
of $15.0 million bearing interest at 1/2 percent over prime and due on demand.
In fiscal 1995 the loan balance was reduced to $12.7 million. In fiscal 1996 the
Real Estate Trust made new loans aggregating $3.5 million to the Saul Company.
During fiscal 1997 a curtail of $750,000 was paid by the Saul Company. At
September 30, 1997 the total due the Real Estate Trust was $15.4 million.
Interest accrued on these loans amounted to $1.4, $1.4 and $1.2 million during
fiscal 1997, 1996 and 1995, respectively.
REMUNERATION OF TRUSTEES AND OFFICERS
For fiscal years 1997, 1996, and 1995, the Real Estate Trust paid the Trustees
$89,000, $79,000 and $81,000, respectively, for their services. No compensation
was paid to the officers of the Real Estate Trust for acting as such; however,
one Trustee was paid by the Bank for his services as Chairman and Chief
Executive Officer of the Bank, and four received payments for their services as
directors of the Bank. Four of the Trustees and all of the officers of the Real
Estate Trust receive compensation from Saul Co. as directors and/or officers.
<PAGE>
LEGAL SERVICES
The law firm in which one of the Trustees is a partner received $0.3, $0.1 and
$0.8 million, excluding expense reimbursements, during fiscal 1997, 1996, and
1995, respectively, for legal services to the Real Estate Trust and its
wholly-owned subsidiaries.
SAUL HOLDINGS LIMITED PARTNERSHIP
The Real Estate Trust accounts for this investment under the equity method. The
Real Estate Trust's share of earnings for fiscal 1997, 1996 and 1995 were $3.0,
$2.7 and $3.1 million, respectively. See Note 2.
OTHER TRANSACTIONS
The Real Estate Trust leases space to the Bank and Franklin at two of its
income-producing properties. Minimum rents and recoveries paid by these
affiliates amounted to approximately $239,000, $143,000 and $55,000, in fiscal
1997, 1996 and 1995, respectively.
<PAGE>
8. LOANS HELD FOR SECURITIZATION AND SALE - THE BANK
Loans held for securitization and sale are composed of the following:
September 30,
(In thousands) 1997 1996
- --------------------------------------------- ------------ ------------
Credit card $ 90,000 $ 225,000
Automobile 80,000 225,000
Home equity 50,000 -
------------ ------------
Total $ 220,000 $ 450,000
============ ============
9. INVESTMENT SECURITIES - THE BANK
At September 30, 1997 and 1996, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
investment securities at September 30, 1997 and 1996 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------- --------- ---------- ---------- ---------
September 30, 1997
U.S. Government securities:
Maturing within one year $ 4,998 $ 14 $ - $ 5,012
========= ========== ========== =========
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------- --------- ---------- ---------- ---------
September 30, 1996
U.S. Government securities:
Maturing within one year $ 4,822 $ 3 $ - $ 4,825
Maturing after one year,
but within five years 4,996 - (1) 4,995
--------- ---------- ---------- ---------
Total U.S. Government
securities $ 9,818 $ 3 $ (1) $ 9,820
========= ========== ========== =========
There were no sales of investment securities during the years ended September
30, 1997, 1996 and 1995.
<PAGE>
10. MORTGAGE-BACKED SECURITIES - THE BANK
At September 30, 1997 and 1996, all mortgage-backed securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
mortgage-backed securities at September 30, 1997 and 1996 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- ----------------------------- ----------- ----------- ----------- ------------
September 30, 1997
FNMA $ 333,563 $ 1,425 $ (1,948) $ 333,040
FHLMC 856,522 6,480 (2,835) 860,167
Private label, AAA-rated 734,632 - (4,828) 729,804
Private label, AA-rated 60,990 666 - 61,656
----------- ----------- ----------- ------------
Total $ 1,985,707 $ 8,571 $ (9,611) $ 1,984,667
=========== =========== =========== ============
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- ----------------------------- ----------- ----------- ----------- ------------
September 30, 1996
FNMA $ 432,527 $ 2,253 $ (162) $ 434,618
FHLMC 792,752 1,266 (2,802) 791,216
Private label, AA-rated 81,138 866 - 82,004
----------- ----------- ----------- ------------
Total $ 1,306,417 $ 4,385 $ (2,964) $ 1,307,838
=========== =========== =========== ============
There were no sales of mortgage-backed securities from the available-for-sale or
the held-to-maturity portfolios during the years ended September 30, 1997, 1996
and 1995. See Summary of Significant Accounting Policies - The Bank - "Trading
Securities."
Accrued interest receivable on mortgage-backed securities totaled $11.9 and $8.1
million at September 30, 1997 and 1996, respectively, and is included in other
assets in the Consolidated Balance Sheets.
At September 30, 1997, certain mortgage-backed securities were pledged as
collateral for Federal Home Loan Bank of Atlanta advances, other short-term
borrowings and other recourse arrangements. See Notes 18, 19 and 26. Other
mortgage-backed securities with a book value of $24.7 million were pledged as
collateral primarily for credit card settlement obligations.
<PAGE>
11. LOANS RECEIVABLE - THE BANK
Loans receivable is composed of the following:
September 30,
(In thousands) 1997 1996
- --------------------------------------- ------------- ------------
Single-family residential $ 747,070 $ 1,525,322
Home equity 44,088 32,052
Commercial real estate and multifamily 53,816 78,951
Real estate construction 77,221 41,561
Ground 29,592 44,723
Commercial 152,483 85,372
Credit card 987,149 893,271
Automobile 137,111 72,560
Home improvement and related loans 49,551 94,316
Overdraft lines of credit and
other consumer 36,029 37,954
------------- ------------
2,314,110 2,906,082
------------- ------------
Less:
Undisbursed portion of loans 106,217 50,811
Unearned discounts 449 836
Net deferred loan origination costs (2,475) (14,055)
Allowance for losses on loans 105,679 95,523
------------- ------------
209,870 133,115
------------- ------------
Total $ 2,104,240 $ 2,772,967
============= ============
The Bank serviced loans owned by others amounting to $9,731.8 and $7,998.5
million at September 30, 1997 and 1996, respectively.
Accrued interest receivable on loans totaled $19.0 and $33.2 million at
September 30, 1997 and 1996, respectively, and is included in other assets in
the Consolidated Balance Sheets.
<PAGE>
12. REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK
Real estate held for investment or sale is composed of the following:
<TABLE>
<CAPTION>
September 30,
(In thousands) 1997 1996
- -------------------------------------------------- -------------- -------------
<S> <C> <C>
Real estate held for investment $ 3,819 $ 3,819
-------------- -------------
Real estate held for sale 231,407 246,380
-------------- -------------
Less:
Allowance for losses on real estate held
for investment 198 191
Allowance for losses on real estate held for sale 140,738 126,519
------------- -------------
140,936 126,710
Total real estate held for investment or sale $ 94,290 $ 123,489
============= =============
Loss on real estate held for investment or sale is composed of the following:
<CAPTION>
September 30,
(In thousands) 1997 1996 1995
- ------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Provision for losses $ (19,623) $ (26,341) $ (26,321)
Net income (loss) from operating properties (221) (350) 1,890
Equity earnings from investments in
limited partnerships - - 4,470
Net gain on sales 1,156 2,278 14,412
---------- ---------- ----------
Total $ (18,688) $ (24,413) $ (5,549)
========== ========== ==========
</TABLE>
<PAGE>
13. ALLOWANCES FOR LOSSES - THE BANK
Activity in the allowances for losses on loans receivable and real estate held
for investment or sale is summarized as follows:
<TABLE>
<CAPTION>
Real Estate
Held for
Loans Investment
(In thousands) Receivable or Sale
- ----------------------------------------- ------------ -----------
<S> <C> <C>
Balance, September 30, 1994 $ 50,205 $ 118,973
Provision for losses 54,979 26,321
Charge-offs (56,577) (10,058)
Recoveries 11,889 -
------------ -----------
Balance, September 30, 1995 60,496 135,236
Provision for losses 115,740 26,341
Charge-offs (92,047) (34,867)
Recoveries 11,334 -
------------ -----------
Balance, September 30, 1996 95,523 126,710
Provision for losses 125,115 19,623
Increase due to acquisition of loans 118 -
Charge-offs (126,506) (5,397)
Recoveries 11,429 -
------------ -----------
Balance, September 30, 1997 $ 105,679 $ 140,936
============ ===========
</TABLE>
The allowances for losses at September 30, 1997 are based on management's
estimates of the amount of allowances required to reflect the losses incurred in
the loan and real estate portfolios based on circumstances and conditions known
at the time. As adjustments to the allowances become necessary, provisions for
losses are reported in operations in the periods they are determined to be
necessary.
14. ASSET-BACKED TRANSACTIONS - THE BANK
The Bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.
The Bank sold credit card receivables and received gross proceeds of $1,084.5,
$919.0 and $1,550.0 million during the years ended September 30, 1997, 1996 and
1995, respectively. During fiscal 1997, the Bank recognized gains of $33.1
million on credit card transactions. Of the $33.1 million gain, $26.2 million
represents gains recognized on 1997 securitizations and sales of additional
receivables for previous transactions, and the remainder represents gains
recognized to adjust the interest-only strips to fair market value. See Summary
of Significant Accounting Policies - The Bank. Outstanding trust certificate
balances related to these and previous securitizations were $4,015.2 and
$3,889.7 million at September 30, 1997 and 1996, respectively. The related
receivable balances contained in the trusts were $4,659.7 and $4,587.1 million
at September 30, 1997 and 1996, respectively. The Bank continues to service the
underlying loans and is contingently liable under various credit enhancement
facilities related to these transactions. See Note 26.
<PAGE>
The Bank sold amounts on deposit in certain spread accounts associated with
certain outstanding credit card securitizations and received gross proceeds of
$144.2, $42.1 and $59.2 million during fiscal 1997, 1996 and 1995, respectively.
A loss of $7.2 million was recognized on the 1997 transaction and is included in
gain on sales of loans, net, in the Consolidated Statements of Operations. No
gains or losses were recorded on the transactions during fiscal 1996 and 1995.
Outstanding trust certificate balances related to these securitizations were
$225.9 and $91.8 million at September 30, 1997 and 1996, respectively.
The Bank sold automobile loan receivables and received gross proceeds of $938.9,
$475.3 and $252.2 million during fiscal 1997, 1996 and 1995, respectively. Gains
recognized on these transactions were $26.9, $7.3 and $4.0 million,
respectively. The outstanding trust certificate balances and the related
receivable balances contained in the trusts were $1,083.0 and $505.6 million at
September 30, 1997 and 1996, respectively, $7.9 million of which represents a
separate class of certificates retained by the Bank in conjunction with one 1997
transaction. These certificates were classified as trading securities at
September 30, 1997. The Bank continues to service the underlying loans and is
contingently liable under various credit enhancement facilities related to these
transactions. See Note 26.
The Bank sold home equity credit line receivables and received gross proceeds of
$139.8, $96.5 and $150.5 million, during the years ended September 30, 1997,
1996 and 1995, respectively. Gains recognized on these transactions were $3.4,
$4.7 and $7.6 million, during the years ended September 30, 1997, 1996 and 1995,
respectively. The $3.4 million amount recognized in income for fiscal 1997
represents gains recognized on the sale of new receivables into existing trusts.
The outstanding trust certificate balances and the related receivable balances
contained in the trusts were $325.8 and $459.1 million, respectively, at
September 30, 1997, and $416.4 and $440.4 million, respectively, at September
30, 1996. The Bank continues to service the underlying loans and is contingently
liable under various credit enhancement facilities related to these
transactions. See Note 26.
During the year ended September 30, 1997, the Bank sold home loan and home
equity receivables in an asset-backed transaction to investors representing
interests in the trust. The gross proceeds received on this sale were $216.3
million. The gain recognized on this transaction was $11.2 million. Pursuant to
a subsequent competitive auction, the Bank purchased the receivables related to
the home loan portion of the trust. At September 30, 1997, the outstanding trust
certificate balances and the related receivable balances (consisting solely of
home equity receivables at September 30, 1997) contained in the trust were
$133.3 million. The Bank continues to service the underlying loans and is
contingently liable under a credit enhancement facility related to this
transaction. See Note 26.
The Bank sold home loan receivables and received gross proceeds of $154.4 and
$153.5 million for the years ended September 30, 1997 and 1996, respectively.
Gains recognized on these transactions were $7.2 and $9.5 million, respectively.
The outstanding trust certificate balances and the related receivable balances
contained in the trusts were $246.8 and $244.1 million, respectively, at
September 30, 1997, and $153.5 and 141.1 million, respectively, at September 30,
1996. The Bank continues to service the underlying loans and is contingently
liable under credit enhancement facilities related to these transactions. See
Note 26.
<PAGE>
15. PROPERTY AND EQUIPMENT - THE BANK
Property and equipment is composed of the following:
<TABLE>
<CAPTION>
Estimated
Useful September 30,
(Dollars in thousands) Lives 1997 1996
- -------------------------- ---------------- ------------ -----------
<S> <C> <C> <C>
Land - $ 49,925 $ 45,211
Construction in progress - 1,950 18,596
Buildings and improvements 10-45 years 122,326 88,362
Leasehold improvements 5-20 years 83,526 65,467
Furniture and equipment 5-10 years 182,044 149,470
Automobiles 3-5 years 2,303 1,964
------------ -----------
442,074 369,070
Less:
Accumulated depreciation
and amortization 168,512 143,935
------------ ----------
Total $ 273,562 $ 225,135
============ ==========
</TABLE>
Depreciation and amortization expense amounted to $28.5, $24.4 and $21.5 million
for the years ended September 30, 1997, 1996 and 1995, respectively.
16. LEASES - THE BANK
The Bank has noncancelable, long-term leases for office premises and retail
space, which have a variety of terms expiring from 1998 to 2019 and ground
leases which have terms expiring from 2029 to 2080. These leases are accounted
for as operating leases. Some of the leases are subject to rent adjustments in
the future based upon changes in the Consumer Price Index and some also contain
renewal options. The following is a schedule by years of future minimum lease
payments required at September 30, 1997:
<TABLE>
<CAPTION>
Year Ending
September 30, (In thousands)
------------- --------------
<S> <C>
1998 $ 13,700
1999 11,696
2000 10,862
2001 9,474
2002 10,620
Thereafter 73,448
--------------
Total $ 129,800
==============
</TABLE>
Future minimum sublease rental income at September 30, 1997 totaled $226,000.
Rent expense totaled $16.1, $13.5 and $11.2 million for the years ended
September 30, 1997, 1996 and 1995, respectively.
<PAGE>
17. DEPOSIT ACCOUNTS - THE BANK
An analysis of deposit accounts and the related weighted average effective
interest rates at year-end are as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
-------------------- -------------------
Weighted Weighted
Average Average
(Dollars in thousands) Amount Rate Amount Rate
- -------------------------------------- ----------- ------ ----------- -------
<S> <C> <C> <C> <C>
Demand accounts $ 215,678 - $ 156,517 -
NOW accounts 904,697 2.42% 851,385 2.42%
Money market deposit accounts 983,016 3.97% 1,002,688 3.88%
Statement savings accounts 907,141 3.48% 881,285 3.47%
Other deposit accounts 79,071 2.99% 68,487 2.98%
Certificate accounts, less than $100 1,156,724 5.50% 1,030,401 5.30%
Certificate accounts, $100 or more 647,429 5.69% 173,274 5.41%
----------- -----------
Total $ 4,893,756 3.99% $ 4,164,037 3.75%
=========== ===========
Interest expense on deposit accounts is composed of the following:
<CAPTION>
Year Ended September 30,
(In thousands) 1997 1996 1995
- ------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
NOW accounts $ 21,882 $ 23,044 $ 23,692
Money market deposit accounts 38,644 38,317 42,420
Statement savings accounts 30,927 30,034 33,394
Certificate accounts 75,180 69,180 53,033
Other deposit accounts 2,274 1,994 1,760
----------- ----------- -----------
Total $ 168,907 $ 162,569 $ 154,299
=========== =========== ===========
Outstanding certificate accounts at September 30, 1997 mature in the years
indicated as follows:
<CAPTION>
Year Ending
September 30, (In thousands)
------------- --------------
<S> <C>
1998 $ 1,514,252
1999 139,458
2000 104,298
2001 19,459
2002 26,686
--------------
Total $ 1,804,153
==============
</TABLE>
<PAGE>
At September 30, 1997, certificate accounts of $100,000 or more have contractual
maturities as indicated below:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Three months or less $ 294,151
Over three months through six months 154,288
Over six months through 12 months 171,852
Over 12 months 27,138
-------------
Total $ 647,429
=============
</TABLE>
18. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
SHORT-TERM BORROWINGS - THE BANK
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
September 30,
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Securities sold under repurchase agreements:
Balance at year-end $ 2,606 $576,823 $ 2,424
Average amount outstanding during the year 483,076 59,687 161,599
Maximum amount outstanding at any month-end 946,090 576,823 355,991
Amount maturing within 30 days 2,606 576,576 2,424
Weighted average interest rate during the year 5.48% 5.50% 6.01%
Weighted average interest rate on year-end
balances 5.35% 5.41% 5.45%
Other short-term borrowings:
Balance at year-end $72,215 $60,318 $ 8,011
Average amount outstanding during the year 39,126 13,641 17,896
Maximum amount outstanding at any month-end 72,241 60,318 50,842
Amount maturing within 30 days 72,215 60,318 8,011
Weighted average interest rate during the year 5.11% 5.04% 5.58%
Weighted average interest rate on year-end
balances 5.34% 5.63% 5.77%
</TABLE>
The investment and mortgage-backed securities underlying the repurchase
agreements were delivered to the dealers who arranged the transactions. The
dealers may have loaned such securities to other parties in the normal course of
their operations and agreed to resell to the Bank the identical securities at
the maturities of the agreements.
At September 30, 1997, the Bank had pledged mortgage-backed securities with a
book value of $100.1 million to secure certain other short-term borrowings.
<PAGE>
19. FEDERAL HOME LOAN BANK ADVANCES - THE BANK
At September 30, 1997, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $188.5 million. Of the total advances at September 30, 1997,
$150.0 million have a weighted average interest rate of 5.63%, adjust quarterly
based on the three-month London Interbank Offered Rate ("LIBOR") and mature over
varying periods between November 1997 and March 1998. The weighted average
interest rate on the remaining $38.5 million is 6.62% which is fixed for the
term of the advances which mature over varying periods between December 1997 and
September 2007.
Under a Specific Collateral Agreement with the FHLB, advances are secured by all
of the Bank's FHLB stock and mortgage-backed securities with a book value of
$257.3 million. The FHLB requires that members maintain qualifying collateral at
least equal to 100% of the member's outstanding advances at all times. The
collateral held by the FHLB in excess of the September 30, 1997 advances is
available to secure additional advances from the FHLB, subject to its
collateralization guidelines.
20. CAPITAL NOTES - SUBORDINATED - THE BANK
Capital notes, which are subordinated to the interest of deposit account
holders, are composed of the following:
September 30, Interest
(Dollars in thousands) 1997 1996 Rate
- ----------------------------------- ------------ ------------ -------------
Private placement:
BACOB Bank, s.c.,
due December 1996 $ - $ 10,000 LIBOR + 3.0%
Public placement:
Subordinated debentures due 2005 150,000 150,000 9 1/4%
Subordinated debentures due 2008 100,000 - 9 1/4%
------------ ------------
Total $ 250,000 $ 160,000
============ ============
On December 3, 1996, the Bank sold $100.0 million 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 Bank received OTS approval to include the principal
amount of the 1996 Debentures in the Bank's supplementary capital for regulatory
capital purposes.
On November 23, 1993, the Bank sold $150.0 million of its 9 1/4% Subordinated
Debentures due 2005 (the "1993 Debentures"). The Bank received net proceeds of
$143.6 million from the sale of the 1993 Debentures, of which approximately
$134.2 million was used to redeem $78.5 million of debentures due in 2002 and
$50.0 million of debentures due in 2003 on December 23, 1993 and December 24,
1993, respectively. The remaining net proceeds were used for general corporate
purposes. The Bank incurred a loss of $6.3 million, after related income taxes,
in connection with the redemption of these debentures. The OTS approved the
inclusion of the principal amount of the 1993 Debentures in the Bank's
supplementary capital for regulatory capital purposes.
<PAGE>
The indenture pursuant to which the 1993 Debentures were sold (the "Indenture")
provides that the Bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be
continuing and the Bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15.0 million, (ii) 66 2/3% of the Bank's consolidated net income
(as defined in the Indenture) accrued on a cumulative basis commencing on
October 1, 1993 and (iii) the aggregate net cash proceeds received by the Bank
after October 1, 1993 from the sale of qualified capital stock or certain debt
securities, minus the aggregate amount of any restricted payments made by the
Bank. Notwithstanding the above restrictions on dividends, provided no event of
default has occurred or is continuing, the Indenture does not restrict the
payment of dividends on the 13% Preferred Stock (as defined below) or any
payment-in-kind preferred stock issued in lieu of cash dividends on the
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the Bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 21.
Deferred debt issuance costs, net of accumulated amortization, amounted to $9.4
and $5.6 million at September 30, 1997 and 1996, respectively, and are included
in other assets in the Consolidated Balance Sheets.
On November 15, 1996, the Bank redeemed the $10.0 million private placement
note.
21. REAL ESTATE INVESTMENT TRUST SUBSIDIARY - THE BANK
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
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 10 3/8%. 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 received OTS approval to
include the proceeds from the sale of the REIT Preferred Stock in the core
capital of the Bank for regulatory capital purposes in an amount up to 25% of
the Bank's core capital. The REIT Preferred Stock is not redeemable until
January 15, 2007, and is redeemable thereafter at the option of the REIT
Subsidiary. The net cash proceeds from the sale of the REIT Preferred Stock is
reflected in minority interest -- other in the Trust's Consolidated Balance
Sheets. Dividends on the REIT Preferred Stock are presented as a reduction of
net income in the Consolidated Statements of Operations.
22. PREFERRED STOCK - THE BANK
In April 1993, the Bank sold $75.0 million of its Noncumulative Perpetual
Preferred Stock, Series A ("Preferred Stock") in a private offering. Cash
dividends on the Preferred Stock are payable quarterly in arrears at an annual
rate of 13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the Bank.
<PAGE>
The OTS has approved the inclusion of the Preferred Stock as tier 1 or core
capital and has approved the payment of dividends on the Preferred Stock,
provided certain conditions are met. The Preferred Stock is not redeemable until
May 1, 2003 and is redeemable thereafter at the option of the Bank. The holders
of the Preferred Stock have no voting rights, except in certain limited
circumstances.
Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25 per share, plus accrued and unpaid
dividends for the then-current dividend period in the event of any voluntary
liquidation of the Bank, after payment of the deposit accounts and other
liabilities of the Bank, and out of the assets available for distribution to
shareholders. The Preferred Stock ranks superior and prior to the issued and
outstanding common stock of the Bank with respect to dividend and liquidation
rights.
23. RETIREMENT PLAN - THE BANK
The Bank participates in a defined contribution profit sharing retirement plan
(the "Plan") which covers those full-time employees who meet the requirements as
specified in the Plan. The Plan, which can be modified or discontinued at any
time, requires participating employees to contribute 2.0% of their compensation.
Corporate contributions, at the discretionary amount of three times the employee
contribution, were $5.6, $4.7 and $3.9 million for the years ended September 30,
1997, 1996 and 1995, respectively. There are no past service costs associated
with the Plan and the Bank has no liability under the Plan other than its
current contributions. The Plan owns 4.0% of the Bank's common stock.
24. REGULATORY MATTERS - THE BANK
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Bank's regulatory capital requirements at September 30, 1997
were a 1.5% tangible capital requirement, a 3.0% core capital requirement and an
8.0% total risk-based capital requirement. Under the OTS "prompt corrective
action" regulations, the Bank must maintain minimum leverage, tier 1 risk-based
and total risk-based capital ratios of 4.0%, 4.0% and 8.0%, respectively, to
meet the ratios established for "adequately capitalized" institutions. At
September 30, 1997, the Bank was in compliance with its tangible, core and total
risk-based regulatory capital requirements and exceeded the capital standards
established for "well capitalized" institutions under the "prompt corrective
action" regulations. The information below is based upon the Bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------------------------------------
MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
----------------------------- ------------------------------ --------------------------------
As a % of As a % of As a % of
(Dollars in thousands) Amount Assets(4) Amount Assets Amount Assets
- ----------------------------------- ------------ ---------------- ------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $ 363,246
Minority interest in REIT
Subsidiary(1) 144,000
Net unrealized holding losses(2) 493
============
Adjusted capital 507,739
Adjustments for tangible and
core capital:
Intangible assets (44,251)
Non-allowable minority interest
in REIT Subsidiary(1) (38,758)
Non-includable subsidiaries(3) (3,762)
------------
Total tangible capital 420,968 6.96% $ 90,715 1.50% $ 330,253 5.46%
------------ ================ ============= ================ =============== ================
Total core capital(4) 420,968 6.96% $ 241,907 4.00% $ 179,061 2.96%
------------ ================ ============= ================ =============== ================
Tier 1 risk-based capital(4) 420,968 7.24% $ 232,713 4.00% $ 188,255 3.24%
============ ================ ============= ================ =============== ================
Adjustments for total risk-based
capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 92,962
------------
Total supplementary capital 342,962
Excess allowance for loan losses (19,989)
------------
Adjusted supplementary capital 322,973
------------
Total available capital 743,941
Equity investments(3) (14,556)
------------
Total risk-based capital(4) $ 729,385 13.50% $ 465,426 8.00% $ 263,959 5.50%
============ ================ ============= ================ =============== ================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 $964 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%.
<PAGE>
At September 30, 1996, the Bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "adequately capitalized" institutions under the
"prompt corrective action" regulations. The information below is based upon the
Bank's understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------------------------------------------
MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
----------------------------- ------------------------------ --------------------------------
As a % of As a % of As a % of
(Dollars in thousands) Amount Assets(4) Amount Assets Amount Assets
- ----------------------------------- ------------ ---------------- ------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $ 339,160
Net unrealized holding losses(1) 1,875
============
Adjusted capital 341,035
Adjustments for tangible and
core capital:
Intangible assets (41,051)
Non-includable subsidiaries(2)(4) (3,622)
------------
Total tangible capital 296,362 5.21% $ 85,255 1.50% $ 211,107 3.71%
------------ ================ ============= ================ =============== ================
Total core capital(3) 296,362 5.21% $ 227,346 4.00% $ 69,016 1.21%
------------ ================ ============= ================ =============== ================
Tier 1 risk-based capital(3) 296,362 5.80% $ 204,519 4.00% $ 91,843 1.80%
============ ================ ============= ================ =============== ================
Adjustments for total risk-based
capital:
Subordinated capital debentures 150,000
Allowance for general loan losses 87,953
------------
Total supplementary capital 237,953
Excess allowance for loan losses (23,744)
------------
Adjusted supplementary capital 214,209
------------
Total available capital 510,571
Equity investments(2) (19,657)
------------
Total risk-based capital(3) $ 490,914 10.14% $ 409,038 8.00% $ 81,876 2.14%
============ ================ ============= ================ =============== ================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(2) Reflects an aggregate offset of $1.2 million representing the allowance for
general loan losses maintained against theBank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(3) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
(4) Effective July 1, 1996, the percentage of non-includable subsidiaries
phased-out from core capital increased from 60% to 100%.
<PAGE>
At September 30, 1997 and 1996, the Bank had $4.0 and $3.8 million,
respectively, in loans to and investments in subsidiaries engaged in activities
impermissible for national banks ("non-includable subsidiaries") which were
fully deducted from all three capital requirements. At September 30, 1997 and
1996, the Bank also had two equity investments with an aggregate balance, after
subsequent valuation allowances, of $15.3 and $20.7 million, respectively, which
were fully deducted from total risk-based capital.
As of September 30, 1997 and 1996, the Bank had $36.2 and $40.2 million,
respectively, in supervisory goodwill, all of which was excluded from core
capital pursuant to statutory provisions.
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. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In November 1996, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties through November 12, 1997. In addition, the Bank has
submitted to the OTS a request for a further extension of the holding periods
through fiscal 1998 for certain of its REO properties. Based on its capital
ratios at September 30, 1997, the Bank's capital raios would have remained above
the levels required for well-capitalized institutions even if the book value of
REO properties for which an extension has not yet been received had been
deducted from total risk-based capital as of that date. The following table sets
forth the Bank's REO at September 30, 1997, after valuation allowances of $140.7
million, by the fiscal year in which the property was acquired through
foreclosure.
Fiscal Year (In thousands)
----------- -----------------
1990 $ 22,667(1)(2)
1991 47,724(2)
1992 3,280(2)
1993 4,050
1994 2,002
1995 8,036
1996 -
1997 2,910
------------
Total REO $ 90,669
============
- --------------------------------------------------------------------------------
(1) Includes REO with an aggregate net book value of $14.6 million, which the
Bank treats as equity investments for regulatory capital purposes. (2) Includes
REO, with an aggregate net book value of $59.1 million, for which the Bank
received an extension of the holding periods through November 12, 1997.
<PAGE>
At the request of the OTS, the Board of Directors of the Bank adopted a
resolution in March 1996 which, among other things, permits the Bank: (i) to
make tax sharing payments without OTS approval to the Trust of up to $15.0
million relating to any single fiscal year; and (ii) to declare dividends on its
common stock in any quarterly period up to the lesser of (a) 50% of its after
tax net income for the immediately preceding quarter or (b) 50% of the average
quarterly after tax net income for the immediately preceding four quarter
period, minus (in either case) dividends declared on the Bank's preferred stock
during that quarterly period. The resolution also provides that the Bank will
present a plan annually to the OTS detailing anticipated consumer loan
securitization activity.
Legislation was enacted on September 30, 1996 that, among other things, imposed
on thrift institutions a one-time assessment of 65.7 basis points on their
SAIF-insured deposits to capitalize the SAIF. The one-time SAIF assessment of
$26.4 million, which was accrued during fiscal 1996 and is included in deposit
insurance premiums in the Consolidated Statements of Operations, was paid during
fiscal 1997.
25. TRANSACTIONS WITH RELATED PARTIES - THE BANK
Loans Receivable
From time to time, in the normal course of business, the Bank may make loans to
executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same terms
as similar loans with unrelated parties. An analysis of activity with respect to
these loans for the year ended September 30, 1997 is as follows:
(In thousands)
---------------
Balance, September 30, 1996 $ 2,737
Additions 451
Reductions (756)
---------------
Balance, September 30, 1997 $ 2,432
===============
Services
B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the Bank. These services include property
management, cafeteria management (discontinued during fiscal 1997), insurance
brokerage and leasing. Fees for these services were $42,000, $366,000 and
$460,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
The law firm in which one director of the Bank is a partner received $4.9, $3.2
and $2.8 million for legal services rendered to the Bank during the years ended
September 30, 1997, 1996 and 1995 respectively.
<PAGE>
For the years ended September 30, 1997, 1996 and 1995, one of the directors of
the Bank was paid $50,000, $37,000 and $30,000, respectively, for consulting
services rendered to the Bank. Another director of the Bank was paid total fees
of $100,000, $100,000 and $75,000 for the years ended September 30, 1997, 1996
and 1995, respectively, for consulting services. Another director of the Bank
was paid $17,000 for consulting services rendered to the Bank during fiscal year
1997.
Tax Sharing Agreement
The Bank and the other companies in the Trust's affiliated group are parties to
a tax sharing agreement dated June 28, 1990 (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides for payments to be made by members of the Trust's
affiliated group to the Trust based on their separate company tax liabilities.
The Tax Sharing Agreement also provides that, to the extent net operating losses
or tax credits of a particular member are used to reduce the overall tax
liability of the Trust's affiliated group, such member will be reimbursed by the
other members of the affiliated group that have taxable income in an amount
equal to such tax reduction. The Bank paid $9.8, $25.0 and $20.5 million to the
Trust during fiscal 1997, 1996 and 1995, respectively, under the Tax Sharing
Agreement. OTS approval of the tax sharing payments during fiscal 1997, 1996 and
1995 was conditioned on a pledge by the Trust of certain assets to secure
certain of its obligations under the Tax Sharing Agreement. Under the terms of
the Bank's board resolution, the Bank is permitted to make tax sharing payments
to the Trust of up to $15.0 million relating to any fiscal year without OTS
approval. See Note 24. There was no tax sharing payment payable to the Trust by
the Bank at September 30, 1997 and 1996.
Other
The Bank paid $4.8, $4.5 and $4.2 million for office space leased from or
managed by companies affiliated with the Bank or its directors during the years
ended September 30, 1997, 1996 and 1995, respectively.
The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and Van
Ness Square Corporation, affiliates of the Bank, from time to time maintain
interest-bearing deposit accounts with the Bank. Those accounts totaled $26.5
million at September 30, 1997. The Bank paid interest on the accounts amounting
to $599,000 in fiscal 1997.
During fiscal 1995, the Bank purchased land and building plans from Lake for
$1.3 million. During fiscal 1996, construction was completed and the Bank began
occupying the building.
26. FINANCIAL INSTRUMENTS - THE BANK
The Bank, in the normal course of business, is a party to financial instruments
with off-balance-sheet risk and other derivative financial instruments to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit at both fixed and variable rates, letters of credit,
interest-rate cap agreements and assets sold with limited recourse. All such
financial instruments are held or issued for purposes other than trading.
These instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the Consolidated
Balance Sheets.
<PAGE>
The contract or notional amount of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The Bank is also a
party to derivative financial instruments that do not have off-balance-sheet
risk (e.g. interest-rate cap agreements).
Commitments to Extend Credit
The Bank had approximately $17 billion of commitments to extend credit at
September 30, 1997. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments are subject to
the Bank's normal underwriting and credit evaluation policies and procedures.
Loans approved but not closed are commitments for fixed or adjustable-rate
residential loans which are secured by real estate. The Bank currently requires
borrowers to obtain private mortgage insurance on all loans where the
loan-to-value ratio exceeds 80%.
Standby Letters of Credit
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At September 30, 1997,
the Bank had written standby letters of credit in the amount of $29.2 million,
which were issued to guarantee the performance of and irrevocably assure payment
by customers under construction projects.
Of the total, $19.2 million will expire in fiscal 1998 and the remainder will
expire over time through fiscal 2001. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan commitments to customers. Mortgage-backed securities with a book value of
$2.3 million were pledged as collateral for certain of these letters of credit
at September 30, 1997.
Recourse Arrangements
The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of credit card
receivables, home equity credit line receivables, automobile loan receivables,
home loan receivables and amounts on deposit in certain spread accounts through
the asset-backed securitizations described in Note 14. At September 30, 1997 and
1996, the primary recourse to the Bank was $142.0 and $128.0 million,
respectively. As a result of these recourse provisions, the Bank maintained
restricted cash accounts amounting to $145.8 and $128.2 million, at September
30, 1997 and 1996, respectively, which are included in other assets in the
Consolidated Balance Sheets.
<PAGE>
The Bank is obligated under various recourse provisions related to the swap of
single-family residential loans for participation certificates and
mortgage-backed securities issued to the Bank by FHLMC and FNMA. At September
30, 1997, recourse to the Bank under these arrangements was $989,000. As
security for the payment of funds due under certain of the FHLMC recourse
obligations, the Bank is required to post collateral. At September 30, 1997,
mortgage-backed securities pledged as collateral under these obligations had a
book value of $2.4 million. In addition, the Bank maintained a restricted cash
account amounting to $325,000 at September 30, 1997 and 1996, which is included
in other assets in the Consolidated Balance Sheets.
Derivative Financial Instruments
Interest-rate cap agreements are used to limit the Bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 1997, the Bank was a party to
four interest-rate cap agreements with an aggregate notional amount of $372.2
million with maturity dates ranging from December 31, 1997 through June 30,
1999. Three of the interest-rate cap agreements with an aggregate notional
amount of $300.0 million entitle the Bank to receive compensatory payments from
the cap provider, which is a AAA-rated (by Standard & Poor's) counterparty,
equal to the product of (a) the amount by which the one-month LIBOR exceeds
7.00% and (b) the then outstanding notional principal amount for a predetermined
period of time. The fourth interest-rate cap agreement with a notional amount of
$72.2 million entitles the Bank to receive compensatory payments from the cap
provider, which is a AA-rated (for long term debt as rated by Standard & Poor's)
counterparty, equal to the product of (a) the amount by which the one-month
LIBOR exceeds 9.00% and (b) the then outstanding notional principal amount for
the predetermined period of time. The Bank has no obligation to make payments to
the provider of the cap or any other party. The Bank is exposed to credit losses
in the event of nonperformance by the counterparty, but does not expect the
counterparty to fail to meet its obligation given its credit rating.
To manage the potentially adverse impact of interest rate movements on the
fixed-rate mortgage loan pipeline, the Bank hedges its pipeline by entering into
whole loan and mortgage-backed security forward sale commitments and
mortgage-backed security forward purchase commitments. Forward sale commitments
are used to sell specific financial instruments (whole loans or mortgage-backed
securities) at a future date for a specified price. Forward sale commitments
generally settle within 90 days. Gains and losses are deferred and recorded as a
component of the gain on sales of loans at the time the forward sale commitment
matures. At September 30, 1997, the Bank had whole loan and mortgage-backed
security forward sale commitments of $0.3 and $149.1 million, respectively. In
addition, at September 30, 1997, the Bank had $19.8 million in mortgage-backed
security forward purchase commitments related to its hedging activities. Forward
purchase commitments generally settle within 90 days. Gains and losses are
deferred and recorded as a component of the gain on sales of loans at the time
the forward purchase commitment matures.
Concentrations of Credit
The Bank's principal real estate lending market is the metropolitan Washington,
D.C. area. In addition, a significant portion of the Bank's consumer loan
portfolio, including credit cards, was generated by customers residing in the
metropolitan Washington, D.C. area. Service industries and federal, state and
local governments employ a significant portion of the Washington, D.C. area
labor force. Adverse changes in economic conditions could have a direct impact
on the timing and amount of payments by borrowers.
<PAGE>
27. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - THE BANK
The majority of the Bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting in a
great degree of subjectivity inherent in the indicated fair value amounts.
Because the fair value is estimated as of the balance sheet date, the amount
which will actually be realized or paid upon settlement or maturity could be
significantly different. Comparability among financial institutions may be
difficult due to the wide range of permitted valuation techniques and the
numerous estimates and assumptions which must be made. The estimated fair values
of the Bank's financial instruments at September 30, 1997 and 1996 are as
follows:
September 30,
---------------------------------------------
1997 1996
--------------------- ---------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- ---------------------------------- ---------- ---------- ---------- ----------
Financial assets:
Cash, due from banks,
interest-bearing deposits,
federal funds sold and
securities purchased under
agreements to resell $ 651,891 $ 651,891 $ 266,425 $ 266,425
Loans held for sale 102,749 103,819 76,064 76,064
Loans held for securitization
and sale 220,000 220,000 450,000 450,000
Trading securities 7,899 7,899 - -
Investment securities 4,998 5,012 9,818 9,820
Mortgage-backed securities 1,985,707 1,984,667 1,306,417 1,307,838
Loans receivable, net 2,104,240 2,207,229 2,772,967 2,834,726
Interest-rate cap agreements 3,114 169 6,179 1,832
Other financial assets 513,735 515,218 392,265 393,748
Financial liabilities:
Deposit accounts with
no stated maturities 3,089,603 3,089,603 2,960,362 2,960,362
Deposit accounts with
stated maturities 1,804,153 1,810,245 1,203,675 1,210,497
Securities sold under
repurchase agreements and
other short-term borrowings,
notes payable and Federal
Home Loan Bank advances 270,351 270,920 913,483 914,418
Capital notes-subordinated 240,618(1) 256,875 154,383(1) 161,875
Other financial liabilities 108,684 108,684 80,760 80,760
- --------------------------------------------------------------------------------
(1) Net of deferred debt issuance costs which are included in other assets in
the Consolidated Balance Sheets.
<PAGE>
The following methods and assumptions were used to estimate the fair value
amounts at September 30, 1997 and 1996:
Cash, due from banks, interest-bearing deposits, federal funds sold and
securities purchased under agreements to resell: Carrying amount approximates
fair value.
Loans held for sale: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.
Loans held for securitization and sale: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.
Trading securities: Fair value is equal to carrying value.
Investment securities: Fair value is based on quoted market prices.
Mortgage-backed securities: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.
Loans receivable, net: Fair value of certain homogeneous groups of loans (e.g.
single-family residential, automobile loans, home improvement loans and
fixed-rate commercial and multifamily loans) is estimated using discounted cash
flow analyses based on contractual repayment schedules. The discount rates used
in these analyses are based on either the interest rates paid on U.S. Treasury
securities of comparable maturities adjusted for credit risk and non-interest
operating costs, or the interest rates currently offered by the Bank for loans
with similar terms to borrowers of similar credit quality. For loans which
reprice frequently at market rates (e.g. home equity, variable-rate commercial
and multifamily, real estate construction and ground loans), the carrying amount
approximates fair value. Because credit card receivables are generally sold at
face value through the Bank's securitization program, such face value is used as
the estimated fair value of these receivables. The fair value of the Bank's loan
portfolio as presented above does not include the value of established credit
card and home equity credit line customer relationships, or the value relating
to estimated cash flows from future receivables and the associated fees
generated from existing customers.
Interest-rate cap agreements: Fair value is based on dealer quotes.
Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips are carried at fair value. The fair value of one of
the Bank's investments is based on quoted market prices.
Deposit accounts with no stated maturities: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
Bank's established deposit customer relationships.
<PAGE>
Deposit accounts with stated maturities: Fair value of fixed-rate certificates
of deposit is estimated based on discounted cash flow analyses using the
remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.
Borrowings: These instruments consist of securities sold under repurchase
agreements and other short-term borrowings, notes payable and Federal Home Loan
Bank advances. For borrowings which either reprice frequently to market interest
rates or are short-term in duration, the carrying amount approximates fair
value. Fair value of the remaining amounts borrowed is estimated based on
discounted cash flow analyses using interest rates currently charged by the
lender for comparable borrowings with similar remaining maturities.
Capital notes-subordinated: Fair value of the 1993 Debentures and the 1996
Debentures is based on quoted market prices. The carrying amount of the $10.0
million private placement capital note approximated fair value at September 30,
1996.
Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable and other short-term payables
approximates fair value.
Off-balance sheet instruments: The difference between the original fees charged
by the Bank for commitments to extend credit and letters of credit and the
current fees charged to enter into similar agreements is immaterial. Fair value
of forward commitments is based on the estimated amount that the Bank would pay
to terminate the arrangements at the reporting date, taking into account the
remaining terms of the arrangements and the counterparties' credit standing,
where applicable, which is immaterial.
28. LITIGATION - THE BANK
During the normal course of business, the Bank is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the Bank is a defendant are material, the Bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the Bank.
29. SUBSEQUENT EVENT - THE BANK
On November 12, 1997 the Bank purchased ASB Capital Management, Inc. ("ASB"), a
wholly-owned subsidiary of NationsBank Corporation and one of the largest
SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area. ASB provides a variety of investment products, including
equity and fixed income securities, money market investments, and real estate
investments, to a primarily institutional client base and has approximately $3.0
billion of assets under management. The Bank anticipates that the acquisition
will provide an additional source of fee-based revenues. The Bank has obtained
regulatory approval from the OTS to obtain trust powers through a new operating
subsidiary which acquired ASB. Although the acquisition generated additional
goodwill which reduced the Bank's regulatory capital levels, the Bank's capital
levels immediately following the acquisition remained above the levels
established for well-capitalized institutions.
<PAGE>
30. COMMITMENTS AND CONTINGENCIES - THE TRUST
The Trust is involved in a number of lawsuits arising from the normal course of
its business. On the basis of consultations with counsel, management does not
believe that any material loss will result.
31. INCOME TAXES - THE TRUST
The Trust voluntarily terminated its qualification as a real estate investment
trust under the Internal Revenue Code during fiscal 1978.
The provisions for income taxes for the years ended September 30, 1997, 1996 and
1995, consist of the following:
Year Ended September 30,
---------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------- ------------ ------------ -----------
Current provision (benefit):
Federal $(1,800) $ 5,628 $ (37)
State 1,658 2,799 (4,186)
------------ ------------ -----------
(142) 8,427 (4,223)
------------ ------------ -----------
Deferred provision (benefit):
Federal 16,113 (513) 5,964
State (3,159) 386 280
------------ ------------ -----------
12,954 (127) 6,244
------------ ------------ -----------
Subtotal 12,812 8,300 2,021
Tax effect of other items:
Tax effect of net unrealized
holding gains (losses) reported
in stockholders' equity 904 809 7,207
------------ ------------ -----------
Total $13,716 $ 9,109 $ 9,228
============ ============ ===========
<PAGE>
The Trust's effective income tax rate varies from the statutory Federal income
tax rate as a result of the following factors:
Year Ended September 30,
---------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------ ------------ ------------ -----------
Computed tax at statutory Federal
income tax rate $21,418 $ 7,003 $ 9,920
Increase (reduction) in taxes
resulting from:
Minority interest (4,524) -- --
Goodwill and other purchase
accounting adjustments 699 1,626 1,164
Change in valuation allowance
for deferred tax asset
allocated to income tax expense 7,066 8,883 --
State income taxes (7,953) (12,277) (3,540)
Other (3,894) 3,066 (5,523)
------------ ------------ -----------
$12,812 $ 8,301 $ 2,021
============ ============ ===========
The components of the net deferred tax asset were as follows:
September 30,
-------------------------
(In thousands) 1997 1996
- ---------------------------------------------------- ------------ -----------
Deferred tax assets:
Provision for losses in excess of deductions $ 44,571 $ 51,166
Deferred BIF/SAIF assessment -- 11,151
Unrealized losses on real estate owned 4,198 3,545
Property 7,211 7,211
State net operating losses 21,351 12,224
Partnership investments 2,384 2,288
Forgiveness of debt 3,928 4,375
Depreciation 2,307 1,973
Other 5,268 3,856
------------ -----------
Gross deferred tax assets 91,218 97,789
------------ -----------
Deferred tax liabilities:
Net unrealized holding gains on
securities available-for-sale (3,342) (5,806)
Deferred loan fees (541) (5,764)
Asset securitizations (16,565) (3,125)
Saul Holdings (4,509) (7,682)
Depreciation (4,096) (5,750)
FHLB stock dividends (3,525) (5,375)
Other (3,879) (2,804)
------------ -----------
Gross deferred tax liabilities (36,457) (36,306)
------------ -----------
Valuation allowance (19,349) (12,283)
------------ -----------
Net deferred tax asset $ 35,412 $ 49,200
============ ===========
<PAGE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. As of September 30,
1997, management has maintained a valuation allowance in part to reduce the net
deferred tax asset for net operating loss carryforwards related to state taxes.
Historically, the Bank has generated taxable income while the Real Estate Trust
has generated taxable losses. The net operating loss carryforwards are not
expected to be realizable for state tax purposes. For federal tax purposes,
there are no net operating loss carryforwards.
Management believes the existing net deductible temporary differences will
reverse during periods in which the Bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive
consolidated earnings will continue as a result of the Bank's earnings.
TAX SHARING AGREEMENT
The Trust's affiliated group, including the Bank, entered into a tax sharing
agreement dated June 28, 1990. This agreement provides that payments be made by
members of the affiliated group to the Trust based on their respective allocable
shares of the overall federal income tax liability of the affiliated group for
taxable years and partial taxable years beginning on or after that date.
Allocable shares of the overall tax liability are prorated among the members
with taxable income calculated on a separate return basis. The agreement also
provides that, to the extent net operating losses or tax credits of a particular
member are used to reduce overall tax liability of the Trust's affiliated group,
such member will be reimbursed on a dollar-for-dollar basis by the other members
of the affiliated group that have taxable income in an amount equal to such tax
reduction. Under the tax sharing agreement, the Bank paid $9.8, $25.0 and $20.5
million, respectively, to the Trust during fiscal 1997, 1996 and 1995.
In recent years, the operations of the Trust have generated net operating losses
while the Bank has reported net income. It is anticipated that the Trust's
consolidation of the Bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the Bank would otherwise owe. If in any future year, the
Bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the Bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated Federal income
tax returns or (ii) the amount of tax refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated Federal
income tax return of the group.
As of September 30, 1997, the alternative minimum tax carryforward was $3.1
million.
<PAGE>
32. SHAREHOLDERS' EQUITY - THE TRUST
In June 1990, the Trust acquired from affiliated companies an additional equity
interest in the Bank, which raised the Trust's ownership share of the Bank to
80%. In exchange for the interest acquired, the Trust issued 450,000 shares of a
new class of $10.50 cumulative preferred shares of beneficial interest with a
par value of $1 ("preferred shares"). The transaction has been accounted for at
historical cost in a manner similar to the pooling of interests method because
the entities are considered to be under common control. In addition, the Trust
acquired two real estate properties from an affiliate in exchange for 66,000
preferred shares.
At September 30, 1997, 1996, and 1995, the amount of dividends in arrears on the
preferred shares was $36.2 million ($70.21 per share), $31.6 million ($61.17 per
share) and $26.6 million ($51.64 per share), respectively. Based on the
dividends paid on the preferred shares during fiscal 1996, the Trust recorded a
liability at September 30, 1996, equal to the total dividends in arrears on that
date. The Trust paid preferred dividends of $750,000 and $500,000 in fiscal 1997
and 1996, respectively.
<PAGE>
33. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST
<TABLE>
<CAPTION>
Year Ended September 30, 1997
(In thousands, except ----------------------------------------------------
per share amounts) December March June September
- ------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real Estate Trust:
Total income $ 19,020 $ 18,653 $ 23,448 $ 23,448
Operating loss (7,092) (6,762) (2,167) (2,966)
The Bank:
Interest income 115,271 123,286 120,748 91,175
Interest expense 57,544 61,911 61,246 59,114
Provision for loan
losses (26,840) (26,922) (36,129) (35,224)
Other income 87,611 88,096 90,158 147,112
Operating income (loss) 19,958 20,126 10,672 29,425
Total Company:
Operating income 12,866 13,364 8,505 26,459
Income (loss) before
minority interest 7,735 10,333 3,444 26,872
Net income (loss) 2,303 2,743 (3,079) 16,893
Net income (loss) per
common share 0.20 0.29 (0.91) 3.20
- -------------------------------------------------------------------------------
<CAPTION>
Year Ended September 30, 1996
(In thousands, except ----------------------------------------------------
per share amounts) December March June September
- ------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Real Estate Trust:
Total income $ 18,159 $ 17,206 $ 20,696 $ 20,778
Operating loss (7,032) (7,430) (4,564) (5,150)
The Bank:
Interest income 93,589 91,230 99,254 103,438
Interest expense 48,269 46,800 45,401 48,366
Provision for loan
losses (11,913) (28,850) (30,062) (44,915)
Other income 66,212 89,324 96,935 91,990
Operating income (loss) 15,984 21,341 31,617 (22,831)
Total Company:
Operating income (loss) 8,952 13,911 27,053 (27,981)
Income (loss) before
minority interest 5,199 7,842 15,621 (15,028)
Net income (loss) 1,294 3,225 10,054 (14,651)
Net income (loss) per
common share (0.01) 0.39 1.80 (3.32)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
34. INDUSTRY SEGMENT INFORMATION - TRUST
Industry segment information with regard to the Real Estate Trust is presented
below. For information regarding the Bank, please refer to the "Banking"
sections of the accompanying financial statements.
<TABLE>
<CAPTION>
Year Ended September 30
---------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
INCOME
Hotels $ 59,464 $ 54,245 $ 54,104
Commercial properties 21,097 17,590 18,812
Other 4,008 5,004 4,369
------------ ----------- ------------
$ 84,569 $ 76,839 $ 77,285
============ =========== ============
OPERATING PROFIT (LOSS)
Hotels $ 14,755 $ 12,635 $ 10,836
Commercial properties 9,020 5,893 6,951
Other 6,429 6,702 6,670
------------ ----------- ------------
30,204 25,230 24,457
Gain (loss) on sales of property 895 (68) 1,664
Interest and debt expense (40,819) (40,514) (41,040)
Advisory fee, management and leasing
fees - related parties (7,995) (7,423) (7,376)
General and administrative (1,272) (1,401) (2,319)
Write-down of assets to net
realizable value -- -- (2,727)
------------ ----------- ------------
Operating loss $ (18,987) $ (24,176) $ (27,341)
============ =========== ============
IDENTIFIABLE ASSETS (AT YEAR END)
Hotels $ 86,815 $ 84,255 $ 87,143
Commercial properties 78,063 78,388 81,821
Other 135,695 129,923 144,448
------------ ----------- ------------
$ 300,573 $ 292,566 $ 313,412
============ =========== ============
DEPRECIATION
Hotels $ 6,186 $ 5,535 $ 5,230
Commercial properties 4,311 4,446 4,452
Other 46 39 32
------------ ----------- ------------
$ 10,543 $ 10,020 $ 9,714
============ =========== ============
CAPITAL EXPENDITURES
Hotels $ 8,462 $ 4,769 $ 13,815
Commercial properties 5,288 2,444 2,544
Other 1,079 195 103
------------ ----------- ------------
$ 14,829 $ 7,408 $ 16,462
============ =========== ============
</TABLE>
<PAGE>
35. CONDENSED FINANCIAL STATEMENTS - THE TRUST
These condensed financial statements reflect the Real Estate Trust and all its
consolidated subsidiaries except for the Bank which has been reflected on the
equity method.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30
-----------------------------------
(In thousands) 1997 1996
- ------------------------------------------- ----------------- -----------------
<S> <C> <C>
ASSETS
Income-producing properties $ 242,450 $ 232,628
Accumulated depreciation (85,915) (76,513)
----------------- -----------------
156,535 156,115
Land parcels 42,160 41,580
Construction in progress 2,480 --
Equity investment in bank 205,552 184,258
Cash and cash equivalents 18,248 15,516
Other assets 81,150 81,292
----------------- -----------------
TOTAL ASSETS $ 506,125 $ 478,761
================= =================
LIABILITIES
Mortgage notes payable $ 180,204 $ 173,345
Notes payable - secured 175,000 177,500
Notes payable - unsecured 46,633 42,367
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred
shares of beneficial interest 36,231 31,563
Other liabilities and accrued expenses 39,959 40,434
----------------- -----------------
Total liabilities 590,910 578,092
----------------- -----------------
TOTAL SHAREHOLDERS' DEFICIT* (84,785) (99,331)
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 506,125 $ 478,761
================= =================
</TABLE>
* See Consolidated Statements of
Shareholders' Deficit
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended September 30
-------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Total income $ 84,569 $ 76,839 $ 77,285
Total expenses (108,601) (104,321) (109,971)
Equity in earnings of partnership investments 4,150 3,374 3,681
Gain (loss) on sales of property 895 (68) 1,664
--------- --------- ---------
Real estate operating loss (18,987) (24,176) (27,341)
Equity in earnings of bank 27,391 15,846 22,882
--------- --------- ---------
Total company operating income (loss) 8,404 (8,330) (4,459)
Income tax benefit (10,456) (8,252) (15,309)
--------- --------- ---------
TOTAL COMPANY NET INCOME (LOSS) $ 18,860 $ (78) $ 10,850
========= ========= =========
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended September 30
-------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 18,860 $ (78) $ 10,850
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 10,543 10,020 9,714
Write-down of real estate to net realizable
value -- -- 2,727
(Gain) loss on sales of property (895) 68 (1,654)
Equity in earnings of bank (27,391) (15,846) (22,882)
(Increase) decrease in deferred tax asset (3,252) (192) 10,836
(Increase) decrease in tax sharing receivable 2,492 16,606 (5,685)
(Increase) decrease in accounts receivable and
accrued income 17 (4,869) (224)
Increase in accounts payable and
accrued expenses 1,058 430 317
Other 5,479 2,893 325
--------- --------- ---------
Net cash provided by operating activities 6,911 9,032 4,324
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures - properties (10,120) (7,408) (6,270)
Property acquisitions (4,709) -- (10,193)
Property sales 1,399 1,812 --
Equity investment in unconsolidated entities 1,723 639 (733)
Other investing activities 43 50 53
--------- --------- ---------
Net cash used in investing activities (11,664) (4,907) (17,143)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 32,894 6,208 16,328
Repayments of long-term debt (24,033) (11,471) (16,083)
Costs of obtaining financings (626) (201) (516)
Dividends paid (750) (500) --
--------- --------- ---------
Net cash provided by (used in) financing
activities 7,485 (4,907) (271)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 2,732 (1,839) (13,090)
Cash and cash equivalents at beginning of year 15,516 17,355 30,445
--------- --------- ---------
Cash and cash equivalents at end of year $ 18,248 $ 15,516 $ 17,355
========= ========= =========
</TABLE>
<PAGE>
MANAGEMENT'S STATEMENT ON RESPONSIBILITY
The Consolidated Financial Statements and related financial information in this
report have been prepared by the Advisor (management) in accordance with
generally accepted accounting principles appropriate in the circumstances, based
on best estimates and judgments, with consideration given to materiality.
The Trust maintains a system of internal accounting control supported by
documentation to provide reasonable assurance that the books and records reflect
authorized transactions of the Trust, and that the assets of the Trust are
safeguarded.
The Board of Trustees exercises its responsibility for the Trust's financial
statements through its Audit Committee, which is composed of two outside
Trustees who meet periodically with the Trust's independent accountants and
management. The Committee considers the audit scope, discusses financial and
reporting subjects, and reviews management actions on these matters. The
independent accountants have full access to the Audit Committee.
The independent accountants are recommended by the Audit Committee and confirmed
by the Board of Trustees. They provide an objective assessment of the fairness
and accuracy of the financial statements, consider the adequacy of the system of
internal accounting controls, and perform such tests and other procedures as
they deem necessary to express an opinion on the fairness of the financial
statements. Management believes that the policies and procedures it has
established provide reasonable assurance that its operations are conducted in
conformity with law and a high standard of business conduct.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The Declaration of Trust provides that there shall be no fewer than three nor
more than twelve Trustees, as determined from time to time by the Trustees in
office. The Board of Trustees has fixed its permanent membership at six Trustees
divided into three classes with overlapping three-year terms. The term of each
class expires at the Annual Meeting of Shareholders, which is usually held on
the last Friday of January.
The following list sets forth the name, age, position with the Trust, present
principal occupation or employment and material occupations, positions, offices
or employments during the past five years of each Trustee and executive officer
of the Trust. Unless otherwise indicated, each individual has held an office
with the Trust for at least the past five years.
Class Two Trustees --Terms End at 1998 Annual Meeting
George M. Rogers, Jr., age 64, has served as a Trustee since 1969. His
professional corporation is a partner in the law firm of Shaw, Pittman, Potts &
Trowbridge, Washington, D.C., which serves as counsel to the Trust and the Bank.
Mr. Rogers serves as a Director of the Bank, B. F. Saul Company, Chevy Chase
Property Company, Westminster Investing Corporation, and Chevy Chase Lake
Corporation.
B. Francis Saul III, age 35, was elected a Trustee and Vice President of the
Trust in 1997. He also serves as a Director and/or Officer of the Bank, B. F.
Saul Company, B. F. Saul Advisory Company, Franklin Property Company, Chevy
Chase Property Company, Westminster Investing Corporation, and Saul Centers,
Inc. He is also a Director of the Greater Washington Boys and Girls Club and The
Heights School.
Class Three Trustees --Terms End at 1999 Annual Meeting
Garland J. Bloom, Jr., age 66, has served as a Trustee since 1964. He is
currently a real estate consultant. He was formerly Executive Vice President and
Principal of GMB Associates, Inc. (a real state finance and management firm)
from 1988 to 1990 and Vice Chairman and Chief Operating Officer of
Smithy-Braedon Company (a real estate finance and management firm) from 1985 to
1987.
John R. Whitmore, age 64, has served as a Trustee since 1984. He also serves as
Director, President and Chief Executive Officer of The Bessemer Group,
Incorporated (a financial management and banking firm) and its Bessemer Trust
Company subsidiaries with which he has been an associated since 1975, and as a
Director of Bessemer Securities Corporation, Chevy Chase Property Company, B. F.
Saul Company and Saul Centers, Inc.
Class One Trustees --Terms End at 2000 Annual Meeting
Gilbert M. Grosvenor, age 66, has served as a Trustee since 1971. He also serves
as Chairman of the Board of Trustees of the National Geographic Society and as a
Director of the Bank, Saul Centers, Inc., Marriott International Corp., and
Ethyl Corporation.
<PAGE>
B. Francis Saul II, age 65, has served as Chairman and Chief Executive Officer
of the Trust since 1969 and as a Trustee since 1964. He also serves as President
and Chairman of the Board of Directors of B. F. Saul Company, B. F. Saul
Advisory Company, Chevy Chase Property Company, Westminster Investing
Corporation, and Chevy Chase Lake Corporation, as Chairman of the Board of the
Bank, as Chairman of the Board and Chief Executive Officer of Saul Centers,
Inc., and as a Trustee of the National Geographic Society and the Brookings
Institute.
EXECUTIVE OFFICERS OF THE TRUST WHO ARE NOT DIRECTORS
Philip D. Caraci, age 59, serves as Senior Vice President and Secretary of the
Trust, Executive Vice President of B.F. Saul Company, Senior Vice President of
B. F. Saul Advisory Company, President of Franklin Property Company and a
Director and President of Saul Centers, Inc.
Stephen R. Halpin, Jr., age 42, serves as Vice President and Chief Financial
Officer of the Trust. He also serves as Executive Vice President and Chief
Financial Officer of the Bank.
Ross E. Heasley, age 58, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company, Franklin Property Company and Saul
Centers, Inc.
Henry Ravenel, Jr., age 63, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company and Saul Centers, Inc.
William K. Albright, age 66, serves as Vice President and Treasurer of the
Trust, B. F. Saul Company, Franklin Property Company and B. F. Saul Advisory
Company, and as Vice President of Saul Centers, Inc.
COMMITTEES OF THE BOARD OF TRUSTEES
The Board of Trustees met four times during fiscal 1997. Each member of the
Board attended at least 75% of the aggregate number of meetings of the Board and
of the Committees of the Board on which he served.
The Board of Trustees has three standing committees: the Audit Committee, the
Executive Committee and the Nominating Committee.
The Audit Committee is composed of Messrs. Bloom and Grosvenor. Its duties
include nominating the Trust's independent auditors, discussing with them the
scope of their examination of the Trust, reviewing with them the Trust's
financial statements and accompanying report, and reviewing their
recommendations regarding internal controls and related matters. This Committee
met four times during fiscal 1997.
The Executive Committee is composed of Messrs. Rogers, Saul II and Whitmore. It
is empowered to oversee day-to-day actions of the Advisor and Franklin in
connection with the operations of the Trust, including the acquisition,
administration, sale or disposition of investments. This Committee did not meet
during fiscal 1997.
The Nominating Committee is composed of Messrs. Rogers and Whitmore. Its
function is to screen and make recommendations to the Board of Trustees
regarding potential candidates for membership on the Board and to perform such
other duties as may be assigned to it from time to time. This Committee did not
meet during fiscal 1997.
<PAGE>
Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee
of $600 for each Board or committee meeting attended. Trustees from outside the
Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul II is not paid for
attending Executive Committee meetings. For the fiscal year ended September 30,
1997, the Real Estate Trust paid total fees of $89,400 to the Trustees,
including $14,900 to Mr. Saul II.
ITEM 11. EXECUTIVE COMPENSATION
The Trust pays no compensation to its executive officers for their services in
such capacity. Mr. Saul II receives compensation from the Bank for his services
as the Bank's Chairman of the Board of Directors and Chief Executive Officer,
and Mr. Halpin, receives compensation from the the Bank for his services as
Executive Vice President and Chief Financial Officer. No other executive
officers of the Trust received any compensation from the Trust or its
subsidiaries with respect to any of the fiscal years ended September 30, 1997,
1996 or 1995.
The following table set forth the cash compensation paid by the Bank to Mr. Saul
and Mr. Halpin for or with respect to the fiscal years ended September 30, 1997,
1996 and 1995 for all capacities in which they served during such fiscal years.
Summary Compensation Table
Annual Compensation
Name and Principal Other Annual All Other
Position Fiscal Salary Bonus Compensation Compensation
- --------------------- ------ ------------ --------- ------------ ------------
B. Francis Saul II 1997 $1,230,440 $600,000 $ -- $292,807 (1)
Chairman and Chief 1996 1,015,054 500,000 -- 214,426 (2)
Executive Officer 1995 830,441 400,000 -- 228,138 (3)
Stephen R. Halpin, Jr. 1997 $375,402 $54,000 $ -- $69,167 (1)
Vice President and 1996 332,320 58,000 -- 50,295 (2)
Chief Financial 1995 304,627 44,250 -- 51,830 (3)
Officer
- ---------------------
(1) The total amounts shown in the "All Other Compensation" column for fiscal
1997 consist of the following: (i) contributions made by the Bank to the Bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul ($109,616) and Mr.
Halpin ($16,164); (ii) the taxable benefit of premiums paid by the Bank for
group term insurance on behalf of Mr. Halpin ($2,325); (iii) contributions to
the B.F. Saul Company Employees Profit Sharing Retirement Plan (the "Retirement
Plan"), a defined contribution plan, on behalf of Mr. Halpin ($9,600); and (iv)
accrued earnings on awards previously made under the Bank's Deferred
Compensation Plan on behalf of Mr. Saul ($183,191) and Mr. Halpin ($41,078).
<PAGE>
(2) The total amounts shown in the "All Other Compensation" column for fiscal
1996 consist of the following: (i) contributions made by the Bank to the Bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul ($90,693) and Mr.
Halpin ($14,373); (ii) the taxable benefit of premiums paid by the Bank for
group term insurance on behalf of Mr. Halpin ($2,102); (iii) contributions total
the B. F. Saul Company Employees Profit Sharing Retirement Plan (the "Retirement
Plan"), a defined contribution plan, on behalf of Mr. Halpin ($9,000); and (iv)
accrued earnings on awards previously made under the Bank's Deferred
Compensation Plan on behalf of Mr. Saul ($123,733) and Mr. Halpin ($24,820).
(3) The total amounts shown in the "All Other Compensation" column for fiscal
1995 consist of the following: (i) contributions made by the Bank to the Bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul ($73,847) and Mr.
Halpin $5,193); (ii) the taxable benefit of premiums paid by the Bank for group
term insurance on behalf of Mr. Halpin ($1,450); (iii) contributions to the B.
F. Saul Company Employees Profit Sharing Retirement Plan (the "Retirement
Plan"), a defined contribution plan, on behalf of Mr. Halpin ($15,763); and (iv)
accrued earnings on awards previously made under the Bank's Deferred
Compensation Plan on behalf of Mr. Saul ($154,291) and Mr. Halpin ($29,424).
Long-Term Incentive Plan Awards. The following table sets forth certain
information concerning the principal contributions (the "Principal
Contributions") credited by the Bank to the accounts (the "Accounts") of the
executive officers of the Bank named above for fiscal 1997 under the Bank's
Deferred Compensation Plan (the "Plan").
Long-Term Incentive Program - Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Number Performance
of Shares Or Other Estimated Future Payouts Under
Units Period Until Non-Stock Price-Based Plans
Name and Principal Or Other Maturation -------------------------------
Position Rights(1) Or Payout Threshold Target(2) Maximum
- ------------------------ --------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
B. Francis Saul II(3)(4) N/A 2002 $500,000 $895,424 $3,095,868
Chairman and Chief
Executive Officer
Stephen R. Halpin, Jr.(4) N/A 2007 $110,000 $196,993 $681,091
Vice President and
Chief Financial
Officer
</TABLE>
- ------------------------
(1) The estimated future payouts shown in the table are based on assumed
performance rates for the Bank during each year in the ten-year performance
period. The actual payouts under the Plan may vary substantially from the
payouts shown in the table, depending upon the Bank's actual rate of return on
average assets for each fiscal year in the ten-year performance period ending
September 30, 2007.
(2) The Plan does not establish any target performance levels. The payout
amounts shown in this column have been calculated assuming that the Bank's rate
of return on average assets during each of the years in the performance period
are the same as the Bank's rate of return during the fiscal year ended September
30, 1997.
<PAGE>
(3) The payout amount shown for Mr. Saul is the estimated amount that would be
payable to Mr. Saul if his employment continued with the Bank for the entire
ten-year performance period of the Plan. Mr. Saul will attain the age of 70 in
2002 at which time he will become fully vested in the account maintained for his
benefit under the plan. Under the Plan, if Mr. Saul were to retire after that
date, he could elect to have the Bank pay out the Net Contribution (as defined )
in his account prior to the year 2007. Certain of the awards credited by the
Bank to the Account maintained for the benefit of Mr. Saul under the Plan vested
at the time Mr. Saul attained age 60 in 1992. Certain other awards credited by
the Bank to the Account maintained for the benefit of Mr. Saul will vest up on
the earlier of (i) five years after the date of the award, (ii) his attainment
of the age 70 in 2002, (iii) his death, (iv) his total or permanent disability,
or a change in control of the Bank (as defined in the Plan). Accordingly, as of
September 30, 1997, Mr. Saul was partially vested in the Account maintained for
his benefit under the Plan. As of that date, the vested Account balance
maintained for Mr. Saul's benefit under the plan was $866,474.
(4) As of September 30, 1996 the following individuals have vested Accounts that
are payable within 120 days after September 30, 1997; Mr. Saul ($216,936); and
Mr. Halpin ($36,156).
The Plan provides that, as of the end of each fiscal year in the ten-year period
ending September 30, 2007 (or the executive officer's earlier termination of
employment with the Bank), the Bank will add to or deduct from each executive
officer's Account a contribution or deduction, as the case may be, which
represents, the hypothetical interest (which may be positive or negative) earned
on the Principal Contribution, based on the Bank's rate of return on average
assets (as computed under the Plan) for the fiscal year then ended. (The
Principal Contribution, plus or minus any interest credited or deducted, is
referred to as the "Net Contribution").
Executive officers are entitled to receive the Net Contribution in their
respective Account only upon full or partial vesting. Plan participants become
fully vested in their Account under the Plan, provided that they remain
continuously employed by the Bank during the vesting period, upon the earliest
to occur of any of the following: (i) September 30, 2007; (ii) attainment of age
60; (iii) death; (iv) total and permanent disability; or (v) a change in control
of the Bank (as defined in the Plan). Plan participants become partially vested
to the extent of 50% of the Net Contribution in the Account, upon the
termination of their employment by the Bank without cause (as defined in the
Plan) after September 30, 2002.
Payouts are made under the Plan without 120 days after September 30, 2007, or
the earlier termination of the executive officer's employment with the Bank,
provided that vesting or partial vesting has occurred under the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information, as of December 5, 1997,
concerning beneficial ownership of Common Shares and Preferred Shares of
Beneficial Interest ("Preferred Shares") by (i) each person known by the Trust
to be the beneficial owner of more than 5% of the Common Shares and the
Preferred Shares, (ii) each member of the Board of Trustees, (iii) each
executive officer of the Trust named in the Summary Compensation Table under
"Executive Compensation" and (iv) all Trustees and executive officers of the
Trust as a group.
<PAGE>
<TABLE>
<CAPTION>
Aggregate Number of Percent
Name of Shares of
Beneficial Owner Beneficially Owned (1) Class (1)
- ----------------------- ---------------------- ------------------
<S> <C> <C>
B. Francis Saul II Preferred:
516,000 (2) 100.00%
Common:
4,807,510 (3) 99.60%
Philip D. Caraci Common:
19,400 (4) 0.40%
All Trustees and Preferred:
executive officers 516,000 (2) 100.00%
as a group (10 persons) Common:
4,826,910 100.00%
</TABLE>
- -----------------------
(1) Beneficial owner and percent of class are calculated pursuant to rule 13d-3
under the Securities Exchange Act of 1934.
(2) Consists of Preferred Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer, director and/or more than 10%
shareholder (comprising 270,000 Preferred Shares owned by B. F. Saul Company,
90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000
Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares
owned by Westminster Investing Corporation). The address of each person listed
in this footnote is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
Pursuant to Rule 13d-3, the Preferred Shares described above are considered to
be beneficially owned by Mr. Saul because he has or may be deemed to have sole
or shared voting and/or investment power in respect thereof.
(3) Consists of Common Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer and director and/or more than 10%
shareholder (comprising 1,125,739 Common Shares owned by Westminster Investing
Corporation, 43,673 Common Shares owned by Derwood Investment Corporation (a
subsidiary of Westminster Investing Corporation), 34,400 Common Shares owned by
Somerset Investment Company, Inc. (a subsidiary of Westminster Investing
Corporation), 2,545,362 Common Shares owned by B. F. Saul Company, 206,300
Common Shares owned by Columbia Credit Company (a subsidiary of B. F. Saul
Company), 283,400 Common Shares owned by Columbia Securities Company of
Washington, D. C., 172,918 Common Shares owned by Franklin Development Company,
Inc., and 395,718 Common Shares owned by The Klingle Corporation). The address
of each person listed in this footnote is 8401 Connecticut Avenue, Chevy Chase,
Maryland 20815. Pursuant to Rule 13d-3, the Common Shares described above are
considered to be beneficially owned by Mr. Saul because he has or may be deemed
to have sole or shared voting and/or investment power in respect thereof.
(4) Mr. Caraci has entered into an agreement with the Trust under which he is
required to sell all Common Shares he then owns to the Trust when his employment
by B. F. Saul Company and any of its affiliates ceases for any reason, including
retirement, termination, death or disability. The price Mr. Caraci will receive
for his Common Shares will be the greater of $28.00 per Share or the price the
Trust determines at the time is the fair market value thereof.
<PAGE>
The Preferred Shares were issued in June 1990 in connection with the transaction
in which the Trust increased its equity interest in the Bank from 60% to 80%.
The dividend rate on the Preferred Shares is $10.50 per share per annum.
Dividends are cumulative and are payable annually or at such other times as the
Trustees may determine, as and when declared by the Trustees out of any assets
legally available therefor. The Preferred Shares have a liquidation preference
of $100 per share. Subject to limits in certain of the Trust's loan agreements,
the Preferred Shares are subject to redemption at the option of the Trust at a
redemption price equal to their liquidation preference. Except as otherwise
required by applicable law, the holders of Preferred Shares are entitled to vote
only in certain limited situations, such as the merger of the Trust or a sale of
all or substantially all of the assets of the Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with B. F. Saul Company and its Subsidiaries. The Real Estate Trust
is managed by the Advisor, a wholly owned subsidiary of the Saul Company. All of
the officers of the Trust and B. Francis Saul II, George M. Rogers, Jr., B.
Francis Saul III and John R. Whitmore, each of whom is a Trustee of the Trust,
are also officers and/or directors of the Saul Company and/or its subsidiary
corporations. The Advisor is paid a fixed monthly fee subject to annual review
by the Trustees. The monthly fee was $292,000 for the period October 1994
through September 1995, $301,000 for the period October 1995 through March 1996,
$306,000 for the period April 1996 through September 1996, and $311,000 for the
period October 1996 through September 1997. The advisory contract has been
extended until September 30, 1998, and will continue thereafter unless cancelled
by either party at the end of any contract year. Certain loan agreements
prohibit termination of this contract.
The Saul Company and Franklin, a wholly owned subsidiary of the Saul Company,
provide services to the Real Estate Trust in the areas of commercial property
management and leasing, hotel management, development and construction
management, and acquisitions, sales and financings of real property. The fee
schedules of the Saul Company and Franklin are reviewed and approved by the
Trustees. Fees to the Saul Company and Franklin amounted to $5.1 million in
fiscal 1997.
The Real Estate Trust reimburses the Advisor and Franklin for costs and expenses
incurred in connection with the acquisition and development of real property on
behalf of the Real Estate Trust, in-house legal expenses, and all travel
expenses incurred in connection with the affairs of the Real Estate Trust.
The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of publicly offered Unsecured Notes as they are issued to offset the Advisor's
costs of administering the program. The Advisor received $100,000 in such fees
in fiscal 1997.
B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the Saul Company,
is a general insurance agency that receives commissions and counter-signature
fees in connection with the Real Estate Trust's insurance program. Such
commissions and fees amounted to $158,000 in fiscal 1997.
In fiscal 1994 the Real Estate Trust made an unsecured loan to the Saul Company
of $15.0 million bearing interest at 1/2 percent over prime and due on demand.
In fiscal 1995 the loan balance was reduced to $12.7 million. In fiscal 1996 the
Real Estate Trust made loans aggregating $3.5 million to the Saul Company.
During fiscal 1997 a curtail of $750,000 was paid by the Saul Company. At
September 30, 1997 the total due the Real Estate Trust was $15.4 million.
Interest accrued on these loans amounted to $1.4 million, $1.4 million and $1.2
million during fiscal 1997, 1996 and 1995 respectively.
<PAGE>
Remuneration of Trustees and Officers. For fiscal 1997, the Real Estate Trust
paid the Trustees $89,400 in fees for their services. See "Trustees and
Executive Officers of the Trust." No compensation was paid to the officers of
the Real Estate Trust for acting as such; however, Mr. Saul II was paid by the
Bank for his services as the Bank's Chairman and Chief Executive Officer and Mr.
Halpin was paid by the Bank for his services as Executive Vice President and
Chief Financial Officer of the Bank. See "Executive Compensation." Messrs.
Grosvenor, Rogers, Saul II and Saul III receive compensation for their services
as directors of the Bank and Messrs. Rogers, Saul II , Saul III and Whitmore and
all of the officers of the Real Estate Trust receive compensation from the Saul
Company and/or its affiliated corporations as directors or officers thereof.
Legal Services. For legal services to the Real Estate Trust and its wholly-owned
subsidiaries, the law firm in which the professional corporation of George M.
Rogers, Jr., a Trustee of the Trust, is a partner received $293,000 in fiscal
1997, excluding expense reimbursements.
Other Transactions. The Real Estate Trust leases space to the Bank and Franklin
at one of its income-producing properties. Amounts paid under these leases
amounted to $239,000 in fiscal 1997.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated Financial Statements of the Trust are
incorporated by reference in Part II, Item 8.
(a) Report of Independent Public Accountant.
(b) Consolidated Balance Sheets - As of September 30, 1997 and 1996.
(c) Consolidated Statements of Operations - For the years ended
September 30, 1997, 1996 and 1995.
(d) Consolidated Statements of Shareholders' Deficit - For the years
ended September 30, 1997, 1996 and 1995.
(e) Consolidated Statements of Cash Flows - For the years ended
September 30, 1997, 1996 and 1995.
(f) Notes to Consolidated Financial Statements.
2. Financial Statement Schedules and Supplementary Data
(a) Selected Quarterly Financial Data for the Real Estate Trust
are incorporated by reference in Part II, Item 8.
(b) Report of Independent Public Accountant.
(c) Schedules of the Real Estate Trust:
Schedule I - Condensed Financial Information - For the years
ended September 30, 1997, 1996 and 1995.
Schedule III - Consolidated Schedule of Investment Properties
As of September 30, 1997.
<PAGE>
EXHIBITS DESCRIPTION
- -------- -----------------------------------------------------------------
3. ORGANIZATIONAL DOCUMENTS
(a) Amended and Restated Declaration of Trust filed with the Maryland
State Department of Assessments and Taxation on June 22, 1990 as
filed as Exhibit 3(a) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
(b) Amendment to Amended and Restated Declaration of Trust reflected
in Secretary Certificate filed with the Maryland State Department
of Assessments and Taxation on June 26, 1990 as filed as Exhibit
3(b) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(c) Amended and Restated By-Laws of the Trust dated as of February
28, 1991 as filed as Exhibit T3B to the Trust's Form T-3
Application for Qualification of Indentures under the Trust
Indenture Act of 1939 (File No. 22-20838) is hereby incorporated
by reference.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
(a) Indenture dated as of March 30, 1994 between the Trust and
Norwest Bank Minnesota, National Association, as Trustee, with
respect to the Trust's 115/8% Series B Senior Secured Notes due
2002, as filed as Exhibit 4(a) to Registration Statement
33-52995 is hereby incorporated by reference.
(b) Indenture with respect to the Trust's Senior Notes Due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration No. 33-19909 is hereby incorporated by reference.
(c) First Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit T-3C to the Trust's Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939
(File No. 22-20838) is hereby incorporated by reference.
(d) Indenture with respect to the Trust's Senior Notes due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration Statement No. 33-9336 is hereby incorporated by
reference.
(e) Fourth Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby
incorporated by reference.
(f) Third Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby
incorporated by reference.
(g) Second Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby
incorporated by reference.
(h) Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue as filed as
Exhibit 4(a) to Registration Statement No. 2-68652 is hereby
incorporated by reference.
(i) Indenture with respect to the Trust's Senior Notes due from One
Year to Five Years from Date of Issue as filed as Exhibit T-3C to
the Trust's Form T-3 Application for Qualification of Indentures
under
<PAGE>
EXHIBITS DESCRIPTION
- -------- -----------------------------------------------------------------
the Trust Indenture Act of 1939 (file No. 22-10206) is hereby
incorporated by reference
(j) Indenture dated as of September 1, 1992 with respect to the
Trust's Notes due from One to Ten Years form Date of Issue filed
as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
10. MATERIAL CONTRACTS
(a) Advisory Contract with B.F. Saul Advisory Company effective
October 1, 1982 filed as Exhibit 10(a) to Registration Statement
No. 2-80831 is hereby incorporated by reference.
(b) Commercial Property Leasing and Management Agreement effective
October 1, 1982 between the Trust and Franklin Property Company
filed as Exhibit 10(b) to Registration Statement No. 2-80831 is
hereby incorporated by reference.
(c) Tax sharing Agreement dated June 28,1990 among the Trust, Chevy
Chase Savings Bank F.S.B. and certain of their subsidiaries filed
as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(d) Agreement dated June 28, 1990 among the Trust B.F. Saul Company,
Franklin Development Co., Inc., The Klingle Corporation and
Westminster Investing Corporation relating to the transfer of
certain shares of Chevy Chase Savings Bank, F.S.B. and certain
real property to the Trust in exchange for preferred shares of
beneficial interest of the Trust filed as Exhibit 10(d) to
Registration Statement No. 33-34930 is hereby incorporated by
reference.
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17,
1988 among B.F. Saul Company, the Trust and the Federal Savings
and Loan Insurance Corporation filed as Exhibit 10(e) to the
Trust's Annual Report on Form 10-K (File No. 1-7184) for the
fiscal year ended September 30, 1991 is hereby incorporated by
reference.
(f) Written Agreement dated September 30, 1991 between the Office of
Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as
Exhibit 10(f) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(g) Amendments to Commercial Property Leasing and Management
Agreement between the Trust and Franklin Property Company dated
as of December 31, 1992 (Amendment No. 5), July 1, 1989
(Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1,
1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed
as Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(h) Advisory Contract between B.F. Saul Advisory Company and Dearborn
Corporation dated as of December 31, 1992 filed as Exhibit 10(p)
to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(i) Commercial Property Leasing and Management Agreement between
Dearborn Corporation and Franklin Property Company dated as of
December 31, 1992 filed as Exhibit 10(q) to Registration
Statement No. 33-34930 is hereby incorporated by reference.
<PAGE>
EXHIBITS DESCRIPTION
- -------- -----------------------------------------------------------------
(j) Registration Rights and Lock-Up Agreement dated August 26, 1993
by and among Saul Centers, Inc. and the Trust, Westminster
Investing Corporation, Van Ness Square Corporation, Dearborn
Corporation, Franklin Property Company and Avenel Executive Park
Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement
No. 33-64562 is hereby incorporated by reference.
(k) Exclusivity and Right of First Refusal Agreement dated August 26,
1993 among Saul Centers, Inc., the Trust, B. F. Saul Company,
Westminster Investing Corporation, Franklin Property Company, Van
Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as
filed as Exhibit 10.7 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(l) First Amended and Restated Reimbursement Agreement dated as of
August 1, 1994 by and among Saul Centers, Inc., Saul Holdings
Limited Partnership, Saul Subsidiary I limited Partnership, Saul
Subsidiary II Limited Partnership, Avenel Executive Park Phase
II, Inc., Franklin Property Company, Westminster Investing
Corporation, Van Ness Square Corporation, Dearborn Corporation
and the Trust filed as Exhibit 10(l) to the Trust's Annual Report
on Form 10-K (File No. 1-7184) for the fiscal year ended
September 30, 1995 is hereby incorporated by reference.
(m) Amendment to Written Agreement dated October 29, 1993 between the
Office of Thrift Supervision and Chevy Chase Savings Bank, F.S.B.
filed as Exhibit 10(u) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
(n) Registration Rights Agreement dated as of March 30, 1994 among
the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Friedman, Billings, Ramsey & Co., Inc. as
filed as Exhibit 4(c) to Registration Statement No. 33-52995 is
hereby incorporated by reference.
(o) Bank Stock Registration Rights Agreement dated as of March 30,
1994 between the Trust and Norwest Bank Minnesota, National
Association, as Trustee, as filed as Exhibit 4(d) to Registration
Statement No. 33-52995 is hereby incorporated by reference.
*21. List of Subsidiaries of the Trust.
*27. Financial Data Schedule.
- ---------------------
* Filed herewith.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Trusees and Shareholders of
B.F. Saul Real Estate Investment Trust
We have audited the consolidated financial statements of B.F. Saul Real Estate
Investment Trust (the "Trust") as of September 30, 1997 and 1996 and for the
years then ended in accordance with generally accepted auditing standards, and
have issued our report thereon dated December 9, 1997. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedules listed in Item 14 are the responsibility of the Trust's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
This information has been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects as to the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
December 9, 1997
<PAGE>
B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION SCHEDULE I
(a) Required consensed financial information on the Trust is disclosed in
the audited consolidated financial statements included herewith.
(b) Amounts of cash dividends paid to the Trust by consolidated subsidiaries
were as follows:
Year Ended September 30
---------------------------------------
1997 1996 1995
$7,200,000 $6,800,000 None
<PAGE>
<TABLE>
<CAPTION>
Consolidated Schedule of Investment Properties - Real Estate Trust Schedule III
September 30, 1997
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
----------------------------------------------------------
Initial Subsequent Buildings
Basis to to and Leasehold
Hotels Trust Acquisition Land Improvements Interests Total
- ------------------------------------------ ------------- ------------- ----------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Hampton Inn-Dulles, Sterling VA $ -- $ 6,085 $ 290 $ 5,795 $ -- $ 6,085
Holiday Inn, Auburn Hills MI 10,450 876 1,031 10,295 -- 11,326
Holiday Inn, Cincinnati OH 6,859 2,428 245 9,042 -- 9,287
Holiday Inn, Sterling VA 6,950 20,023 862 26,111 -- 26,973
Holiday Inn, Gaithersburg MD 3,849 14,780 1,781 16,848 -- 18,629
Holiday Inn, Herndon VA 5,259 -- 1,178 4,081 -- 5,259
Holiday Inn, Pueblo CO 3,458 2,270 561 5,167 -- 5,728
Holiday Inn, Rochester NY 3,340 9,359 605 12,094 -- 12,699
Holiday Inn, Tysons Corner VA 6,976 12,593 3,107 16,462 -- 19,569
Howard Johnsons, Arlington VA 10,187 2,815 1,183 11,819 -- 13,002
------------- ------------- ----------- ------------------ ------------- -------------
Subtotal - Hotels $ 57,328 $ 71,229 $ 10,843 $ 117,714 $ -- $ 128,557
------------- ------------- ----------- ------------------ ------------- -------------
Commercial
- ------------------------------------------
900 Circle 75, Atlanta GA $ 33,434 $ 1,134 $ 563 $ 34,005 $ -- $ 34,568
1000 Circle 75, Atlanta GA 2,820 1,057 248 3,629 -- 3,877
1100 Circle 75, Atlanta GA 22,746 2,003 419 24,330 -- 24,749
8201 Greensboro, Tysons Corner VA 28,890 3,700 1,633 30,957 -- 32,590
Commerce Ctr-Ph II, Ft Lauderdale FL 4,266 719 782 4,203 -- 4,985
Dulles North, Loudoun County VA -- 5,552 421 5,131 -- 5,552
Metairie Tower, Metairie LA 2,729 578 403 2,904 -- 3,307
------------- ------------- ----------- ------------------ ------------- -------------
Subtotal - Commercial $ 94,885 $ 14,743 $ 4,469 $ 105,159 $ -- $ 109,628
------------- ------------- ----------- ------------------ ------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Schedule of Investment Properties - Real Estate Trust Schedule III (Continued)
September 30, 1997
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
----------------------------------------------------------
Initial Subsequent Buildings
Basis to to and Leasehold
Purchase-Leasebacks Trust Acquisition Land Improvements Interests Total
- ------------------------------------------ ------------- ------------- ----------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Chateau di Jon, Metairie, LA $ 1,125 $ -- $ 1,125 $ -- $ -- $ 1,125
Country Club, Knoxville, TN 500 -- 500 -- -- 500
Houston Mall, Warner Robbins, GA 650 -- 650 -- -- 650
Old National, Atlanta, GA 550 -- 550 -- -- 550
------------- ------------- ----------- ------------------ ------------- -------------
Subtotal - Purchase-Leasebacks $ 2,825 $ -- $ 2,825 $ -- $ -- $ 2,825
------------- ------------- ----------- ------------------ ------------- -------------
Miscellaneous investments $ 633 $ 807 $ 250 $ 1,041 $ 149 $ 1,440
------------- ------------- ----------- ------------------ ------------- -------------
Total Income-Producing Properties $ 155,671 $ 86,779 $ 18,387 $ 223,914 $ 149 $ 242,450
------------- ------------- ----------- ------------------ ------------- -------------
Land Parcels
- ------------------------------------------
Arvida Park of Commerce,
Boca Raton, FL $ 7,378 143 $ 7,521 $ -- $ -- $ 7,521
Avenel, Gaithersburg, MD 361 (82) 279 -- -- 279
Church Road, Loudoun Co., VA 2,586 2,272 4,858 -- -- 4,858
Circle 75, Atlanta, GA 12,927 4,276 17,203 -- -- 17,203
Flagship Centre, Rockville, MD 1,729 39 1,768 -- -- 1,768
Holiday Inn - Auburn Hills, Auburn Hills MI 656 656 -- -- 656
Holiday Inn - Rochester, Roch., NY 68 -- 68 -- -- 68
Overland Park, Overland Park, KA 3,771 398 4,169 -- -- 4,169
Prospect Indust. Pk, Ft. Laud., FL 2,203 10 2,213 -- -- 2,213
Sterling Blvd., Loudoun Co., VA -- 3,425 3,425 -- -- 3,425
------------- ------------- ----------- ------------------ ------------- -------------
Subtotal $ 31,023 $ 11,137 $ 42,160 $ -- $ -- $ 42,160
------------- ------------- ----------- ------------------ ------------- -------------
Total Investment Properties $ 186,694 $ 97,916 $ 60,547 $ 223,914 $ 149 $ 284,610
============= ============= =========== ================== ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Schedule of Investment Properties - Real Estate Trust Schedule III (Continued)
September 30, 1997
(Dollars in Thousands)
Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Hotels Depreciation Debt Construction Acquired Lives (Years)
- ------------------------------------------ ------------------- ------------------ -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Hampton Inn-Dulles, Sterling VA $ 2,263 $ 6,017 1987 4/87 31.5
Holiday Inn, Auburn Hills MI 1,084 7,254 1989 11/94 31.5
Holiday Inn, Cincinnati OH 4,723 5,738 1975 2/76 40
Holiday Inn, Dulles VA 11,227 12,133 1971 11/84 28
Holiday Inn, Gaithersburg MD 6,965 6,926 1972 6/75 45
Holiday Inn, Herndon VA 133 3,364 1987 10/96 40
Holiday Inn, Pueblo CO 2,582 3,604 1973 3/76 40
Holiday Inn, Rochester NY 5,710 13,256 1975 3/76 40
Holiday Inn, Tysons Corner VA 7,225 15,608 1971 6/75 47
Howard Johnsons, Arlington VA 5,358 9,014 1973 11/83 30
------------------- ------------------
Subtotal - Hotels $ 47,270 $ 82,914
------------------- ------------------
Commercial
- ------------------------------------------
900 Circle 75, Atlanta GA $ 12,226 $ 20,924 1985 12/85 35
1000 Circle 75, Atlanta GA 1,956 3,460 1974 4/76 40
1100 Circle 75, Atlanta GA 10,640 14,332 1982 9/82 40
8201 Greensboro, Tysons Corner VA 9,444 34,681 1985 4/86 35
Commerce Ctr-Ph II, Ft Lauderdale FL 1,428 3,028 1986 1/87 35
Dulles North, Loudoun County VA 1,093 3,172 1990 10/90 31.5
Metairie Tower, Metairie LA 1,544 -- 1974 11/76 40
------------------- ------------------
Subtotal - Commercial $ 38,331 $ 79,597
------------------- ------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Schedule of Investment Properties - Real Estate Trust Schedule III (Continued)
September 30, 1997
(Dollars in Thousands)
Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Purchase-Leasebacks Depreciation Debt Construction Acquired Lives (Years)
- ------------------------------------------ ------------------- ------------------ -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Chateau di Jon, Metairie, LA $ -- $ -- 11/73
Country Club, Knoxville, TN -- -- 5/76
Houston Mall, Warner Robbins, GA -- -- 2/72
Old National, Atlanta, GA -- -- 8/71
------------------- ------------------
Subtotal - Purchase-Leasebacks $ -- $ --
------------------- ------------------
Miscellaneous investments $ 314 $ --
------------------- ------------------
Total Income-Producing Properties $ 85,915 $ 162,511
------------------- ------------------
Land Parcels
- ------------------------------------------
Arvida Park of Commerce,
Boca Raton, FL $ -- $ 16,390 12/84 & 5/85
Avenel, Gaithersburg, MD -- -- 12/76
Church Road, Loudoun Co., VA -- -- 9/84 & 4/85
Circle 75, Atlanta, GA -- 2,312 2/77 & 1/84
Flagship Centre, Rockville, MD -- -- 8/85
Holiday Inn - Auburn Hills, Auburn Hills MI -- 499 7/97
Holiday Inn - Rochester, Roch., NY -- -- 9/86
Overland Park, Overland Park, KA -- -- 1/77 & 2/85
Prospect Indust. Pk, Ft. Laud., FL -- -- 10/83 & 8/84
Sterling Blvd., Loudoun Co., VA -- -- 4/84
------------------- ------------------
Subtotal $ -- $ 19,201
------------------- ------------------
Total Investment Properties $ 85,915 $ 181,712
=================== ==================
</TABLE>
<PAGE>
Schedule III (Continued)
CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES - REAL ESTATE TRUST
NOTES:
(1) See Summary of Significant Accounting Policies for basis of
recording investment properties and computing depreciation.
Investment properties are discussed in Note 3 to Consolidated
Financial Statements.
(2) A reconciliation of the basis of investment properties and
accumulated depreciation follows.
BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
(In thousands)
<TABLE>
<CAPTION>
For The Year Ended September 30
-----------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Basis of investment properties
- -------------------------------------------------
Balance at beginning of period $ 274,208 $ 277,385 $ 266,095
Additions (reductions) during the period:
Capital expenditures 12,069 7,408 16,462
Sales - nonaffiliates (525) (5,382) --
Write-down of assets to net realizable value -- -- (2,727)
Other (1,142) (5,203) (2,445)
----------------------- ----------------------- -----------------------
Balance at end of period $ 284,610 $ 274,208 $ 277,385
======================= ======================= =======================
Accumulated depreciation
- -------------------------------------------------
Balance at beginning of period $ 76,513 $ 75,140 $ 68,111
Additions (reductions) during the period:
Depreciation expense 10,543 10,020 9,714
Sales - nonaffiliates -- (3,441) --
Other (1,141) (5,206) (2,685)
----------------------- ----------------------- -----------------------
Balance at end of period $ 85,915 $ 76,513 $ 75,140
======================= ======================= =======================
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Trust has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
B.F. Saul Real Estate Investment Trust
December 29, 1997 B. Francis Saul II
---------------------------------------------
B. Francis Saul II
Chairman of the Board
Pursuant to the requirements of the Securities Exchanges Act of 1934. this
report had been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates shown.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
B. Francis Saul II
- -------------------------- Trustee, Chairman of the Board
B. Francis Saul II (Principal Executive Officer) December 29, 1997
Stephen R. Halpin, Jr. December 29, 1997
- -------------------------- Vice President and Chief
Stephen R. Halpin, Jr. Financial Officer (Principal
Financial Officer)
Ross E. Heasley December 29, 1997
- -------------------------- Vice President (Principal
Ross E. Heasley Accounting Officer)
Garland J. Bloom, Jr. December 29, 1997
- -------------------------- Trustee
Garland J. Bloom, Jr.
Gilbert M. Grosvenor December 29, 1997
- -------------------------- Trustee
Gilbert M. Grosvenor
George M. Rogers, Jr. December 29, 1997
- -------------------------- Trustee
George M. Rogers, Jr.
John R. Whitmore December 29, 1997
- -------------------------- Trustee
John R. Whitmore
</TABLE>
<PAGE>
EXHIBIT 21
B. F. SAUL REAL ESTATE INVESTMENT TRUST
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Current
Site of Date of Principal
Incorporation Acquisition/ Business
Formation Activity
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
100% OWNED SUBSIDIARIES
Arlington Hospitality Corp. Virginia 1997 Hotel Owner
Auburn Hills Hotel Corporation Maryland 1994 Hotel Owner
Auburn Hills Land Corp. Maryland 1997 Land Owner
Avenel Executive Park Phase II, Inc. Maryland 1987 Real Estate
Investor
Commerce Center Development Corp. Florida 1980 Office Park
Owner
Crystal City Hospitality Corp. Virginia 1989 Hotel Owner
Dallas San Simeon Incorporated Texas 1993 Apartment
Project
Owner
Dearborn Corporation Delaware 1992 Land Owner
Dulles Airport Hotel Corporation Virginia 1989 Inactive
Dulles Hospitality Corp. Virginia 1997 Hotel Owner
Flagship Centre Corporation Maryland 1985 Land Owner
Herndon Hotel Corporation Virginia 1996 Hotel Owner
MHC Airport Inn. Inc. (a) New York 1980/1976 Hotel
Operator
MHC Corporation Maryland 1980/1974 Hotel
Operator
Metairie Office Towers, Inc. (b) Louisiana 1995 Office Bldg
Owner
NVA Development Corporation Virginia 1984 Gen'l Part/
Real Est.
P/ship
Peachtree / Northeast Corp. Georgia 1979 Land Owner
Pueblo Hotel Corp. Colorado 1985 Hotel Owner
Rochester Airport Hotel Corporation New York 1986 Inactive
Scope Hospitality Corp. Virginia 1989 Inactive
Sharonville Hotel Corporation Ohio 1986 Inactive
Sterling Hotel Corporation Virginia 1997 Hotel Owner
Tysons Corner Hospitality Corp. Virginia 1989 Inactive
Wheeler Road, Inc. Maryland 1992 Inactive
900 Corporation Georgia 1981 Office Bldg
Owner
1100 Corporation Georgia 1979 Office Bldg
Owner
1113 Corporation Florida 1984 Gen'l Part/
Real Est.
P/ship
</TABLE>
- ---------------------------------------
(a) Subsidiary of MHC Corporation
(b) Subsidiary of Dearborn Corporation
<PAGE>
EXHIBIT 21 (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
LIST OF SUBSIDIARIES (Continued)
<TABLE>
<CAPTION>
Date of Current
Site of Acquistion Principal Business
Note Corporation Formation/ Activity
- --------------------------------------------------------------------------------------------------------------------------------
80% OWNED SUBSIDIARIES
<S> <C> <C> <C> <C>
Ashburn Village Development Corporation (A) Maryland 1991 Real Estate Owned (REO)
Bailey's Corporation (sold property 11/95) (A) Maryland 1993 Inactive
Balmoral Golf Corporation (B) Maryland 1992 Inactive
B. F. Saul Mortgage Company (C) Maryland 1984 Residential Loan Origination
Bondy Way Development Corporation (A) Maryland 1990 REO
Brambleton Land Corporation (A) Maryland 1977 REO
Brooke Manor Land Corporation (sold
property 8/96) (A) Maryland 1990 Inactive
CCB Holding Corporation (C) Delaware 1994 Investments
CCRE, Inc. (D) Maryland 1984 Inactive
Cherrytree Corporation (A) Maryland 1993 REO
Chevy Chase Bank, F.S.B. United States 1969 Savings Bank
Chevy Chase Financial Services Corporation (C) Virginia 1996 Stock Ownership of CCIA and CCS
Chevy Chase Insurance Agency, Inc. ("CCIA") (E) Maryland 1985/1971 Insurance Agency
Chevy Chase Mortgage Company (F) Maryland 1972 Inactive
Chevy Chase Mortgage Company of Virginia (C) Virginia 1996 Inactive
Chevy Chase Preferred Capital Corporation (C) Maryland 1996 Real Estate Investment Trust (REIT)
Chevy Chase Real Estate Corporation (C) Virginia 1996 Holding Company
Chevy Chase Securities, Inc. ("CCS") (E) Maryland 1984 Securities
Consumer Finance Corporation (C) Virginia 1994 Consumer Loan Origination
Duvall Village Corporation (A) Maryland 1992 REO
First Balmoral Corporation (A) Maryland 1991 REO
Great Seneca Development Corporation (A) Maryland 1991 REO
Hamlets at Brambleton, Inc. (A) Virginia 1997 REO
Inglewood Corporation (sold property 11/95) (A) Maryland 1990 Inactive
Manor Holding Corporation (C) Virginia 1996 Inactive
Manor Investment Company (G) Maryland 1971 Real Estate Ownership / Development
Marbury I Corporation (A) Maryland 1991 REO
Marbury II Corporation (A) Maryland 1991 REO
NML Corporation (A) Maryland 1992 REO
North Ode Street Development Corporation (D) Maryland 1981 Real Estate Finance / Development
Oak Den, Inc. (sold remaining lots 10/94) (A) Maryland 1991 Inactive
Old Chapel Corporation (A) Maryland 1992 REO
Presley Corporation (C) Maryland 1993 Real Estate Ownership
Primrose Development Corporation (A) Maryland 1990 REO
Ridgeview Centre Corp. (A) Maryland 1992 REO
Ronam Corporation, Inc. (C) Maryland 1986 Real Estate Finance/Development
Sully Park Corporation (sold property 6/96) (A) Maryland 1990 Inactive
Sully Station Corporation (sold property 9/97) (A) Maryland 1990 Inactive
Sycolin - Leesburg Corporation (A) Maryland 1992 REO
Terminal Drive Properties Corporation (A) Maryland 1991 REO
</TABLE>
- -------------------------------------------
(A) Subsidiary of Chevy Chase Real Estate Corporation
(B) Subsidiary of First Balmoral Corporation
(C) Subsidiary of Chevy Chase Bank, F.S.B.
(D) Subsidiary of Manor Investment Company
(E) Subsidiary of Chevy Chase Financial Services Corporation
(F) Subsidiary of Chevy Chase Mortgage Company of Virginia
(G) Subsidiary of Manor Holding Company
<PAGE>
Attachment B
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20579
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 9, 1998, was 4,826,910.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
(a) Consolidated Balance Sheets at December 31, 1997 and
September 30, 1997
(b) Consolidated Statements of Operations for the
three-month periods ended December 31, 1997 and 1996
(c) Consolidated Statements of Cash Flows for the
three-month periods ended December 31, 1997 and 1996
(d) Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three months ended December 31, 1997 compared
to three months ended December 31, 1996
PART II. OTHER INFORMATION
Item 6. Exhibits:
Exhibit 27
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
December 31 September 30
-------------- --------------
(In thousands) 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 155,325 $ 128,557
Office and industrial 109,443 109,628
Other 4,275 4,265
------------ ------------
269,043 242,450
Accumulated depreciation (88,574) (85,915)
------------ ------------
180,469 156,535
Land parcels 42,279 42,160
Construction in progress 4,298 2,480
Cash and cash equivalents 8,628 18,248
Other assets 81,745 81,150
------------ ------------
Total real estate assets 317,419 300,573
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and other deposits 376,751 286,891
Federal funds sold and securities purchased under agreements to resell 300,000 365,000
Loans held for sale 108,441 102,749
Loans held for securitization and sale 180,000 220,000
Trading securities 16,744 7,899
Investment securities (market value $38,977 and $5,012, respectively) 39,008 4,998
Mortgage-backed securities (market value $1,746,589 and $1,984,667, respectively) 1,752,149 1,985,707
Loans receivable (net of allowance for losses of $113,131 and $105,679, respectively) 2,327,325 2,104,240
Federal Home Loan Bank stock 33,170 33,170
Real estate held for investment or sale (net of allowance for losses of $143,872 and $140,936,
respectively 88,932 94,290
Property and equipment, net 278,832 273,562
Goodwill and other intangible assets, net 31,680 8,846
Interest-only strips, net 139,365 105,812
Other assets 456,544 464,249
------------ ------------
Total banking assets 6,128,941 6,057,413
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,446,360 $ 6,357,986
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable $ 206,969 $ 180,204
Notes payable - secured 175,000 175,000
Notes payable - unsecured 47,252 46,633
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred shares of beneficial interest 37,585 36,231
Other liabilities and accrued expenses 31,648 39,959
------------ ------------
Total real estate liabilities 611,337 590,910
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 4,994,545 4,893,756
Borrowings 86,931 81,840
Federal Home Loan Bank advances 139,939 188,511
Other liabilities and accrued expenses 170,551 168,060
Capital notes -- subordinated 250,000 250,000
------------ ------------
Total banking liabilities 5,641,966 5,582,167
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 53,734 51,388
Minority interest -- other 218,307 218,306
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,525,344 6,442,771
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' DEFICIT
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares
authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million 516 516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
6,641,598 shares issued 6,642 6,642
Paid-in surplus 92,943 92,943
Deficit (137,140) (142,642)
Net unrealized holding loss (97) (396)
------------ ------------
(37,136) (42,937)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (78,984) (84,785)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,446,360 $ 6,357,986
- ------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months
Ended December 31
------------------------------
(In thousands, except per share amounts) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE
Income
Hotels $ 15,206 $ 13,209
Office and industrial properties 5,518 4,833
Other 1,025 978
-------------- --------------
Total income 21,749 19,020
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
Hotels 10,222 9,061
Office and industrial properties 1,911 1,840
Land parcels and other 399 469
Interest expense 10,082 9,971
Amortization of debt expense 140 174
Depreciation 2,659 2,649
Advisory, management and leasing fees - related parties 2,043 1,912
General and administrative 384 480
-------------- --------------
Total expenses 27,840 26,556
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of unconsolidated entities (1,339) 444
- -----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $ (7,430) $ (7,092)
- -----------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans $ 74,495 $ 93,240
Mortgage-backed securities 26,607 18,914
Trading securities 472 244
Investment securities 402 144
Other 4,419 2,729
-------------- --------------
Total interest income 106,395 115,271
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 48,779 38,326
Borrowings 9,513 19,218
-------------- --------------
Total interest expense 58,292 57,544
-------------- --------------
Net interest income 48,103 57,727
Provision for loan losses (35,062) (26,840)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,041 30,887
- -----------------------------------------------------------------------------------------------------------------------------------
Other income
Loan and deposit servicing fees 76,228 63,285
Credit card fees 13,758 14,532
Gain (loss) on sales of trading securities, net 557 (51)
Loss on real estate held for investment or sale, net (4,914) (4,374)
Gain on sales of loans, net 33,172 7,901
Net unrealized gain on interest-only strips 3,824 --
Other 6,744 6,318
-------------- --------------
Total other income 129,369 87,611
- -----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months
Ended December 31
------------------------------
(In thousands, except per share amounts) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 44,845 $ 36,604
Loan 9,762 4,320
Property and equipment 6,680 5,665
Marketing 20,315 20,077
Data processing 10,549 11,845
Depreciation and amortization 7,830 6,543
Deposit insurance premiums 1,466 2,066
Amortization of goodwill and other intangible assets 798 368
Other 10,732 11,052
-------------- --------------
Total operating expenses 112,977 98,540
- -----------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME $ 29,433 $ 19,958
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Operating income $ 22,003 $ 12,866
Income tax provision 5,581 5,131
-------------- --------------
Income before extraordinary item and minority interest 16,422 7,735
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (266) --
-------------- --------------
Income before minority interest 16,156 7,735
Minority interest held by affiliates (2,971) (1,740)
Minority interest -- other (6,329) (3,692)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME 6,856 2,303
DEFICIT
Beginning of period (142,642) (156,084)
Dividends
Preferred shares of beneficial interest 1,354 1,354
- -----------------------------------------------------------------------------------------------------------------------------------
End of period $ (137,140) $ (155,135)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 5,502 $ 949
NET INCOME PER COMMON SHARE
Income before extraordinary item and minority interest $ 3.13 $ 1.32
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (0.06) --
-------------- --------------
Income before minority interest 3.07 1.32
Minority interest held by affiliates (0.62) (0.36)
Minority interest -- other (1.31) (0.76)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.14 $ 0.20
- -----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months
Ended December 31
------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (5,027) $ (4,658)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 2,659 2,649
Early extiguishment of debt 266 --
Decrease (increase) in accounts receivable and accrued income (1,397) (855)
Decrease (increase) in deferred tax asset (2,691) (2,517)
Increase in accounts payable and accrued expenses (7,209) (5,772)
Amortization of debt expense 140 174
Equity in (earnings) losses of unconsolidated entities 1,339 (444)
Other 2,632 2,653
-------------- --------------
(9,288) (8,770)
-------------- --------------
Banking
Net income 11,883 6,961
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 7,998 (1,172)
Depreciation and amortization 7,889 6,656
Amortization of goodwill and other intangible assets 802 2,418
Provision for loan losses 35,062 26,840
Capitalized interest on real estate held for investment or sale (499) (559)
Net purchases of trading securities (8,845) --
Proceeds from sales of trading securities 137,539 91,926
Net fundings of loans held for sale and/or securitization (197,425) (191,348)
Proceeds from sales of loans held for sale and/or securitization 829,487 755,197
Earnings on real estate (332) (424)
Provision for losses on real estate held for investment or sale 5,307 4,697
(Gain) loss on sales of trading securities, net (557) 51
Gain on sales of loans, net (33,172) (7,901)
Unrealized gain on interest-only strips (3,824) --
Increase in interest-only strips (33,553) --
Increase in excess servicing assets -- (9,117)
Decrease (increase) in servicing assets 6,930 (1,519)
Increase in goodwill and other intangible assets (23,870) --
Decrease (increase) in other assets 557 (64,169)
Increase (decrease )in other liabilities and accrued expenses 1,455 (16,475)
Minority interest held by affiliates 2,971 1,740
Minority interest - other 2,438 2,438
Other 3,940 (2,136)
-------------- --------------
752,181 604,104
-------------- --------------
Net cash provided by operating activities 742,893 595,334
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (2,086) (1,497)
Property acquisitions (26,124) (4,709)
Equity investment in unconsolidated entities 1,327 1,097
-------------- --------------
(26,883) (5,109)
-------------- --------------
Banking
Net proceeds from redemption of Federal Home Loan Bank stock -- 9,482
Net proceeds from sales of real estate 3,566 7,327
Net fundings of loans receivable (691,629) (725,811)
Principal collected on mortgage-backed securities 233,730 103,667
Purchases of investment securities (34,010) --
Purchases of mortgage-backed securities -- (168,941)
Purchases of loans receivable (272,979) (195,186)
Purchases of property and equipment (13,253) (17,295)
Disbursements for real estate held for investment or sale (3,325) (5,952)
Other (1,830) 233
-------------- --------------
(779,730) (992,476)
-------------- --------------
Net cash used in investing activities (806,613) (997,585)
- -----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months
Ended December 31
------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 54,278 $ 19,500
Principal curtailments and repayments of mortgages (27,448) (9,750)
Repayments of secured notes -- (2,500)
Proceeds from sales of unsecured notes 2,587 1,881
Repayments of unsecured notes (1,968) (351)
Costs of obtaining financings (818) (236)
Loan prepayment fees (80) --
Dividends paid - preferred shares of beneficial interest -- (750)
-------------- --------------
26,551 7,794
-------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 6,181,097 4,221,190
Customer withdrawals of deposits and payments for maturing certificates of deposit (6,080,308) (4,179,256)
Net increase in securities sold under repurchase agreements 8,768 55,755
Advances from the Federal Home Loan Bank 106,602 393,216
Repayments of advances from the Federal Home Loan Bank (155,174) (243,616)
Proceeds from other borrowings 2,385,502 1,004,944
Repayments of other borrowings (2,389,177) (1,026,649)
Cash dividends paid on preferred stock (2,438) (2,438)
Cash dividends paid on common stock (3,500) (3,000)
Repayment of capital notes - subordinated -- (10,000)
Net proceeds received from capital notes - subordinated -- 96,112
Net proceeds from issuance of preferred stock -- 144,000
Other 1,037 (133)
-------------- --------------
52,409 450,125
-------------- --------------
Net cash provided by financing activities 78,960 457,919
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 15,240 55,668
Cash and cash equivalents at beginning of period 670,139 281,941
-------------- --------------
Cash and cash equivalents at end of period $ 685,379 $ 337,609
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 76,216 $ 72,718
Income taxes paid 1,826 290
Shares of Saul Centers, Inc. common stock 706 844
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 706 565
Distributions from Saul Holdings Limited Partnership 1,363 1,363
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 1,204 1,514
Loans held for sale exchanged for trading securities 137,414 92,072
Loans receivable transferred to loans held for sale and/or securitization 697,547 576,582
Loans made in connection with the sale of real estate 3,624 467
Loans receivable transferred to real estate acquired in settlement of loans 1,222 1,148
Loans receivable exchanged for mortgage-backed securities held-to-maturity 2,786 --
- -----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements reflect
all adjustments necessary for a fair presentation of the Trust's financial
position and results of operations. All such adjustments are of a normal
recurring nature. These financial statements and the accompanying notes should
be read in conjunction with the Trust's audited consolidated financial
statements included in its Form 10-K for the fiscal year ended September 30,
1997. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year.
2. The accompanying financial statements include the accounts of B. F. Saul Real
Estate Investment Trust and its wholly owned subsidiaries (the "Real Estate
Trust"), which are involved in the ownership and development of income-producing
properties. The accounts of the Trust's 80%-owned banking subsidiary, Chevy
Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase" or the "Bank") have also
been consolidated. Accordingly, the accompanying financial statements reflect
the assets, liabilities, operating results and cash flows for two business
segments: Real Estate and Banking. All significant intercompany balances and
transactions have been eliminated.
3. The Trust voluntarily terminated its qualification as a real estate
investment trust under the Internal Revenue Code during fiscal 1978. As a result
of the Trust's acquisition of an additional 20% equity interest in the Bank in
June 1990, the Bank became a member of the Trust's affiliated group filing
consolidated federal income tax returns. The current effect of the Trust's
consolidation of the Bank's operations into its federal income tax return
results in the use of the Trust's net operating losses and net operating loss
carryforwards to reduce the federal income taxes the Bank would otherwise owe.
4. BANKING:
LOANS HELD FOR SALE:
Loans held for sale are composed of the following:
December 31, September 30,
1997 1997
------------ -----------
(In thousands)
Single-family residential $ 97,616 $ 102,749
Home improvement and related loans 10,825 -
------------ -----------
$ 108,441 $ 102,749
============ ===========
<PAGE>
LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale are composed of the following:
December 31, September 30,
1997 1997
---------- ----------
(In thousands)
Credit card $ 60,000 $ 90,000
Automobile 60,000 80,000
Home equity credit line 60,000 50,000
---------- ----------
Total $ 180,000 $ 220,000
========== ==========
LOANS RECEIVABLE:
December 31, September 30,
1997 1997
-------------- -------------
(In thousands)
Single-family residential $ 993,291 $ 747,070
Home equity credit line 81,101 44,088
Commercial real estate and multifamily 73,270 53,816
Real estate construction 118,330 77,221
Ground 29,446 29,592
Commercial 183,439 152,483
Credit card 949,173 987,149
Automobile 88,563 137,111
Home improvement and related loans 57,003 49,551
Overdraft lines of credit and
other consumer 35,578 36,029
-------------- -------------
2,609,194 2,314,110
-------------- -------------
Less:
Undisbursed portion of loans 171,462 106,217
Unearned discounts 420 449
Net deferred loan origination
costs (3,144) (2,475)
Allowance for loan losses 113,131 105,679
-------------- -------------
281,869 209,870
-------------- -------------
Total $ 2,327,325 $ 2,104,240
============== =============
<PAGE>
REAL ESTATE HELD FOR INVESTMENT OR SALE:
The Bank's real estate held for investment is carried at the lower of aggregate
cost or net realizable value. The Bank's real estate acquired in settlement of
loans is considered to be held for sale and is carried at the lower of cost or
fair value (less estimated selling costs).
Real estate held for investment or sale is composed of the following:
December 31, September 30,
1997 1997
----------- -----------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
----------- -----------
Real estate held for sale 228,985 231,407
----------- -----------
Less:
Allowance for losses on real estate
held for investment 198 198
Allowance for losses on real estate
held for sale 143,674 140,738
----------- -----------
143,872 140,936
----------- -----------
Total real estate held for
investment or sale $ 88,932 $ 94,290
=========== ===========
<PAGE>
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 December 31, 1997, the Bank's assets accounted for
approximately 95% of the Trust's consolidated assets. The Trust recorded net
income of $6.9 million for the three-month period ended December 31, 1997,
compared to net income of $2.3 million for the three-month period ended December
31, 1996.
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B. F.
Saul Real Estate Investment and its subsidiaries, including Chevy Chase and
Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real Estate
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the Bank and its subsidiaries
is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at
December 31, 1997, which consisted primarily of hotels, office and industrial
projects, and land parcels, was increased by one property from the number at
September 30, 1997. In the first quarter of fiscal 1998, the Real Estate Trust
purchased a 308-room Holiday Inn in Arlington, Virginia.
Space in the Real Estate Trust's commercial property portfolio was 99% leased at
December 31, 1997, compared to leasing rates of 99% and 95% at September 30,
1997 and December 31, 1996, respectively. At December 31, 1997, the Real Estate
Trust's commercial property portfolio had a total gross leasable area of 1.3
million square feet, of which 217,000 square feet (16.6%) and 258,000 square
feet (19.7%) are subject to leases whose terms expire in the balance of fiscal
1998 and in fiscal 1999, respectively.
The nine hotel properties owned by the Real Estate Trust throughout the first
fiscal quarters of 1998 and 1997 experienced average occupancy rates of 64% and
61%, respectively, and average room rates of $75.91 and $69.96, respectively.
Five of these hotels registered improved occupancy rates and seven registered
higher average room rates in the current period. Overall, the hotel portfolio
experienced an average occupancy rate of 63% and an average room rate of $75.84
during the quarter ended December 31, 1997. On December 10, 1997, the Real
Estate Trust purchased a 308-room Holiday Inn hotel located in Arlington,
Virginia, near Washington National Airport and the Real Estate Trust's Howard
Johnsons hotel. The purchase price was $25.8 million. The Real Estate Trust
obtained 15 - year fixed rate financing on the hotel in the amount of $17.7
million.
<PAGE>
BANKING
General. The Bank recorded operating income of $29.4 million during the December
1997 quarter, compared to operating income of $20.0 million in the prior
corresponding period. The increase in operating income for the current quarter
was primarily a result of a $41.8 million increase in the Bank's other
(non-interest) income, which was primarily due to increased gains on sales of
loans and loan and deposit servicing fees. Partially offsetting these increases
were a decrease in interest income, an increase in the provision for loan losses
and an increase in operating expenses. See "Results of Operations."
Gains on sales of loans of $33.2 million continued to be a large component of
the Bank's non-interest income during the current quarter and resulted primarily
from the Bank's securitization activity. During the December 1997 quarter, the
Bank securitized and sold $335.0 million of credit card receivables, $220.9
million of automobile loan receivables and $161.7 million of home equity credit
line receivables, and recognized gains of $4.5 million, $9.0 million and $4.1
million, respectively, in connection with these sales. See "Liquidity." Gains of
$17.6 million were also recognized during the quarter on sales of loans that
were transferred to existing trusts. Amortization of the interest-only strips
related to prior gains on sales of loans, in the amount of $8.6 million is
included in loan and deposit servicing fees.
At December 31, 1997, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.65%, 6.65%, 6.81% and 13.01%,
respectively. The Bank's capital ratios exceeded the requirements under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA")
as well as the standards established for "well-capitalized" institutions under
the prompt corrective action regulations issued pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). See "Capital."
During the quarter, the Bank declared and paid, out of the retained earnings of
the Bank, a cash dividend on its Common Stock in the amount of $350 per share.
On November 12, 1997, the Bank purchased ASB Capital Management, Inc. ("ASB"),
formerly a wholly-owned subsidiary of NationsBank Corporation and one of the
largest SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area. ASB provides a variety of investment products, including
equity and fixed income securities, money market investments, and real estate
investments, to a primarily institutional client base and has approximately $3.0
billion of assets under management. The Bank anticipates that the acquisition
will provide an additional source of fee-based revenues. Although the
acquisition generated additional goodwill which reduced the Bank's regulatory
capital levels, the Bank's capital levels remained above the levels established
for well-capitalized institutions.
Asset Quality. Non-Performing Assets. The following table sets forth information
concerning the Bank's non-performing assets at the dates indicated. The figures
shown are after charge-offs and, in the case of real estate acquired in
settlement of loans, after all valuation allowances.
<PAGE>
<TABLE>
Non-Performing Assets and Past Due Credit Card Loans
(Dollars in thousands)
December 31, September 30, December 31,
1997 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 10,379 $ 9,617 $ 9,082
Credit card (1) -- -- 31,414
Consumer and other 5,875 4,226 2,720
------------------ ------------------ -----------------
Total non-accrual loans (2) 16,254 13,843 43,216
------------------ ------------------ -----------------
Real estate acquired in settlement of loans 228,985 231,407 246,477
Allowance for losses on real estate acquired in
settlement of loans (143,674) (140,738) (131,216)
------------------ ------------------ -----------------
Real estate acquired in settlement of loans, net 85,311 90,669 115,261
------------------ ------------------ -----------------
Total non-performing assets 101,565 104,512 158,477
Accruing credit card loans past due 90 days (1) 26,357 25,700 --
------------------ ------------------ -----------------
Total non-performing assets and accruing credit card
loans past due 90 days $ 127,922 $ 130,212 $ 158,477
================== ================== =================
Allowance for losses on loans $ 113,131 $ 105,679 $ 95,485
Allowance for losses on real estate held for investment 198 198 191
Allowance for losses on real estate acquired in settlement
of loans 143,674 140,738 131,216
------------------ ------------------ -----------------
Total allowances for losses $ 257,003 $ 246,615 $ 226,892
================== ================== =================
Ratios:
Non-performing assets and credit card loans past due
90 days, net to total assets (3) 0.24% 0.40% 1.02%
Allowance for losses on real estate loans to non-accrual
real estate loans (2) 95.41% 99.80% 115.68%
Allowance for losses on consumer and other loans to
non-accrual consumer and other loans (2) 136.94% 148.37% 187.02%
Allowance for losses on loans to non-accrual loans (2) 696.02% 763.41% 220.95%
Allowance for losses on loans to total loans receivable (4) 4.15% 4.17% 2.62%
(1) Effective June 30, 1997, the Bank no longer places credit card loans on
non-accrual status.
(2) Before deduction of allowances for losses.
(3) Non-performing assets and credit card loans past due 90 days are presented
after all allowances for losses on loans and real estate held for investment
or sale.
(4) Includes loans receivable and loans held for sale and/or securitization,
before deduction of allowance for losses.
</TABLE>
<PAGE>
Non-performing assets include non-accrual loans (loans, other than credit card
loans, which are contractually past due 90 days or more or with respect to which
other factors indicate that full payment of principal and interest is unlikely)
and real estate acquired in settlement of loans, either through foreclosure or
deed-in-lieu of foreclosure. Credit card loans are not placed on non-accrual
status, but continue to accrue interest until the loan is either paid or
charged-off.
Non-performing assets totaled $101.6 million, after valuation allowances on real
estate held for sale or real estate owned ("REO") of $143.7 million, at December
31, 1997, compared to $104.5 million, after valuation allowances on REO of
$140.7 million, at September 30, 1997. In addition to the valuation allowances
on REO, the Bank maintained $3.8 million of valuation allowances on its
non-accrual loans at December 31, 1997. The $2.9 million decrease in
non-performing assets for the current quarter was primarily attributable to a
net decrease in REO of $5.4 million, which was partially offset by an increase
in non-accrual loans of $2.5 million. See "Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $16.3 million at
December 31, 1997, as compared to $13.8 million at September 30, 1997. At
December 31, 1997, non-accrual loans consisted of $10.4 million of real estate
loans and $5.9 million of other consumer loans.
REO. At December 31, 1997, the Bank's REO totaled $85.3 million, after valuation
allowances on such assets of $143.7 million as set forth in the following table.
The principal component of REO consists of five planned unit developments (the
"Communities"), four of which are under active development. Only commercial
ground remains in two of the four active Communities. The fifth Community,
consisting of approximately 2,400 acres in Loudoun County, Virginia, is in the
predevelopment stage.
<TABLE>
<CAPTION>
Balance Balance
Before All After
Number of Valuation Valuation Valuation Percent
Properties Allowances Allowances Allowances of Total
---------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Communities 5 $ 205,332 $ 138,013 $ 67,319 78.9%
Residential ground 3 6,844 1,097 5,747 6.7%
Commercial ground 4 14,217 4,564 9,653 11.3%
Single-family
residential properties 22 2,592 - 2,592 3.1%
-- --------- --------- -------- -------
Total REO 34 $ 228,985 $ 143,674 $ 85,311 100.0%
== ========= ========= ======== =======
</TABLE>
During the three months ended December 31, 1997, REO decreased $5.4 million,
which was primarily attributable to additional sales in the Communities and
other properties, partially offset by additional capitalized costs, and
additional valuation allowances of $2.9 million.
During the three months ended December 31, 1997, the Bank received revenues of
$9.2 million from the disposition of REO, which consisted of 36 residential lots
or units in the Communities ($2.5 million), 65.4 acres of commercial land ($5.3
million) and various single-family residential properties ($1.4 million).
At December 31, 1997, the Bank had executed contracts to sell one residential
ground property and one commercial ground property at their aggregate book value
of $2.4 million at that date.
<PAGE>
Delinquent Loans. At December 31, 1997, delinquent loans totaled $81.8 million
(or 3.0% of loans) compared to $84.6 million (or 3.3% of loans) at September 30,
1997. The following table sets forth information regarding the Bank's delinquent
loans at December 31, 1997.
<TABLE>
<CAPTION>
Principal Balance
----------------------------------------- Total as a
Mortgage Non-Mortgage Percentage
Loans Loans Total of Loans (1)
----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Loans delinquent for:
30-59 days ............$ 5,142 $ 29,793 $ 34,935 1.3%
60-89 days ............ 1,609 18,923 20,532 0.7%
90 days or more and
still accruing....... - 26,357 26,357 1.0%
----------- ------------ ----------- -----
Total ................$ 6,751 $ 75,073 $ 81,824 3.0%
=========== ============ =========== =====
</TABLE>
- ----------------
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity credit line
loans. Total delinquent mortgage loans decreased from $8.5 million at September
30, 1997 to $6.8 million at December 31, 1997.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
decreased to $48.7 million at December 31, 1997 from $50.4 million at September
30, 1997, primarily due to a decline in delinquent credit card loans.
Non-mortgage loans delinquent 90 days or more and still accruing, which consists
entirely of credit card loans, increased slightly from $25.7 million at
September 30, 1997.
Troubled Debt Restructurings. At December 31, 1997 and September 30, 1997, loans
accounted for as troubled debt restructurings totaled $11.9 million, and
included one commercial permanent loan with a principal balance of $11.7 million
and one commercial collateralized loan with a principal balance of $0.2 million.
At December 31, 1997, the Bank had commitments to lend $0.1 million of
additional funds on loans that have been restructured.
Real Estate Held for Investment. At December 31, 1997 and September 30, 1997,
real estate held for investment consisted of two properties with an aggregate
book value of $3.6 million, net of valuation allowances of $0.2 million.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and the allowance for
losses on real estate held for investment or sale. These tables reflect
charge-offs taken against assets during the periods indicated and may include
charge-offs taken against assets which the Bank disposed of during such periods.
<PAGE>
<TABLE>
<CAPTION>
Analysis of Allowance for and Charge-offs of Loans
(Dollars in thousands)
Three Months Ended Year Ended
December 31, September 30,
----------------------------------
1997 1996 1997
-------------- -------------- --------------------
<S> <C> <C> <C>
Balance at beginning of period $ 105,679 $ 95,523 $ 95,523
-------------- -------------- --------------------
Provision for loan losses 35,062 26,840 125,115
-------------- -------------- --------------------
Increase due to acquisition of loans -- 118 118
-------------- -------------- --------------------
Charge-offs:
Single-family residential 274 332 1,014
Credit card 26,442 27,236 115,835
Other 3,972 1,902 9,657
-------------- -------------- --------------------
Total charge-offs 30,688 29,470 126,506
-------------- -------------- --------------------
Recoveries:
Single-family residential -- 9 34
Credit card 2,842 2,225 10,365
Other 236 240 1,030
-------------- -------------- --------------------
Total recoveries 3,078 2,474 11,429
-------------- -------------- --------------------
Charge-offs, net of recoveries 27,610 26,996 115,077
-------------- -------------- --------------------
Balance at end of period $ 113,131 $ 95,485 $ 105,679
============== ============== ====================
Provision for loan losses to average loans (1) (2) 5.45% 3.12% 3.50%
Net loan charge-offs to average loans (1) (2) 4.29% 3.14% 3.22%
Ending allowance for losses on loans to total
loans (2) (3) 4.15% 2.62% 4.17%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of allowance for losses.
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans by Type
(Dollars in thousands)
December 31,
-------------------------------------------------------------- September 30,
1997 1996 1997
------------------------------- ------------------------------ ------------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------------- ---------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period allocated to:
Single-family residential $ 784 40.1% $ 1,025 48.0% $ 661 33.5%
Home equity credit line 757 5.2 608 5.6 683 3.7
Commercial real estate and multifamily 7,781 2.2 7,924 2.1 7,705 2.1
Real estate construction and ground 581 2.1 949 1.6 550 2.2
Commercial 425 4.2 211 1.8 364 3.9
Credit card 94,758 37.0 79,681 31.9 89,446 42.6
Automobile 3,820 5.4 1,800 4.4 3,080 8.6
Home improvement and related loans 3,450 2.5 1,750 3.5 2,415 2.0
Overdraft lines of credit and
other consumer 775 1.3 1,537 1.1 775 1.4
-------------- -------------- --------------
Total $ 113,131 $ 95,485 $ 105,679
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(Dollars in thousands)
Three Months Ended Year Ended
December 31, September 30,
------------------------------------
1997 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 198 $ 191 $ 191
Real estate held for sale 140,738 126,519 126,519
--------------- --------------- ---------------
Total 140,936 126,710 126,710
--------------- --------------- ---------------
Provision for real estate losses:
Real estate held for investment -- -- 7
Real estate held for sale 5,307 4,697 19,616
--------------- --------------- ---------------
Total 5,307 4,697 19,623
--------------- --------------- ---------------
Charge-offs:
Real estate held for sale:
Ground 2,371 -- 5,397
--------------- --------------- ---------------
Total charge-offs on real estate
held for investment or sale 2,371 -- 5,397
--------------- --------------- ---------------
Balance at end of period:
Real estate held for investment 198 191 198
Real estate held for sale 143,674 131,216 140,738
--------------- --------------- ---------------
Total $ 143,872 $ 131,407 $ 140,936
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(Dollars in thousands)
December 31, September 30,
-----------------------------------
1997 1996 1997
--------------- -------------- -----------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 198 $ 191 $ 198
--------------- -------------- -----------------
Allowance for losses on real estate held for sale:
Single-family residential -- 83 --
Home equity credit line -- 1 --
Ground 143,674 131,132 140,738
--------------- -------------- -----------------
Total 143,674 131,216 140,738
--------------- -------------- -----------------
Total allowance for losses on real
estate held for investment or sale $ 143,872 $ 131,407 $ 140,936
=============== ============== =================
</TABLE>
<PAGE>
The Bank maintains valuation allowances for estimated losses on loans and real
estate. The Bank's total valuation allowances for losses on loans and real
estate held for investment or sale increased by $10.4 million from the level at
September 30, 1997 to $257.0 million at December 31, 1997. The $10.4 million
increase was primarily attributable to increased valuation allowances on credit
card loans and the Communities.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $153.7 million at December 31, 1997, which
constituted 64.2% of total non-performing real estate assets, before valuation
allowances. This amount represented a $3.2 million increase from the September
30, 1997 level of $150.5 million, or 62.5% of total non-performing real estate
assets, before valuation allowances at that date.
During the three months ended December 31, 1997, the Bank provided an additional
$5.9 million of valuation allowances on loans secured by real estate and real
estate held for investment or sale and recorded net charge-offs of $2.6 million
on these assets. The allowance for losses on real estate held for sale at
December 31, 1997 is in addition to approximately $48.7 million of cumulative
charge-offs previously taken against assets remaining in the Bank's portfolio at
December 31, 1997.
During the three months ended December 31, 1997, the Bank provided an additional
$0.9 million of general valuation allowances against the Communities pursuant to
its policy of providing additional general valuation allowances equal to, or in
excess of, the amount of the net earnings generated by the development and sale
of land in the Communities.
Net charge-offs of credit card loans for the three months ended December 31,
1997 were $23.6 million, compared to $25.0 million for the three months ended
December 31, 1996. The Bank believes that the decrease in net charge-offs over
the prior three-month period partially reflects the impact of more stringent
underwriting and other lending policies which the Bank implemented in recent
periods. The allowance for losses on credit card loans increased to $94.8
million at December 31, 1997 from $89.4 million at September 30, 1997, primarily
because of an increase in the provision for losses on such loans. The increase
in the provision was primarily attributable to an unallocated allowance
established by the Bank due to bankruptcies. The ratio of the allowance for such
losses to outstanding credit card loans was 9.4% at December 31, 1997 compared
to 8.3% at September 30, 1997.
The combined allowance for losses on consumer and other loans (automobile, home
improvement, overdraft lines of credit and other consumer loans) increased to
$8.0 million at December 31, 1997 from $6.3 million at September 30, 1997,
primarily because of the increased volume of consumer and other loans. The
ratios of the allowances for losses on consumer and other loans to
non-performing consumer and other loans and to outstanding consumer and other
loans were 136.9% and 3.2%, respectively, at December 31, 1997 compared to
148.4% and 2.1%, respectively, at September 30, 1997.
<PAGE>
Asset and Liability Management. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mixes, volumes and maturities to stabilize the
net interest spread is referred to as asset and liability management. The
objective of asset and liability management is to maximize the net interest
yield within the constraints imposed by prudent lending and investing practices,
liquidity needs and capital planning.
The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at December 31, 1997,
which reflects management's estimate of mortgage loan prepayments and
amortization and provisions for adjustable interest rates. Adjustable and
floating rate loans are included in the period in which their interest rates are
next scheduled to adjust, and prepayment rates are assumed for the Bank's loans
based on recent actual experience. Statement savings and passbook accounts with
balances under $20,000 are classified based upon management's assumed attrition
rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW
accounts, are assumed to be subject to repricing within six months or less.
<PAGE>
<TABLE>
Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
------------- ------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997 Real estate
loans:
Adjustable-rate $ 317,888 $ 597,111 $ 113,273 $ 1,718 $ 568 $ 1,030,558
Fixed-rate 7,918 3,269 18,974 21,567 13,876 65,604
Loans held for sale 108,441 -- -- -- -- 108,441
Home equity credit lines and second
mortgages 90,899 1,053 3,672 2,940 11,022 109,586
Credit card and other 1,055,434 30,325 75,244 49,453 24,252 1,234,708
Loans held for securitization and sale 180,000 -- -- -- -- 180,000
Mortgage-backed securities 741,993 437,852 435,600 109,734 26,970 1,752,149
Trading securities -- -- 16,744 -- -- 16,744
Other investments 497,233 -- 34,009 -- -- 531,242
------------- ------------ ------------- ------------- ----------- ------------
Total interest-earning assets 2,999,806 1,069,610 697,516 185,412 76,688 5,029,032
Total non-interest earning assets -- -- -- -- 1,099,909 1,099,909
------------- ------------ ------------- ------------- ----------- ------------
Total assets $ 2,999,806 $ 1,069,610 $ 697,516 $ 185,412 $1,176,597 $ 6,128,941
============= ============ ============= ============= =========== ============
Deposits:
Fixed maturity deposits $ 1,222,251 $ 238,263 $ 243,300 $ 49,278 $ -- $ 1,753,092
NOW, statement and passbook accounts 1,528,868 42,688 142,178 96,770 206,227 2,016,731
Money market deposit accounts 976,555 -- -- -- -- 976,555
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 183,754 373 6,444 19,256 17,043 226,870
------------- ------------ ------------- ------------- ----------- ------------
Total interest-bearing liabilities 3,911,428 281,324 391,922 165,304 473,270 5,223,248
Total non-interest bearing liabilities -- -- -- -- 562,718 562,718
Stockholders' equity -- -- -- -- 342,975 342,975
------------- ------------ ------------- ------------- ----------- ------------
Total liabilities & stockholders'
equity $ 3,911,428 $ 281,324 $ 391,922 $ 165,304 $1,378,963 $ 6,128,941
============= ============ ============= ============= =========== ============
Gap $ (911,622) $ 788,286 $ 305,594 $ 20,108 $ (396,582)
Cumulative gap $ (911,622) $ (123,336) $ 182,258 $ 202,366 $ (194,216)
Adjustment for interest rate caps (1) $ 261,111 $ 205,556 $ 50,000 $ -- $ --
Adjusted cumulative gap $ (650,511) $ 82,220 $ 232,258 $ 202,366 $ (194,216)
Adjusted cumulative gap as a
percentage of total assets (10.6%) 1.3% 3.8% 3.3% (3.2%)
(1) At December 31, 1997, the Bank had $305,556 notional amount of interest rate
caps. The adjustments reflect the average notional amount outstanding for each
period until the last cap expires June 30, 1999.
</TABLE>
<PAGE>
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, adjusted for the effect of
the Bank's interest rate caps, as a percentage of total assets, was 1.2% at
December 31, 1997.
Capital. At December 31, 1997, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for "well-capitalized" institutions under OTS prompt
corrective action regulations.
The following table shows the Bank's regulatory capital levels at December 31,
1997 in relation to the regulatory requirements in effect at that date. The
information below is based upon the Bank's under standing of the regulations and
interpretations currently in effect and may be subject to change.
<PAGE>
<TABLE>
Regulatory Capital
(Dollars in thousands)
Minimum Excess
Actual Capital Requirement Capital
--------------------------- ------------------------ -------------------------
As a % As a % As a %
Amount of Assets Amount of Assets Amount of Assets
------------ ----------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity per financial
statements $ 374,290
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding losses (2) 116
------------
518,406
Adjustments for tangible and core capital:
Intangible assets (66,312)
Non-allowable minority interest in
REIT Subsidiary (1) (42,582)
Non-includable subsidiaries (3) (3,762)
Non-qualifying purchased/originated
loan servicing (82)
------------
Total tangible capital 405,668 6.65% $ 91,441 1.50% $ 314,227 5.15%
------------ =========== ============ ========== ============ ==========
Total core capital (4) 405,668 6.65% $ 243,844 4.00% $ 161,824 2.65%
------------ =========== ============ ========== ============ ==========
Tier 1 risk-based capital (4) 405,668 6.81% $ 238,317 4.00% $ 167,351 2.81%
------------ =========== ============ ========== ============ ==========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 101,997
------------
Total supplementary capital 351,997
Excess allowance for loan losses (27,183)
------------
Adjusted supplementary capital 324,814
------------
Total available capital 730,482
Equity investments (3) (15,233)
------------
Total risk-based capital (4) $ 715,249 3.01% $ 476,634 8.00% $ 238,615 5.01%
============ =========== ============ ========== ============ ==========
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(3) Reflects an aggregate offset of $1.0 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio
of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a
total risk-based capital ratio of at least 10.0%.
</TABLE>
<PAGE>
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. In February 1998, the Bank received from the OTS an extension of the
holding periods for certain of its REO properties through February 17, 1999.
The following table sets forth the Bank's REO at December 31, 1997, after
valuation allowances of $143.7 million, by the fiscal year in which the property
was acquired through foreclosure.
Fiscal Year (In thousands)
--------------------- --------------
1990 (1) (2)......... $ 23,395
1991 (2)............. 46,599
1992 (2)............. 2,903
1993 ................ -
1994 ................ 1,776
1995 ................ 8,047
1996 ................ -
1997 ................ 2,591
--------------
Total REO ...... $ 85,311
==============
- -----------------------
(1) Includes REO with an aggregate net book value of $15.2 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $57.7 million, for
which the Bank received an extension of the holding periods
through February 17, 1999.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of outstanding
debt.
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. This condition is currently the case and is
expected to continue for the foreseeable future. The Real Estate Trust's
internal sources of funds, primarily cash flow generated by its income-producing
properties, generally have been sufficient to meet its cash needs other than the
repayment of principal on outstanding debt, including outstanding unsecured
notes ("Unsecured Notes") sold to the public, the payment of interest on its
Senior Secured Notes ("Secured Notes"), and the payment of capital improvement
costs. In the past, the Real Estate Trust funded such shortfalls through a
combination of external funding sources, primarily new financings (including the
sale of Unsecured Notes), refinancings of maturing mortgage debt, asset sales
and tax sharing payments from the Bank. See the Consolidated Statements of Cash
Flows included in the Consolidated Financial Statements in this report.
Liquidity. The Real Estate Trust's ability to meet its liquidity needs,
including debt service payments in the balance of fiscal 1998 and subsequent
years, will depend in significant part on its receipt of dividends from the Bank
and tax sharing payments from the Bank pursuant to the tax sharing agreement
among the Trust, the Bank, and their subsidiaries. The availability and amount
of tax sharing payments and dividends in future periods is dependent upon, among
other things, the Bank's operating performance and income, regulatory
restrictions and restrictions imposed by various agreements on such payments,
and (in the case of tax sharing payments), the continued consolidation of the
Bank and the Bank's subsidiaries with the Trust for federal income tax purposes
and the availability of Trust collateral to support such payments.
The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods, as well as the Bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the Bank. In the first quarter of fiscal 1998, the
Bank made no tax sharing payments, but did make a dividend payment of $2.8
million to the Real Estate Trust. In recent years, the operations of the Trust
have generated net operating losses while the Bank has reported net income. It
is anticipated that the Trust's consolidation of the Bank's operations into the
Trust's federal income tax return will continue to result in the use of the
Trust's net operating losses to reduce the federal income taxes the Bank would
otherwise owe, resulting in the Real Estate Trust receiving tax sharing
payments. If in any future year, the Bank has taxable losses or unused credits,
the Trust would be obligated to reimburse the Bank for the greater of (i) the
tax benefit to the group using such tax losses or unused tax credits in the
group's consolidated federal income tax returns or (ii) the amount of the refund
which the Bank would otherwise have been able to claim if it were not being
included in the consolidated federal income tax return of the group.
The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, it will finance such
repayments from other sources of funds.
<PAGE>
In fiscal 1994, the Real Estate refinanced a significant portion of its
outstanding secured indebtedness with the proceeds of the issuance of $175.0
million aggregate principal amount of 11 5/8% Senior Secured Notes due 2002 (the
"Senior Secured Notes"). The Indenture pursuant to which the Senior Secured
Notes were issued contains covenants that, among other things, restrict the
ability of the Trust and/or its subsidiaries (excluding, in most cases, the Bank
and the Bank's subsidiaries) to incur additional indebtedness, make investments,
sell assets or pay dividends and make other distributions to holders of the
Trust's capital stock.
Through February 12, 1998, the Trust has purchased either in the open market or
through dividend reinvestment approximately 2.0 million shares of common stock
of Saul Centers (representing 15.6% of such company's outstanding common stock).
Most of these shares have been deposited with the Trustee for the Senior Secured
Notes to satisfy in part the collateral requirements for those securities,
thereby permitting release to the Trust of a portion of the cash on deposit with
the Trustee.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At December 31, 1996, there were no borrowings under the facility
and unrestricted availability on that date was $9.2 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. In fiscal 1997, the line of credit was increased to $10.0 million and
was extended for an additional year. Interest in computed by reference to the
floating rate index. At December 31, 1997, there were no borrowings under the
facility and unrestricted availability was $4.6 million.
On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in the Crystal City neighborhood in Arlington, Virginia. The purchase
price was $25.8 million. Also on December 10, 1997, the Real Estate Trust
refinanced five other hotels in its portfolio. Funds for the two transactions
were provided by a lender in the amount of $53.0 million. The new loans have a
15-year term, a fixed interest rate of 7.57% and amortization based on a 25-year
schedule.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at December
31, 1997 for the balance of fiscal 1998 and subsequent years is set forth in the
following table:
<TABLE>
<CAPTION>
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------------------
Notes Payable- Notes Payable-
Fiscal Year Mortgage Notes Secured Unsecured Total
- ----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
1998 (1) $ 8,489 $ -- $ 5,642 $ 14,131
1999 9,987 -- 16,079 26,066
2000 12,928 -- 8,834 21,762
2001 10,579 -- 4,589 15,168
2002 12,018 175,000 5,164 192,182
Thereafter 152,968 -- 6,944 159,912
-------------- -------------- -------------- -----------
Total $206,969 $175,000 $47,252 $429,221
============== =============== ============= ===========
</TABLE>
(1) January 1, 1998 - September 30, 1998
Of the $207.0 million of mortgage debt outstanding at December 31, 1997, $173.4
million was nonrecourse to Real Estate Trust.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Limited Partnership ("Saul Holdings
Partnership"), the Real Estate Trust shares in cash distributions from
operations and from capital transactions involving the sale of properties. The
partnership agreement of Saul Holdings Partnership provides for quarterly cash
distributions to the partners out of net cash flow. During the three-month
period ended December 31, 1997, the Real Estate Trust received a cash
distribution of $1.4 million from Saul Holdings Partnership.
Development and Capital Expenditures. During the third quarter of fiscal 1997,
the Real Estate Trust commenced development of a 46,000 square foot single-story
office research and development building on 3.2 acres of its Avenel Business
Park land parcel located in Gaithersburg, Maryland. The project is 100%
pre-leased. The Real Estate Trust financed the project with a
construction/permanent loan which is expected to cover all costs except for the
land and fees to related parties. The project was substantially completed on
January 31, 1998.
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 2.7 acre parcel located adjacent to its Hampton Inn and
Holiday Inn in Sterling, Virginia. The new hotel will be franchised as a
TownePlace Suites by Marriott and is expected to be completed in July 1998. The
Real Estate Trust has obtained a construction loan which is expected to cover
all costs except for the land, fees to related parties, taxes and insurance.
The Real Estate Trust believes that its capital improvement costs in the next
several fiscal years will be in the range of $6.0 to $7.0 million per year.
<PAGE>
BANKING
Liquidity. The OTS has established a minimum liquidity requirement, which may
vary from time to time depending upon economic conditions and deposit flows. The
required liquidity level under OTS regulations at December 31, 1997 was 4.0%.
The Bank's average liquidity ratio for the month ended December 31, 1997 was
17.1%, compared to 11.1% for the month ended September 30, 1997. Additionally,
the Bank met the liquidity requirements imposed by the OTS for each month of the
first three months of fiscal 1998.
In recent periods, the proceeds from the securitization and sale of credit card,
home equity credit line, automobile and home loan receivables have been
significant sources of liquidity for the Bank. The Bank securitized and sold
$335.0 million of credit card receivables, $220.9 million of automobile loan
receivables and $161.7 million of home equity credit line receivables, during
the December 1997 quarter. At December 31, 1997, the Bank was considering the
securitization and sale of the following receivables: (i) approximately $570.0
million of credit card receivables, including $60.0 million of receivables
outstanding at December 31, 1997 and $510.0 million of receivables which the
Bank expects to become available through additional fundings or amortization of
existing trusts, during the six months ending June 30, 1998; (ii) approximately
$465.0 million of automobile loan receivables, including $60.0 million of
receivables outstanding at December 31, 1997 and $405.0 million of receivables
which the Bank expects to become available through additional fundings during
the six months ending June 30, 1998 and (iii) approximately $60.0 million of
home equity credit line receivables. As part of its operating strategy, the Bank
will continue to explore opportunities to sell assets and to securitize and sell
credit card, home equity credit line, automobile and home loan receivables to
meet liquidity and other balance sheet objectives. See Note 4 to the
Consolidated Financial Statements.
The Bank is obligated under various recourse provisions related to the
securitization and sale of receivables. Of the $6.1 billion of outstanding trust
certificate balances at December 31, 1997, the primary recourse to the Bank was
approximately $137.4 million. The Bank is also obligated under various recourse
provisions related to the swap of single-family residential loans for
participation certificates issued to the Bank by the Federal Home Loan Mortgage
Corporation. At December 31, 1997, recourse to the Bank under these arrangements
was approximately $1.0 million.
There were no material commitments for capital expenditures at December 31,
1997.
The Bank's liquidity requirements in fiscal 1998 and for years subsequent to
fiscal 1998 will continue to be affected both by the asset size of the Bank, the
growth of which will be constrained by capital requirements, and the composition
of the asset portfolio. Management believes that the Bank's primary sources of
funds, described above, will be sufficient to meet the Bank's foreseeable
long-term liquidity needs. The mix of funding sources utilized from time to time
will be determined by a number of factors, including capital planning
objectives, lending and investment strategies and market conditions.
Year 2000 Considerations. Some of the Bank's computer systems are designed to
process transactions using two digits to describe the year (e.g., "97" for 1997)
rather than four digits and therefore such systems may have difficulty
accurately processing transactions and making calculations using dates later
than December 31, 1999. Management has implemented a program to upgrade or
replace its computer systems to address this problem and expects the upgrades
and replacements, along with related testing to be substantially completed not
later than December 1998. Management does not expect that the cost of converting
such systems will be material to its financial condition or results of
operations. Nevertheless, a failure on the part of the Bank to ensure that its
computer systems are year 2000 compliant could have a material adverse affect on
the Bank's operations. Moreover, if any of the Bank's significant customers or
service providers do not successfully and timely achieve year 2000 compliance
for their computer systems, the Bank also could be adversely affected.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1996
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$4.6 million and an operating loss of $7.4 million in the three-month period
ended December 31, 1997 (the "1998 quarter") compared to a loss before
depreciation and amortization of $4.3 million and an operating loss of $7.1
million in the three-month period ended December 31, 1996, (the "1997 quarter").
The changes reflect improved results from properties reduced by a loss in equity
results from unconsolidated entities.
Income after direct operating expenses from hotels increased $836,000 (20.2%) in
the 1998 quarter over the level achieved in the 1997 quarter. $717,000 (17.7%)
of this increase reflected improved results from the nine hotels owned
throughout both quarters and $119,000 reflected results from acquisition
properties. The increase in total revenue of $1,997,000 (15.1%) exceeded the
increase of $ 1,161,000 (12.8%) in direct operating expenses. For the nine
hotels owned throughout both periods, the increase in total revenue was
$1,507,000 (11.6%) and the increase in direct operating expenses was $790,000
(8.9%). The revenue increase was attributable to improved market conditions
which permitted the Real Estate Trust to raise average room rates and occupancy
levels.
Income after direct operating expenses from office and industrial properties
increased $614,000 (20.5%) in the 1998 quarter over the 1997 quarter. The
increase in gross income, which totaled $685,000 (14.2%), exceeded the increase
in expenses of $71,000 (3.9%). The improvement was due to additional space
leased in the current period and higher turnover rents.
Interest expense increased $111,000 (1.1%) in the 1998 quarter, because of
higher average borrowings. Average balances of the Real Estate Trust's
outstanding borrowings increased to $404.0 million for the 1998 quarter from
$396.4 million for the 1997 quarter. The average interest rate in the 1998 and
1997 quarters was 10.22% and 10.28%, respectively.
Amortization of debt expense decreased $34,000 (19.5%) in the 1998 quarter,
primarily due to lower costs experienced in the renewal of lines of credit.
Depreciation increased $10,000 (0.4%) in the 1998 quarter as a result of new
assets placed in service and the change in the hotel portfolio described above.
Advisory, management and leasing fees paid to related parties increased $131,000
(6.9%) in the 1998 quarter from their level in the 1997 quarter. The monthly
advisory fees were $317,000 in the 1998 quarter, compared to $311,000 in the
1997 quarter, an increase aggregating $19,000 (2.0%). Management and leasing
fees increased $112,000 (11.4%) in the current quarter, reflecting both higher
hotel sales and office rents on which the fees are based.
General and administrative expense decreased $96,000 (20.0%) in the 1998
quarter, primarily due to lower legal expense ($84,000).
Equity in earnings (losses) of unconsolidated entities reflected a loss of
$1,339,000 in the 1998 quarter and earnings of $444,000 in the 1997 quarter. The
loss was attributable to nonrecurring charges for losses on sales of interest
rate protection agreements and losses on early extinguishment of debt.
<PAGE>
BANKING
Overview. The Bank recorded operating income of $29.4 million for the three
months ended December 31, 1997 (the "1997 quarter"), compared to operating of
$20.0 million for the three months ended December 31, 1996 (the "1996 quarter").
The increase in operating income for the 1997 quarter was primarily attributable
to a $41.8 million increase in other (non-interest) income resulting primarily
from increased gains on sales of loans and loan and deposit servicing fee
income. Partially offsetting the positive effect such increases had on income
were a decrease in interest income, an increase in the provision for loan losses
and an increase in operating expenses.
Net Interest Income. Net interest income, before the provision for loan losses,
decreased $9.6 million (or 16.7%) in the 1997 quarter. The Bank would have
recorded additional interest income of $0.5 million for the 1997 quarter if the
Bank's non-accrual assets and restructured loans had been current in accordance
with their original terms. The Bank's net interest income in future periods will
continue to be adversely affected by the Bank's non-performing assets. See
"Financial Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)
Three Months Ended December 31,
-----------------------------------------------------------------------------
1997 1996
------------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
------------- ------------ ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $ 2,574,477 $ 74,495 11.57% $ 3,439,724 $ 93,240 10.84%
Mortgage-backed securities 1,892,345 26,607 5.62 1,277,901 18,914 5.92
Federal funds sold and securities
purchased under agreements to resell 213,924 3,027 5.66 78,391 1,055 5.38
Trading securities 27,597 472 6.84 13,325 244 7.32
Investment securities 27,804 402 5.78 9,850 144 5.85
Other interest-earning assets 168,592 1,392 3.30 158,765 1,674 4.22
------------- ------------ -------------- ------------
Total 4,904,739 106,395 8.68 4,977,956 115,271 9.26
============ ========== ============ ==========
Noninterest-earning assets:
Cash 206,274 185,194
Real estate held for investment or sale 94,013 123,451
Property and equipment, net 274,908 229,447
Goodwill and other intangible assets, net 13,863 2,255
Other assets 482,025 322,118
------------- --------------
Total assets $ 5,975,822 $ 5,840,421
============= ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 929,530 5,828 2.51 $ 854,263 5,296 2.48
Savings deposits 992,692 8,531 3.44 953,087 8,133 3.41
Time deposits 1,791,592 24,775 5.53 1,183,496 15,290 5.17
Money market deposits 970,999 9,645 3.97 993,038 9,607 3.87
------------- ---------- -------------- ----------
Total deposits 4,684,813 48,779 4.16 3,983,884 38,326 3.85
Borrowings 507,732 9,513 7.49 1,281,952 19,218 6.00
------------- ------------ -------------- ------------
Total liabilities 5,192,545 58,292 4.49 5,265,836 57,544 4.37
------------ ---------- ------------ ----------
Noninterest-bearing items:
Noninterest-bearing deposits 231,583 168,639
Other liabilities 80,218 48,732
Minority interest 144,000 45,016
Stockholders' equity 327,476 312,198
------------- --------------
Total liabilities and stockholders' equity $ 5,975,822 $ 5,840,421
============= ==============
Net interest income $ 48,103 $ 57,727
============ ============
Net interest spread (2) 4.19% 4.89%
========== ==========
Net yield on interest-earning assets (3) 3.92% 4.64%
========== ==========
Interest-earning assets to interest-bearing liabilities 94.46% 94.53%
========== ==========
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on
non-accruing loans has been included only to the extent reflected in the
Consolidated Statements of Operations; however, the loan balance is
included in the average amount outstanding until transferred to real
estate acquired in settlement of loans.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
<PAGE>
<TABLE>
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Three Months Ended December 31, 1997
Compared to
Three Months Ended December 31, 1996
Increase (Decrease)
Due to Change in (1)
------------------------------------------
Total
Volume Rate Change
----------- ----------- ------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (54,401) $ 35,656 $ (18,745)
Mortgage-backed securities 13,896 (6,203) 7,693
Federal funds sold and securities
purchased under agreements to resell 1,914 58 228
Trading securities 335 (107) 1,972
Investment securities 270 (12) 258
Other interest-earning assets 584 (866) (282)
----------- ----------- ------------
Total interest income (37,402) 28,526 (8,876)
----------- ----------- ------------
Interest expense:
Deposit accounts 7,171 3,282 10,453
Borrowings (33,948) 24,243 (9,705)
----------- ----------- ------------
Total interest expense (26,777) 27,525 748
----------- ----------- ------------
Increase in net interest income $ (10,625) $ 1,001 $ (9,624)
=========== =========== ============
- -----------------------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
Interest income in the 1997 quarter decreased $8.9 million (or 7.7%) from the
level in the 1996 quarter as a result of lower average balances of loans
receivable, and, to a lesser extent, lower average yields on mortgage-backed
securities. Higher average yields on loans receivable and higher average
balances of mortgage-backed securities partially offset the negative effect on
interest income of the lower average loan balances and yields on mortgage-backed
securities.
The Bank's net yield on interest-earning assets decreased to 3.92% in the 1997
quarter from 4.64% in the 1996 quarter. The decrease in the net yield primarily
reflected lower yields earned on certain of the Bank's interest-earning assets
resulting from a decline in market rates, as well as higher average rates on
deposits, reflecting a shift in the composition of the Bank's deposits to higher
yielding certificates of deposit, primarily due to brokered deposits accepted in
fiscal 1997. The Bank does not currently anticipate significant reliance on
brokered deposits as a key source of funding in the future.
Interest income on loans, the largest category of interest-earning assets,
decreased by $18.8 million (or 20.1%) from the 1996 quarter primarily because of
lower average balances. Higher average yields earned on the loan portfolio
partially offset the negative effect of the lower average balances.
Lower average balances of the Bank's single-family residential loans, which
decreased $694.2 million (or 42.3%), resulted primarily from the $1.1 billion
exchange of single-family residential loans held in its portfolio for
mortgage-backed securities (which the Bank retained for its own portfolio) in
September 1997. The decrease was primarily responsible for an $11.3 million (or
38.7%) decrease in interest income from single-family residential loans. Average
balances of credit card loans and home improvement and related loans decreased
$95.4 million and $62.1 million, respectively, largely because of additional
securitization activity during fiscal 1997, which, in addition to the decline in
net yields on credit card loans discussed below, resulted in a $7.3 million and
$2.2 million decline in interest income from such loans, respectively. An
increase in the securitization of automobile loans was the primary reason for
the $81.9 million decline (or 26.2%) in average balances of automobile loans. An
increase in the average balances of home equity credit line loans of $58.4
million (or 90.3%) partially offset the decreases discussed above, and was
primarily a result of the $119.2 million purchase of such loans in December
1996. Interest income on home equity credit line loans increased by $1.6 million
(or 170.9%) in the current quarter.
The average yield on the loan portfolio in the 1997 quarter increased 73 basis
points (to 11.57% from 10.84%) from the average yield in the 1996 quarter.
Contributing to the higher net yield was an increase in the average yield on
automobile loans (from 11.95% to 15.86%), resulting from higher yields earned on
loans originated by one of the Bank's operating subsidiaries. In addition, an
increase in the average yield on single-family residential loans (from 7.14% to
7.59%) resulted from the September 1997 $1.1 billion exchange of single-family
residential loans for mortgage-backed securities. These loans had a weighted
average interest rate of 6.89% at the date of exchange.
<PAGE>
Interest income on mortgage-backed securities increased $7.7 million (or 40.7%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1997 quarter reflected the $1.1 billion
securitization of single-family residential loans in September 1997. The
positive effect of the higher average balances was partially offset by a
decrease in the average interest rates on these securities from 5.92% to 5.62%.
Interest expense increased $0.7 million (or 1.3%) for the 1997 quarter primarily
because of an increase of $10.5 million (or 27.3%) in interest expense on
deposits, the largest category of interest-bearing liabilities. Interest expense
on deposits increased as a result of an increase in average deposit balances of
$700.9 million (or 17.6%), and, to a lesser extent, an increase in the average
rates on deposits (to 4.16% from 3.85%), which reflected the shift in the
composition of the Bank's deposits to higher yielding certificates of deposit.
The increase in interest expense on deposits was partially offset by a $9.7
million (or 50.5%) decrease in interest expense on borrowings. The decrease in
interest paid on borrowings was primarily attributable to a $9.1 million and a
$2.3 million decrease in interest expense on repurchase agreement transactions
and Federal Home Loan Bank advances, respectively, largely because of a $675.2
million and a $177.1 million decline in the average balances of such borrowings,
respectively. Excess funds generated from securitization activity during fiscal
1997 and additional deposits facilitated the paydown of such borrowings.
Provision for Loan Losses. The Bank's provision for loan losses increased to
$35.1 million in the 1997 quarter from $26.8 million in the 1996 quarter. The
$8.2 million increase was primarily due to a $3.9 million and a $3.4 million
increase in the provision for losses on credit card and other consumer loans,
respectively. See "Financial Condition - Asset Quality - Allowances for Losses."
Other Income. Other (non-interest) income increased to $129.4 million in the
1997 quarter from $87.6 million in the 1996 quarter. The $41.8 million increase
in such income was primarily attributable to increases in gain on sales of loans
and loan and deposit servicing fees.
Gain on sales of loans increased by $25.3 million to $33.2 million from $7.9
million, primarily because of $16.3 million of gains recognized on the
securitization and sale of credit card loan receivables. Additional gains
recognized on the securitization and sale of home equity credit line and
automobile loans in the amount of $7.2 million and $1.8 million, respectively,
also contributed to the $25.1 million increase during the current quarter.
Amortization of prior gains on sales of loans in the amount of $8.6 million is
included in loan and deposit servicing fees.
The Bank recognized a $3.8 million net unrealized gain on its interest-only
strips reflecting the December 31, 1997 market-value adjustment on the
interest-only strips related to the credit card securitized assets.
The increase of $12.9 million (or 20.5%) in loan and deposit servicing fees was
primarily due to an increase of $11.2 million in income earned by the Bank on
interest-only strips for servicing its portfolio of securitized credit card
loans. Fees recognized for servicing deposit accounts also increased by $1.8
million and resulted primarily from the additional fees generated through the
Bank's ATM network.
Operating Expenses. Operating expenses for the 1997 quarter increased $14.4
million (or 14.7%) from the level in the 1996 quarter. The primary component of
the higher operating expenses was an increase in salaries and employee benefits.
The $8.2 million increase in salaries and employee benefits resulted primarily
from the addition of staff to the Bank's credit card, consumer lending and
branch operations.
<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: February 12, 1998 Stephen R. Halpin, Jr.
----------------- -----------------------------------------------
Vice President and Chief Financial Officer
Date: February 12, 1998 Ross E. Heasley
----------------- -----------------------------------------------
Vice President and Principal Accounting Officer
<PAGE>
ATTACHMENT C
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997 AND 1996,
TOGETHER WITH AUDITORS' REPORT
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants 1
Consolidated Financial Statements:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Consolidated Financial Statements 9
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Chevy Chase Bank, F.S.B.:
We have audited the accompanying consolidated statements of financial condition
of Chevy Chase Bank, F.S.B. and subsidiaries as of September 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chevy Chase Bank, F.S.B. and
subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1, 1997,
the Bank changed its method of accounting for servicing assets and interest-only
strips.
/s/ Arthur Andersen LLP
Washington, D.C.
October 22, 1997 (except with respect
to the matter discussed in Note 24, as to
which the date is November 12, 1997).
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-----------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
September 30,
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 238,169 $ 213,394
Interest-bearing deposits 48,722 53,031
Federal funds sold and securities purchased
under agreements to resell 365,000 0
Loans held for sale 102,749 76,064
Loans held for securitization and sale 220,000 450,000
Trading securities 7,899 0
Investment securities (market value of $5,012 and
$9,820, respectively) 4,998 9,818
Mortgage-backed securities (market value of
$1,984,667 and $1,307,838, respectively) 1,985,707 1,306,417
Loans receivable (net of allowance for losses of
$105,679 and $95,523, respectively) 2,104,140 2,773,024
Federal Home Loan Bank stock 33,170 31,940
Real estate held for investment or sale (net of allowance
for losses of $140,936 and $126,710, respectively) 94,290 123,489
Property and equipment, net 268,540 219,740
Goodwill and other intangible assets, net 44,251 40,523
Interest-only strips, net 105,812 0
Excess spread assets, net 0 42,602
Servicing assets, net 41,413 32,607
Other assets 424,553 354,955
---------- ----------
Total assets $6,089,413 $5,727,604
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $4,893,756 $4,164,037
Securities sold under repurchase agreements
and other short-term borrowings 74,821 637,141
Notes payable 7,019 7,277
Federal Home Loan Bank advances 188,511 269,065
Custodial accounts 2,809 7,415
Amounts due to banks 44,835 44,423
Other liabilities 120,416 99,086
---------- ----------
5,332,167 5,228,444
Capital notes-subordinated 250,000 160,000
---------- ----------
Total liabilities 5,582,167 5,388,444
---------- ----------
Minority interest 144,000 0
Stockholders' equity:
13% Noncumulative Perpetual Preferred Stock, Series A,
$0.01 par value, 3,000,000 shares authorized, issued
and outstanding 30 30
Common Stock, $1 par value, 10,000,000 shares
authorized, 510,000 shares issued, 10,000 shares
outstanding 10 10
Capital contributed in excess of par 165,704 165,704
Retained earnings 197,995 175,291
Net unrealized holding gains (losses) (493) (1,875)
---------- ----------
Total stockholders' equity 363,246 339,160
---------- ----------
Total liabilities and stockholders' equity $6,089,413 $5,727,604
========== ==========
- ----------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
2
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Year Ended September 30,
----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Loans $360,780 $317,902 $294,575
Mortgage-backed securities 72,209 50,955 60,623
Trading securities 1,530 953 373
Investment securities 481 315 194
Other 15,418 17,441 9,571
-------- -------- --------
Total interest income 450,418 387,566 365,336
-------- -------- --------
INTEREST EXPENSE
Deposit accounts 168,907 162,569 154,299
Short-term borrowings 47,378 10,407 18,094
Long-term borrowings 23,530 15,860 16,721
-------- -------- --------
Total interest expense 239,815 188,836 189,114
-------- -------- --------
NET INTEREST INCOME 210,603 198,730 176,222
Provision for loan losses 125,115 115,740 54,979
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 85,488 82,990 121,243
-------- -------- --------
OTHER INCOME
Loan servicing fees 227,817 264,139 184,275
Credit card fees 57,381 30,765 9,855
Deposit servicing fees 41,893 29,900 24,442
Gain (loss) on sales of trading securities, net 1,203 1,158 (600)
Loss on real estate held for investment
or sale, net (18,688) (24,413) (5,164)
Gain on sales of loans, net 73,822 23,242 12,882
interest-only strips 6,976 0 0
Other 22,573 19,713 7,320
-------- -------- --------
Total other income 412,977 344,504 233,010
-------- -------- --------
OPERATING EXPENSES
Salaries and employee benefits 160,949 127,370 108,218
Loan 29,925 28,263 15,720
Property and equipment 24,397 20,705 16,283
Marketing 74,504 53,705 46,117
Data processing 48,138 41,270 34,310
Depreciation and amortization 28,479 24,410 21,461
Deposit insurance premiums 5,033 37,362 10,749
Amortization of goodwill and other
intangible assets 5,335 4,005 4,110
Other 44,059 46,222 42,633
-------- -------- --------
Total operating expenses 420,819 383,312 299,601
-------- -------- --------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Continued on the following page.
3
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
--------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income before income taxes and minority interest 77,646 44,182 54,652
Provision for income taxes 23,266 16,553 17,330
--------- --------- ---------
Income before minority interest 54,380 27,629 37,322
Minority interest (12,926) 0 0
--------- --------- ---------
NET INCOME $ 41,454 $ 27,629 $ 37,322
========= ========= =========
PREFERRED STOCK DIVIDENDS 9,750 9,750 9,750
--------- --------- ---------
EARNINGS AVAILABLE TO COMMON
STOCKHOLDERS $ 31,704 $ 17,879 $ 27,572
========= ========= =========
EARNINGS PER COMMON SHARE: $3,170.40 $1,787.90 $2,757.20
========= ========= =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
Net
Capital Unrealized
Contributed Holding Total
Preferred Common in Excess Retained Gains Stockholders'
Stock Stock of Par Earnings (Losses) Equity
--------- ------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $ 30 $ 10 $ 165,704 $ 138,340 $ (14,128) $ 289,956
Net income - - - 37,322 - 37,322
Cash dividends on 13%
Noncumulative Perpetual
Preferred Stock, Series A - - - (9,750) - (9,750)
Increase in net unrealized
holding gains (losses) - - - - 11,016 11,016
--------- ------- ----------- ---------- ---------- ------------
Balance, September 30, 1995 30 10 165,704 165,912 (3,112) 328,544
Net income - - - 27,629 - 27,629
Cash dividends on 13%
Noncumulative Perpetual
Preferred Stock, Series A - - - (9,750) - (9,750)
Cash dividends on
Common Stock - - - (8,500) - (8,500)
Increase in net unrealized
holding gains (losses) - - - - 1,237 1,237
--------- ------- ----------- ---------- ---------- ------------
Balance, September 30, 1996 30 10 165,704 175,291 (1,875) 339,160
Net income - - - 41,454 - 41,454
Cash dividends on 13%
Noncumulative Perpetual
Preferred Stock, Series A - - - (9,750) - (9,750)
Cash dividends on
Common Stock - - - (9,000) - (9,000)
Increase in net unrealized
holding gains (losses) - - - - 1,382 1,382
--------- ------- ----------- ---------- ---------- ------------
Balance, September 30, 1997 $ 30 $ 10 $ 165,704 $ 197,995 $ (493) $ 363,246
========= ======= ============ =========== ========== =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,454 $ 27,629 $ 37,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization (accretion) of premiums, discounts and
net deferred loan fees 7,192 (219) (457)
Depreciation and amortization 28,479 24,410 21,461
Amortization of goodwill and other intangible assets 5,335 4,005 4,110
Provision for loan losses 125,115 115,740 54,979
Capitalized interest on real estate held for investment or sale (2,212) (3,462) (4,512)
Purchases of trading securities (7,899) 0 0
Proceeds from sales of trading securities 430,938 363,364 239,147
Net fundings of loans held for sale (697,593) (690,589) (390,634)
Proceeds from sales of loans held for sale and/or
securitization 2,599,860 1,984,484 2,188,531
Proceeds from sales of spread accounts 144,200 42,140 59,200
Earnings on real estate (1,156) (2,278) (19,267)
Provision for losses on real estate held for investment or sale 19,623 26,341 26,321
(Gain) loss on sales of trading securities, net (1,203) (1,158) 600
Gain on sales of loans, net (73,822) (23,242) (12,882)
Unrealized gain on valuation of interest-only strips (6,976) 0 0
Increase in interest-only strips (105,812) 0 0
Decrease (increase) in excess spread assets 42,602 (16,962) (442)
Increase in servicing assets (8,806) (4,238) (13,294)
Increase in other assets (210,375) (117,744) (140,240)
Increase in other liabilities 21,741 23,724 34,903
Other 8,006 (12,440) 3,176
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,358,691 1,739,505 2,088,022
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from maturities of investment securities 5,000 4,410 100
Net proceeds from redemption of Federal Home Loan Bank stock 9,482 0 0
Net proceeds from sales of real estate 23,624 58,874 133,300
Net fundings of loans receivable (1,898,904) (1,702,926) (2,295,069)
Principal collected on mortgage-backed securities 771,095 221,698 183,166
Purchases of Federal Home Loan Bank stock (10,712) 0 0
Purchases of investment securities 0 (9,725) 0
Purchases of mortgage-backed securities (311,554) (649,688) (107,127)
Purchases of loans receivable (754,515) (391,878) (88,518)
Purchases of property and equipment (77,859) (69,749) (55,924)
Acquisition of other intangible assets (9,063) 0 0
Disbursements for real estate held for investment or sale (14,199) (14,447) (32,834)
Other 1,036 (5,950) 1,103
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,266,569) (2,559,381) (2,261,803)
----------- ----------- -----------
</TABLE>
Continued on the following page.
6
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from customer deposits and sales of
certificates of deposit 18,915,801 15,312,125 14,086,575
Customer withdrawals of deposits and payments
for maturing certificates of deposit (18,186,082) (15,307,340) (13,936,084)
Net (decrease) increase in securities sold under
repurchase agreements (574,217) 574,400 777
Advances from the Federal Home Loan Bank 877,483 429,459 992,073
Repayments of advances from the Federal Home Loan Bank (958,037) (315,446) (937,021)
Proceeds from other borrowings 6,271,193 2,469,675 793,261
Repayments of other borrowings (6,259,554) (2,417,606) (816,755)
Cash dividends paid on preferred stock (9,750) (9,750) (9,750)
Cash dividends paid on common stock (9,000) (8,500) -
Repayment of capital notes - subordinated (10,000) - -
Net proceeds received from capital notes - subordinated 96,112 - -
Net proceeds from issuance of preferred stock 144,000 - -
Other (4,605) 2 (12,110)
----------- ----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 293,344 727,019 160,966
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 385,466 (92,857) (12,815)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 266,425 359,282 372,097
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 651,891 $ 266,425 $ 359,282
=========== =========== ===========
</TABLE>
Continued on the following page.
7
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 232,748 $ 203,241 $ 189,717
Income taxes $ 7,348 $ 37,196 $ 19,133
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Loans held for sale exchanged for trading securities $ 430,786 $ 363,257 $ 133,014
Mortgage-backed securities available-for-sale transferred to
mortgage-backed securities held-to-maturity $ - $ - $ 942,085
Investment securities available-for-sale transferred to
investment securities held-to-maturity $ - $ - $ 4,354
Real estate held for investment transferred to real
estate held for sale $ - $ - $ 9,273
Loans receivable transferred to loans held for sale and/or
securitization $2,026,478 $1,594,262 $2,387,690
Loans made in connection with the sale of real estate $ 7,769 $ 46,537 $ 10,826
Loans receivable transferred to real estate acquired in
settlement of loans $ 4,706 $ 5,972 $ 9,822
Loans receivable exchanged for mortgage-backed securities
held-to-maturity $1,136,180 $ - $ 23,155
Loans held for sale and/or securitization transferred to
to loans receivable $ - $ - $ 50,000
Loans held for sale transferred to loans receivable $ - $ 3,146 $ -
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
8
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Chevy Chase Bank, F.S.B. is a federally chartered and federally insured stock
savings bank and, as such, is subject to comprehensive regulation, examination
and supervision by the Office of Thrift Supervision ("OTS") and by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is principally engaged in the
business of attracting deposits from the public and using such deposits,
together with borrowings and other funds, to make loans secured by real estate,
primarily residential mortgage loans, and various types of consumer loans,
primarily credit card and automobile loans. The Bank's principal deposit market
is the Washington, D.C. metropolitan area.
A summary of significant accounting policies of Chevy Chase Bank, F.S.B. and
subsidiaries (collectively the "Bank") is as follows:
AFFILIATION OF CORPORATIONS AND BASIS OF PRESENTATION:
All of the outstanding common stock of the Bank is owned by affiliated
entities, with the majority (80%) owned by B. F. Saul Real Estate Investment
Trust (the "Trust").
The accompanying consolidated financial statements include the accounts of the
Bank and all subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the balance sheet and revenues and expenses for
the reporting period. The most critical estimates relate to impairment of
loans and other assets and the fair values of loan interests sold and
retained. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest - bearing deposits, federal funds sold and
securities purchased under agreements to resell.
Regulation D of the Federal Reserve Act requires the Bank to maintain reserves
in the form of cash and deposits at the Federal Reserve Bank. The total
average reserve balances maintained by the Bank, which consisted primarily of
cash, were $114,632, $105,170, and $87,803 during the years ended September
30, 1997, 1996, and 1995, respectively.
LOANS HELD FOR SALE:
The Bank engages in mortgage banking activities. At September 30, 1997 and
1996, loans held for sale are composed of single-family residential loans
originated or purchased for sale in the secondary market
9
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LOANS HELD FOR SALE (CONTINUED):
and are carried at aggregate cost which is lower than aggregate market value.
Single-family residential loans held for sale will either be sold or will be
exchanged for mortgage-backed securities and then sold. Gains and losses on
sales of whole loans held for sale are determined using the specific
identification method. See "Trading Securities."
LOANS HELD FOR SECURITIZATION AND SALE:
The Bank periodically securitizes and sells certain pools of loan receivables
in the public and private markets. These securitizations are recorded as
sales. Gains on the sale of loans are limited to amounts related to loans
existing at the date of sale and do not include amounts related to loans
expected to be sold during any future reinvestment period.
Loans held for securitization and sale are the lesser of loans eligible for
securitization or loans that management contemplates to securitize within six
months. Such loans held for securitization and sale are reported at the lower
of aggregate cost or aggregate market value for each asset type.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES:
The Bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. Prior to fiscal 1995, the Bank classified all of its
investment and mortgage-backed securities as available-for-sale.
During fiscal 1995, the Bank transferred all of its investment securities and
mortgage-backed securities previously classified as available-for-sale to
held-to-maturity. These securities were transferred at their fair value. Net
unrealized holding losses, net of the related income tax effect, amounting to
$3,476 as of the date of the transfer, and $493 as of September 30, 1997,
continue to be reported as a separate component of stockholders' equity and
are being amortized to income over the remaining lives of the securities using
the level-yield method. All investment securities and mortgage-backed
securities are classified as held-to-maturity at September 30, 1997 and 1996.
Premiums and discounts on investment securities and mortgage-backed securities
are amortized or accreted using the level-yield method. Realized gains and
losses are determined using the specific identification method.
TRADING SECURITIES:
As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party
investors in the month of issuance. Proceeds from sales of trading securities
were $430,938, $363,364 and $239,147 during the years ended September 30,
1997, 1996 and 1995, respectively. The
10
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
TRADING SECURITIES (CONTINUED):
Bank realized net gains of $1,203 and $1,158 on the sales of trading
securities for the years ended September 30, 1997 and 1996, respectively. The
Bank realized net losses of $600 on the sales of trading securities for the
year ended September 30, 1995. Gains and losses on sales of trading
securities are determined using the specific identification method. There
were no mortgage securities classified as trading securities at September 30,
1997 and 1996.
At September 30, 1997, the Bank held one automobile loan-backed security in
the amount of $7,899, which was classified as trading. Such security was
established in conjunction with an automobile loan securitization transaction
and represents a separate class of certificates, all of which was retained by
the Bank. See Note 8.
LOAN ORIGINATION AND COMMITMENT FEES:
Nonrefundable loan fees, such as origination and commitment fees, and
incremental loan origination costs relating to loans originated or purchased
are deferred. Net deferred fees (costs) related to loans held for investment
are amortized over the life of the loan using the level-yield or straight-line
method. Net fees (costs) related to loans held for sale are deferred until
such time as the loan is sold, at which time the net deferred fees (costs)
become a component of the gain or loss on sale.
CREDIT CARD FEES AND COSTS:
Credit card membership fees are deferred and recognized as income on a
straight-line basis over the period the fee entitles the cardholder to use the
card, which is one year. Credit card origination costs are deferred and
recognized as a reduction of income on a straight-line basis over the
privilege period which is generally one year.
IMPAIRED LOANS:
A loan is considered impaired when, based on all current information and
events, it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the agreement, including all scheduled
principal and interest payments. Such impaired loans are measured based on
the present value of expected future cash flows, discounted at the loan's
effective interest rate or, as a practical expedient, impairment may be
measured based on the loan's observable market price, or, if the loan is
collateral-dependent, the fair value of the collateral. When the measure of
the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance. Loans for which
foreclosure is probable continue to be accounted for as loans. Certain credit
card loans for which customers have agreed to modified payment terms are also
classified as impaired loans.
Each impaired real estate loan is evaluated individually to determine the
income recognition policy. Generally, payments received are applied in
accordance with the contractual terms of the note or as a
11
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
IMPAIRED LOANS (CONTINUED):
reduction of principal. Interest income on impaired credit card loans is
recognized using the current interest rate of the loan and the accrual method.
Interest income continues to accrue on delinquent credit card loans until such
loan is either paid or charged off.
At September 30, 1997 and 1996, the Bank had two impaired real estate loans
with aggregate book values of $1,027 and $1,268, respectively, before the
related allowance for losses of $545 and $364, respectively. At September 30,
1997, the Bank had impaired credit card loans with a carrying value of
$116,871, before the related allowance for losses of $18,892. At September
30, 1996, the Bank had impaired credit card loans with a carrying value of
$55,918, before the related allowance for losses of $3,987. The average
recorded investment in impaired credit card and real estate loans for the
years ended September 30, 1997, 1996 and 1995 was $99,034, $49,783, and
$33,525, respectively. The Bank recognized interest income of $13,123,
$7,339, and $5,261 on its impaired loans for the years ended September 30,
1997, 1996 and 1995, respectively.
TROUBLED DEBT RESTRUCTURINGS:
At September 30, 1997 and 1996, the Bank had $11,861 and $13,618,
respectively, of loans accounted for as troubled debt restructurings, all of
which were performing loans. At September 30, 1997, the Bank had commitments
to lend $85 of additional funds on loans which have been restructured.
ALLOWANCES FOR LOSSES:
Management reviews the loan, real estate held for investment and real estate
held for sale portfolios to establish allowances for estimated losses. The
allowances for losses are reviewed periodically, and allowances are provided
after consideration of the borrower's financial condition and/or the estimated
value of collateral or real estate, including estimated selling and holding
costs. Allowances are also provided by management after considering such
factors as the economy in lending areas, delinquency statistics, past loss
experience and estimated future losses.
The allowances for losses are based on estimates, and ultimate losses may vary
from current estimates. As adjustments to the allowances become necessary,
provisions for losses are reported in operations in the periods they are
determined to be necessary.
ACCRUED INTEREST RECEIVABLE ON LOANS:
Loans, other than credit card loans, are reviewed on a monthly basis and are
placed on non-accrual status when, in the opinion of management, the full
collection of principal or interest has become unlikely. Uncollectible
accrued interest receivable on non-accrual loans is charged against current
period interest income.
12
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ACCRUED INTEREST RECEIVABLE ON LOANS (CONTINUED):
Effective June 30, 1997, the Bank conformed its reporting practices for credit
card loans to that of most credit card issuers and has excluded credit card
loans from non-performing assets. Credit card loans are not placed on non-
accrual status, but continue to accrue interest until the loan is either
paid or charged-off.
REAL ESTATE HELD FOR INVESTMENT OR SALE:
REAL ESTATE HELD FOR INVESTMENT:
--------------------------------
At September 30, 1997 and 1996, real estate held for investment consists of
developed land owned by one the Bank's subsidiaries. Real estate held for
investment is carried at the lower of aggregate cost or net realizable value.
See Note 6.
REAL ESTATE HELD FOR SALE:
--------------------------
Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value. Costs
relating to the development and improvement of property, including interest,
are capitalized, whereas costs relating to the holding of property are
expensed. Capitalized interest amounted to $2,212, $3,462 and $4,512 for the
years ended September 30, 1997, 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-
line method which allocates the cost of the applicable assets over their
estimated useful lives. Major improvements and alterations to office premises
and leaseholds are capitalized. Leasehold improvements are amortized over the
shorter of the terms of the respective leases (including renewal options that
are expected to be exercised) or 20 years. Maintenance and repairs are charged
to operating expenses as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill is stated net of accumulated amortization and is being amortized
using the straight-line method generally over a period of 25 years. At
September 30, 1997 and 1996, goodwill totaled $36,518 and $40,523,
respectively. During fiscal 1997, the Bank purchased approximately $138,000 of
home equity loans. The amount of the premium attributable to the value of the
home equity relationships has been included in goodwill and other intangible
assets in the Consolidated Statements of Financial Condition. This premium is
being amortized over the estimated lives of the underlying loans. Other
intangible assets totaled $7,733 at September 30, 1997. Accumulated
amortization of goodwill and other intangible assets was $52,070 and $46,735
at September 30, 1997 and 1996, respectively.
13
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SERVICING ASSETS:
Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 ("SFAS 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," (described
below under the caption "Adoption of Recently Issued Accounting Standards")
which supersedes, but generally retains, the requirements of SFAS No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"). Both statements
require that entities that acquire servicing assets through either purchase or
origination of loans and sells or securitizes those loans with servicing
assets retained must allocate the total cost of the loans to the servicing
assets and the loans (without the servicing assets) based on their relative
fair values.
Servicing assets, which are stated net of accumulated amortization, are
amortized in proportion to the remaining net servicing revenues estimated to
be generated by the underlying loans. Amortization of these assets amounted to
$9,009, $7,780 and $2,154 for the years ended September 30, 1997, 1996 and
1995, respectively. Accumulated amortization was $54,522 and $45,513 at
September 30, 1997 and 1996, respectively. During fiscal 1997, 1996 and 1995,
the Bank recorded $15,802, $16,107 and $16,283 respectively, of servicing
assets related to the sale and/or securitization of loans.
The Bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the Bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets
at September 30, 1997 was $46,026.
Activity in the valuation allowance for servicing assets is summarized as
follows. No valuation allowances were recorded during fiscal 1995.
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of year $ 3,142 $ -
Additions charged / (reductions)
credited to loan expenses (2,013) 3,142
------- ------
Balance at end of year $ 1,129 $3,142
======= ======
</TABLE>
During fiscal 1996, the Bank sold $947 of rights to service mortgage loans
with principal balances of $59,702, which were originated by the Bank in
connection with its mortgage banking activities. In fiscal 1995, the Bank sold
the rights to service mortgage loans with principal balances of $148,149,
which were originated by the Bank in connection with its mortgage banking
activities, and recognized a gain of $1,397. There were no sales of rights to
service mortgage loans during fiscal 1997.
14
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INTEREST-ONLY STRIPS:
Upon the Bank's adoption of SFAS 125, effective January 1, 1997, previously
recognized excess spread assets were reclassified as interest-only strips.
Interest-only strips represent rights to certain future net cash flows from
securitized assets that are available after all expenses of the transaction
have been paid ("residual cash flow"). Interest-only strips are amortized
using the effective yield method over the estimated lives of the underlying
loans. Amortization of these assets amounted to $26,051 for the nine months
ended September 30, 1997. Accumulated amortization was $124,285 at September
30, 1997. Interest-only strips capitalized in the nine months ended September
30, 1997 of $80,143 were related to the securitization and sale of credit
card, home equity, automobile and home loan receivables. See Note 8.
Prior to January 1, 1997, when loans (other than credit card) were sold with
the residual cash flow retained by the Bank, the net present value of such
residual cash flow was recorded as an adjustment to the sales price of the
loans. See "Accounting Standards Issued but not yet Adopted." Estimated future
losses were deducted in the computation of such residual cash flows. The
resulting excess spread assets were amortized using the level-yield
("interest") method over the estimated lives of the underlying loans.
Amortization of these assets amounted to $4,912, $17,753 and $14,549 for the
three months ended December 31, 1996 and for the years ended September 30,
1996 and 1995, respectively. Accumulated amortization was $103,163 and $98,251
at December 31, 1996 and September 30, 1996, respectively. Excess spread
assets capitalized in the three months ended December 31, 1996 and in fiscal
1996 and 1995 of $14,030, $34,715 and $14,991, respectively, were the result
of the residual cash flow retained upon the securitization and sale of home
equity credit line, automobile and home loan receivables.
SFAS 125 requires a periodic assessment of the carrying value of interest-only
strips. Because these assets can be contractually prepaid or otherwise settled
such that the Bank would not recover substantially all of its recorded
investment, the assets are being measured like available-for-sale securities
or trading securities, under SFAS No. 115 ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities." At September 30, 1997, the
Bank accounted for its interest-only strips as trading securities, and
accordingly carries them at fair value.
The Bank estimates the fair value of the interest-only strips on a discounted
cashflow basis using appropriate discount rates. Adjustments to the fair
market value are recognized as unrealized gains or losses. Unrealized gains
in the aggregate amount of $6,976, are included in the Consolidated Statements
of Operations and represent the September 30, 1997 adjustment on the interest-
only strips related to the credit card securitized assets.
DERIVATIVE FINANCIAL INSTRUMENTS:
The Bank uses various strategies to minimize interest-rate risk, including
interest-rate cap agreements and forward sale or purchase commitments.
Premiums paid for interest-rate cap agreements are included in other assets in
the Consolidated Statements of Financial Condition and are amortized to
15
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
DERIVATIVE FINANCIAL INSTRUMENTS(CONTINUED):
expense over the terms of the interest-rate caps on a straight-line basis.
Funds payable to the Bank are recognized as income in the month such funds are
earned. At September 30, 1997 and 1996, unamortized premiums amounted to
$3,114 and $6,179, respectively. Gains and losses on forward sale or purchase
commitments are deferred and recorded as a component of the gain on sales of
loans at the time the forward sale or purchase commitment matures. See Note
21. The Bank does not hold any derivative financial instruments for trading
purposes.
INCOME TAXES:
Deferred income taxes are recorded using currently enacted tax laws and rates.
To the extent that realization of deferred tax assets is more likely than not,
such assets are recognized. The Bank's net deferred tax asset at September 30,
1997 and 1996 was $26,038 and $42,593, respectively, and is included in other
assets in the Consolidated Statements of Financial Condition.
EARNINGS PER COMMON SHARE:
Dividends on preferred stock, when declared by the Bank's Board of Directors,
are deducted from earnings in the computation of earnings per common share.
RECLASSIFICATION:
Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 1996 and 1995 to conform with the
presentation used for the year ended September 30, 1997.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Bank adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), during the
fiscal year ended September 30, 1997. The impact of the adoption of SFAS 121
was not material to the Bank's financial condition or its results of
operations.
Effective January 1, 1997, the Bank adopted 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. Under SFAS 125, a transfer of
financial assets in which the transferor surrenders control over those assets
is accounted for as a sale to the extent that consideration other than
beneficial interests in the transferred assets is received in exchange. SFAS
125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the
16
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED):
assets sold, if any, and retained interests, if any, based on their relative
fair values at the date of the transfer. As a result of the adoption of SFAS
125, the Bank recognized gains of $33,132 during fiscal 1997 (of which a
portion represents the unrealized gains recognized), upon the securitization
and sale of credit card receivables based upon the estimated fair value of the
expected cash flows to be generated by the underlying receivables.
Under SFAS 125, the Bank records a gain on the securitization and sale of
credit card receivables based on the estimated fair value of assets obtained
and liabilities incurred in the sale. The gain recognized at the time of the
sale, principally represents the estimated fair value of the interest-only
strip retained reduced by the estimated fair value of future losses. During
the revolving period of each transaction, gains are recorded on the sale of
new receivables to the trusts to replenish the investors' interest in trust
receivables. See Note 8.
Prior to January 1, 1997, no gain or loss was recorded on the securitization
and sale of credit card receivables. Rather, loan servicing fees were
recognized over the life of the transaction when earned.
SFAS 125 amends and extends to all servicing assets and liabilities the
accounting standards for mortgage servicing rights now in SFAS 65, and
supersedes, but generally retains, the requirements of SFAS 122. 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.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED:
SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129")
establishes standards for disclosing information about an entity's capital
structure. SFAS 129 supersedes capital structure disclosure requirements
found in previous accounting pronouncements and consolidates them into one
statement for ease of retrieval and greater visibility for non-public
entities. SFAS 129 is effective for financial statements for periods ending
after December 15, 1997. Because SFAS 129 addresses only disclosure related
issues, its adoption will not have an impact on the Bank's financial condition
or its results of operations.
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued in June
1997 and establishes accounting standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 also requires an
enterprise to classify items of other comprehensive income by their nature in
a financial statement and to display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
17
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED (CONTINUED):
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), was also issued in June 1997. SFAS 131 establishes
accounting standards for the way business enterprises report information about
operating segments in annual and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131
requires that a business enterprise report financial and descriptive
information, including profit or loss, certain specific revenue and expense
items, and segment assets, about its reportable operating segments. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by management
in deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. Because SFAS 131 addresses only disclosure related issues,
its adoption will not have an impact on the Bank's financial condition or its
results of operations.
NOTE 2 - LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale are composed of the following:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Credit card $ 90,000 $225,000
Automobile 80,000 225,000
Home equity 50,000 -
-------- --------
Total $220,000 $450,000
======== ========
</TABLE>
18
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - INVESTMENT SECURITIES:
At September 30, 1997 and 1996, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
investment securities at September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
September 30, 1997
- ------------------
U.S. Government securities:
Maturing within one year $ 4,998 $ 14 $ - $ 5,012
========== ========== ========== ========
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
September 30, 1996
- ------------------
U.S. Government securities:
Maturing within one year $ 4,822 $ 3 $ - $ 4,825
Maturing after one year,
but within five years 4,996 - (1) 4,995
---------- ---------- ---------- --------
Total U.S. Government securities $ 9,818 $ 3 $ (1) $ 9,820
========== ========== ========== ========
</TABLE>
There were no sales of investment securities during the years ended September
30, 1997, 1996 and 1995.
19
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - MORTGAGE-BACKED SECURITIES:
At September 30, 1997 and 1996, all mortgage-backed securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
mortgage-backed securities at September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
September 30, 1997
- ------------------
FNMA $ 333,563 $1,425 $(1,948) $ 333,040
FHLMC 856,522 6,480 (2,835) 860,167
Private label, AAA-rated 734,632 - (4,828) 729,804
Private label, AA-rated 60,990 666 - 61,656
---------- ------ ------- ----------
Total $1,985,707 $8,571 $(9,611) $1,984,667
========== ====== ======= ==========
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ----------- ---------- ----------
September 30, 1996
- ------------------
FNMA $ 432,527 $2,253 $ (162) $ 434,618
FHLMC 792,752 1,266 (2,802) 791,216
Private label, AA-rated 81,138 866 - 82,004
---------- ------ --------- ----------
Total $1,306,417 $4,385 $ (2,964) $1,307,838
========== ====== ========= ==========
</TABLE>
There were no sales of mortgage-backed securities from the available-for-sale or
the held-to-maturity portfolios during the years ended September 30, 1997, 1996
and 1995. See Note 1 - "Trading Securities."
Accrued interest receivable on mortgage-backed securities totaled $11,914 and
$8,107 at September 30, 1997 and 1996, respectively, and is included in other
assets in the Consolidated Statements of Financial Condition.
At September 30, 1997, certain mortgage-backed securities were pledged as
collateral for Federal Home Loan Bank of Atlanta advances, other short-term
borrowings and other recourse arrangements. See Notes 12, 13 and 21. Other
mortgage-backed securities with a book value of $24,727 were pledged as
collateral primarily for credit card settlement obligations.
20
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - LOANS RECEIVABLE:
Loans receivable is composed of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------
1997 1996
-------------- ------------
<S> <C> <C>
Single-family residential $ 747,070 $1,525,322
Home equity 44,088 32,052
Commercial real estate and multifamily 53,816 78,951
Real estate construction 77,221 41,561
Ground 29,592 44,723
Commercial 152,483 85,372
Credit card 987,149 893,271
Automobile 137,111 72,560
Home improvement and related loans 49,551 94,316
Overdraft lines of credit and
other consumer 36,029 37,954
---------- ----------
2,314,110 2,906,082
---------- ----------
Less:
Undisbursed portion of loans 106,217 50,811
Unearned discounts 477 677
Net deferred loan origination costs (2,403) (13,953)
Allowance for losses on loans 105,679 95,523
---------- ----------
209,970 133,058
---------- ----------
Total $2,104,140 $2,773,024
========== ==========
</TABLE>
The Bank serviced loans owned by others amounting to $9,731,839 and $7,998,463
at September 30, 1997 and 1996, respectively.
Accrued interest receivable on loans totaled $19,038 and $33,249 at September
30, 1997 and 1996, respectively, and is included in other assets in the
Consolidated Statements of Financial Condition.
21
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - REAL ESTATE HELD FOR INVESTMENT OR SALE:
Real estate held for investment or sale is composed of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1997 1996
---------- -----------
<S> <C> <C>
Real estate held for investment $ 3,819 $ 3,819
---------- -----------
Real estate held for sale 231,407 246,380
--------- -----------
Less:
Allowance for losses on real estate held
for investment 198 191
Allowance for losses on real estate held for sale 140,738 126,519
--------- -----------
140,936 126,710
--------- -----------
Total real estate held for investment or sale $ 94,290 $ 123,489
======== ===========
Loss on real estate held for investment or sale is composed of the following:
September 30,
--------------------------------
1997 1996 1995
-------- -------- --------
Provision for losses $(19,623) $(26,341) $(26,321)
Net income (loss) from operating properties (221) (350) 1,890
Equity earnings from investments in
limited partnerships - - 4,470
Net gain on sales 1,156 2,278 14,797
-------- -------- --------
Total $(18,688) $(24,413) $ (5,164)
======== ======== ========
</TABLE>
22
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 - ALLOWANCES FOR LOSSES:
Activity in the allowances for losses on loans receivable and real estate held
for investment or sale is summarized as follows:
<TABLE>
<CAPTION>
Real Estate
Held for
Loans Investment
Receivable or Sale
----------- -----------
<S> <C> <C>
Balance, September 30, 1994 $ 50,205 $ 118,973
Provision for losses 54,979 26,321
Charge-offs (56,577) (10,058)
Recoveries 11,889 -
---------- ----------
Balance, September 30, 1995 60,496 135,236
Provision for losses 115,740 26,341
Charge-offs (92,047) (34,867)
Recoveries 11,334 -
--------- ----------
Balance, September 30, 1996 95,523 126,710
Provision for losses 125,115 19,623
Increase due to acquisition of loans 118 -
Charge-offs (126,506) (5,397)
Recoveries 11,429 -
--------- ----------
Balance, September 30, 1997 $ 105,679 $ 140,936
========= ==========
</TABLE>
The allowances for losses at September 30, 1997 are based on management's
estimates of the amount of allowances required to reflect the losses incurred in
the loan and real estate portfolios based on circumstances and conditions known
at the time. As adjustments to the allowances become necessary, provisions for
losses are reported in operations in the periods they are determined to be
necessary.
NOTE 8 - ASSET-BACKED TRANSACTIONS:
The Bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.
The Bank sold credit card receivables and received gross proceeds of $1,084,500,
$919,000 and $1,550,000 during the years ended September 30, 1997, 1996 and
1995, respectively. During fiscal 1997, the Bank recognized gains of $33,132 on
credit card transactions. Of the $33,132 gain, $26,156 represents gains
recognized on 1997 securitizations and sales of additional receivables for
previous transactions, and the remainder represents gains recognized to adjust
the interest-only strips to fair market value. See Note 1. Outstanding trust
certificate balances related to these and previous securitizations were
$4,015,172 and $3,889,704 at September 30, 1997 and 1996, respectively. The
related receivable balances contained in the trusts were $4,659,702 and
$4,587,135 at September 30, 1997 and 1996, respectively. The Bank continues to
service the underlying loans and is contingently liable under various credit
enhancement facilities related to these transactions. See Note 21.
23
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 - ASSET-BACKED TRANSACTIONS (CONTINUED):
The Bank sold amounts on deposit in certain spread accounts associated with
certain outstanding credit card securitizations and received gross proceeds of
$144,200, $42,140 and $59,200 during fiscal 1997, 1996 and 1995, respectively.
A loss of $7,210 was recognized on the 1997 transaction and is included in gain
on sales of loans, net, in the Consolidated Statements of Operations. No gains
or losses were recorded on the transactions during fiscal 1996 and 1995.
Outstanding trust certificate balances related to these securitizations were
$225,927 and $91,769 at September 30, 1997 and 1996, respectively.
The Bank sold automobile loan receivables and received gross proceeds of
$938,875, $475,281 and $252,235 during fiscal 1997, 1996 and 1995, respectively.
Gains recognized on these transactions were $26,935, $7,282 and $3,988,
respectively. The outstanding trust certificate balances and the related
receivable balances contained in the trusts were $1,083,026 and $505,638 at
September 30, 1997 and 1996, respectively, $7,899 of which represents a separate
class of certificates retained by the Bank in conjunction with one 1997
transaction. These certificates were classified as trading securities at
September 30, 1997. The Bank continues to service the underlying loans and is
contingently liable under various credit enhancement facilities related to these
transactions. See Note 21.
The Bank sold home equity credit line receivables and received gross proceeds of
$139,773, $96,460 and $150,455, during the years ended September 30, 1997, 1996
and 1995, respectively. Gains recognized on these transactions were $3,372,
$4,749 and $7,606, during the years ended September 30, 1997, 1996 and 1995,
respectively. The $3,372 amount recognized in income for fiscal 1997 represents
gains recognized on the sale of new receivables into existing trusts. The
outstanding trust certificate balances and the related receivable balances
contained in the trusts were $325,810 and $459,130, respectively, at September
30, 1997, and $416,365 and $440,366, respectively, at September 30, 1996. The
Bank continues to service the underlying loans and is contingently liable under
various credit enhancement facilities related to these transactions. See Note
21.
During the year ended September 30, 1997, the Bank sold home loan and home
equity receivables in an asset-backed transaction to investors representing
interests in the trust. The gross proceeds received on this sale was $216,262.
The gain recognized on this transaction was $11,167. Pursuant to a subsequent
competitive auction, the Bank purchased the receivables related to the home loan
portion of the trust. At September 30, 1997, the outstanding trust certificate
balances and the related receivable balances (consisting solely of home equity
receivables at September 30, 1997) contained in the trust were $133,321. The
Bank continues to service the underlying loans and is contingently liable under
a credit enhancement facility related to this transaction. See Note 21.
The Bank sold home loan receivables and received gross proceeds of $154,426 and
$153,521 for the years ended September 30, 1997 and 1996, respectively. Gains
recognized on these transactions were $7,225 and $9,478, respectively. The
outstanding trust certificate balances and the related receivable balances
contained in the trusts were $246,772 and $244,140, respectively, at September
30, 1997, and $153,521 and 141,106, respectively, at September 30, 1996. The
Bank continues to service the underlying loans and is contingently liable under
credit enhancement facilities related to these transactions. See Note 21.
24
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - PROPERTY AND EQUIPMENT:
Property and equipment is composed of the following:
<TABLE>
<CAPTION>
Estimated September 30,
Useful ----------------------
Lives 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Land - $ 49,925 $ 45,211
Construction in progress - 1,950 18,596
Buildings and improvements 10-45 years 121,656 87,692
Leasehold improvements 5-20 years 74,278 55,847
Furniture and equipment 5-10 years 182,044 149,470
Automobiles 3-5 years 2,303 1,964
-------- --------
432,156 358,780
Less:
Accumulated depreciation and amortization 163,616 139,040
-------- --------
Total $268,540 $219,740
======== ========
</TABLE>
Depreciation and amortization expense amounted to $28,479, $24,410 and $21,461
for the years ended September 30, 1997, 1996 and 1995, respectively.
NOTE 10 - LEASES:
The Bank has noncancelable, long-term leases for office premises and retail
space, which have a variety of terms expiring from 1998 to 2019 and ground
leases which have terms expiring from 2029 to 2080. These leases are accounted
for as operating leases. Some of the leases are subject to rent adjustments in
the future based upon changes in the Consumer Price Index and some also contain
renewal options. The following is a schedule by years of future minimum lease
payments required at September 30, 1997:
<TABLE>
<CAPTION>
Year Ending
September 30,
------------
<S> <C>
1998 $ 13,700
1999 11,696
2000 10,862
2001 9,474
2002 10,620
Thereafter 73,448
--------
Total $129,800
========
</TABLE>
Future minimum sublease rental income at September 30, 1997 totaled $226. Rent
expense totaled $16,053, $13,527 and $11,228 for the years ended September 30,
1997, 1996 and 1995, respectively.
25
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 - DEPOSIT ACCOUNTS:
An analysis of deposit accounts and the related weighted average effective
interest rates at year-end are as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1997 1996
------------------------ ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- --------- ----------- -----
<S> <C> <C> <C> <C>
Demand accounts $ 215,678 - $ 156,517 -
NOW accounts 904,697 2.42% 851,385 2.42%
Money market deposit accounts 983,016 3.97% 1,002,688 3.88%
Statement savings accounts 907,141 3.48% 881,285 3.47%
Other deposit accounts 79,071 2.99% 68,487 2.98%
Certificate accounts, less than $100 1,156,724 5.50% 1,030,401 5.30%
Certificate accounts, $100 or more 647,429 5.69% 173,274 5.41%
---------- ----------
Total $4,893,756 3.99% $4,164,037 3.75%
========== ==========
</TABLE>
Interest expense on deposit accounts is composed of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NOW accounts $ 21,882 $ 23,044 $ 23,692
Money market deposit accounts 38,644 38,317 42,420
Statement savings accounts 30,927 30,034 33,394
Certificate accounts 75,180 69,180 53,033
Other deposit accounts 2,274 1,994 1,760
-------- -------- --------
Total $168,907 $162,569 $154,299
======== ======== ========
</TABLE>
Outstanding certificate accounts at September 30, 1997 mature in the years
indicated as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
--------------------------------
<S> <C>
1998 $1,514,252
1999 139,458
2000 104,298
2001 19,459
2002 26,686
----------
Total $1,804,153
==========
</TABLE>
26
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 - DEPOSIT ACCOUNTS(CONTINUED):
At September 30, 1997, certificate accounts of $100 or more have contractual
maturities as indicated below:
<TABLE>
<CAPTION>
<S> <C>
Three months or less $294,151
Over three months through six months 154,288
Over six months through 12 months 171,852
Over 12 months 27,138
--------
Total $647,429
========
NOTE 12 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
SHORT-TERM BORROWINGS:
Short-term borrowings are summarized as follows:
September 30,
---------------------------------
1997 1996 1995
---------------------------------
<S> <C> <C> <FN>
Securities sold under repurchase agreements:
Balance at year-end $ 2,606 $576,823 $ 2,424
Average amount outstanding during the year 483,076 59,687 161,599
Maximum amount outstanding at any month-end 946,090 576,823 355,991
Amount maturing within 30 days 2,606 576,576 2,424
Weighted average interest rate during the year 5.48% 5.50% 6.01%
Weighted average interest rate on year-end balances 5.35% 5.41% 5.45%
Other short-term borrowings:
Balance at year-end $ 72,215 $ 60,318 $ 8,011
Average amount outstanding during the year 39,126 13,641 17,896
Maximum amount outstanding at any month-end 72,241 60,318 50,842
Amount maturing within 30 days 72,215 60,318 8,011
Weighted average interest rate during the year 5.11% 5.04% 5.58%
Weighted average interest rate on year-end balances 5.34% 5.63% 5.77%
</TABLE>
The investment and mortgage-backed securities underlying the repurchase
agreements were delivered to the dealers who arranged the transactions. The
dealers may have loaned such securities to other parties in the normal course of
their operations and agreed to resell to the Bank the identical securities at
the maturities of the agreements.
At September 30, 1997, the Bank had pledged mortgage-backed securities with a
book value of $100,112 to secure certain other short-term borrowings.
27
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 - FEDERAL HOME LOAN BANK ADVANCES:
At September 30, 1997, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $188,511. Of the total advances at September 30, 1997, $150,000
have a weighted average interest rate of 5.63%, adjust quarterly based on the
three-month London Interbank Offered Rate ("LIBOR") and mature over varying
periods between November 1997 and March 1998. The weighted average interest
rate on the remaining $38,511 is 6.62% which is fixed for the term of the
advances which mature over varying periods between December 1997 and September
2007.
Under a Specific Collateral Agreement with the FHLB, advances are secured by all
of the Bank's FHLB stock and mortgage-backed securities with a book value of
$257,281. The FHLB requires that members maintain qualifying collateral at
least equal to 100% of the member's outstanding advances at all times. The
collateral held by the FHLB in excess of the September 30, 1997 advances is
available to secure additional advances from the FHLB, subject to its
collateralization guidelines.
NOTE 14 - CAPITAL NOTES - SUBORDINATED:
Capital notes, which are subordinated to the interest of deposit account
holders, are composed of the following:
<TABLE>
<CAPTION>
September 30, Interest
-------------------------------------
1997 1996 Rate
------------- -------- ------------
<S> <C> <C> <C>
Private placement:
BACOB Bank, s.c.,
due December 1996 $ - $ 10,000 LIBOR + 3.0%
Public placement:
Subordinated debentures due 2005 150,000 150,000 9 1/4%
Subordinated debentures due 2008 100,000 - 9 1/4%
-------- --------
Total $ 250,000 $160,000
======== ===========
</TABLE>
On December 3, 1996, the Bank sold $100.0 million of its 9 1/4% Subordinated
Debentures due 2008 (the "1996 Debentures"). The Bank received net proceeds of
$96,112 from the sale of the 1996 Debentures which were used for general
corporate purposes. The Bank received OTS approval to include the principal
amount of the 1996 Debentures in the Bank's supplementary capital for regulatory
capital purposes.
On November 23, 1993, the Bank sold $150.0 million of its 9 1/4% Subordinated
Debentures due 2005 (the "1993 Debentures"). The Bank received net proceeds of
$143,603 from the sale of the 1993 Debentures, of which approximately $134,200
was used to redeem $78,500 of debentures due in 2002 and $50,000 of debentures
due in 2003 on December 23, 1993 and December 24, 1993, respectively. The
remaining net proceeds were used for general corporate purposes. The Bank
incurred a loss of $6,333, after related income taxes, in connection with the
redemption of these debentures. The OTS approved the inclusion of the principal
amount of the 1993 Debentures in the Bank's supplementary capital for regulatory
capital purposes.
28
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 - CAPITAL NOTES - SUBORDINATED (CONTINUED):
The indenture pursuant to which the 1993 Debentures were sold (the "Indenture")
provides that the Bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be
continuing and the Bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15,000, (ii) 66% of the Bank's consolidated net income (as
defined in the Indenture) accrued on a cumulative basis commencing on October 1,
1993 and (iii) the aggregate net cash proceeds received by the Bank after
October 1, 1993 from the sale of qualified capital stock or certain debt
securities, minus the aggregate amount of any restricted payments made by the
Bank. Notwithstanding the above restrictions on dividends, provided no event of
default has occurred or is continuing, the Indenture does not restrict the
payment of dividends on the 13% Preferred Stock (as defined below) or any
payment-in-kind preferred stock issued in lieu of cash dividends on the
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the Bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 15.
Deferred debt issuance costs, net of accumulated amortization, amounted to
$9,382 and $5,617 at September 30, 1997 and 1996, respectively, and are included
in other assets in the Consolidated Statements of Financial Condition.
On November 15, 1996, the Bank redeemed the $10,000 private placement note.
NOTE 15 - MINORITY INTEREST:
On December 3, 1996, a new real estate investment trust subsidiary of the Bank
(the "REIT Subsidiary") sold $150,000 of its Noncumulative Exchangeable
Preferred Stock, Series A (the "REIT Preferred Stock"), and received net cash
proceeds of $144,000. Cash dividends on the REIT Preferred Stock are payable
quarterly in arrears at an annual rate of 10%. 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 received OTS approval to include the
proceeds from the sale of the REIT Preferred Stock in the core capital of the
Bank for regulatory capital purposes in an amount up to 25% of the Bank's core
capital. The REIT Preferred Stock is not redeemable until January 15, 2007, and
is redeemable thereafter at the option of the REIT Subsidiary. The net cash
proceeds from the sale of the REIT Preferred Stock is reflected as minority
interest in the Bank's Consolidated Statements of Financial Condition.
Dividends on the REIT Preferred Stock are presented as a reduction of net income
in the Consolidated Statements of Operations.
NOTE 16 - PREFERRED STOCK:
In April 1993, the Bank sold $75,000 of its Noncumulative Perpetual Preferred
Stock, Series A ("Preferred Stock") in a private offering. Cash dividends on
the Preferred Stock are payable quarterly in arrears at an annual rate of 13%.
If the Board of Directors does not declare the full amount of the noncumulative
cash dividend accrued in respect of any quarterly dividend period, in lieu
thereof the Board of Directors will be
29
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 - PREFERRED STOCK (CONTINUED):
required to declare (subject to regulatory and other restrictions) a stock
dividend in the form of a new series of payment-in-kind preferred stock of the
Bank.
The OTS has approved the inclusion of the Preferred Stock as tier 1 or core
capital and has approved the payment of dividends on the Preferred Stock,
provided certain conditions are met. The Preferred Stock is not redeemable
until May 1, 2003 and is redeemable thereafter at the option of the Bank. The
holders of the Preferred Stock have no voting rights, except in certain limited
circumstances.
Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25 per share, plus accrued and unpaid dividends
for the then-current dividend period in the event of any voluntary liquidation
of the Bank, after payment of the deposit accounts and other liabilities of the
Bank, and out of the assets available for distribution to shareholders. The
Preferred Stock ranks superior and prior to the issued and outstanding common
stock of the Bank with respect to dividend and liquidation rights.
NOTE 17 - RETIREMENT PLAN:
The Bank participates in a defined contribution profit sharing retirement plan
(the "Plan") which covers those full-time employees who meet the requirements as
specified in the Plan. The Plan, which can be modified or discontinued at any
time, requires participating employees to contribute 2.0% of their compensation.
Corporate contributions, at the discretionary amount of three times the employee
contribution, were $5,631, $4,705 and $3,920 for the years ended September 30,
1997, 1996 and 1995, respectively. There are no past service costs associated
with the Plan and the Bank has no liability under the Plan other than its
current contributions. The Plan owns 4.0% of the Bank's common stock.
NOTE 18 - INCOME TAXES:
The provision for income taxes for the years ended September 30, 1997, 1996 and
1995, consists of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1997 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Current provision (benefit):
Federal $ 5,372 $14,694 $25,661
State 1,338 2,452 (4,761) 6,710 17,146 20,900
----- ------- -------- -------- -------- --------
Deferred provision (benefit):
Federal 19,715 (979) (3,046)
State (3,159) 386 (524)
----- ------- --------
16,556 (593) (3,570)
- ---------------------------------------------- ------- --------
Provision for income taxes 23,266 16,553 17,330
Tax effect of net unrealized holding gains
(losses) reported in stockholders' equity 904 809 7,207 Total $24,170 $17,362 $24,537
----- --- ------- ======== ======== ========
</TABLE>
30
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 18 - INCOME TAXES (CONTINUED):
The Bank's effective income tax rate varies from the statutory federal income
tax rate as a result of the following factors:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1997 1996 1995
---------------- -------- -----------
<S> <C> <C> <C>
Computed tax at statutory federal
income tax rate $27,176 $ 15,464 $19,129
Increase (decrease) in taxes resulting from:
Minority interest (4,524) - -
Goodwill and other purchase accounting
adjustments 1,586 1,626 1,465
State franchise tax effect (7,105) (11,367) (3,451)
Change in allowance for deferred tax asset 6,026 7,763 -
Other 107 3,067 187
------- -------- -------
Total $23,266 $ 16,553 $17,330
======= ======== =======
</TABLE>
The net deferred tax asset is composed of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------
1997 1996
------------- --------
<S> <C> <C>
Deferred tax assets:
Provision for losses in excess of deductions $44,571 $51,166
Amortization of intangible asset 379 -
Deferred deposit insurance premiums - 11,151
State net operating losses 16,898 8,812
Unrealized losses on property 4,198 3,545
Other 2,884 3,685
------- -------
Gross deferred tax assets 68,930 78,359
------- -------
Deferred tax liabilities:
Net unrealized holding gains 3,342 5,806
Amortization of servicing asset 738 -
Deferred loan fees 541 5,764
Asset securitizations 16,565 3,125
Depreciation 4,096 5,750
FHLB stock dividends 3,525 5,375
Other 296 2,183
------- -------
Gross deferred tax liabilities 29,103 28,003
------- -------
Less: Valuation allowances 13,789 7,763
------- -------
Net deferred tax asset $26,038 $42,593
======= =======
</TABLE>
31
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 18 - INCOME TAXES (CONTINUED):
The Bank establishes a valuation allowance against the gross deferred tax assets
to the extent it cannot be determined that it is more likely than not that such
assets will be realized through taxes available in carryback years, future
reversals of existing taxable temporary differences or projected future taxable
income.
The net deferred tax asset, along with current taxes receivable, is included in
other assets in the Consolidated Statements of Financial Condition. The
components are as follows:
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
------------- -------
<S> <C> <C>
Current taxes receivable $ 1,418 $ 1,237
Net deferred tax asset 26,038 42,593
------- -------
Total $27,456 $43,830
======= =======
</TABLE>
32
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 - REGULATORY MATTERS:
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Bank's regulatory capital requirements at September 30, 1997
were a 1.5% tangible capital requirement, a 3.0% core capital requirement and an
8.0% total risk-based capital requirement. Under the OTS "prompt corrective
action" regulations, the Bank must maintain minimum leverage, tier 1 risk-based
and total risk-based capital ratios of 4.0%, 4.0% and 8.0%, respectively, to
meet the ratios established for "adequately capitalized" institutions. At
September 30, 1997, the Bank was in compliance with its tangible, core and total
risk-based regulatory capital requirements and exceeded the capital standards
established for "well capitalized" institutions under the "prompt corrective
action" regulations. The information below is based upon the Bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------------------------------
MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
--------------------------------- ---------------------- ---------------------
As a % of As a % of As a % of
Amount Assets/(4)/ Amount Assets Amount Assets
-------------- -------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $363,246
Minority interest in REIT
Subsidiary/(1)/ 144,000
Net unrealized holding losses/(2)/ 493
--------
Adjusted capital 507,739
Adjustments for tangible and
core capital:
Intangible assets (44,251)
Non-allowable minority interest in
REIT Subsidiary/(1)/ (38,758)
Non-includable subsidiaries/(3)/ (3,762)
--------
Total tangible capital 420,968 6.96% $ 90,715 1.50% $ 330,253 5.46%
-------------- -------------- ---------- ---------- ---------- --------
Total core capital/(4)/ 420,968 6.96% $241,907 4.00% $ 179,061 2.96%
------- =============== ========= =========== ========== ======
Tier 1 risk-based capital/(4)/ 420,968 7.24% $232,713 4.00% $188,255 3.24%
------- =============== ========= =========== ========== ======
Adjustments for total risk-based
capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 92,962
--------
Total supplementary capital 342,962
Excess allowance for loan losses (19,989)
--------
Adjusted supplementary capital 322,973
-------
Total available capital 743,941
Equity investments/(3)/ (14,556)
--------
Total risk-based capital/(4)/ $729,385 13.50% $465,426 8.00% $263,959 5.50%
</TABLE>
/(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 $964 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%.
33
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 - REGULATORY MATTERS (CONTINUED):
At September 30, 1996, the Bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "adequately capitalized" institutions under the
"prompt corrective action" regulations. The information below is based upon the
Bank's understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------------------------------
MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
--------------------------------- ---------------------- ---------------------
As a % of As a % of As a % of
Amount Assets/(4)/ Amount Assets Amount Assets
-------------- -------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $339,160
Net unrealized holding losses/(1)/ 1,875
---------
Adjusted capital 341,035
Adjustments for tangible and
core capital:
Intangible assets (41,051)
Non-includable subsidiaries/(2)(4)/
--------
Total l tangible capital 296,362 5.21% $ 85,255 1.50% $211,107 3.71%
-------
Total core capital/(3)/ 296,362 5.21% $227,346 4.00% $ 69,016 1.21%
-------- =================== ========= ====== ========= ======
Tier 1 risk-based capital/(3)/ 296,362 5.80% $204,519 4.00% $ 91,843 1.80%
-------- =================== ========= ====== ========= ======
Adjustments for total risk-based capital:
Subordinated capital debentures 150,000
Allowance for general loan losses 87,953
---------
Total supplementary capital 237,953
Excess allowance for loan losses (23,744)
----------
Adjusted supplementary capital 214,209
---------
Total available capital 510,571
Equity investments/(2)/ (19,657)
----------
Total risk-based capital/(3)/ $490,914 10.14% $409,038 8.00% $ 81,876 2.14%
======== =================== ========= ====== ========= ======
</TABLE>
/(1)/ Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
/(2)/ Reflects an aggregate offset of $1,226 representing the allowance for
general loan losses maintained against the Bank's equity investments
and non-includable subsidiaries which, pursuant to OTS guidelines, is
available as a "credit" against the deductions from capital otherwise
required for such investments.
/(3)/ Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least
6.0% and a total risk-based capital ratio of at least 10.0%.
/(4)/ Effective July 1, 1996, the percentage of non-includable subsidiaries
phased-out from core capital increased from 60% to 100%.
At September 30, 1997 and 1996, the Bank had $3,959 and $3,813, respectively, in
loans to and investments in subsidiaries engaged in activities impermissible for
national banks ("non-includable subsidiaries") which were fully deducted from
all three capital requirements. At September 30, 1997 and
34
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 - REGULATORY MATTERS (CONTINUED):
1996, the Bank also had two equity investments with an aggregate balance, after
subsequent valuation allowances, of $15,322 and $20,692, respectively, which
were fully deducted from total risk-based capital.
As of September 30, 1997 and 1996, the Bank had $36,189 and $40,201,
respectively, in supervisory goodwill, all of which was excluded from core
capital pursuant to statutory provisions.
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. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In November 1996, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties through November 12, 1997. In addition, the Bank has
submitted to the OTS a request for a further extension of the holding periods
through fiscal 1998 for certain of its REO properties. In the event the Bank
does not receive such an extension, the Bank's capital ratios would remain above
the levels required for well capitalized institutions. The following table sets
forth the Bank's REO at September 30, 1997, after valuation allowances of
$140,738, by the fiscal year in which the property was acquired through
foreclosure.
<TABLE>
<CAPTION>
Fiscal Year
---------------
<S> <C>
1990 $22,667/(1)(2)/
1991 47,724/(2)/
1992 3,280/(2)/
1993 4,050
1994 2,002
1995 8,036
1996 -
1997 2,910
---------------
Total REO $ 90,669
===============
</TABLE>
/(1)/ Includes REO with an aggregate net book value of $14,555, which the Bank
treats as equity investments for regulatory capital purposes.
/(2)/ Includes REO, with an aggregate net book value of $59,116, for which the
Bank received an extension of the holding periods through November 12,
1997.
On March 29, 1996, the OTS released the Bank from its September 30, 1991 written
agreement with the OTS, as amended in October 1993, and from regulatory
restrictions on asset growth. In connection with the termination of the written
agreement and at the request of the OTS, the Board of Directors of the Bank
adopted a resolution which addressed certain issues previously addressed by the
written agreement. Among other things, the resolution permits the Bank: (i) to
make tax sharing payments without OTS approval to the Trust of up to $15,000
relating to any single fiscal year; and (ii) to declare dividends on
35
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 - REGULATORY MATTERS (CONTINUED):
its common stock in any quarterly period up to the lesser of (a) 50% of its
after tax net income for the immediately preceding quarter or (b) 50% of the
average quarterly after tax net income for the immediately preceding four
quarter period, minus (in either case) dividends declared on the Bank's
preferred stock during that quarterly period. The resolution also provides that
the Bank will present a plan annually to the OTS detailing anticipated consumer
loan securitization activity.
Legislation was enacted on September 30, 1996 that, among other things, imposed
on thrift institutions a one-time assessment of 65.7 basis points on their SAIF-
insured deposits to capitalize the SAIF. The one-time SAIF assessment of
$26,416, which was accrued during fiscal 1996 and is included in deposit
insurance premiums in the Consolidated Statements of Operations, was paid during
fiscal 1997.
NOTE 20 - TRANSACTIONS WITH RELATED PARTIES:
LOANS RECEIVABLE:
From time to time, in the normal course of business, the Bank may make loans to
executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same
terms as similar loans with unrelated parties. An analysis of activity with
respect to these loans for the year ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, September 30, 1996 $2,737
Additions 451
Reductions (756)
------
Balance, September 30, 1997 $2,432
======
</TABLE>
SERVICES:
B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the Bank. These services include property
management, cafeteria management (discontinued during fiscal 1997), insurance
brokerage and leasing. Fees for these services were $42, $366 and $460 for the
years ended September 30, 1997, 1996 and 1995, respectively.
The law firm in which one director of the Bank is a partner received $4,877,
$3,213 and $2,756 for legal services rendered to the Bank during the years
ended September 30, 1997, 1996 and 1995 respectively.
For the years ended September 30, 1997, 1996 and 1995, one of the directors of
the Bank was paid $50, $37 and $30, respectively, for consulting services
rendered to the Bank. Another director of the Bank was paid total fees of
$100, $100 and $75 for the years ended September 30, 1997, 1996 and 1995,
respectively, for consulting services. Another director of the Bank was paid
$17 for consulting services rendered to the Bank during fiscal year 1997.
36
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 20 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED):
TAX SHARING AGREEMENT:
The Bank and the other companies in the Trust's affiliated group are parties to
a tax sharing agreement dated June 28, 1990 (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides for payments to be made by members of the
Trust's affiliated group to the Trust based on their separate company tax
liabilities. The Tax Sharing Agreement also provides that, to the extent net
operating losses or tax credits of a particular member are used to reduce the
overall tax liability of the Trust's affiliated group, such member will be
reimbursed by the other members of the affiliated group that have taxable
income in an amount equal to such tax reduction. The Bank paid $9,811, $25,000
and $20,500 to the Trust during fiscal 1997, 1996 and 1995, respectively, under
the Tax Sharing Agreement. OTS approval of the tax sharing payments during
fiscal 1997, 1996 and 1995 was conditioned on a pledge by the Trust of certain
assets to secure certain of its obligations under the Tax Sharing Agreement.
Under the terms of the Bank's board resolution, the Bank is permitted to make
tax sharing payments to the Trust of up to $15,000 relating to any fiscal year
without OTS approval. See Note 19. There was no tax sharing payment payable to
the Trust by the Bank at September 30, 1997 and 1996.
OTHER:
The Bank paid $4,861, $4,500 and $4,210 for office space leased from or managed
by companies affiliated with the Bank or its directors during the years ended
September 30, 1997, 1996 and 1995, respectively.
The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and
Van Ness Square Corporation, affiliates of the Bank, from time to time maintain
interest-bearing deposit accounts with the Bank. Those accounts totaled
$26,486 at September 30, 1997. The Bank paid interest on the accounts
amounting to $599 in fiscal 1997.
During fiscal 1995, the Bank purchased land and building plans from Lake for
$1,332. During fiscal 1996, construction was completed and the Bank began
occupying the building.
NOTE 21 - FINANCIAL INSTRUMENTS:
The Bank, in the normal course of business, is a party to financial instruments
with off-balance-sheet risk and other derivative financial instruments to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit at both fixed and variable rates, letters of credit, interest-
rate cap agreements and assets sold with limited recourse. All such financial
instruments are held or issued for purposes other than trading.
These instruments involve, to varying degrees, elements of credit and interest-
rate risk in excess of the amount recognized in the Consolidated Statements of
Financial Condition.
37
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 21 - FINANCIAL INSTRUMENTS (CONTINUED):
The contract or notional amount of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The Bank is also a
party to derivative financial instruments that do not have off-balance-sheet
risk (e.g. interest-rate cap agreements).
COMMITMENTS TO EXTEND CREDIT:
The Bank had approximately $17 billion of commitments to extend credit at
September 30, 1997. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Because many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
These commitments are subject to the Bank's normal underwriting and credit
evaluation policies and procedures.
Loans approved but not closed are commitments for fixed or adjustable-rate
residential loans which are secured by real estate. The Bank currently
requires borrowers to obtain private mortgage insurance on all loans where the
loan-to-value ratio exceeds 80%.
STANDBY LETTERS OF CREDIT:
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At September 30,
1997, the Bank had written standby letters of credit in the amount of $29,186,
which were issued to guarantee the performance of and irrevocably assure
payment by customers under construction projects.
Of the total, $19,228 will expire in fiscal 1998 and the remainder will expire
over time through fiscal 2001. The credit risk involved in issuing standby
letters of credit is essentially the same as that involved in extending loan
commitments to customers. Mortgage-backed securities with a book value of
$2,343 were pledged as collateral for certain of these letters of credit at
September 30, 1997.
RECOURSE ARRANGEMENTS:
The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of credit card
receivables, home equity credit line receivables, automobile loan receivables,
home loan receivables and amounts on deposit in certain spread accounts through
the asset-backed securitizations described in Note 8. At September 30, 1997
and 1996, the primary recourse to the Bank was $141,992 and $128,029,
respectively. As a result of these recourse provisions, the Bank maintained
restricted cash accounts amounting to $145,812 and $128,191, at September 30,
38
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 21 - FINANCIAL INSTRUMENTS (CONTINUED):
RECOURSE ARRANGEMENTS(CONTINUED):
1997 and 1996, respectively, which are included in other assets in the
Consolidated Statements of Financial Condition.
The Bank is obligated under various recourse provisions related to the swap of
single-family residential loans for participation certificates and mortgage-
backed securities issued to the Bank by FHLMC and FNMA. At September 30, 1997,
recourse to the Bank under these arrangements was $989. As security for the
payment of funds due under certain of the FHLMC recourse obligations, the Bank
is required to post collateral. At September 30, 1997, mortgage-backed
securities pledged as collateral under these obligations had a book value of
$2,398. In addition, the Bank maintained a restricted cash account amounting
to $325 at September 30, 1997 and 1996, which is included in other assets in
the Consolidated Statements of Financial Condition.
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest-rate cap agreements are used to limit the Bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 1997, the Bank was a party to
four interest-rate cap agreements with an aggregate notional amount of $372,222
with maturity dates ranging from December 31, 1997 through June 30, 1999.
Three of the interest-rate cap agreements with an aggregate notional amount of
$300,000 entitle the Bank to receive compensatory payments from the cap
provider, which is a AAA-rated (by Standard & Poor's) counterparty, equal to
the product of (a) the amount by which the one-month LIBOR exceeds 7.00% and
(b) the then outstanding notional principal amount for a predetermined period
of time. The fourth interest-rate cap agreement with a notional amount of
$72,222 entitles the Bank to receive compensatory payments from the cap
provider, which is a AA-rated (for long term debt as rated by Standard &
Poor's) counterparty, equal to the product of (a) the amount by which the one-
month LIBOR exceeds 9.00% and (b) the then outstanding notional principal
amount for the predetermined period of time. The Bank has no obligation to
make payments to the provider of the cap or any other party. The Bank is
exposed to credit losses in the event of nonperformance by the counterparty,
but does not expect the counterparty to fail to meet its obligation given its
credit rating.
To manage the potentially adverse impact of interest rate movements on the
fixed-rate mortgage loan pipeline, the Bank hedges its pipeline by entering
into whole loan and mortgage-backed security forward sale commitments and
mortgage-backed security forward purchase commitments. Forward sale commitments
are used to sell specific financial instruments (whole loans or mortgage-backed
securities) at a future date for a specified price. Forward sale commitments
generally settle within 90 days. Gains and losses are deferred and recorded as
a component of the gain on sales of loans at the time the forward sale
commitment matures. At September 30, 1997, the Bank had whole loan and
mortgage-backed security forward sale commitments of $343 and $149,061,
respectively. In addition, at September 30, 1997, the Bank had $19,845 in
mortgage-backed security forward purchase commitments related to its hedging
activities. Forward purchase commitments generally settle within 90 days.
Gains
39
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 21 - FINANCIAL INSTRUMENTS (CONTINUED):
DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED):
and losses are deferred and recorded as a component of the gain on sales of
loans at the time the forward purchase commitment matures.
CONCENTRATIONS OF CREDIT:
The Bank's principal real estate lending market is the metropolitan Washington,
D.C. area. In addition, a significant portion of the Bank's consumer loan
portfolio, including credit cards, was generated by customers residing in the
metropolitan Washington, D.C. area. Service industries and federal, state and
local governments employ a significant portion of the Washington, D.C. area
labor force. Adverse changes in economic conditions could have a direct impact
on the timing and amount of payments by borrowers.
40
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 22 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The majority of the Bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting in a
great degree of subjectivity inherent in the indicated fair value amounts.
Because the fair value is estimated as of the balance sheet date, the amount
which will actually be realized or paid upon settlement or maturity could be
significantly different. Comparability among financial institutions may be
difficult due to the wide range of permitted valuation techniques and the
numerous estimates and assumptions which must be made. The estimated fair
values of the Bank's financial instruments at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1997 1996
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks,
interest-bearing deposits, federal
funds sold and securities purchased
under agreements to resell $ 651,891 $ 651,891 $ 266,425 $ 266,425
Loans held for sale 102,749 103,819 76,064 76,064
Loans held for securitization and sale 220,000 220,000 450,000 450,000
Trading securities 7,899 7,899 - -
Investment securities 4,998 5,012 9,818 9,820
Mortgage-backed securities 1,985,707 1,984,667 1,306,417 1,307,838
Loans receivable, net 2,104,140 2,207,229 2,773,024 2,834,726
Interest-rate cap agreements 3,114 169 6,179 1,832
Other financial assets 513,735 515,218 392,265 393,748
Financial liabilities:
Deposit accounts with
no stated maturities 3,089,603 3,089,603 2,960,362 2,960,362
Deposit accounts with
stated maturities 1,804,153 1,810,245 1,203,675 1,210,497
Securities sold under
repurchase agreements and other
short-term borrowings,
notes payable and Federal Home Loan
Bank advances 270,351 270,920 913,483 914,418
Capital notes-subordinated 240,618/(1)/ 256,875 154,383/(1)/ 161,875
Other financial liabilities 108,684 108,684 80,760 80,760
</TABLE>
/(1)/ Net of deferred debt issuance costs which are included in other assets in
the Consolidated Statements of Financial Condition.
41
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 22 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The following methods and assumptions were used to estimate the fair value
amounts at September 30, 1997 and 1996:
CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS, FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL: Carrying amount approximates
fair value.
LOANS HELD FOR SALE: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.
LOANS HELD FOR SECURITIZATION AND SALE: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.
TRADING SECURITIES: Fair value is equal to carrying value.
INVESTMENT SECURITIES: Fair value is based on quoted market prices.
MORTGAGE-BACKED SECURITIES: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.
LOANS RECEIVABLE, NET: Fair value of certain homogeneous groups of loans (e.g.
single-family residential, automobile loans, home improvement loans and fixed-
rate commercial and multifamily loans) is estimated using discounted cash flow
analyses based on contractual repayment schedules. The discount rates used in
these analyses are based on either the interest rates paid on U.S. Treasury
securities of comparable maturities adjusted for credit risk and non-interest
operating costs, or the interest rates currently offered by the Bank for loans
with similar terms to borrowers of similar credit quality. For loans which
reprice frequently at market rates (e.g. home equity, variable-rate commercial
and multifamily, real estate construction and ground loans), the carrying amount
approximates fair value. Because credit card receivables are generally sold at
face value through the Bank's securitization program, such face value is used as
the estimated fair value of these receivables. The fair value of the Bank's
loan portfolio as presented above does not include the value of established
credit card and home equity credit line customer relationships, or the value
relating to estimated cash flows from future receivables and the associated fees
generated from existing customers.
INTEREST-RATE CAP AGREEMENTS: Fair value is based on dealer quotes.
OTHER FINANCIAL ASSETS: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips are carried at fair value. The fair value of one
of the Bank's investments is based on quoted market prices.
42
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 22 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
DEPOSIT ACCOUNTS WITH NO STATED MATURITIES: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
Bank's established deposit customer relationships.
DEPOSIT ACCOUNTS WITH STATED MATURITIES: Fair value of fixed-rate certificates
of deposit is estimated based on discounted cash flow analyses using the
remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.
BORROWINGS: These instruments consist of securities sold under repurchase
agreements and other short-term borrowings, notes payable and Federal Home Loan
Bank advances. For borrowings which either reprice frequently to market
interest rates or are short-term in duration, the carrying amount approximates
fair value. Fair value of the remaining amounts borrowed is estimated based on
discounted cash flow analyses using interest rates currently charged by the
lender for comparable borrowings with similar remaining maturities.
CAPITAL NOTES-SUBORDINATED: Fair value of the 1993 Debentures and the 1996
Debentures is based on quoted market prices. The carrying amount of the
$10,000 private placement capital note approximated fair value at September 30,
1996.
OTHER FINANCIAL LIABILITIES: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable and other short-term payables
approximates fair value.
OFF-BALANCE SHEET INSTRUMENTS: The difference between the original fees charged
by the Bank for commitments to extend credit and letters of credit and the
current fees charged to enter into similar agreements is immaterial. Fair value
of forward commitments is based on the estimated amount that the Bank would pay
to terminate the arrangements at the reporting date, taking into account the
remaining terms of the arrangements and the counterparties' credit standing,
where applicable, which is immaterial.
NOTE 23 - LITIGATION:
During the normal course of business, the Bank is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the Bank is a defendant are material, the Bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the Bank.
43
<PAGE>
CHEVY CHASE BANK, F.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 24 - SUBSEQUENT EVENT:
On November 12, 1997 the Bank purchased ASB Capital Management, Inc. ("ASB"), a
wholly-owned subsidiary of NationsBank Corporation and one of the largest SEC-
registered investment managers headquartered in the Washington, D.C.
metropolitan area. ASB provides a variety of investment products, including
equity and fixed income securities, money market investments, and real estate
investments, to a primarily institutional client base and has approximately $3.0
billion of assets under management. The Bank anticipates that the acquisition
will provide an additional source of fee-based revenues. The Bank has obtained
regulatory approval from the OTS to obtain trust powers through a new operating
subsidiary which acquired ASB. Although the acquisition generated additional
goodwill which reduced the Bank's regulatory capital levels, the Bank's capital
levels immediately following the acquisition remained above the levels
established for well-capitalized institutions.
44
<PAGE>
ATTACHMENT D
CHEVY CHASE BANK, F.S.B.
INTERIM FINANCIAL STATEMENTS
December 31, 1997
<PAGE>
CHEVY CHASE BANK, F.S.B.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
-------------- --------------
ASSETS
------
<S> <C> <C>
Cash and other deposits $ 376,751 $ 286,891
Federal funds sold and securities purchased
under agreements to resell 300,000 365,000
Loans held for sale 108,441 102,749
Loans held for securitization and sale 180,000 220,000
Trading securities 16,744 7,899
Investment securities (market value of $38,977 and
$5,012, respectively) 39,008 4,998
Mortgage-backed securities (market value of
$1,746,589 and $1,984,667, respectively) 1,752,149 1,985,707
Loans receivable (net of allowance for losses of
$113,131 and $105,679, respectively) 2,327,249 2,104,140
Federal Home Loan Bank stock 33,170 33,170
Real estate held for investment or sale (net of allowance
for losses of $143,872 and $140,936, respectively) 88,932 94,290
Property and equipment, net 273,904 268,540
Goodwill and other intangible assets, net 66,312 44,251
Interest-only strips, net 139,365 105,812
Other assets 458,231 465,966
-------------- --------------
Total assets $ 6,160,256 $ 6,089,413
============== ==============
94,198
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Deposit accounts $ 4,994,545 $ 4,893,756
Borrowings 86,931 81,840
Federal Home Loan Bank advances 139,939 188,511
Other liabilities 170,551 168,060
-------------- --------------
5,391,966 5,332,167
Capital notes-subordinated 250,000 250,000
-------------- --------------
Total liabilities 5,641,966 5,582,167
-------------- --------------
Minority interest 144,000 144,000
Stockholders' equity:
13% Noncumulative Perpetual Preferred Stock, Series A,
$0.01 par value, 3,000,000 shares authorized, issued
and outstanding 30 30
Common stock, $1 par value, 10,000,000 shares
authorized, 510,000 shares issued, 10,000 shares
outstanding 10 10
Capital contributed in excess of par 165,704 165,704
Retained earnings 208,662 197,995
Net unrealized holding gains (losses) (116) (493)
-------------- --------------
Total stockholders' equity 374,290 363,246
-------------- --------------
Total liabilities and stockholders' equity $ 6,160,256 $ 6,089,413
============== ==============
- ------------------------------------------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
-1-
<PAGE>
CHEVY CHASE BANK, F.S.B.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans $ 74,519 $ 93,279
Mortgage-backed securities 26,607 18,914
Trading securities 472 244
Investment securities 402 144
Other 4,419 2,729
---------- ----------
Total interest income 106,419 115,310
---------- ----------
INTEREST EXPENSE
Deposit accounts 48,779 38,326
Borrowings 9,513 19,218
---------- ----------
Total interest expense 58,292 57,544
---------- ----------
NET INTEREST INCOME 48,127 57,766
Provision for loan losses 35,062 26,840
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,065 30,926
---------- ----------
OTHER INCOME
Loan and deposit servicing fees 76,228 63,285
Credit card fees 13,758 14,532
Gain (loss) on sales of trading securities, net 557 (51)
Loss on real estate held for investment or
sale, net (4,914) (4,374)
Gain on sales of loans, net 33,172 7,901
Net unrealized gain on interest-only strips 3,824 -
Other 6,744 6,318
---------- ----------
Total other income 129,369 87,611
---------- ----------
OPERATING EXPENSES
Salaries and employee benefits 44,845 36,604
Loan 9,758 4,315
Property and equipment 6,621 5,608
Marketing 20,315 20,077
Data processing 10,549 11,845
Depreciation and amortization 7,830 6,543
Deposit insurance premiums 1,466 2,066
Amortization of goodwill and other
intangible assets 1,572 1,001
Other 10,732 11,052
---------- ----------
Total operating expenses 113,688 99,111
---------- ----------
</TABLE>
- -------------------------------------------------------------------------------
Continued on the following page.
-2-
<PAGE>
CHEVY CHASE BANK, F.S.B.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Income before income taxes and minority interest 28,746 19,426
Provision for income taxes 8,250 7,565
---------- ----------
Income before minority interest 20,496 11,861
Minority interest (3,891) (1,254)
---------- ----------
NET INCOME $ 16,605 $ 10,607
========== ==========
PREFERRED STOCK DIVIDENDS 2,438 2,438
---------- ----------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDERS $ 14,167 $ 8,169
========== ==========
EARNINGS PER COMMON SHARE $ 1,416.70 $ 816.90
========== ==========
</TABLE>
- -------------------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
CHEVY CHASE BANK, F.S.B.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Net
Capital Unrealized
Contributed Holding Total
Preferred Common in Excess Retained Gains Stockholders'
Stock Stock of Par Earnings (Losses) Equity
--------- ------ ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 $ 30 $ 10 $ 165,704 $ 197,995 $ (493) $ 363,246
Net income - - - 16,605 - 16,605
Cash dividends on 13%
Noncumulative Perpetual
Preferred Stock, Series A - - - (2,438) - (2,438)
Cash dividends on Common Stock - - - (3,500) - (3,500)
Increase in net unrealized
holding gains (losses) - - - - 377 377
--------- ------ ----------- ----------- ---------- -------------
Balance, December 31, 1997 $ 30 $ 10 $ 165,704 $ 208,662 $ (116) $ 374,290
========= ====== =========== =========== ========== =============
</TABLE>
================================================================================
See the accompanying Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
CHEVY CHASE BANK, F.S.B.
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,605 $ 10,607
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Amortization (accretion) of premiums, discounts and
net deferred loan fees 7,974 (1,209)
Depreciation and amortization 7,830 6,599
Amortization of goodwill and other intangible assets 1,572 3,044
Provision for loan losses 35,062 26,840
Capitalized interest on real estate held for investment or sale (499) (559)
Net fundings of loans held for sale and/or securitization (197,425) (191,348)
Net purchases of trading securities (8,845) -
Proceeds from sales of trading securities 137,539 91,926
Proceeds from sales of loans held for sale
and/or securitization 829,487 755,197
Earnings on real estate (332) (424)
Provision for losses on real estate held for investment or sale 5,307 4,697
(Gain) loss on sales of trading securities, net (557) 51
Gain on sales of loans, net (33,172) (7,901)
Unrealized gain on interest-only strips (3,824) -
Increase in interest-only strips (33,553) -
Increase in excess servicing assets - (9,117)
Decrease (increase) in servicing assets 6,930 (1,519)
Increase in goodwill and other intangible assets (23,870) -
Decrease (increase) in other assets 557 (64,169)
Increase (decrease) in other liabilities 1,455 (16,475)
Other 3,940 (2,136)
------------------- --------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 752,181 604,104
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from redemption of Federal Home Loan Bank stock - 9,482
Net proceeds from sales of real estate 3,566 7,327
Net fundings of loans receivable (691,629) (725,811)
Principal collected on mortgage-backed securities 233,730 103,667
Purchases of investment securities (34,010) -
Purchases of mortgage-backed securities - (168,941)
Purchases of loans receivable (272,979) (195,186)
Purchases of property and equipment (13,253) (17,295)
Disbursements for real estate held for investment or sale (3,325) (5,952)
Other (1,830) 233
------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (779,730) (992,476)
------------------- --------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
CHEVY CHASE BANK, F.S.B.
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from customer deposits and sales of
certificates of deposit 6,181,097 4,221,190
Customer withdrawals of deposits and payments
for maturing certificates of deposit (6,080,308) (4,179,256)
Net increase in securities sold under repurchase
agreements 8,768 55,755
Advances from the Federal Home Loan Bank 106,602 393,216
Repayments of advances from the Federal Home Loan Bank (155,174) (243,616)
Proceeds from other borrowings 2,385,502 1,004,944
Repayments of other borrowings (2,389,177) (1,026,649)
Cash dividends paid on preferred stock (2,438) (2,438)
Cash dividends paid on common stock (3,500) (3,000)
Repayment of capital notes - subordinated - (10,000)
Net proceeds from issuance of capital notes - subordinated - 96,112
Net proceeds from issuance of preferred stock - 144,000
Other 1,037 (133)
-------------------- --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,409 450,125
-------------------- --------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,860 61,753
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 651,891 266,425
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 676,751 $ 328,178
==================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 62,990 $ 61,215
Income taxes $ 1,837 $ 282
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Loans held for sale exchanged for trading $ 137,414 $ 92,072
securities
Loans receivable transferred to loans held for sale and/or
securitization $ 697,547 $ 576,582
Loans made in connection with the sale of real estate $ 3,624 $ 467
Loans receivable transferred to real estate acquired in
settlement of loans $ 1,222 $ 1,148
Loans receivable exchanged for mortgage-backed securities
held-to-maturity $ 2,786 $ -
</TABLE>
- -------------------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements of Chevy Chase
Bank, F.S.B. (the "Bank") have been prepared in accordance with the instructions
for Form 10-Q and, therefore, do not include all information and notes necessary
for a fair presentation of financial condition, results of operations and cash
flows in conformity with generally accepted accounting principles. The
accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Form 10-K of the Bank for the fiscal year ended September 30, 1997.
The accompanying condensed consolidated financial statements include the
accounts of the Bank and all subsidiaries. All significant intercompany
balances and transactions have been eliminated. The condensed consolidated
financial statements as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 are unaudited but include all adjustments (consisting
only of normal recurring adjustments) which the Bank considers necessary for a
fair presentation of its financial condition and results of operations for those
periods. The Condensed Consolidated Statements of Operations for the three
months ended December 31, 1997 are not necessarily indicative of the results
that will be achieved for the entire year.
Certain reclassifications of prior periods' information have been made to
conform with the presentation for the three months ended December 31, 1997.
NOTE 2 - EARNINGS PER COMMON SHARE:
Earnings per common share are calculated based upon the weighted average number
of common shares outstanding during each period presented, which amounted to
10,000 shares in each such period. Dividends on preferred stock are deducted
from earnings in the computation of earnings per common share when declared by
the Bank's Board of Directors.
NOTE 3 - LOANS HELD FOR SALE:
Loans held for sale are composed of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
(In thousands)
<S> <C> <C>
Single-family residential $ 97,616 $102,749
Home improvement and related loans 10,825 -
-------- --------
$108,441 $102,749
======== ========
</TABLE>
-7-
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
----------------------------------------------------------------
(Unaudited)
NOTE 4 - LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale are composed of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
(In thousands)
<S> <C> <C>
Credit card $ 60,000 $ 90,000
Automobile 60,000 80,000
Home equity credit line 60,000 50,000
---------- ----------
Total $ 180,000 $ 220,000
========== ==========
</TABLE>
NOTE 5 - LOANS RECEIVABLE:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
(In thousands)
<S> <C> <C>
Single-family residential $ 993,291 $ 747,070
Home equity credit line 81,101 44,088
Commercial real estate and multifamily 73,270 53,816
Real estate construction 118,330 77,221
Ground 29,446 29,592
Commercial 183,439 152,483
Credit card 949,173 987,149
Automobile 88,563 137,111
Home improvement and related loans 57,003 49,551
Overdraft lines of credit and
other consumer 35,578 36,029
---------- ----------
2,609,194 2,314,110
---------- ----------
Less:
Undisbursed portion of loans 171,462 106,217
Unearned discounts 439 477
Net deferred loan origination
costs (3,087) (2,403)
Allowance for loan losses 113,131 105,679
---------- ----------
281,945 209,970
---------- ----------
Total $2,327,249 $2,104,140
========== ==========
</TABLE>
-8-
<PAGE>
CHEVY CHASE BANK, F.S.B.
------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
----------------------------------------------------------------
(Unaudited)
NOTE 6 - 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:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
(In thousands)
<S> <C> <C>
Real estate held for investment $ 3,819 $ 3,819
-------- --------
Real estate held for sale 228,985 231,407
-------- --------
Less:
Allowance for losses on real estate
held for investment 198 198
Allowance for losses on real estate
held for sale 143,674 140,738
-------- --------
143,872 140,936
-------- --------
Total real estate held for
investment or sale $ 88,932 $ 94,290
======== ========
</TABLE>
-9-
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE TRUST SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... ii
Documents Incorporated by Reference...................................... iii
Prospectus Summary....................................................... 1
Risk Factors and Other Considerations.................................... 17
Use of Proceeds.......................................................... 31
Capitalization........................................................... 32
The Exchange Offer....................................................... 33
Description of the Notes................................................. 39
Certain Federal Income Tax Considerations................................ 81
Plan of Distribution..................................................... 83
Legal Matters............................................................ 84
Experts.................................................................. 84
Attachment A--Annual Report of the Trust on Form 10-K for the fiscal year
ended September 30, 1997
Attachment B--Quarterly Report of the Trust on Form 10-Q for the quarter
ended December 31, 1997
Attachment C--Consolidated Financial Statements of the Bank as of
September 30, 1997 and 1996, together with Auditor's Report
Attachment D--Interim Financial Statements of the Bank as of December 31,
1997
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$200,000,000
EXCHANGE OFFER
B.F. SAUL REAL ESTATE INVESTMENT TRUST
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008 (SECURED BY AND WITH RECOURSE
ONLY TO CAPITAL STOCK OF CHEVY CHASE BANK, F.S.B.)
---------------------
PROSPECTUS
---------------------
APRIL , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Declaration of Trust (Article III) provides that no Trustee or officer
of the Trust shall be liable for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence or reckless disregard of
his duties, and, except as stated, Trustees and officers are entitled to be
reimbursed and indemnified for all loss, expenses, and outlays which they may
suffer because they are Trustees or officers of the Trust.
ITEM 21. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
3. (a) Amended and Restated Declaration of Trust filed with the Maryland
State Department of Assessments and Taxation on June 22, 1990 (as
filed as Exhibit 3(a) to Registration Statement No. 33-34930 and
incorporated herein by reference).
(b) Amendment to Amended and Restated Declaration of Trust reflected in
Secretary Certificate filed with the Maryland State Department of
Assessments and Taxation on June 26, 1990 (as filed as Exhibit 3(b)
to Registration Statement No. 33-34930 and incorporated herein by
reference).
(c) Amended and Restated By-Laws of the Trust dated as of February 28,
1991 (as filed as Exhibit T-3B to the Trust's Form T-3 Application
for Qualification of Indentures under the Trust Indenture Act of 1939
(File No. 22-20838) and incorporated herein by reference).
4. (a)* Indenture dated as of March 25, 1998 between the Trust and Norwest
Bank Minnesota, National Association, as Trustee, including the form
of 9 3/4% Series B Senior Secured Notes due 2008.
(b)* Form of 9 3/4% Series B Senior Secured Note due 2008 (included in
Exhibit 4(a))
(c)* Registration Rights Agreement dated as of March 25, 1998 among the
Trust, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Friedman, Billings, Ramsey & Co., Inc.
(d)* Bank Stock Registration Rights Agreement dated as of March 25, 1998
between the Trust and Norwest Bank Minnesota, National Association,
as Trustee
(e) Indenture dated as of September 1, 1992 with respect to the Trust's
Notes due from One to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 33-34930 and incorporated
herein by reference).
(f) First Supplemental Indenture dated as of January 16, 1997 with
respect to the Trust's Notes due from One to Ten Years from Date of
Issue (as filed as Exhibit 4(b)to Registration Statement No. 33-34930
and incorporated herein by reference).
(g) Indenture with respect to the Trust's Senior Notes Due from One Year
to Ten Years from Date of Issue (as filed as Exhibit 4(a) to
Registration Statement No. 33-19909 and incorporated herein by
reference).
(h) First Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue (as filed as
Exhibit T-3C to the Trust's Form T-3 Application for Qualification of
Indentures under the Trust Indenture Act of 1939 (File No. 22-20838)
and incorporated herein by reference).
(i) Indenture with respect to the Trust's Senior Notes due from One Year
to Ten Years from Date of Issue (as filed as Exhibit 4(a) to
Registration Statement No. 33-9336 and incorporated herein by
reference).
(j) Fourth Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 2-95506 and incorporated
herein by reference).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
(k) Third Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 2-91126 and incorporated
herein by reference).
(l) Second Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 2-80831 and incorporated
by reference).
(m) Supplemental Indenture with respect to the Trust's Senior Notes due
from One Year to Ten Years from Date of Issue (as filed as Exhibit
4(a) to Registration Statement No. 2-68652 and incorporated by
reference).
(n) Indenture with respect to the Trust's Senior Notes due from One Year
to Five Years from Date of Issue (as filed as Exhibit T-3C to the
Trust's Form T-3 Application for Qualification of Indentures under
the Trust Indenture Act of 1939 (File No. 22-10206) and incorporated
herein by reference).
5. * Opinion of Shaw Pittman Potts & Trowbridge as to the legality of the
securities being registered by the Registrant.
10. (a) Advisory Contract with B.F. Saul Advisory Company effective October
1, 1982 (as filed as Exhibit 10(a) to Registration Statement No. 2-
80831 and incorporated herein by reference).
(b) Commercial Property Leasing and Management Agreement effective
October 1, 1982 between the Trust and Franklin Property Company (as
filed as Exhibit 10(b) to Registration Statement No.
2-80831 and incorporated herein by reference).
(c) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy
Chase Bank, F.S.B. (formerly Chevy Chase Savings Bank, F.S.B.) and
certain of their subsidiaries (as filed as Exhibit 10(c) to
Registration Statement No. 33-34930 and incorporated herein by
reference).
(d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company,
Franklin Development Co., Inc., The Klingle Corporation and
Westminster Investing Corporation relating to the transfer of certain
shares of Chevy Chase Bank, F.S.B. (formerly Chevy Chase Savings
Bank, F.S.B.) and certain real property to the Trust in exchange for
preferred shares of beneficial interest of the " Trust (as filed as
Exhibit 10(d) to Registration Statement 33-34930 and incorporated
herein by reference).
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17, 1988
among B.F. Saul Company, the Trust and the Federal Savings and Loan
Insurance Corporation (as filed as Exhibit 10(e) to the Trust's
Annual Report on Form 10-K (File No. 1-7184) for the fiscal year
ended September 30, 1991 and incorporated herein by reference).
(f) Amendments to Commercial Property Leasing and Management Agreement
between the Trust and Franklin Property Company dated as of December
31, 1992 (Amendment No. 5), July 1, 1989 (Amendment No. 4), October
1, 1986 (Amendment No. 3), January 1, 1985 (Amendment No. 2) and July
1, 1984 (Amendment No. 1) (as filed as Exhibit 10(o) to Registration
Statement No.
33-34930 and incorporated herein by reference).
(g) Advisory Contract between B.F. Saul Advisory Company and Dearborn
Corporation dated as of December 31, 1992 (as filed as Exhibit 10(p)
to Registration Statement No. 33-34930 and incorporated herein by
reference).
(h) Commercial Property Leasing and Management Agreement between Dearborn
Corporation and Franklin Property Company dated as of December 31,
1992 (as filed as Exhibit 10(q) to Registration Statement No. 33-
34930 and incorporated herein by reference).
(i) Registration Rights and Lock-Up Agreement dated August 26, 1993 by
and among Saul Centers, Inc. and the Trust, Westminster Investing
Corporation, Van Ness Square Corporation, Dearborn Corporation,
Franklin Property Company and Avenel Executive Park Phase II, Inc.
(as filed as Exhibit 10.6 to Registration Statement No. 33-64562 and
incorporated herein by reference).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
(j) Exclusivity and Right of First Refusal Agreement dated August 26,
1993 among Saul Centers, Inc., the Trust, B. F. Saul Company,
Westminster Investing Corporation, Franklin Property Company, Van
Ness Square Corporation, and Chevy Chase Bank, F.S.B. (formerly Chevy
Chase Savings Bank, F.S.B.) (as filed as Exhibit 10.7 to Registration
Statement No. 33-64562 and incorporated herein by reference).
(k) First Amended and Restated Reimbursement Agreement dated as of August
1, 1994 by and among Saul Centers, Inc., Saul Holdings Limited
Partnership, Saul Subsidiary I Limited Partnership, Saul Subsidiary
II Limited Partnership, Avenel Executive Park Phase II, Inc.,
Franklin Property Company, Westminster Investing Corporation Van Ness
Square Corporation, Dearborn Corporation and the Trust (as filed as
Exhibit 10(l) to the Trust's Annual Report on Form 10-K (File No.
1-7184) for the fiscal year ended September 30, 1994 and incorporated
herein by reference).
*12. Statement re: Computation of Ratio of Earnings to Fixed Charges.
*21. Subsidiaries of the Trust.
*23(a) Consent of Arthur Andersen LLP.
*23(b) Consent of Shaw Pittman Potts & Trowbridge (included in Exhibit 5).
*24. Power of Attorney (included on signature page).
*25. Statement of Eligibility on Form T-1 of Norwest Bank Minnesota,
National Association.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Clients.
*99.4 Form of Letter to Brokers.
</TABLE>
- --------
* Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when it
became effective.
II-3
<PAGE>
(6) The undersigned Registrant hereby undertakes:
(i) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(ii) that every prospectus: (a) that is filed pursuant to paragraph (i)
immediately preceding, or (b) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provision, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN CHEVY CHASE, MARYLAND ON THIS THE
10TH DAY OF APRIL, 1998.
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
B. Francis Saul II
By___________________________________
B. Francis Saul II
Chairman of the Board
(Principal Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen R. Halpin, Jr. and Ross E. Heasley, and
each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED BELOW ON THIS 10TH DAY OF APRIL, 1998.
SIGNATURE CAPACITY
--------- --------
/s/ B. Francis Saul II Trustee, Chairman of
- ------------------------------------- the Board and
B. FRANCIS SAUL II Principal Executive
Officer
/s/ Stephen R. Halpin, JR. Vice President and
- ------------------------------------- Chief Financial
STEPHEN R. HALPIN JR. Officer (Principal
Financial Officer)
/s/ Ross E. Heasley Vice President
- ------------------------------------- (Principal
ROSS E. HEASLEY Accounting Officer)
II-5
<PAGE>
SIGNATURE CAPACITY
/s/ Garland J. Bloom, Jr. Trustee
- -------------------------------------
GARLAND J. BLOOM, JR.
/s/ Gilbert M. Grosvenor Trustee
- -------------------------------------
GILBERT M. GROSVENOR
/s/ George M. Rogers, Jr. Trustee
- -------------------------------------
GEORGE M. ROGERS, JR.
/s/ B. Francis Saul III Trustee
- -------------------------------------
B. FRANCIS SAUL III
/s/ John R. Whitmore Trustee
- -------------------------------------
JOHN R. WHITMORE
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
3. (a) Amended and Restated Declaration of Trust filed with the Maryland
State Department of Assessments and Taxation on June 22, 1990 (as
filed as Exhibit 3(a) to Registration Statement No. 33-34930 and
incorporated herein by reference).
(b) Amendment to Amended and Restated Declaration of Trust reflected in
Secretary Certificate filed with the Maryland State Department of
Assessments and Taxation on June 26, 1990 (as filed as Exhibit 3(b)
to Registration Statement No. 33-34930 and incorporated herein by
reference).
(c) Amended and Restated By-Laws of the Trust dated as of February 28,
1991 (as filed as Exhibit T-3B to the Trust's Form T-3 Application
for Qualification of Indentures under the Trust Indenture Act of 1939
(File No. 22-20838) and incorporated herein by reference).
4. (a)* Indenture dated as of March 25, 1998 between the Trust and Norwest
Bank Minnesota, National Association, as Trustee, including the form
of 9 3/4% Series B Senior Secured Notes due 2008.
(b)* Form of 9 3/4% Series B Senior Secured Note due 2008 (included in
Exhibit 4(a))
(c)* Registration Rights Agreement dated as of March 25, 1998 among the
Trust, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Friedman, Billings, Ramsey & Co., Inc.
(d)* Bank Stock Registration Rights Agreement dated as of March 25, 1998
between the Trust and Norwest Bank Minnesota, National Association,
as Trustee
(e) Indenture dated as of September 1, 1992 with respect to the Trust's
Notes due from One to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 33-34930 and incorporated
herein by reference).
(f) First Supplemental Indenture dated as of January 16, 1997 with
respect to the Trust's Notes due from One to Ten Years from Date of
Issue (as filed as Exhibit 4(b)to Registration Statement No. 33-34930
and incorporated herein by reference).
(g) Indenture with respect to the Trust's Senior Notes Due from One Year
to Ten Years from Date of Issue (as filed as Exhibit 4(a) to
Registration Statement No. 33-19909 and incorporated herein by
reference).
(h) First Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue (as filed as
Exhibit T-3C to the Trust's Form T-3 Application for Qualification of
Indentures under the Trust Indenture Act of 1939 (File No. 22-20838)
and incorporated herein by reference).
(i) Indenture with respect to the Trust's Senior Notes due from One Year
to Ten Years from Date of Issue (as filed as Exhibit 4(a) to
Registration Statement No. 33-9336 and incorporated herein by
reference).
(j) Fourth Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 2-95506 and incorporated
herein by reference).
(k) Third Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 2-91126 and incorporated
herein by reference).
(l) Second Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue (as filed as
Exhibit 4(a) to Registration Statement No. 2-80831 and incorporated
by reference).
(m) Supplemental Indenture with respect to the Trust's Senior Notes due
from One Year to Ten Years from Date of Issue (as filed as Exhibit
4(a) to Registration Statement No. 2-68652 and incorporated by
reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
(n) Indenture with respect to the Trust's Senior Notes due from One Year
to Five Years from Date of Issue (as filed as Exhibit T-3C to the
Trust's Form T-3 Application for Qualification of Indentures under
the Trust Indenture Act of 1939 (File No. 22-10206) and incorporated
herein by reference).
5. * Opinion of Shaw Pittman Potts & Trowbridge as to the legality of the
securities being registered by the Registrant.
10. (a) Advisory Contract with B.F. Saul Advisory Company effective October
1, 1982 (as filed as Exhibit 10(a) to Registration Statement No. 2-
80831 and incorporated herein by reference).
(b) Commercial Property Leasing and Management Agreement effective
October 1, 1982 between the Trust and Franklin Property Company (as
filed as Exhibit 10(b) to Registration Statement No.
2-80831 and incorporated herein by reference).
(c) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy
Chase Bank, F.S.B. (formerly Chevy Chase Savings Bank, F.S.B.) and
certain of their subsidiaries (as filed as Exhibit 10(c) to
Registration Statement No. 33-34930 and incorporated herein by
reference).
(d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company,
Franklin Development Co., Inc., The Klingle Corporation and
Westminster Investing Corporation relating to the transfer of certain
shares of Chevy Chase Bank, F.S.B. (formerly Chevy Chase Savings
Bank, F.S.B.) and certain real property to the Trust in exchange for
preferred shares of beneficial interest of the " Trust (as filed as
Exhibit 10(d) to Registration Statement 33-34930 and incorporated
herein by reference).
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17, 1988
among B.F. Saul Company, the Trust and the Federal Savings and Loan
Insurance Corporation (as filed as Exhibit 10(e) to the Trust's
Annual Report on Form 10-K (File No. 1-7184) for the fiscal year
ended September 30, 1991 and incorporated herein by reference).
(f) Amendments to Commercial Property Leasing and Management Agreement
between the Trust and Franklin Property Company dated as of December
31, 1992 (Amendment No. 5), July 1, 1989 (Amendment No. 4), October
1, 1986 (Amendment No. 3), January 1, 1985 (Amendment No. 2) and July
1, 1984 (Amendment No. 1) (as filed as Exhibit 10(o) to Registration
Statement No.
33-34930 and incorporated herein by reference).
(g) Advisory Contract between B.F. Saul Advisory Company and Dearborn
Corporation dated as of December 31, 1992 (as filed as Exhibit 10(p)
to Registration Statement No. 33-34930 and incorporated herein by
reference).
(h) Commercial Property Leasing and Management Agreement between Dearborn
Corporation and Franklin Property Company dated as of December 31,
1992 (as filed as Exhibit 10(q) to Registration Statement No. 33-
34930 and incorporated herein by reference).
(i) Registration Rights and Lock-Up Agreement dated August 26, 1993 by
and among Saul Centers, Inc. and the Trust, Westminster Investing
Corporation, Van Ness Square Corporation, Dearborn Corporation,
Franklin Property Company and Avenel Executive Park Phase II, Inc.
(as filed as Exhibit 10.6 to Registration Statement No. 33-64562 and
incorporated herein by reference).
(j) Exclusivity and Right of First Refusal Agreement dated August 26,
1993 among Saul Centers, Inc., the Trust, B. F. Saul Company,
Westminster Investing Corporation, Franklin Property Company, Van
Ness Square Corporation, and Chevy Chase Bank, F.S.B. (formerly Chevy
Chase Savings Bank, F.S.B.) (as filed as Exhibit 10.7 to Registration
Statement No. 33-64562 and incorporated herein by reference).
(k) First Amended and Restated Reimbursement Agreement dated as of August
1, 1994 by and among Saul Centers, Inc., Saul Holdings Limited
Partnership, Saul Subsidiary I Limited Partnership, Saul Subsidiary
II Limited Partnership, Avenel Executive Park Phase II, Inc.,
Franklin Property Company, Westminster Investing Corporation Van Ness
Square Corporation, Dearborn Corporation and the Trust (as filed as
Exhibit 10(l) to the Trust's Annual Report on Form 10-K (File No.
1-7184) for the fiscal year ended September 30, 1994 and incorporated
herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*12. Statement re: Computation of Ratio of Earnings to Fixed Charges.
*21. Subsidiaries of the Trust.
*23(a) Consent of Arthur Andersen LLP.
*23(b) Consent of Shaw Pittman Potts & Trowbridge (included in Exhibit 5).
*24. Power of Attorney (included on signature page).
*25. Statement of Eligibility on Form T-1 of Norwest Bank Minnesota,
National Association.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Clients.
*99.4 Form of Letter to Brokers.
</TABLE>
- --------
* Filed herewith.
<PAGE>
Exhibit 4(a)
================================================================================
B.F. SAUL REAL ESTATE INVESTMENT TRUST,
Issuer
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
--------------------------------------------
Trustee
__________________
Indenture
Dated as of March 25, 1998
_________________
$200,000,000
9 3/4% Senior Secured Notes
due 2008
9 3/4% Series B Senior Secured Notes
due 2008
================================================================================
<PAGE>
B.F. SAUL REAL ESTATE INVESTMENT TRUST
Reconciliation and tie between Trust Indenture Act
of 1939 and Indenture, dated as of March 25, 1998
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
<S> <C>
(S) 310(a)(1) ................... 608(a)
(a)(2) ................... 608(a)
(b) ................... 609
(S) 312(c) ................... 701
(S) 313(c) ................... 702
(S) 314(a) ................... 703
(a)(4) ................... 1008(a)
(b)(1) ................... 1213(b)
(b)(2) ................... 1213(c)
(c)(1) ................... 103
(c)(2) ................... 103
(d)(1) ................... 1213(a)(i)
(d)(2) ................... 1213(a)(ii)
(d)(3) ................... 1213(a)(iii)
(e) ................... 102
(S) 315(b) ................... 602
(S) 316(a)(last
sentence) ................... 101 ("Outstanding")
(a)(1)(A) ................... 502, 512
(a)(1)(B) ................... 513
(b) ................... 508
(c) ................... 105(d)
(S) 317(a)(1) ................... 503
(a)(2) ................... 504
(b) ................... 1003
(S) 318(a) ................... 112
</TABLE>
_____________________
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
a part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PARTIES................................................................... 1
RECITALS.................................................................. 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions................................................. 2
Accumulated Interest................................................. 2
Acquired Indebtedness................................................ 2
Act.................................................................. 3
Additional Interest.................................................. 3
Advisory Fees........................................................ 3
Affiliate............................................................ 3
Agent Member......................................................... 3
Applicable Premium................................................... 3
Asset Sale........................................................... 3
Authenticating Agent................................................. 4
Available Amount..................................................... 4
Average Life to Stated Maturity...................................... 4
Bank................................................................. 4
Bank Collateral Account.............................................. 4
Bank Common Stock.................................................... 4
Bank Contribution.................................................... 4
Bank Contribution Collateral......................................... 4
Bank Contribution Collateral Account................................. 5
Bank Stock........................................................... 5
Bank Stock Purchase Amount........................................... 5
Bank Tax Rate........................................................ 5
Board of Trustees.................................................... 5
Board Resolution..................................................... 5
Business Day......................................................... 5
Capital Maintenance Agreement........................................ 5
Capital Stock........................................................ 5
Capitalized Lease Obligation......................................... 6
Cash Equivalents..................................................... 6
Cash Flow--Indenture................................................. 6
CCPCC................................................................ 7
CCPCC Preferred Stock................................................ 7
Certificates of Deposit.............................................. 7
</TABLE>
<PAGE>
ii
<TABLE>
<S> <C>
Change of Control.................................................... 7
Closing Date......................................................... 8
Collateral........................................................... 8
Collateral Value..................................................... 8
Commission........................................................... 8
Consolidated Bank Net Income (Loss).................................. 8
Consolidated Interest Expense........................................ 8
Consolidated Net Income (Loss)....................................... 9
Consolidated Net Worth............................................... 9
Consolidated Tax Subsidiary.......................................... 9
Corporate Trust Office............................................... 9
Corporation.......................................................... 10
Currency Agreements.................................................. 10
Custodian............................................................ 10
Custodian Account.................................................... 10
Custodian Agreement.................................................. 10
Default.............................................................. 11
Defaulted Interest................................................... 11
Depositary........................................................... 11
Disinterested Trustee................................................ 11
Event of Default..................................................... 11
Exchange Act......................................................... 11
Exchange Offer....................................................... 11
Exchange Offer Registration Statement................................ 11
Exchange Securities.................................................. 11
Fair Market Value.................................................... 11
FDIA................................................................. 11
FDIC................................................................. 11
Federal Bankruptcy Code.............................................. 12
Financial Asset...................................................... 12
Generally Accepted Accounting Principles............................. 12
GAAP................................................................. 12
General Capital Requirement.......................................... 12
Global Securities.................................................... 12
Guaranteed Indebtedness.............................................. 12
Holder............................................................... 12
Indebtedness......................................................... 12
Indenture............................................................ 13
Initial Purchasers................................................... 13
Initial Securities................................................... 13
Interest Payment Date................................................ 14
Interest Rate Agreements............................................. 14
Investment........................................................... 14
</TABLE>
<PAGE>
iii
<TABLE>
<S> <C>
Investment Property.................................................. 14
knowledge............................................................ 14
Lien................................................................. 14
Management Agreements................................................ 14
Margin Securities.................................................... 15
Market Value......................................................... 15
Material Subsidiary.................................................. 15
Maturity............................................................. 15
Moody's.............................................................. 15
New Obligor.......................................................... 15
Nonrecourse Indebtedness............................................. 16
Non-U.S. Person...................................................... 16
Officers' Certificate................................................ 16
Offshore Global Securities........................................... 16
Offshore Physical Securities......................................... 16
Offshore Security Exchange Date...................................... 16
Operating Cash Flow Coverage Ratio................................... 16
Opinion of Counsel................................................... 16
OTS.................................................................. 16
Outstanding.......................................................... 17
Partnership Units.................................................... 17
Paying Agent......................................................... 18
Permitted Holders.................................................... 18
Permitted Indebtedness............................................... 18
Permitted Investment................................................. 19
Permitted Subsidiary Indebtedness.................................... 20
Person............................................................... 21
Physical Securities.................................................. 21
PIK Preferred Stock.................................................. 21
Pledged Bank Stock................................................... 22
Predecessor Security................................................. 22
Preferred Stock...................................................... 22
Private Placement Legend............................................. 22
QIB.................................................................. 22
Qualified Capital Stock.............................................. 22
Real Estate Property................................................. 22
Redeemable Capital Stock............................................. 22
Redemption Date...................................................... 22
Redemption Price..................................................... 22
Registration Rights Agreement........................................ 23
Regular Record Date.................................................. 23
Regulation S......................................................... 23
Regulatory Capital Requirements...................................... 23
</TABLE>
<PAGE>
iv
<TABLE>
<S> <C>
Reimbursement Agreement.............................................. 23
Responsible Officer.................................................. 23
Restricted Subsidiary................................................ 23
Retail Notes......................................................... 24
Rule 144A............................................................ 24
S&P.................................................................. 24
Sale Deficit Amount.................................................. 24
Saul Holdings Partnership............................................ 24
Secured Obligations.................................................. 24
Securities........................................................... 24
Securities Act....................................................... 24
Securities Intermediary.............................................. 24
Securitization Entity................................................ 24
Security Entitlement................................................. 24
Security Register and Security Registrar............................. 24
Series B Preferred Stock............................................. 25
Shelf Registration Statement......................................... 25
Single Asset Subsidiary.............................................. 25
Special Record Date.................................................. 25
Stated Maturity...................................................... 25
Subordinated Indebtedness............................................ 25
Subsidiary........................................................... 25
Substitution......................................................... 25
Substitution Date.................................................... 25
Surviving Entity..................................................... 25
Tax Collateral....................................................... 25
Tax Payment Collateral............................................... 25
Tax Payment Collateral Account....................................... 26
Tax Sharing Agreement................................................ 26
Tax Sharing Payment.................................................. 26
13% Preferred Stock.................................................. 26
Treasury Rate........................................................ 26
Trust................................................................ 27
Trust Indenture Act.................................................. 27
TIA.................................................................. 27
Trust Nonrecourse Indebtedness....................................... 27
Trust Request or Trust Order......................................... 27
Trustee.............................................................. 27
Uniform Commercial Code.............................................. 27
Unrestricted Subsidiary.............................................. 27
U.S. Global Security................................................. 28
U.S. Government Obligations.......................................... 28
U.S. Government Securities........................................... 28
U.S. Physical Securities............................................. 28
</TABLE>
<PAGE>
v
<TABLE>
<S> <C>
Vice President....................................................... 28
Voting Stock......................................................... 28
Wholly Owned Restricted Subsidiary................................... 29
Wholly Owned Subsidiary.............................................. 29
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 102. Incorporation by Reference of Trust Indenture Act........... 29
SECTION 103. Compliance Certificates and Opinions........................ 29
SECTION 104. Form of Documents Delivered to Trustee...................... 30
SECTION 105. Acts of Holders............................................. 31
SECTION 106. Notices, Etc., to Trustee and Trust......................... 32
SECTION 107. Notice to Holders; Waiver................................... 32
SECTION 108. Effect of Headings and Table of Contents.................... 33
SECTION 109. Successors and Assigns...................................... 33
SECTION 110. Separability Clause......................................... 33
SECTION 111. Benefits of Indenture....................................... 33
SECTION 112. Governing Law............................................... 33
SECTION 113. Legal Holidays.............................................. 33
SECTION 114. Execution of Agreement by Trust............................. 34
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally............................................. 34
SECTION 202. Restrictive Legends......................................... 35
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount and Terms............................................ 38
SECTION 302. Denominations............................................... 39
SECTION 303. Execution, Authentication, Delivery and Dating.............. 39
SECTION 304. Temporary Securities........................................ 41
SECTION 305. Registration, Registration of Transfer and Exchange......... 41
SECTION 306. Book-Entry Provisions for Global Securities................. 42
SECTION 307. Transfer Provisions......................................... 44
SECTION 308. Mutilated, Destroyed, Lost and Stolen Securities............ 53
SECTION 309. Payment of Interest; Interest Rights Preserved.............. 53
SECTION 310. Persons Deemed Owners....................................... 55
</TABLE>
<PAGE>
vi
<TABLE>
<S> <C>
SECTION 311. Cancellation................................................ 55
SECTION 312. Computation of Interest..................................... 55
SECTION 313. CUSIP Numbers............................................... 55
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture..................... 56
SECTION 402. Application of Trust Money.................................. 57
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default........................................... 57
SECTION 502. Acceleration of Maturity; Rescission and Annulment.......... 60
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.................................................... 62
SECTION 504. Trustee May File Proofs of Claim............................ 63
SECTION 505. Trustee May Enforce Claims Without Possession of
Securities................................................. 64
SECTION 506. Application of Money Collected.............................. 64
SECTION 507. Limitation on Suits......................................... 65
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium
and Interest............................................... 66
SECTION 509. Restoration of Rights and Remedies.......................... 66
SECTION 510. Rights and Remedies Cumulative.............................. 66
SECTION 511. Delay or Omission Not Waiver................................ 66
SECTION 512. Control by Holders.......................................... 67
SECTION 513. Waiver of Past Defaults..................................... 67
SECTION 514. Waiver of Stay or Extension Laws............................ 67
SECTION 515. Undertaking for Costs....................................... 67
SECTION 516. Nonrecourse Against the Trust or its Subsidiaries........... 68
ARTICLE SIX
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities......................... 68
SECTION 602. Notice of Defaults.......................................... 69
SECTION 603. Certain Rights of Trustee................................... 70
SECTION 604. Trustee Not Responsible for Recitals or Issuance of
Securities................................................. 71
SECTION 605. May Hold Securities......................................... 72
SECTION 606. Money Held in Trust......................................... 72
SECTION 607. Compensation and Reimbursement.............................. 72
SECTION 608. Corporate Trustee Required; Eligibility..................... 73
SECTION 609. Resignation and Removal; Appointment of Successor........... 73
</TABLE>
<PAGE>
vii
<TABLE>
<CAPTION>
<S> <C>
SECTION 610. Acceptance of Appointment by Successor...................... 75
SECTION 611. Merger, Conversion, Consolidation or Succession to Business. 76
SECTION 612. Appointment of Authenticating Agent......................... 76
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND TRUST
SECTION 701. Disclosure of Names and Addresses of Holders................ 78
SECTION 702. Reports by Trustee.......................................... 78
SECTION 703. Reports by the Trust........................................ 79
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Trust May Consolidate, Etc., Only on Certain Terms.......... 80
SECTION 802. Successor Substituted....................................... 81
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.......... 81
SECTION 902. Supplemental Indentures with Consent of Holders............. 83
SECTION 903. Execution of Supplemental Indentures........................ 84
SECTION 904. Effect of Supplemental Indentures........................... 84
SECTION 905. Conformity with Trust Indenture Act......................... 84
SECTION 906. Reference in Securities to Supplemental Indentures.......... 84
SECTION 907. Notice of Supplemental Indentures........................... 85
SECTION 908. Payment for Consent......................................... 85
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if Any, Interest............ 85
SECTION 1002. Maintenance of Office or Agency............................ 85
SECTION 1003. Money for Security Payments to Be Held in Trust............ 86
SECTION 1004. Existence.................................................. 87
SECTION 1005. Payment of Taxes and Other Claims.......................... 87
SECTION 1006. Maintenance of Properties.................................. 88
SECTION 1007. Insurance.................................................. 88
SECTION 1008. Statement by Officers As to Default........................ 88
SECTION 1009. Provision of Financial Statements.......................... 89
SECTION 1010. Limitation on Indebtedness................................. 89
SECTION 1011. Limitation on Restricted Payments.......................... 90
</TABLE>
<PAGE>
viii
<TABLE>
<S> <C>
SECTION 1012. Limitation on Issuances and Sales of Capital Stock
of Restricted Subsidiaries................................ 94
SECTION 1013. Limitation on Dividends from the Bank and Its
Subsidiaries.............................................. 95
SECTION 1014. Limitation on Transactions with Affiliates................. 95
SECTION 1015. Limitation on Liens........................................ 97
SECTION 1016. Restriction on Transfer of Assets to Subsidiaries.......... 97
SECTION 1017. Limitation on Asset Sales.................................. 97
SECTION 1018. Limitation on Restricted Subsidiaries...................... 98
SECTION 1019. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.......................... 98
SECTION 1020. Required Stock Ownership................................... 99
SECTION 1021. Purchase of Securities upon a Change of Control............ 99
SECTION 1022. Obtaining a Rating on the Securities....................... 100
SECTION 1023. Payment of Tax Sharing Payment............................. 100
SECTION 1024. Amendments, Etc............................................ 101
SECTION 1025. Waiver of Certain Covenants................................ 101
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Right of Redemption........................................ 101
SECTION 1102. Applicability of Article................................... 102
SECTION 1103. Election to Redeem; Notice to Trustee...................... 102
SECTION 1104. Selection by Trustee of Securities to Be Redeemed.......... 102
SECTION 1105. Notice of Redemption....................................... 102
SECTION 1106. Deposit of Redemption Price................................ 103
SECTION 1107. Securities Payable on Redemption Date...................... 103
SECTION 1108. Securities Redeemed in Part................................ 104
ARTICLE TWELVE
SECURITY AND PLEDGE OF COLLATERAL
SECTION 1201. Grant of Security Interest................................. 104
SECTION 1202. Secured Obligations........................................ 105
SECTION 1203. Delivery, Investment and Release of Collateral............. 105
SECTION 1204. Delivery and Holding of Collateral......................... 109
SECTION 1205. Representations, Warranties and Covenants.................. 110
SECTION 1206. Further Assurances......................................... 112
SECTION 1207. Dividends; Voting Rights; Etc.............................. 112
SECTION 1208. Trustee Appointed Attorney-in-Fact......................... 114
SECTION 1209. Trustee May Perform........................................ 114
SECTION 1210. Remedies upon Event of Default............................. 114
SECTION 1211. Application of Proceeds.................................... 115
</TABLE>
<PAGE>
ix
<TABLE>
<S> <C>
SECTION 1212. Continuing Lien; Termination............................... 116
SECTION 1213. Certificates and Opinions.................................. 116
SECTION 1214. Additional Covenants of the Trust.......................... 118
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. Trust's Option to Effect Defeasance or Covenant Defeasance.. 119
SECTION 1302. Defeasance and Discharge.................................... 120
SECTION 1303. Covenant Defeasance......................................... 120
SECTION 1304. Conditions to Defeasance or Covenant Defeasance............. 121
SECTION 1305. Deposited Money and U.S. Government Obligations
to Be Held in Trust; Other Miscellaneous Provisions......... 123
SECTION 1306. Reinstatement............................................... 123
ARTICLE FOURTEEN
SUBSTITUTION OF NEW OBLIGOR
SECTION 1401. Substitution of Obligor Under the Indenture................. 124
SECTION 1402. Supplemental Indenture...................................... 126
</TABLE>
TESTIMONIUM
SIGNATURES AND SEALS
EXHIBITS
Exhibit A - Form of Securities, Trustee's Certificate of Authentication
Exhibit B - Form of Certificate to Be Delivered upon Termination of
Restricted Period
Exhibit C - Form of Certificate to Be Delivered in Connection with Transfers
to Non-QIB Institutional Accredited Investors
Exhibit D - Form of Certificate to Be Delivered in Connection with Transfers
Pursuant to Regulation S
Exhibit E - Form of Rule 144A Certificate
Exhibit F - Form of Subordination Agreement
<PAGE>
INDENTURE, dated as of March 25, 1998 between B.F. SAUL REAL ESTATE
INVESTMENT TRUST, an unincorporated business trust existing and operating under
a declaration of trust governed by the laws of the State of Maryland (herein
called the "Trust"), having its principal office at 8401 Connecticut Avenue,
Chevy Chase, Maryland, and Norwest Bank Minnesota, National Association, a
national bank duly organized and existing under the laws of the United States,
Trustee (herein called the "Trustee").
RECITALS OF THE TRUST
The Trust has duly authorized the creation of an issue of 9 3/4%
Senior Secured Notes due 2008 (herein called the "Initial Securities") and 9
3/4% Series B Senior Secured Notes due 2008 (the "Exchange Securities" and,
together with the Initial Securities, the "Securities"), of substantially the
tenor and amount hereinafter set forth, and to provide therefor the Trust has
duly authorized the execution and delivery of this Indenture.
Upon the issuance of the Exchange Securities , if any, or the
effectiveness of the Shelf Registration Statement (as defined herein), this
Indenture will be subject to the provisions of the Trust Indenture Act of 1939,
as amended, that are required to be part of this Indenture and shall, to the
extent applicable, be governed by such provisions.
The Securities will be nonrecourse obligations of the Trust, and the
sole recourse for the collection of principal, premium, if any, and interest on
the Securities will be against the Pledged Bank Stock (as defined herein) and
the other Collateral (as defined herein).
All things necessary have been done to make the Securities, when
executed by the Trust and authenticated and delivered hereunder and duly issued
by the Trust, the valid obligations of the Trust and to make this Indenture a
valid agreement of the Trust, in accordance with their and its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders of the Securities, as follows:
<PAGE>
2
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein, and the terms "cash transaction" and "self-
liquidating paper", as used in TIA Section 311, shall have the meanings
assigned to them in the rules of the Commission adopted under the Trust
Indenture Act;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as
are generally accepted at the date of such computation; and
(d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Article Twelve, are defined in that
Article.
"Accumulated Interest" means, as of any date of determination and
without duplication, the aggregate amount of interest on the Securities paid or
accrued since March 25, 1998.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at
the time such Person becomes a Subsidiary of any other Person or (b) assumed in
connection with the acquisition of assets from such Person, in each case, other
than Indebtedness incurred in connection with, or in contemplation of, such
Person becoming a Subsidiary of such other Person or such acquisition. Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Subsidiary of such other Person.
<PAGE>
3
"Act", when used with respect to any Holder, has the meaning specified
in Section 105.
"Additional Interest" has the meaning specified in Section 502.
"Advisory Fees" means fees pursuant to that certain Amended and
Restated Advisory Contract, dated as of October 1, 1992, between B.F. Saul
Company and the Trust, as most recently amended by Amendment No. 8 thereto dated
as of October 1, 1993, as the same may be further amended or supplemented in
accordance with Section 1014.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person and any legal or beneficial
owner, directly or indirectly, of 20% or more of the Voting Stock of such
specified Person. Notwithstanding the foregoing, no Securitization Entity shall
be deemed an Affiliate of the Bank or the Trust or any of their Subsidiaries.
The fact that an Affiliate of any specified Person is a partner (or a
shareholder, director or officer of a partner) of a law firm that renders
services to such specified Person or its Affiliates does not mean that the law
firm is an Affiliate of such specified Person. For the purposes of this
definition, "control," when used with respect to any specified Person, means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Agent Member" has the meaning specified in Section 306.
"Applicable Premium" means, with respect to a Security, the greater of
(i) 1.0% of the then outstanding principal amount of such Security and (ii) (a)
the present value of all remaining required interest and principal payments due
on such Security and all premium payments relating thereto assuming a redemption
date of April 1, 2003, computed using a discount rate equal to the Treasury Rate
plus 50 basis points minus (b) the then outstanding principal amount of such
Security minus (c) accrued and unpaid interest paid on the date of redemption.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of (a) any
Capital Stock of any Restricted Subsidiary; (b) all or substantially all of the
properties and assets of any division or line of business of the Trust or its
Restricted Subsidiaries; or (c) any other properties or assets of the Trust or
any Restricted Subsidiary other than in the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties or assets or Capital Stock (i) that is governed by the
provisions of Article Eight, (ii) of the Trust or any of its Restricted
<PAGE>
4
Subsidiaries to the Trust or any Single Asset Subsidiary, (iii) in compliance
with Section 1011 or (iv) that is governed by the provisions of Article
Fourteen.
"Authenticating Agent" means any Person authorized by the Trustee to
act on behalf of the Trustee to authenticate Securities.
"Available Amount" has the meaning set forth in the definition of
"Bank Contribution."
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (a) the sum of the products of (i) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment (including, without limitation, any sinking fund requirements) of such
Indebtedness multiplied by (ii) the amount of each such principal payment by (b)
the sum of all such principal payments.
"Bank" means Chevy Chase Bank, F.S.B., a federally chartered savings
bank and a controlled subsidiary of the Trust.
"Bank Collateral Account" means the Bank Collateral Account
established by the Trust pursuant to Section 1204(b).
"Bank Common Stock" means the Bank Stock and any other class or series
of capital stock of the Bank not preferred to the Bank Stock as to dividends or
distributions on the liquidation of the Bank or both.
"Bank Contribution" means, as of any date of determination, the dollar
amount, if any, by which (a) the aggregate amount of all dividends paid by the
Bank to the Trust since October 1, 1997, exceeds (b) the sum of (i) Accumulated
Interest, multiplied by (1 (one) - the Bank Tax Rate), plus (ii) 50% of the
difference of (A) 80% of the cumulative Consolidated Bank Net Income (Loss)
since October 1, 1997, minus (B) the amount determined pursuant to clause (b)(i)
of this definition, minus (iii) the Bank Stock Purchase Amount; provided,
however, that if at any time between October 1, 1997 and the date of
determination of the Bank Contribution, the Trust shall own more or less than
80% of the outstanding common stock of the Bank, the Bank Contribution shall be
calculated for each period of varying ownership as set forth in this definition
by substituting the percentage ownership of common stock of the Bank for the 80%
in clause (b)(ii)(A) of this definition; provided further that if the amount in
clause (b) exceeds the amount in clause (a), the absolute value of such excess
shall be referred to herein as the "Available Amount."
"Bank Contribution Collateral" has the meaning set forth in Section
1203(d).
<PAGE>
5
"Bank Contribution Collateral Account" means the Bank Contribution
Collateral Account established by the Trust pursuant to Section 1204(b).
"Bank Stock" means the common stock, par value $1.00 per share, of the
Bank.
"Bank Stock Purchase Amount" means, as of the date of determination,
the aggregate amount paid by the Bank and its Subsidiaries since March 25, 1998
(other than in shares of Qualified Capital Stock of the Bank) to purchase,
redeem or otherwise acquire or retire for value any shares of Qualified Capital
Stock of the Bank pursuant to paragraph (b)(x) of Section 1011.
"Bank Tax Rate" means the weighted average combined effective state
and federal tax rate for the Bank for the period from March 25, 1998 to the
Substitution Date, determined as if the Bank were a stand alone taxpayer.
"Board of Trustees" means either the board of trustees of the Trust or
any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Trust to have been duly adopted by
the Board of Trustees and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in Minneapolis,
Minnesota, Chevy Chase, Maryland, or The City of New York are authorized or
obligated by law or executive order to close.
"Capital Maintenance Agreement" means the May 17, 1988 Agreement
between B.F. Saul Real Estate Investment Trust, the B.F. Saul Company and the
FDIC (as successor to the Federal Savings and Loan Insurance Corporation) under
which the Saul Company and the Trust agreed to maintain the Bank's regulatory
capital at the levels prescribed by applicable regulatory requirements or any
similar agreement required by the FDIC (including in connection with the
Substitution or the subsequent distribution of the Capital Stock of the New
Obligor by the Trust or any owner of Capital Stock of the Trust) or any
guarantee of a capital plan that is submitted by the Bank pursuant to applicable
law.
"Capital Stock" in any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents or
interests in (however designated) capital stock in such Person, including, with
respect to a corporation, common stock, Preferred Stock and other corporate
stock, with respect to a trust, shares or other evidence of beneficial
interests, and, with respect to a partnership, partnership interests, whether
general or limited, and any rights (other than debt securities convertible into
corporate
<PAGE>
6
stock, partnership interests or other capital stock), warrants or options
exchangeable for or convertible into such corporate stock, partnership interests
or other capital stock.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP, and,
for the purpose of this Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with GAAP.
"Cash Equivalents" means (a) cash; (b) any evidence of Indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (c) certificates of deposit, time deposits,
deposits in money market accounts or any other deposit accounts or acceptances
with a maturity of 180 days or less of any financial institution that is a
member of the Federal Reserve System that issues (or the parent of which issues)
commercial paper or certificates of deposit rated as described in clause (d)
below and that has combined capital and surplus and undivided profits of not
less than $500,000,000; (d) commercial paper with a maturity of 180 days or less
issued by a corporation that is not an Affiliate of the Trust and is organized
under the laws of any state of the United States or the District of Columbia and
rated at least A-1 by S&P or at least P-l by Moody's; and (e) Partnership Units
and Margin Securities; provided that for purposes of Section 1017, Cash
Equivalents will also include (i) the assumption of Indebtedness of the Trust or
any Restricted Subsidiary by the purchaser of the assets sold and the release of
the Trust or such Restricted Subsidiary from all liability on such Indebtedness
in connection with the subject Asset Sale, (ii) securities received by the Trust
or any Restricted Subsidiary from the transferee that can be promptly converted
by the Trust or such Restricted Subsidiary into cash, (iii) limited partnership
interests in real estate partnerships that can be converted promptly and at will
by the holder of such interests into cash or Margin Securities and (iv) a
promissory note from the purchaser of the asset sold, provided that such note is
secured by a first priority perfected security interest in the asset sold and
provided further that such note is converted into Cash Equivalents of a type
referred to in clauses (a) through and including (e) of this definition within
one year after the date of the Asset Sale giving rise thereto.
"Cash Flow--Indenture" means with respect to the Trust, for any
period, all as determined in accordance with GAAP and without duplication, the
sum of the following items for such period: (a) real estate operating income
(loss), plus (b) depreciation and amortization expense, plus (c) interest
expense, plus (d) equity in losses of partnership investments, less (e) equity
in earnings of partnership investments, plus (f) losses on sales of property,
less (g) gains on sales of property, plus (h) non-cash charges, less (i) non-
cash gains, plus (j) cash distributions received from partnership investments,
plus (k) tax sharing payments paid by the Bank to the Trust, plus (l) dividends
paid by the Bank to the Trust.
<PAGE>
7
"CCPCC" means Chevy Chase Preferred Capital Corporation, a Maryland
corporation.
"CCPCC Preferred Stock" means the 3,000,000 shares of 10 3/8%
Noncumulative Exchangeable Preferred Stock, Series A of CCPCC.
"Certificates of Deposit" means certificates of deposit or acceptances
with a maturity of 180 days or less of any financial institution that, in the
case of any book-entry certificates of deposit, is organized under the laws of
the State of New York, that (a) is a member of the Federal Reserve System; (b)
has combined capital and surplus and undivided profits of not less than
$500,000,000; (c) is not an Affiliate of the Trust; and (d) has (or the parent
of which has) a short-term rating of at least A-1 by S&P and at least P-1 by
Moody's.
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of Voting Stock representing more than 50% of the voting power of
the Voting Stock of the Trust; (b) the Trust consolidates with, or merges with
or into, another Person or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any Person, or
any Person consolidates with, or merges with or into, the Trust, in any such
event pursuant to a transaction in which any Voting Stock of the Trust is
reclassified or changed into or exchanged for cash, securities or other
property, other than any such transaction where (i) any Voting Stock of the
Trust is reclassified or changed into or exchanged for Voting Stock (other than
Redeemable Capital Stock) of the surviving or transferee corporation and (ii)
immediately after such transaction no "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act), other than Permitted
Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the voting power of the total Voting
Stock of the surviving or transferee corporation; (c) during any consecutive
two-year period (or, in the case of the New Obligor, the period since the
Substitution Date if shorter than two years), individuals who at the beginning
of such period constituted the Board of Trustees of the Trust (together with any
new trustees whose election by such Board of Trustees or whose nomination for
election by the stockholders of the Trust was approved by a vote of 66 2/3% of
the trustees then still in office who were either trustees at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of Trustees
of the Trust then in office; or (d) any final order, judgment or decree of a
court of competent jurisdiction shall be entered against the Trust decreeing the
dissolution or liquidation of the Trust.
<PAGE>
8
"Closing Date" means the date on which the Securities are originally
issued under the Indenture.
"Collateral" has the meaning specified in Section 1201.
"Collateral Value" means, as of any date of determination, (a) for
cash, the amount thereof and (b) for Certificates of Deposit and U.S. Government
Securities, the principal amount thereof.
"Commission" means the U.S. Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or if at any time
after the execution of this Indenture such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Consolidated Bank Net Income (Loss)" means, for any period, the
consolidated net income (or loss) of the Bank and its consolidated Subsidiaries
for such period as determined in accordance with GAAP (net of cash and non-cash
dividends due (whether or not declared) on outstanding (excluding treasury
stock) Redeemable Capital Stock or outstanding (excluding treasury stock)
Preferred Stock of the Bank), adjusted, to the extent included in calculating
such net income (loss), by excluding, without duplication, (i) all extraordinary
gains and losses (other than those relating to the use of net operating losses
of the Bank carried forward), less all fees and expenses relating thereto, net
of taxes, (ii) the portion of net income (or loss) of any Person (other than the
Bank and any of its consolidated Subsidiaries) in which the Bank or any of its
Subsidiaries has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to the Bank or its consolidated
Subsidiaries in cash by such other Person during such period, (iii) net income
(or loss) of any Person combined with the Bank or any of its Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (iv) any gain or loss, net of taxes, realized upon the termination
of any employee pension benefit plan or (v) the net income of any Subsidiary of
the Bank to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Subsidiary or its shareholders; provided that,
upon the termination or expiration of such dividend or distribution
restrictions, the portion of net income (or loss) of such Subsidiary allocable
to the Bank and previously excluded shall be added to the Consolidated Bank Net
Income (Loss) of the Bank to the extent of the amount of dividends or other
distribution actually paid to the Bank in cash by such Subsidiary.
"Consolidated Interest Expense" means, with respect to the Trust, for
any period, the amount, as determined in accordance with GAAP, of interest
expense of the Trust and its Restricted Subsidiaries (excluding all amounts
relating to interest expense of the Bank and its Subsidiaries).
<PAGE>
9
"Consolidated Net Income (Loss)" of the Trust means, for any period,
the consolidated net income (or loss) of the Trust and its consolidated
Restricted Subsidiaries for such period as determined in accordance with GAAP,
adjusted, to the extent included in calculating such net income (loss), by
excluding, without duplication, (i) all extraordinary gains and losses (other
than those relating to the use of net operating losses of the Trust carried
forward), less all fees and expenses relating thereto, net of taxes, (ii) the
portion of net income (or loss) of any Person (other than the Trust and any of
its consolidated Restricted Subsidiaries) in which the Trust or any of its
Restricted Subsidiaries has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to the Trust or its
consolidated Restricted Subsidiaries in cash by such other Person during such
period, (iii) net income (or loss) of any Person combined with the Trust or any
of its Restricted Subsidiaries on a "pooling of interest" basis attributable to
any period prior to the date of combination, (iv) any gain or loss, net of
taxes, realized upon the termination of any employee pension benefit plan, (v)
the net income of any Restricted Subsidiary of the Trust (other than the Bank
and its Subsidiaries) to the extent that the declaration or payment of dividends
or similar distributions by that Restricted Subsidiary of that income is not at
the time permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgement, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
shareholders; provided that, upon the termination or expiration of such dividend
or distribution restrictions, the portion of net income (or loss) of such
Restricted Subsidiary allocable to the Trust and previously excluded shall be
added to the Consolidated Net Income (Loss) of the Trust to the extent of the
amount of dividends or other distributions actually paid to the Trust in cash by
such Restricted Subsidiary and (vi) all gains resulting from the sale of credit
card relationships.
"Consolidated Net Worth" means, at any date and with respect to any
Person, the consolidated shareholders' equity of such Person, less the amount of
shareholders' equity attributable to (i) Redeemable Capital Stock or treasury
stock of such Person and its Restricted Subsidiaries (or, in the case of the
Bank, a Surviving Entity or the Pledged Subsidiary resulting from a merger, such
Person and its Subsidiaries), determined on a consolidated basis in accordance
with GAAP, and (ii) in the case of the Trust, extraordinary gains and any gains
resulting from the sale, transfer or other disposition of Partnership Units,
other than Partnership Units that are acquired after the date of the Indenture
as a result of contributing real property to Saul Holdings Partnership.
"Consolidated Tax Subsidiary" means any Subsidiary of any Person that
joins with such Person in the filing of a consolidated federal income tax
return.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee, at which at any particular time its corporate trust business shall
be administered, which office at the date of execution of this Indenture is
located at Norwest Center, Sixth Street and Marquette Avenue, Minneapolis,
Minnesota 55479-0069, except that with respect to
<PAGE>
10
presentation of Securities for payment or for registration of transfer or
exchange, such term shall mean the office or agency of the Trustee at which, at
any particular time, its corporate agency business shall be conducted, which
agency at the date of execution of this Indenture is Norwest Trust Company c/o
The Depository Trust Company, 55 Water Street, New York, New York 10041.
"Corporation" includes corporations, associations, companies and
business trusts.
"Currency Agreements" means any spot or forward foreign exchange
agreements and currency swap, currency option or other similar financial
agreements or arrangements entered into by the Trust or any of its Restricted
Subsidiaries and designed to protect against or manage exposure to fluctuations
in foreign currency exchange rates.
"Custodian" means (i) Bankers Trust Company or (ii) another financial
institution in the State of New York reasonably acceptable to the Trustee, that
(a) is a "securities intermediary" within the meaning of Section 8-
102(a)(14) of the UCC as in effect in the State of New York whose
"jurisdiction" for purposes of Section 8-110(e) of the UCC as in effect in
the State of New York is the State of New York,
(b) issues (or whose parent issues) commercial paper or certificates
of deposit rated as described in clause (d) of the definition of Cash
Equivalent,
(c) has combined capital and surplus and undivided profits of not less
than $500,000,000,
(d) enters into a Custodian Agreement, and
(e) enters into an agreement pursuant to which the Trustee has
"control" within the meaning of Section 8-106(d) of the UCC as in effect in
the State of New York with respect to the applicable Custodian Account and
the related Securities Entitlements and other property held in such
Custodian Account.
"Custodian Account" means one or more Custodian Accounts established
under and as defined in the Custodian Agreements, including the Bank
Contribution Collateral Account, the Bank Collateral Account and the Tax Payment
Collateral Account (or any sub-account of a Custodian Account).
"Custodian Agreement" means the Custodian Account Agreement dated as
of March 24, 1998 between the Trust and Bankers Trust Company or another
custodian agreement with Bankers Trust Company or another Custodian on similar
terms.
<PAGE>
11
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 309.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors.
"Disinterested Trustee" means, with respect to any transaction or
series of related transactions, a member of the Board of Trustees of the Trust
or a member of the board of directors of any successor corporation who does not
have any material direct or indirect financial interest in or with respect to
such transaction or series of related transactions.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means an offer by the Trust to exchange the Initial
Securities for notes registered under the Securities Act, with terms identical
to the Securities (except such notes will not contain (i) transfer restrictions
or (ii) certain provisions relating to the increase in the interest rate of such
notes), pursuant to the Registration Rights Agreement.
"Exchange Offer Registration Statement" means the Exchange Offer
Registration Statement as defined in the Registration Rights Agreement.
"Exchange Securities" has the meaning stated in the first recital of
this Indenture and refers to any Exchange Securities containing terms
substantially identical to the Initial Securities (except that such Exchange
Securities shall be registered under the Securities Act and will not contain (i)
transfer restrictions or (ii) certain provisions relating to the increase in the
interest rate of such Exchange Securities) that are issued and exchanged for the
Initial Securities pursuant to the Registration Rights Agreement and this
Indenture.
"Fair Market Value" means the fair market value of property as
determined in good faith by the Board of Trustees, whose determination shall be
conclusive in all circumstances, net of attorney's fees, accountant's fees and
brokerage, consulting, underwriting and other fees and expenses actually
incurred in connection with a transaction and net of taxes paid or payable by
the Trust as a result thereof.
"FDIA" means the Federal Deposit Insurance Act, 12 U.S.C. Sections
1811-1833, as amended from time to time.
"FDIC" means the Federal Deposit Insurance Corporation or any
successor thereto.
<PAGE>
12
"Federal Bankruptcy Code" means the Bankruptcy Code of Title 11 of the
United States Code, as amended from time to time.
"Financial Asset" shall have the meaning set forth in Section 8-
102(a)(9) of the UCC as in effect in the State of New York.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied.
"General Capital Requirement" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation (but excluding any higher individual minimum capital requirement
imposed on the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R. Section
567.3 (and any amendment to either thereof) or any successor law or regulation).
"Global Securities" has the meaning set forth in Section 201.
"Guaranteed Indebtedness" of any Person means, without duplication,
all Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
Person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make payment
of such Indebtedness or to assure the holder of such Indebtedness against loss,
(iii) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without requiring that
such property be received or such services be rendered), (iv) to maintain
working capital or equity capital of the debtor, or otherwise to maintain the
net worth, solvency or other financial condition of the debtor or (v) otherwise
to assure a creditor with respect to Indebtedness against loss; provided that
the term "guarantee" shall not include endorsements for collection or deposit,
in either case in the ordinary course of business.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Indebtedness" means, with respect to any Person, without duplication,
(a) all liabilities of such Person for borrowed money (including overdrafts) or
for the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred in the ordinary course
of business, but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar
<PAGE>
13
facilities, and in connection with any agreement by such Person to make payment
to purchase, redeem, exchange, convert or otherwise acquire for value any
Capital Stock of such Person now or hereafter outstanding, (b) all obligations
of such Person evidenced by bonds, notes, debentures or other similar
instruments, (c) all indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (d) all Capitalized Lease Obligations of such Person, (e) all
obligations of such Person under or in respect of Interest Rate Agreements or
Currency Agreements, (f) all Indebtedness referred to in (but not excluded from)
the preceding clauses (a) through (e) of other Persons and all dividends payable
by other Persons, the payment of which is secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness (the amount of
such obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured), (g) all guarantees by such
Person of Guaranteed Indebtedness, (h) all Redeemable Capital Stock of such
Person valued at the greater of its book value and voluntary or involuntary
maximum fixed repurchase price plus accrued and unpaid dividends, and (i) any
amendment, supplement, modification, deferral, renewal, extension, refunding or
refinancing of any liability of the types referred to in clauses (a) through (h)
above. For purposes hereof, (x) the "maximum fixed repurchase price" of any
Redeemable Capital Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased on any date on which the amount of
outstanding Indebtedness shall be required to be determined pursuant to this
Indenture, and if such price is based upon, or measured by, the fair market
value of such Redeemable Capital Stock, such fair market value shall be
determined in good faith by the board of directors or similar governing body (or
any duly authorized committee thereof) of the issuer of such Redeemable Capital
Stock, and (y) Indebtedness is deemed to be incurred pursuant to a revolving
credit facility or any other facility providing for partial advances each time
an advance is made thereunder.
"Indenture" means this instrument as originally executed and as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Initial Purchasers" means Merrill Lynch & Co. and Friedman, Billings,
Ramsey & Co., Inc., as the initial purchasers of the Initial Securities pursuant
to the Purchase Agreement dated March 19, 1998 between such Persons and the
Trust.
"Initial Securities" has the meaning stated in the first recital of
this Indenture.
<PAGE>
14
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"Interest Rate Agreements" means any interest rate protection
agreements and other types of interest rate hedging agreements (including,
without limitation, interest rate swaps, caps, floors, collars and similar
agreements) designed to protect against or manage exposure to fluctuations in
interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee or other extension of credit or capital contribution to
(by means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase,
acquisition or ownership by such Person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued or owned by,
any other Person and all other items that would be classified as investments on
a balance sheet prepared in accordance with GAAP. "Investments" shall exclude
(i) extensions of trade credit on commercially reasonable terms in accordance
with normal trade practices and (ii) advances to customers in the ordinary
course of business that are (x) recorded as accounts receivable on the balance
sheet of the Trust or its Restricted Subsidiaries or (y) after the Substitution,
credit card loans, home equity loans, automobile loans, leases or installment
sales contracts, other consumer receivables, mortgage loans or mortgage notes
owned by a Restricted Subsidiary of the New Obligor.
"Investment Property" shall have the meaning set forth in Section 9-
115(1)(f) of the UCC.
"knowledge" when used with respect to the Trust, is effective for a
particular event from the time when it is brought to the attention of a director
or a vice president or a more senior officer of the Trust, and in any event from
the time when the event would have been brought to the attention of a director
or a vice president or a more senior officer of the Trust if the Trust had
exercised due diligence; the Trust exercises due diligence for purposes of this
definition if it maintains reasonable methods for communicating significant
information to officers and directors of the Trust and there is reasonable
compliance with the methods.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), privilege, security interest, hypothecation, assignment for
security, claim, or preference or priority or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired. A Person shall be deemed to own subject to a Lien
any property that such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Management Agreements" means (a) the Amended and Restated Commercial
Property Leasing and Management Agreement dated as of October 1, 1982, as
amended,
<PAGE>
15
between the Trust and Franklin Property Company relating to the leasing and
management of real property owned by the Trust and its subsidiaries (other than
the Bank and its Subsidiaries) other than their hotel properties, and (b) any
written hotel management agreement between a subsidiary of the Trust and
Franklin Property Company relating to the management of such hotel properties
entered into in the ordinary course of business and consistent with past
practice, in each case as further amended or modified in accordance with the
terms of this Indenture.
"Margin Securities" means "margin stock" as defined in Regulation G
(12 C.F.R. Section 207, as amended) of the Board of Governors of the Federal
Reserve System prior to April 1, 1998 and, on and after April 1, 1998, means
"Margin Stock" as defined in Regulation U (12 C.F.R. Section 221.2, as amended,
or any successor provision); provided that the term "Margin Securities" shall
not include the securities of an Affiliate of the Trust, other than common stock
of Saul Centers, Inc. and the common stock of Persons less than 20% of the
outstanding common stock of which is held by the Trust or its Affiliates.
"Market Value" means, as of any date of determination,
(i) with respect to cash, the amount thereof; and
(ii) with respect to a U.S. Government Security or Certificate of
Deposit, the principal amount thereof;
"Material Subsidiary" means, at any particular time, (i) any
Restricted Subsidiary of the Trust that, together with the Restricted
Subsidiaries of such Restricted Subsidiary, (a) accounted for more than 10% of
the consolidated revenues or earnings of the Trust and its Restricted
Subsidiaries for the most recently completed fiscal year of the Trust, (b) was
the owner of more than 10% of the consolidated assets of the Trust and its
Restricted Subsidiaries as of the end of such fiscal year (in the case of clause
(a) or clause (b) as shown on the consolidated financial statements of the Trust
and its Restricted Subsidiaries for such fiscal year) or (c) was organized or
acquired since the end of such fiscal year and would have been a Material
Subsidiary if it had been owned during such fiscal year, and (ii) the Bank.
"Maturity" means, with respect to any Security, the date on which any
principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"New Obligor" has the meaning set forth in Section 1401.
<PAGE>
16
"Nonrecourse Indebtedness" means Indebtedness incurred by any
Restricted Subsidiary of the Trust as to which, under the terms thereof (except
with respect to fraud, willful misconduct, intentional misrepresentation,
misapplication of funds, waste and undertakings with respect to environmental
matters), (i) neither the Trust nor any other Restricted Subsidiary of the Trust
provides credit support or is directly or indirectly liable for such
Indebtedness, (ii) enforcement of obligations on such Indebtedness is limited
only to recourse against interests in specified assets and properties owned by
such Restricted Subsidiary (the "Subject Assets"), accounts, rents, revenues and
proceeds arising therefrom, and rights under purchase agreements or other
agreements relating to such Subject Assets and (iii) no default with respect to
such Indebtedness would permit (upon notice, lapse of time or both) any holder
of other Indebtedness of the Bank or its Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"Non-U.S. Person" means a person who is not a U.S. person, as defined
in Regulation S.
"Officers' Certificate" means a certificate signed by (i) the Chairman
or Vice Chairman of the Board of Trustees, the President or any Vice President
of the Trust and (ii) the Treasurer, any Assistant Treasurer, the Secretary or
any Assistant Secretary of the Trust, and delivered to the Trustee by the terms
of this Indenture; provided that, in the event an officer of the Trust holds a
position set forth in clause (i) above and a position set forth in clause (ii)
above, such officer may sign an Officers' Certificate only in his capacity as
officer under either clause (i) or (ii) above, but not under both.
"Offshore Global Securities" has the meaning set forth in Section 201.
"Offshore Physical Securities" has the meaning set forth in Section
201.
"Offshore Security Exchange Date" has the meaning set forth in Section
202.
"Operating Cash Flow Coverage Ratio" means with respect to the Trust,
at any date of determination, the ratio of (i) Cash Flow - Indenture to (ii)
Consolidated Interest Expense.
"Opinion of Counsel" means a written opinion of counsel, who, except
as otherwise set forth in this Indenture, may be counsel for the Trust,
including an employee of the Trust, and who shall be acceptable to the Trustee.
"OTS" means the Office of Thrift Supervision or any successor thereto.
<PAGE>
17
"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Securities, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent (other than the Trust) in trust or set
aside and segregated in trust by the Trust (if the Trust shall act as its
own Paying Agent) for the Holders of such Securities; provided that, if
such Securities are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture or provision therefor satisfactory to the
Trustee has been made;
(iii) Securities, except to the extent provided in Sections 1302 and
1303, with respect to which the Trust has effected defeasance and/or
covenant defeasance as provided in Article Thirteen; and
(iv) Securities which have been paid pursuant to Section 308 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands the Securities are valid obligations of the Trust;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, consent, notice or waiver hereunder, and for the
purpose of making the calculations required by TIA Section 313, Securities owned
by the Trust or any other obligor upon the Securities or any Affiliate of the
Trust or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in making such calculation or in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Securities which the
Trustee knows to be so owned shall be so disregarded. Securities so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Trust or any
other obligor upon the Securities or any Affiliate of the Trust or such other
obligor.
"Partnership Units" means limited partnership interests in Saul
Holdings Partnership.
<PAGE>
18
"Paying Agent" means any Person (including the Trust acting as Paying
Agent) authorized by the Trust to pay the principal of (and premium, if any, on)
or interest on any Securities on behalf of the Trust.
"Permitted Holders" means the descendants of Bernard Francis Saul, any
of their spouses or any Person controlled, directly or indirectly, or
beneficially owned by such descendants or spouses.
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the Trust under the Securities;
(b) Indebtedness of the Trust outstanding on the date of this
Indenture (other than the Trust's 11 5/8% Series B Senior Secured Notes due
2002);
(c) obligations of the Trust pursuant to Interest Rate Agreements
designed to protect the Trust against fluctuations in interest rates in
respect of Indebtedness of the Trust, which obligations do not exceed the
aggregate principal amount of such Indebtedness;
(d) Indebtedness of the Trust consisting of guarantees, indemnities or
obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets;
(e) Indebtedness of the Trust that, together with any other
outstanding Indebtedness incurred pursuant to clause (d) of the definition
of "Permitted Subsidiary Indebtedness," has an aggregate principal amount
outstanding at any one time, without duplication, not in excess of the sum
of $80,000,000 plus 50% of the increase in Consolidated Net Worth of the
Trust from October 1, 1997;
(f) Indebtedness of the Trust consisting of guarantees under the
Reimbursement Agreement that, together with any other guarantees of
Indebtedness incurred pursuant to clause (g) of the definition of
"Permitted Subsidiary Indebtedness," do not exceed an aggregate amount
(without duplication) of $150,000,000 outstanding at any one time;
(g) Indebtedness of the Trust to any of its Wholly Owned Restricted
Subsidiaries, except that any transfer of such Indebtedness by any such
Subsidiary (other than to another such Subsidiary) will be deemed to be an
incurrence of Indebtedness by the Trust; provided that such Indebtedness is
subordinated in right of payment from and after such time as the Securities
shall become due and payable (whether at Stated Maturity, acceleration or
otherwise) to payment of the Securities pursuant to a subordination
agreement substantially in the form of Exhibit F;
<PAGE>
19
(h) obligations of the Trust under the Capital Maintenance Agreement;
provided, however, that this clause (h) is not intended to include any
Indebtedness incurred by the Trust in connection with complying with its
obligations pursuant to such agreement; and
(i) any renewals, extensions, substitutions, refinancings or
replacements and any successive refinancings (each, for purposes of this
clause (i), a "refinancing") by the Trust of any Indebtedness of the Trust
referred to in clauses (b) or (e) of this definition and any Indebtedness
of the Trust incurred in accordance with Section 1010 (other than Permitted
Indebtedness), so long as (i) any such new Indebtedness shall be in a
principal amount that does not exceed the principal amount (or, if such
Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced, plus the amount of any premium required to be paid under the
terms of the instrument governing such Indebtedness being so refinanced or
the amount of any premium reasonably determined by the Trust as necessary
to accomplish such refinancing through means of a tender offer or privately
negotiated transaction (it being understood that any sales of the Retail
Notes will be considered a refinancing thereof to the extent that the total
principal amount of Retail Notes outstanding at any one time does not
exceed the principal amount thereof outstanding on the date of this
Indenture), (ii) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, (A) such new Indebtedness is made subordinate to
the Securities at least to the same extent as the Subordinated Indebtedness
being refinanced and (B) such new Indebtedness has an Average Life to
Stated Maturity and final Stated Maturity of principal that exceeds the
Average Life to Stated Maturity and final Stated Maturity of the
Subordinated Indebtedness being refinanced); and (iii) in the case of any
refinancing of Trust Nonrecourse Indebtedness, such new Indebtedness is
made nonrecourse to the same extent as the Indebtedness refinanced;
provided that for purposes of determining whether additional Indebtedness
can be incurred pursuant to clause (e) above or clauses (d) and (e) of the
definition of "Permitted Subsidiary Indebtedness," any refinancing of
Indebtedness initially incurred pursuant to such clause (e) of this
definition and refinanced under this clause (i), or any further refinancing
thereof, will be considered to be outstanding under clause (e) of this
definition of "Permitted Indebtedness."
"Permitted Investment" means any Investment (i) in Cash Equivalents,
(ii) of up to $10,000,000 in Wholly Owned Restricted Subsidiaries, (iii) of up
to $50,000,000 in cash in Single Asset Subsidiaries, (iv) in consideration
received, not constituting Cash Equivalents, pursuant to an Asset Sale made in
compliance with Section 1017 in an aggregate amount of up to 25% of the
consideration received with respect to such Asset Sale, (v) in or by the Bank or
its Subsidiaries, (vi) permitted by Section 1016, (vii) constituting cash
advances on an intercompany open account basis (A) from the Trust to its
Restricted Subsidiaries required for working capital, the payment of interest
and premium, if any, on and principal of any
<PAGE>
20
Indebtedness, expenditures for maintenance and capital improvements, and other
operating expenses, to the extent Restricted Subsidiaries have advanced cash to
the Trust or (B) from any Restricted Subsidiary to the Trust, of excess cash on
hand from time to time, in each case made in the ordinary course of business and
consistent with past practice or (viii) in any Wholly Owned Restricted
Subsidiary resulting from the acquisition of such Subsidiary for Qualified
Capital Stock of the Trust, such Subsidiary at the time of such acquisition
owning Qualified Capital Stock of the Bank and having no other assets in excess
of $1,000,000 and no operations.
"Permitted Subsidiary Indebtedness" means any of the following:
(a) Indebtedness of any Restricted Subsidiary outstanding on the date
of this Indenture;
(b) obligations of any Restricted Subsidiary pursuant to Interest Rate
Agreements designed to protect such Restricted Subsidiary against
fluctuations in interest rates in respect of Indebtedness of such
Restricted Subsidiary, which obligations do not exceed the aggregate
principal amount of such Indebtedness;
(c) Indebtedness of any Restricted Subsidiary of the Trust consisting
of guaranties, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets;
(d) Indebtedness of any Restricted Subsidiary that, together with any
other outstanding Indebtedness incurred pursuant to clause (e) of the
definition of "Permitted Indebtedness," has an aggregate principal amount
outstanding at any one time, without duplication, not in excess of the sum
of $80,000,000 plus 50% of the increase in Consolidated Net Worth of the
Trust from October 1, 1997;
(e) Nonrecourse Indebtedness of any Restricted Subsidiary which,
together with any other outstanding Indebtedness incurred pursuant to
clause (d) above and clause (e) of the definition of "Permitted
Indebtedness," has an aggregate principal amount
outstanding at any one time not in excess of the sum of $225,000,000 plus
50% of the increase in Consolidated Net Worth of the Trust from October 1,
1997; provided, however, that notwithstanding the definition of Nonrecourse
Indebtedness, an aggregate principal amount of Indebtedness permitted by
this clause (e) of up to the sum of $100,000,000 plus 50% of the increase
in Consolidated Net Worth of the Trust from October 1, 1997 may be incurred
without regard to clause (ii) of the definition of Nonrecourse Indebtedness
and without regard to any indirect credit support or direct or indirect
liability of any Restricted Subsidiary by way of any cross-
collateralization of assets;
<PAGE>
21
(f) Indebtedness of any Wholly Owned Restricted Subsidiary (other than
the Bank and its Subsidiaries) to the Trust, to the extent permitted by
Section 1011, except that any transfer of any such Indebtedness by the
Trust to any other Person shall be deemed to be an incurrence of
Indebtedness by such Restricted Subsidiary;
(g) Indebtedness of Restricted Subsidiaries consisting of guarantees
under the Reimbursement Agreement that, together with any other guarantees
of Indebtedness incurred pursuant to clause (f) of the definition of
"Permitted Indebtedness," do not exceed an aggregate amount (without
duplication) of $150,000,000 at any one time outstanding; and
(h) any renewals, extensions, substitutions, refinancings or
replacements and any successive refinancings (each, for purposes of this
clause (h) a "refinancing") by any Restricted Subsidiary of any
Indebtedness of such Restricted Subsidiary referred to in clauses (a), (d)
and (e) of this definition, so long as (i) any such new Indebtedness shall
be in a principal amount that does not exceed the principal amount (or, if
such Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced, plus the amount of any premium required to be paid under the
terms of the instrument governing such Indebtedness being so refinanced or
the amount of any premium reasonably determined by such Restricted
Subsidiary as necessary to accomplish such refinancing through means of a
tender offer or privately negotiated transaction (it being understood that
any borrowings under lines of credit will be considered a refinancing
thereof to the extent that the total principal amount outstanding
thereunder at any one time does not exceed the principal amount thereof
outstanding on the date of the Indenture), and (ii) in the case of any
refinancing of Nonrecourse Indebtedness, such new Indebtedness is
Nonrecourse Indebtedness; provided that for purposes of determining whether
additional Indebtedness can be incurred pursuant to clauses (d) and (e) of
this definition or clause (e) of the definition of "Permitted
Indebtedness," any refinancing of Indebtedness initially incurred pursuant
to such clauses (d) and (e) of this definition and refinanced under this
clause (h), or any further refinancing thereof, will be considered to be
outstanding under clause (d) or (e) of this definition, as the case may be.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"Physical Securities" has the meaning set forth in Section 201.
"PIK Preferred Stock" means any and all payment-in-kind Preferred
Stock issued in lieu of cash dividends on the 13% Preferred Stock or in lieu of
cash dividends on such payment-in-kind Preferred Stock.
<PAGE>
22
"Pledged Bank Stock" has the meaning specified in Section 1201(b).
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 308 in exchange for a mutilated
security or in lieu of a lost, destroyed or stolen Security shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Security.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participation or other equivalents (however designated) of
such Person's preferred or preference stock or other equity interests having a
preference as to dividends or other distributions or on liquidation, whether now
outstanding or issued after the Closing Date, and including, without limitation,
all classes and series of preferred or preference stock of such Person.
"Private Placement Legend" means the legend initially set forth on the
Securities in the form set forth in Section 202(a)(i).
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Redeemable Capital Stock.
"Real Estate Property" means (i) real property, (ii) a building or
group of related buildings or (iii) real property upon which is located a
building or group of related buildings.
"Redeemable Capital Stock" means any class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed prior
to the final Stated Maturity of the Securities or is redeemable at the option of
the holder thereof at any time prior to such final Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
final Stated Maturity at the option of the holder thereof.
"Redemption Date", when used with respect to any Security to be
redeemed, in whole or in part, means the date fixed for such redemption by or
pursuant to this Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, in whole or in part, means the price at which such Security (or
portion thereof) is to be redeemed pursuant to this Indenture.
<PAGE>
23
"Registration Rights Agreement" means the Registration Rights
Agreement between the Trust and the Initial Purchasers dated as of March 25,
1998.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the March 15 or September 15 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act and any
successor provision.
"Regulatory Capital Requirements" means the minimum amount of capital
required for the Bank (i) to meet each capital ratio necessary for the Bank to
be classified as an "adequately capitalized" savings association pursuant to 12
U.S.C. Section 1831o and 12 C.F.R. Section 565 (and any amendment to either
thereof) or any successor law or regulation and (ii) to meet (x) each of the
industry-wide regulatory capital requirements applicable to the Bank pursuant to
12 U.S.C. Section 1464(t) and 12 C.F.R. Section 567 (and any amendment to either
thereof) or any successor law or regulation, or (y) such higher amount of
capital as the Bank, individually, is required to maintain in order to meet any
individual minimum capital standard applicable to the Bank pursuant to 12 U.S.C.
Section 1464(s) and 12 C.F.R. Section 567.3 (and any amendment to either such
Section) or any successor law or regulation.
"Reimbursement Agreement" means the Third Amended and Restated
Reimbursement Agreement dated as of October 1, 1997 among Saul Holdings
Partnership and its subsidiary partnerships, the Trust and certain of its
Restricted Subsidiaries and affiliates, as such agreement may be further
amended, restated or supplemented; provided that the aggregate amount of the
contingent reimbursement obligations assumed by the Trust and its Restricted
Subsidiaries outstanding at any time under this agreement shall not exceed the
aggregate amount of $150,000,000.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above-designated
officers, and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Subsidiary" means the Bank and its Subsidiaries, the New
Obligor and any other Subsidiary of the Trust that is not an Unrestricted
Subsidiary.
<PAGE>
24
"Retail Notes" means the unsecured notes of the Trust sold from time
to time at varying interest rates with maturities of one to ten years.
"Rule 144A" means Rule 144A under the Securities Act and any successor
provision.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-
Hill Companies, Inc, and its successors.
"Sale Deficit Amount" has the meaning specified in Section 1203(f).
"Saul Holdings Partnership" means Saul Holdings Limited Partnership, a
Maryland limited partnership.
"Secured Obligations" has the meaning specified in Section 1202.
"Securities" has the meaning stated in the first recital of this
Indenture and more particularly means any Securities authenticated and delivered
under this Indenture. For all purposes of this Indenture, the term "Securities"
shall include any Exchange Securities to be issued and exchanged for any Initial
Securities pursuant to the Registration Rights Agreement and this Indenture and,
for purposes of this Indenture, all Initial Securities and Exchange Securities
shall vote together as one series of Securities under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Intermediary" shall have the meaning set forth in Section
8-102(a)(14) of the UCC as in effect in the State of New York.
"Securitization Entity" means any pooling arrangement or entity
(except for any entity in corporate or partnership form) formed or originated
for the purpose of holding, and issuing securities representing interests in,
one or more pools of mortgages, leases, credit card receivables, home equity
loan receivables, automobile loans, leases or installment sales contracts, other
consumer receivables or other financial assets of the Bank or any Subsidiary of
the Bank, and shall include, without limitation, any grantor trust, owner trust
or real estate mortgage investment conduit or Financial Asset Securitization
Investment Trust ("FASIT").
"Security Entitlement" shall have the meaning set forth in Section
357.2 of the Treasury Regulations and Section 8-102(a)(17) of the UCC as in
effect in the State of New York, as the context may require or as otherwise is
appropriate.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
<PAGE>
25
"Series B Preferred Stock" means the Bank's noncumulative Preferred
Stock, Series B, issuable in exchange for the CCPCC Preferred Stock outstanding
on the date of the Indenture.
"Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Registration Rights Agreement
"Single Asset Subsidiary" means any Wholly Owned Restricted Subsidiary
that owns no more than one Real Estate Property and owns no Investments other
than those permitted to such Subsidiary by Section 1018.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 309.
"Stated Maturity" means, when used with respect to any Security or any
installment of interest thereon, the date specified in such Security as the
fixed date on which the principal of such Security or such installment of
interest is due and payable, and, when used with respect to any other
Indebtedness, means the date specified in the instrument governing such
Indebtedness as the fixed date on which the principal of such Indebtedness, or
any installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Trust that is
expressly, by the terms of the instrument creating or evidencing such
Indebtedness, subordinated in right of payment to the Securities.
"Subsidiary" with respect to any Person, means any other Person a
majority of the equity ownership or majority of the Voting Stock of which is at
the time owned, directly or indirectly, by such Person, or by one or more other
Subsidiaries of such Person or by such Person and one or more other Subsidiaries
of such Person.
"Substitution" has the meaning set forth in Section 1401.
"Substitution Date" means the date that the New Obligor assumes the
obligations of the Trust under this Indenture and the Securities (as amended as
described in Section 1402) and becomes the direct holder of the outstanding
common stock and Voting Stock of the Bank owned by the Trust, all in accordance
with the provisions of this Indenture.
"Surviving Entity" has the meaning set forth in Section 801.
"Tax Collateral" has the meaning set forth in Section 1023(a).
"Tax Payment Collateral" has the meaning set forth in Section 1203(c).
<PAGE>
26
"Tax Payment Collateral Account" means the Tax Payment Collateral
Account established by the Trust pursuant to Section 1204(b).
"Tax Sharing Agreement" means (i) the Tax Sharing Agreement dated June
28, 1990, as amended, between the Trust and other members of the affiliated
group of corporations joining with the Trust in the filing of a consolidated
federal income tax return (the "Affiliated Group"), as such Tax Sharing
Agreement may be further amended or modified from time to time, provided that
(A) such further amendments or modifications reflect only the addition or
deletion of parties to such Tax Sharing Agreement, legislative, judicial or
administrative changes in the provisions, rules, application or effect of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated under the Code (the "Regulations") or applicable state law, or
amendments or modifications, requested, required or approved by the OTS and (B)
any such further modification or amendment is approved by the OTS, to the extent
such approval is required by the rules and regulations of the OTS, and (ii) any
other tax sharing agreement to which the Trust or any Consolidated Tax
Subsidiaries may become a party, provided that such other tax sharing agreement
(A) consistently reflects the applicable tax liabilities of, and the benefit of
the use of losses, deductions, credits and other tax attributes by, the Trust
and the other members of the Affiliated Group pursuant to the Code, the
Regulations and applicable state law (except as otherwise may be requested,
required or approved by the OTS or required for compliance with any guidelines,
orders or other authority issued by the OTS) and (B) is approved by the OTS, to
the extent such approval is required by the rules and regulations of the OTS,
and provided further that the Trust shall have received an opinion of
independent counsel to the Trust or of a nationally recognized accounting firm
to the effect that such other tax sharing agreement satisfies the condition in
subclause (A) of the first proviso of this clause (ii) and that such other tax
sharing agreement is not materially less beneficial to the Bank or the Trust,
unless, with respect to the Trust, otherwise required by the OTS, than the tax
sharing agreement described in clause (i).
"Tax Sharing Payment" means any payment made pursuant to the Tax
Sharing Agreement.
"13% Preferred Stock" means the 3,000,000 shares of the 13%
Noncumulative Perpetual Preferred Stock, Series A of the Bank.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two Business Days prior to the date
fixed for repayment (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the then
remaining term to April 1, 2003; provided, however, that if the then remaining
term to April 1, 2003 is not equal to the constant maturity of a United States
Treasury security for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the nearest one-twelfth
of a year) from the
<PAGE>
27
weekly average yields of United States Treasury securities for which such yields
are given, except that if the then remaining term to April 1, 2003 is less than
one year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
"Trust" means the Person named as the "Trust" in the first paragraph
of this Indenture, until a successor Person shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Trust" shall mean
such successor Person.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939
as in force at the date as of which this Indenture was executed, except as
provided in Section 905.
"Trust Nonrecourse Indebtedness" means Indebtedness of the Trust as to
which, subject to exceptions for fraud and certain environmental violations, (i)
the sole recourse for collection of principal, interest and premium with respect
to such Indebtedness is against the specific property or assets identified in
the instruments evidencing or securing such Indebtedness, (ii) no other property
or assets may be realized upon in collection of principal, interest or premium
of such Indebtedness, (iii) other than as provided in clause (i) or (ii), the
Trust does not provide credit support and is not directly or indirectly liable
for such Indebtedness and (iv) no default with respect to such Indebtedness
would permit (upon notice, lapse of time or both) any holder of other
Indebtedness of the Trust or any Restricted Subsidiary of the Trust to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Trust Request" or "Trust Order" means a written request or order
signed in the name of the Trust by its Chairman, its President, any Vice
President, its Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Uniform Commercial Code" or "UCC" means the Uniform Commercial Code
in any applicable jurisdiction as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Trust that
at the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Trustees as provided below) and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Trustees may designate (a "Designation")
any Subsidiary of the Trust (other than the Bank or any of its Subsidiaries, the
New Obligor (prior to the Substitution) or a Subsidiary that owns any Capital
Stock of, or owns, or holds any Lien on, any property of the Trust or any other
Restricted Subsidiary of the Trust that is not a Subsidiary of the Subsidiary to
be so designated) to be an Unrestricted Subsidiary if: (a) no Default or Event
of Default shall have occurred and be
<PAGE>
28
continuing at the time of or after giving effect to such Designation; and (b)
the Trust could make an Investment in such Unrestricted Subsidiary at the time
of such Designation (assuming the effectiveness thereof) in an amount (the
"Designation Amount") equal to the Fair Market Value of the Capital Stock of
such Subsidiary on such date. In the event of any such Designation, the Trust
shall be deemed to have made an Investment constituting a Restricted Payment
pursuant to Section 1011 for all purposes of this Indenture in the Designation
Amount. The Board of Trustees may revoke (a "Revocation") any Designation of a
Subsidiary as an Unrestricted Subsidiary if: (a) no Default or Event or Default
shall have occurred and be continuing at the time of and after giving effect to
such Revocation; and (b) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such Revocation would, if incurred
at such time, have been permitted to be incurred under the Indenture. Any
Designation or Revocation must be evidenced by a Board Resolution certifying
compliance with the foregoing provisions.
"U.S. Global Security" has the meaning set forth in Section 201.
"U.S. Government Obligations" has the meaning specified in Section
1304.
"U.S. Government Securities" means any evidence of Indebtedness with
an initial maturity of 180 days or less issued or directly and fully guaranteed
or insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of America
is pledged in support thereof) and in which an interest may be acquired by book-
entry transfer pursuant to the regulations of the U.S. Department of the
Treasury and the rules and procedures of the Federal Reserve System for U.S.
Treasury securities.
"U.S. Physical Securities" has the meaning set forth in Section 201.
"Vice President", when used with respect to the Trust or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have (i) in respect of a corporation, the general
voting power under ordinary circumstances to elect at least a majority of the
board of directors, managers or trustees of such corporation (irrespective of
whether or not, at the time, stock of any other class or classes shall have, or
might have, voting power by reason of the happening of any contingency) and (ii)
in respect of the Trust, the general voting power under ordinary circumstances
to elect the Board of Trustees or other governing board of the Trust
(irrespective of whether or not, at the time, stock of any other class or
classes shall have, or might have, voting power by reason of the happening of
any contingency).
<PAGE>
29
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary of
the Trust all the outstanding Capital Stock (other than directors' qualifying
shares) of which is owned by the Trust, by one or more other Wholly Owned
Restricted Subsidiaries, or by the Trust and one or more other Wholly Owned
Restricted Subsidiaries.
"Wholly Owned Subsidiary" means a Subsidiary of a Person all the
outstanding Capital Stock (other than directors' qualifying shares) of which is
owned by such Person, by one or more Wholly Owned Subsidiaries of such Person,
or by such Person and one or more other Wholly Owned Subsidiaries of such
Person.
SECTION 102. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the Trust Indenture
Act, the provision is incorporated by reference in and made a part of this
Indenture. The following Trust Indenture Act terms used in this Indenture have
the following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Holder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the indenture securities means the Trust or any other
obligor on the Securities.
All other Trust Indenture Act terms used in this Indenture that are
defined by the Trust Indenture Act, defined by reference in the Trust Indenture
Act to another statute or defined by a rule of the Commission and not otherwise
defined herein shall have the meanings assigned to them therein.
SECTION 103. Compliance Certificates and Opinions.
------------------------------------
Upon any application or request by the Trust to the Trustee to take
any action under any provision of this Indenture, the Trust shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture (including any covenant compliance with which
constitutes a condition precedent) relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of one or both of such documents is specifically required by any provision of
this Indenture relating to such particular application
<PAGE>
30
or request, no additional certificate or opinion need be furnished except as
otherwise set forth in this Indenture.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than pursuant to
Section 1008(a)) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 104. Form of Documents Delivered to Trustee.
--------------------------------------
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Trust may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Trust stating that the
information with respect to such factual matters is in the possession of the
Trust, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
<PAGE>
31
SECTION 105. Acts of Holders.
---------------
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Trust. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and conclusive in favor of the Trustee and the Trust, if made in the
manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The principal amount and serial numbers of Securities held by any
Person, and the date of holding the same, shall be proved by the Security
Register.
(d) If the Trust shall solicit from the Holders of Securities any
request, demand, authorization, direction, notice, consent, waiver or other Act,
the Trust may, at its option, by or pursuant to Board Resolution, fix in advance
a record date for the determination of Holders entitled to give such request,
demand, authorization, direction, notice, consent, waiver or other Act, but the
Trust shall have no obligation to do so. Notwithstanding TIA Section 316(c),
such record date shall be the record date specified in or pursuant to such Board
Resolution, which shall be a date not earlier than the date 30 days prior to the
first solicitation of Holders generally in connection therewith and not later
than the date such solicitation is completed. If such a record date is fixed,
such request, demand, authorization, direction, notice, consent, waiver or other
Act may be given before or after such record date, but only the Holders of
record at the close of business on such record date shall be deemed to be
Holders for the purposes of determining whether Holders of the requisite
proportion of Outstanding Securities have authorized or agreed or consented to
such request, demand, authorization, direction, notice, consent, waiver or other
Act, and for that purpose the Outstanding Securities shall be computed as of
such record date; provided that no such authorization, agreement or consent by
the Holders on such record date shall be deemed
<PAGE>
32
effective unless it shall become effective pursuant to the provisions of this
Indenture not later than eleven months after the record date.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Trust in reliance thereon, whether or not notation of such action is made upon
such Security.
SECTION 106. Notices, Etc., to Trustee and Trust.
-----------------------------------
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Trust shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing to or
with the Trustee at its Corporate Trust Office, Attention: Corporate Trust
Division, or
(2) the Trust by the Trustee or by any Holder shall be sufficient for
every purpose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, or delivered by recognized
courier to the Trust addressed to it at the address of its principal office
specified in the first paragraph of this Indenture, or at any other address
previously furnished in writing to the Trustee by the Trust.
SECTION 107. Notice to Holders; Waiver.
-------------------------
Where this Indenture provides for notice of any event to Holders by
the Trust or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing and mailed, first-class
postage prepaid, to each Holder affected by such event, at his address as it
appears in the Security Register, not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such notice. In
any case where notice to Holders is given by mail, neither the failure to mail
such notice, nor any defect in any notice so mailed, to any particular Holder
shall affect the sufficiency of such notice with respect to other Holders. Any
notice mailed to a Holder in the manner herein prescribed shall be conclusively
deemed to have been received by such Holder, whether or not such Holder actually
receives such notice. Where this Indenture provides for notice in any manner,
such notice may be waived in writing by the Person entitled to receive such
notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
<PAGE>
33
In case by reason of the suspension of or irregularities in regular
mail service or by reason of any other cause, it shall be impracticable to mail
notice of any event to Holders when such notice is required to be given pursuant
to any provision of this Indenture, then any manner of giving such notice as
shall be satisfactory to the Trustee shall be deemed to be a sufficient giving
of such notice for every purpose hereunder.
SECTION 108. Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Trust shall bind
its successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
-------------------
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto, any Paying Agent, any
Securities Registrar and their successors hereunder and the Holders any benefit
or any legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
-------------
This Indenture and the Securities shall be governed by and construed
in accordance with the law of the State of New York. Upon the issuance of the
Exchange Securities, if any, or the effectiveness of the Shelf Registration
Statement, this Indenture will be subject to the provisions of the Trust
Indenture Act of 1939, as amended, that are required to be part of this
Indenture and shall, to the extent applicable, be governed by such provisions.
SECTION 113. Legal Holidays.
--------------
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity or Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of interest or principal (and premium, if any) need not be made on such
date, but may be made on the next succeeding
<PAGE>
34
Business Day with the same force and effect as if made on the Interest Payment
Date, Redemption Date or sinking fund payment date, or at the Stated Maturity or
Maturity; provided that no interest shall accrue on such payment for the period
from and after such Interest Payment Date, Redemption Date, Stated Maturity or
Maturity, as the case may be, if such payment is made in accordance with this
Indenture on the next succeeding Business Day.
SECTION 114. Execution of Agreement by Trust.
-------------------------------
The name "B.F. Saul Real Estate Investment Trust" is the designation
of the trustees of the Trust under a Declaration of Trust. All Persons dealing
with the Trust must look solely to the property and assets of the Trust for the
enforcement of any claims against the Trust and neither the trustees,
shareholders, officers, employees or agents of the Trust in their individual
capacities assume any personal liability for the obligations of the Trust and
the respective properties of the trustees, shareholders, officers, employees and
agents of the Trust in their individual capacities shall not be subject to the
claims of any such Persons with respect to any such obligations.
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally.
---------------
The Initial Securities shall be known as the "9 3/4% Senior Secured
Notes due 2008" and the Exchange Securities shall be known as the "9 3/4% Series
B Senior Secured Notes due 2008", in each case, of the Trust. The Securities
and the Trustee's certificate of authentication shall be in substantially the
form annexed hereto as Exhibit A. The Securities may have such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, notations or other marks
of identification and such notations, legends or endorsements as may be required
by law, or to comply with the rules on any securities exchange or agreements to
which the Trust is subject or as may, consistently herewith, be determined by
the officers executing such Securities, as evidenced by their execution of the
Securities. Any portion of the text of any Security may be set forth on the
reverse thereof, with an appropriate reference thereto on the face of the
Security. The Trust shall approve the form of the Securities and any notation,
legend or endorsement on the Securities. Each Security shall be dated the date
of its authentication.
The terms and provisions contained in the form of the Securities
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Indenture. To the extent applicable, the Trust and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
<PAGE>
35
Initial Securities offered and sold in reliance on Rule 144A shall be
issued initially in the form of one or more permanent global Securities
substantially in the form set forth in Exhibit A and contain each of the legends
set forth in Section 202 (the "U.S. Global Security"), deposited with the
Trustee, as custodian for the Depositary, duly executed by the Trust and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the U.S. Global Security may from time to time be increased or
decreased by adjustments made on the records of the Trustee, as custodian for
the Depositary or its nominee, as hereinafter provided.
Initial Securities offered and sold in offshore transactions in
reliance on Regulation S shall be issued initially in the form of a single
permanent global security substantially in the form set forth in Exhibit A (the
"Offshore Global Security") deposited with the Trustee, as custodian for the
Depositary or its nominee, duly executed by the Trust and authenticated by the
Trustee as hereinafter provided. The aggregate principal amount of the Offshore
Global Security may from time to time be increased or decreased by adjustments
made in the records of the Trustee, as custodian for the Depositary or its
nominee, as herein provided. Initial Securities issued pursuant to Section 305
in exchange for or upon transfer of beneficial interests in the U.S. Global
Security or the Offshore Global Security shall be in the form of U.S. Physical
Securities or in the form of permanent certificated Securities substantially in
the form set forth in Exhibit A (the "Offshore Physical Securities"),
respectively as hereinafter provided.
Initial Securities offered and sold other than as described in the
preceding two paragraphs shall be issued in the form of permanent certificated
Securities in registered form substantially in the form set forth in Exhibit A
and contain the Private Placement Legend as set forth in Section 202(a)(i) (the
"U.S. Physical Securities").
The Offshore Global Securities and U.S. Physical Securities are
sometimes collectively herein referred to as the "Physical Securities". The
U.S. Global Security and the Offshore Global Securities are sometimes
collectively referred to as the "Global Securities".
The definitive Securities shall be printed, lithographed or engraved
on steel-engraved borders or may be produced in any other manner, all as
determined by the officers of the Trust executing such Securities, as evidenced
by their execution of such Securities.
Exchange Securities shall be substantially in the form set forth in
Exhibit A.
SECTION 202. Restrictive Legends.
-------------------
(a) Unless and until (x) an Initial Security is sold pursuant to an
effective Shelf Registration Statement or (y) an Initial Security is exchanged
for an Exchange Security in an Exchange Offer pursuant to an effective Exchange
Offer Registration Statement, in each case pursuant to the Registration Rights
Agreement, (A) each such U.S. Global Security and
<PAGE>
36
each U.S. Physical Security shall bear the following legend on the face thereof
and (B) the Offshore Physical Securities and the Offshore Global Security shall
bear the Private Placement Legend on the face thereof until at least 41 days
after the date hereof (the "Offshore Securities Exchange Date") and receipt by
the Trustee of a certificate substantially in the form of Exhibit B hereto:
(i) THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER
SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT
FROM, OR NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE
HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE
144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904
OF REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE
DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS
PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR
PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY
ON WHICH THE TRUST OR ANY AFFILIATE OF THE TRUST WAS THE OWNER OF
THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) AND (Y) SUCH
LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE
"RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE TRUST OR ANY SUBSIDIARY
THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS
THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A
INSIDE THE UNITED STATES, TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS
BEING MADE IN RELIANCE
<PAGE>
37
ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S.
PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING
OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF
REGULATION S, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR"
WITHIN THE MEANING OF SUBPARAGRAPHS (a)(1),(2),(3) OR (7) OF RULE
501 UNDER THE SECURITIES ACT WITH TOTAL ASSETS IN EXCESS OF
$5,000,000 THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR
FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR,"
FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR
SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3)
AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND;
PROVIDED THAT THE TRUST, THE TRUSTEE, THE TRANSFER AGENT AND THE
REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER (I) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE
DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE
FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN
THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS
COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE
RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE
THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.
(ii) THE SECURITY REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT BY AND BETWEEN THE
TRUST AND THE HOLDERS NAMED THEREIN. THE TRUST WILL FURNISH A
COPY OF SUCH AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE
WITHOUT CHARGE UPON WRITTEN REQUEST TO THE TRUST AT ITS PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE.
<PAGE>
38
(b) Each Global Security, whether or not an Initial Security, shall
also bear the following legend on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE TRUST OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
IS MADE TO CEDE & CO OR TO SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 307
OF THE INDENTURE.
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount and Terms.
----------------
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to $200,000,000,
except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities pursuant to Section 303,
304, 305, 306, 307, 308, 906, 1021 or 1108 or pursuant to an Exchange Offer.
The Stated Maturity of the Securities shall be April 1, 2008, and they
shall bear interest at the rate of 9 3/4% per annum from March 25, 1998, or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, payable on
<PAGE>
39
October 1, 1998 and semiannually thereafter on each April 1 and October 1 in
each year and at said Stated Maturity, until the principal thereof is paid or
duly provided for.
The principal of (and premium, if any, on) and interest on the
Securities shall be payable at the office or agency of the Trust maintained for
such purpose in The City of New York, or at such other office or agency of the
Trust as may be maintained for such purpose; provided, however, that, at the
option of the Trust, interest may be paid by check mailed to addresses of the
Persons entitled thereto as such addresses shall appear on the Security
Register; provided further that, in the case of any Holder of at least
$1,000,000 aggregate principal amount of Securities, any such Holder may elect,
such election to be made in writing and received by the Security Registrar prior
to the Regular Record Date and to include applicable account information (which
account shall be located in the United States), such payment to be made by wire
transfer to the account specified in the election notice.
Holders shall have the right to require the Trust to purchase their
Securities, in whole or in part, in the event of the Change of Control pursuant
to Section 1021.
The Securities shall be redeemable as provided in Article Eleven and
in the Securities.
SECTION 302. Denominations.
-------------
The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Securities shall be executed on behalf of the Trust by its
Chairman or a Vice Chairman, its President or a Vice President, under its
corporate seal reproduced thereon and attested by its Secretary or an Assistant
Secretary, Treasurer or Assistant Treasurer. The signature of any of these
officers on the Securities may be manual or facsimile signatures of the present
or any future such authorized officer and may be imprinted or otherwise
reproduced on the Securities.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Trust shall bind the Trust,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Trust may deliver Initial Securities executed by the Trust
to the Trustee for authentication, together with a Trust Order for the
authentication and delivery of such Initial Securities, and the Trustee in
accordance with such Trust Order shall authenticate and deliver
<PAGE>
40
for original issue Initial Securities in the aggregate principal amount of
$200,000,000. On a Trust Order, the Trustee or an authenticating agent shall
authenticate for original issue Exchange Securities in an aggregate principal
amount not to exceed $200,000,000; provided that such Exchange Securities shall
be issuable only upon the valid surrender for cancellation of Initial Securities
of a like aggregate principal amount in accordance with an Exchange Offer
pursuant to the Registration Rights Agreement. The Officers' Certificate and
Opinion of Counsel provided for in Section 103 shall not be applicable to the
initial Trust Order to authenticate and deliver the Initial Securities to the
Initial Purchasers. In each case thereafter, the Trustee shall be entitled to
receive an Officers' Certificate and an Opinion of Counsel of the Trust in
connection with such authentication of Securities as provided in Section 103.
Such Trust Order shall specify the amount of Securities to be authenticated and
the date on which the original issue of Initial Securities or Exchange
Securities is to be authenticated.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for in Exhibit
A duly executed by the Trustee by manual signature of an authorized signatory,
and such certificate upon any Security shall be conclusive evidence, and the
only evidence, that such Security has been duly authenticated and delivered
hereunder and is entitled to the benefits of this Indenture.
In case the Trust, pursuant to Article Eight, shall be consolidated or
merged with or into any other Person or shall sell, assign, convey, transfer,
lease or otherwise dispose of all or substantially all of its properties and
assets to any other Person or Persons or permit any of its Restricted
Subsidiaries to enter into any such transaction or series of related
transactions where such transaction or series of related transactions, in the
aggregate, would result in the sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of the properties and assets of
the Trust and its Restricted Subsidiaries on a consolidated basis to any other
Person or Persons, and the successor Person resulting from such consolidation,
or surviving such merger, or into which the Trust shall have been merged, or the
Person or Persons which shall have received a sale, assignment, conveyance,
transfer, lease or other disposition as aforesaid, shall have executed an
indenture supplemental hereto with the Trustee pursuant to Article Eight, any of
the Securities authenticated or delivered prior to such consolidation, merger,
conveyance, transfer, lease or other disposition may, from time to time, at the
request of the successor Person, be exchanged for other Securities executed in
the name of the successor Person with such changes in phraseology and form as
may be appropriate, but otherwise in substance of like tenor as the Securities
surrendered for such exchange and of like principal amount; and the Trustee,
upon Trust Request of the successor Person, shall authenticate and deliver
Securities as specified in such request for the purpose of such exchange. If
Securities shall at any time be authenticated and delivered in any new name of a
successor Person pursuant to this Section in exchange or substitution for or
upon registration of transfer of any Securities, such successor Person, at the
option of the Holders
<PAGE>
41
but without expense to them, shall provide for the exchange of all Securities at
the time Outstanding for Securities authenticated and delivered in such new
name.
SECTION 304. Temporary Securities.
--------------------
Pending the preparation of definitive Securities, the Trust may
execute, and upon Trust Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as conclusively evidenced
by their execution of such Securities.
If temporary Securities are issued, the Trust will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Trust designated for such purpose pursuant to Section 1002,
without charge to the Holder. Upon surrender for cancellation of any one or
more temporary Securities, the Trust shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations. Until so exchanged, the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
SECTION 305. Registration, Registration of Transfer and Exchange.
---------------------------------------------------
The Trust shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
referred to as the "Security Register") in which, subject to such reasonable
regulations as it may prescribe, the Trust shall provide for the registration of
Securities and of transfers of Securities. The Security Register shall be in
written form or any other form capable of being converted into written form
within a reasonable time. At all reasonable times, the Security Register shall
be open to inspection by the Trustee. The Trustee is hereby initially appointed
as security registrar (the "Security Registrar") for the purpose of registering
Securities and transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security at the
office or agency of the Trust designated pursuant to Section 1002, the Trust
shall execute, and the Trustee shall authenticate and deliver, in the name of
the designated transferee or transferees, one or more new Securities of any
authorized denomination or denominations of a like aggregate principal amount.
<PAGE>
42
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denomination and of a like aggregate principal
amount, upon surrender of the Securities to be exchanged at such office or
agency. Whenever any Securities are so surrendered for exchange (including an
exchange of Initial Securities for Exchange Securities), the Trust shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Holder making the exchange is entitled to receive; provided that no exchange
of Initial Securities for Exchange Securities shall occur until an Exchange
Offer Registration Statement shall have been declared effective by the
Commission and that the Securities to be exchanged for the Exchange Securities
shall be canceled by the Trustee.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Trust, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer
or for exchange shall (if so required by the Trust or the Security Registrar) be
duly endorsed, or be accompanied by a written instrument of transfer, in form
satisfactory to the Trust and the Security Registrar, duly executed by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange or redemption of Securities, but the Trust may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 303, 304, 906, 1021 or 1108 not involving any
transfer.
The Trust shall not be required (i) to issue, register the transfer of
or exchange any Security during a period beginning at the opening of business 15
days before the selection of Securities to be redeemed under Section 1104 and
ending at the close of business on the day of such mailing of the relevant
notice of redemption, or (ii) to register the transfer of or exchange any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.
SECTION 306. Book-Entry Provisions for Global Securities.
-------------------------------------------
(a) Each Global Security initially shall (i) be registered in the name
of the Depositary for such Global Security or the nominee of such Depositary,
(ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear
legends as set forth in Section 202.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depositary, or the Trustee as its custodian, or under the
Global Security, and the Depositary
<PAGE>
43
may be treated by the Trust, the Trustee and any agent of the Trust or the
Trustee as the absolute owner of such Global Security for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the
Trust, the Trustee or any agent of the Trust or the Trustee, from giving effect
to any written certification, proxy or other authorization furnished by the
Depositary or shall impair, as between the Depositary and its Agent Members, the
operation of customary practices governing the exercise of the rights of a
holder of any Security.
(b) Transfers of a Global Security shall be limited to transfers of
such Global Security in whole, but not in part, to the Depositary, its
successors or their respective nominees, except (i) as otherwise set forth in
Section 307 and (ii) U.S. Physical Securities or Offshore Physical Securities
shall be transferred to all beneficial owners in exchange for their beneficial
interests in the U.S. Global Security or the Offshore Global Security,
respectively, in the event that the Depositary notifies the Trust that it is
unwilling or unable to continue as Depositary for the applicable Global Security
or the Depositary ceases to be a "Clearing Agency" registered under the Exchange
Act and a successor depositary is not appointed by the Trust within 90 days.
Interests of beneficial owners in a Global Security may be transferred in
accordance with the rules and procedures of the Depositary and the provisions
of Section 307. In connection with the transfer of an entire Global Security to
beneficial owners pursuant to clause (ii) of this paragraph (b), the applicable
Global Security shall be deemed to be surrendered to the Trustee for
cancellation, and the Trust shall execute, and the Trustee shall authenticate
and deliver, to each beneficial owner identified by the Depositary in exchange
for its beneficial interest in the applicable Global Security, an equal
aggregate principal amount at maturity of U.S. Physical Securities (in the case
of the U.S. Global Security) or Offshore Physical Securities (in the case of the
Offshore Global Security), as the case may be, of authorized denominations.
(c) Any beneficial interest in one of the Global Securities that is
transferred to a Person who takes delivery in the form of an interest in the
other Global Security will, upon transfer, cease to be an interest in such
Global Security and become an interest in the other Global Security and,
accordingly, will thereafter be subjected to all transfer restrictions, if any,
and other procedures applicable to beneficial interests in such other Global
Security for as long as it remains such an interest.
(d) Any U.S. Physical Security delivered in exchange for an interest
in the U.S. Global Security pursuant to paragraph (b) of this Section shall,
unless such change is made on or after the Resale Restriction Termination Date
and except as otherwise provided in Section 307, bear the Private Placement
Legend.
(e) The registered holder of a Global Security may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Securities.
<PAGE>
44
SECTION 307. Transfer Provisions.
-------------------
Unless and until (i) an Initial Security is sold pursuant to an
effective Registration Statement, or (ii) an Initial Security is exchanged for
an Exchange Security in the Exchange Offer pursuant to an effective Registration
Statement, in each case, pursuant to the Registration Rights Agreement, the
following provisions shall apply:
(a) General. The provisions of this Section 307 shall apply to all
-------
transfers involving any Physical Security and any beneficial interest in
any Global Security.
(b) Certain Definitions. As used in this Section 307 only, "delivery"
-------------------
of a certificate by a transferee or transferor means the delivery to the
Security Registrar by such transferee or transferor of the applicable
certificate duly completed; "holding" includes both possession of a
Physical Security and ownership of a beneficial interest in a Global
Security, as the context requires; "transferring" a Global Security means
transferring that portion of the principal amount of the transferor's
beneficial interest therein that the transferor has notified the Security
Registrar that it has agreed to transfer; and "transferring" a Physical
Security means transferring that portion of the principal amount thereof
that the transferor has notified the Security Registrar that it has agreed
to transfer.
As used in this Indenture, "Accredited Investor Certificate" means a
certificate substantially in the form set forth in Exhibit C; "Regulation S
Certificate" means a certificate substantially in the form set forth in
Exhibit D; "Rule 144A Certificate" means a certificate substantially in the
form set forth in Exhibit E; and "Non-Registration Opinion and Supporting
Evidence" means a written opinion of counsel reasonably acceptable to the
Trust to the effect that, and such other certification or information as
the Trust may reasonably require to confirm that, the proposed transfer is
being made pursuant to an exemption from, or in a transaction not subject
to, the registration requirements of the Securities Act.
(c) [Intentionally Omitted]
(d) Deemed Delivery of a Rule 144A Certificate in Certain
-----------------------------------------------------
Circumstances. A Rule 144A Certificate, if not actually delivered, will be
-------------
deemed delivered if (A) (i) the transferor advises the Trust and the
Trustee in writing that the relevant offer and sale were made in accordance
with the provisions of Rule 144A (or, in the case of a transfer of a
Physical Security, the transferor checks the box provided on the Physical
Security to that effect) and (ii) the transferee advises the Trust and the
Trustee in writing that (x) it and, if applicable, each account for which
it is acting in connection with the relevant transfer, is a qualified
institutional buyer within the meaning of Rule 144A, (y) it is aware that
the transfer of Securities to it is being made in reliance on the exemption
from the provisions of Section 5 of the Securities Act provided by Rule
<PAGE>
45
144A, and (z) if at any time the Trust is not subject to Section 13 or
15(d) of the Exchange Act, prior to the proposed date of transfer the
transferee has been given the opportunity to obtain from the Trust the
information referred to in Rule 144A(d)(4), and has either declined such
opportunity or has received such information (or, in the case of a transfer
of a Physical Security, the transferee signs the certification provided on
the Physical Security to that effect); or (B) the transferor holds the U.S.
Global Security and is transferring to a transferee that will take delivery
in the form of the U.S. Global Security.
(e) Procedures and Requirements.
---------------------------
1. If the proposed transfer occurs prior to the Offshore
Security Exchange Date, and the proposed transferor holds:
(A) a U.S. Physical Security which is surrendered to the
Security Registrar, and the proposed transferee or transferor, as
applicable:
(i) delivers an Accredited Investor Certificate and, if
required by the Trust, a Non-Registration Opinion and
Supporting Evidence, or delivers (or is deemed to have
delivered pursuant to clause (d) above) a Rule 144A
Certificate and the proposed transferee requests delivery in
the form of a U.S. Physical Security, then the Security
Registrar shall (x) register such transfer in the name of
such transferee and record the date thereof in its books and
records, (y) cancel such surrendered U.S. Physical Security
and (z) deliver a new U.S. Physical Security to such
transferee duly registered in the name of such transferee in
principal amount equal to the principal amount being
transferred of such surrendered U.S. Physical Security;
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the proposed
transferee is or is acting through an Agent Member and
requests that the proposed transferee receive a beneficial
interest in the U.S. Global Security, then the Security
Registrar shall (x) cancel such surrendered U.S. Physical
Security, (y) record an increase in the principal amount of
the U.S. Global Security equal to the principal amount being
transferred of such surrendered U.S. Physical Security and
(z) notify the Depositary in accordance with the procedures
of the Depositary that it approves of such transfer; or
<PAGE>
46
(iii) delivers a Regulation S Certificate and the
proposed transferee is or is acting through an Agent Member
and requests that the proposed transferee receive a
beneficial interest in the Offshore Global Security, then the
Security Registrar shall (x) cancel such surrendered U.S.
Physical Security, (y) record an increase in the principal
amount of the Offshore Global Security equal to the principal
amount being transferred of such surrendered U.S. Physical
Security and (z) notify the Depositary in accordance with the
procedures of the Depositary that it approves of such
transfer.
In any of the cases described in this Section 307(e)(1)(A), the
Security Registrar shall deliver to the transferor a new U.S. Physical
Security in principal amount equal to the principal amount not being
transferred of such surrendered U.S. Physical Security, as applicable.
(B) the U.S. Global Security, and the proposed transferee or
transferor, as applicable:
(i) delivers an Accredited Investor Certificate and, if
required by the Trust, a Non-Registration Opinion and
Supporting Evidence, or delivers (or is deemed to have
delivered pursuant to clause (d) above) a Rule 144A
Certificate and the proposed transferee requests delivery in
the form of a U.S. Physical Security, then the Security
Registrar shall (w) register such transfer in the name of
such transferee and record the date thereof in its books and
records, (x) record a decrease in the principal amount of the
U.S. Global Security in an amount equal to the beneficial
interest therein being transferred, (y) deliver a new U.S.
Physical Security to such transferee duly registered in the
name of such transferee in principal amount equal to the
amount of such decrease and (z) notify the Depositary in
accordance with the procedures of the Depositary that it
approves of such transfer;
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the proposed
transferee is or is acting through an Agent Member and
requests that the proposed transferee receive a beneficial
interest in the U.S. Global Security, then the transfer shall
be effected in accordance with the procedures of the
Depositary therefor; or
<PAGE>
47
(iii) delivers a Regulation S Certificate and the
proposed transferee is or is acting through an Agent Member
and requests that the proposed transferee receive a beneficial
interest in the Offshore Global Security, then the Security
Registrar shall (w) register such transfer in the name of such
transferee and record the date thereof in its books and
records, (x) record a decrease in the principal amount of the
U.S. Global Security in an amount equal to the beneficial
interest therein being transferred, (y) record an increase in
the principal amount of the Offshore Global Security equal to
the amount of such decrease and (z) notify the Depositary in
accordance with the procedures of the Depositary that it
approves of such transfer.
(C) the Offshore Global Security, and the proposed transferee
or transferor, as applicable:
(i) delivers an Accredited Investor Certificate and, if
required by the Trust, a Non-Registration Opinion and
Supporting Evidence delivers (or is deemed to have delivered
pursuant to clause (d) above) a Rule 144A Certificate and the
proposed transferee requests delivery in the form of a U.S.
Physical Security, then the Security Registrar shall (w)
register such transfer in the name of such transferee and
record the date thereof in its books and records, (x) record
a decrease in the principal amount of the Offshore Global
Security in an amount equal to the beneficial interest
therein being transferred, (y) deliver a new U.S. Physical
Security to such transferee duly registered in the name of
such transferee in principal amount equal to the amount of
such decrease and (z) notify the Depositary in accordance
with the procedures of the Depositary that it approves of
such transfer;
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the proposed
transferee is or is acting through an Agent Member and
requests that the proposed transferee receive a beneficial
interest in the U.S. Global Security, then the Security
Registrar shall (x) record a decrease in the principal amount
of the Offshore Global Security in an amount equal to the
beneficial interest therein being transferred, (y) record an
increase in the principal amount of the U.S. Global Security
equal to the amount of such decrease and (z) notify the
Depositary in accordance with the procedures of the
Depositary that it approves of such transfer; or
<PAGE>
48
(iii) delivers a Regulation S Certificate and the
proposed transferee is or is acting through an Agent Member
and requests that the proposed transferee receive a
beneficial interest in the Offshore Global Security, then
the transfer shall be effected in accordance with the
procedures of the Depositary therefor; provided, however,
that until the Offshore Security Exchange Date occurs,
beneficial interests in the Offshore Global Security may be
held only in or through accounts maintained at the
Depositary by Euroclear or Cedel (or by Agent Members acting
for the account thereof), and no person shall be entitled to
effect any transfer or exchange that would result in any
such interest being held otherwise than in or through such
an account.
2. If the proposed transfer occurs on or after the Offshore
Security Exchange Date and the proposed transferor holds:
(A) a U.S. Physical Security which is surrendered to the
Security Registrar, and the proposed transferee or transferor, as
applicable:
(i) delivers and Accredited Investor Certificate and,
if required by the Trust, a Non-Registration Opinion and
Supporting Evidence, or delivers (or is deemed to have delivered
pursuant to clause (d) above) a Rule 144A Certificate and the
proposed transferee requests delivery in the form of a U.S.
Physical Security, then the procedures set forth in Section
307(e)(1)(A)(i) shall apply;
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the proposed
transferee is or is acting through an Agent Member and requests
that the proposed transferee receive a beneficial interest in the
Offshore Global Security, then the procedures set forth in
Section 307(e)(1)(A)(ii) shall apply; or
(iii) delivers a Regulation S Certificate, then
the Security Registrar shall cancel such surrendered U.S.
Physical Security and at the direction of the transferee, either:
(x) register such transfer in the name of such
transferee, record the date thereof in its books and
records and deliver a new Offshore Physical Security to
such transferee in principal amount equal to the
principal
<PAGE>
49
amount being transferred of such surrendered U.S.
Physical Security, or
(y) if the proposed transferee is or is acting
through an Agent Member, record an increase in the
principal amount of the Offshore Global Security equal
to the principal amount being transferred of such
surrendered U.S. Physical Security and notify the
Depositary in accordance with the procedures of the
Depositary that it approves of such transfer.
In any of the cases described in this Section 307(e)(2)(A)(i),
(ii) or (iii)(x), the Security Registrar shall deliver to the
transferor a new U.S. Physical Security in principal amount equal
to the principal amount not being transferred of such surrendered
U.S. Physical Security, as applicable.
(B) the U.S. Global Security, and the proposed transferee or
transferor, as applicable:
(i) delivers an Accredited Investor Certificate and,
if required by the Trust, a Non-Registration Opinion and
Supporting Evidence, or delivers (or is deemed to have delivered
pursuant to clause (d) above) a Rule 144A Certificate and the
proposed transferee requests delivery in the form of a U.S.
Physical Security, then the procedures set forth in Section
307(e)(1)(B)(i) shall apply; or
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the proposed
transferee is or is acting through an Agent Member and requests
that the proposed transferee receive a beneficial interest in the
U.S. Global Security, then the procedures set forth in Section
307(e)(1)(B)(ii) shall apply; or
(iii) delivers a Regulation S Certificate, then the
Security Registrar shall (x) record a decrease in the principal
amount of the U.S. Global Security in an amount equal to the
beneficial interest therein being transferred, (y) notify the
Depositary in accordance with the procedures of the Depositary
that it approves of such transfer and (z) at the direction of the
transferee, either:
<PAGE>
50
(x) register such transfer in the name of such
transferee, record the date thereof in its books and records
and deliver a new Offshore Physical Security to such
transferee in principal amount equal to the amount of such
decrease, or
(y) if the proposed transferee is or is acting through
an Agent Member, record an increase in the principal amount
of the Offshore Global Security equal to the amount of such
decrease.
(C) an Offshore Physical Security which is surrendered to the
Security Registrar, and the proposed transferee or transferor, as
applicable:
(i) delivers (or is deemed to have delivered pursuant to
clause (d) above) a Rule 144A Certificate and the proposed
transferee is or is acting through an Agent Member and requests
delivery in the form of the U.S. Global Security, then the
Security Registrar shall (x) cancel such surrendered Offshore
Physical Security, (y) record an increase in the principal amount
of the U.S. Global Security equal to the principal amount being
transferred of such surrendered Offshore Physical Security and
(z) notify the Depositary in accordance with the procedures of
the Depositary that it approves of such transfer;
(ii) where the proposed transferee is or is acting through
an Agent Member, requests that the proposed transferee receive a
beneficial interest in the Offshore Global Security, then the
Security Registrar shall (x) cancel such surrendered Offshore
Physical Security, (y) record an increase in the principal amount
of the Offshore Global Security equal to the principal amount
being transferred of such surrendered Offshore Physical Security
and (z) notify the Depositary in accordance with the procedures
of the Depositary that it approves of such transfer; or
(iii) does not make a request covered by Section
307(e)(2)(C)(i) or Section 307(e)(2)(C)(ii), then the Security
Registrar shall (x) register such transfer in the name of such
transferee and record the date thereof in its books and records,
(y) cancel such surrendered Offshore Physical Security and (z)
deliver a new Offshore Physical Security to such transferee duly
registered in the name of such transferee in principal amount
<PAGE>
51
equal to the principal amount being transferred of such
surrendered Offshore Physical Security.
In any of the cases described in this Section
307(e)(2)(C), the Security Registrar shall deliver to the
transferor a new U.S. Physical Security in principal amount
equal to the principal amount not being transferred of such
surrendered U.S. Physical Security, as applicable.
(D) the Offshore Global Security, and the proposed
transferee or transferor, as applicable:
(i) delivers (or is deemed to have delivered
pursuant to clause (d) above) a Rule 144A Certificate and
the proposed transferee is or is acting through an Agent
Member and requests delivery in the form of the U.S. Global
Security, then the Security Registrar shall (x) record a
decrease in the principal amount of the Offshore Global
Security in an amount equal to the beneficial interest
therein being transferred, (y) record an increase in the
principal amount of the U.S. Global Security equal to the
amount of such decrease and (z) notify the Depositary in
accordance with the procedures of the Depositary that it
approves of such transfer;
(ii) where the proposed transferee is or is acting
through an Agent Member, requests that the proposed
transferee receive a beneficial interest in the Offshore
Global Security, then the transfer shall be effected in
accordance with the procedures of the Depositary therefor;
or
(iii) does not make a request covered by Section
307(e)(2)(D)(i) or Section 307(e)(2)(D)(ii), then the
Security Registrar shall (w) register such transfer in the
name of such transferee and record the date thereof in its
books and records, (x) record a decrease in the principal
amount of the Offshore Global Security in an amount equal to
the beneficial interest therein being transferred, (y)
deliver a new Offshore Physical Security to such transferee
duly registered in the name of such transferee in principal
amount equal to the amount of such decrease and (z) notify
the Depositary in accordance with the procedures of the
Depositary that it approves of such transfer.
<PAGE>
52
(f) Execution, Authentication and Delivery of Physical Securities. In
-------------------------------------------------------------
any case in which the Security Registrar is required to deliver a Physical
Security to a transferee or
transferor, the Trust shall execute, and the Trustee shall authenticate and
make available for delivery, such Physical Security.
(g) Certain Additional Terms Applicable to Physical Securities. Any
----------------------------------------------------------
transferee entitled to receive a Physical Security may request that the
principal amount thereof be evidenced by one or more Physical Securities in
any authorized denomination or denominations and the Security Registrar
shall comply with such request if all other transfer restrictions are
satisfied.
(h) Transfers Not Covered by Section 307(e). The Security Registrar
---------------------------------------
shall effect and record, upon receipt of a written request from the Trust
so to do, a transfer not otherwise permitted by Section 307(e), such
recording to be done in accordance with the otherwise applicable provisions
of Section 307(e), upon the furnishing by the proposed transferor or
transferee of a Non-Registration Opinion and Supporting Evidence.
(i) General. By its acceptance of any Security bearing the Private
-------
Placement Legend, each Holder of such Security acknowledges the
restrictions on transfer of such Security set forth in this Indenture and
in the Private Placement Legend and agrees that it will transfer such
Security only as provided in the Indenture. The Security Registrar shall
not register a transfer of any Security unless such transfer complies with
the restrictions with respect thereto set forth in this Indenture. The
Security Registrar shall not be required to determine (but may rely upon a
determination made by the Trust) the sufficiency or accuracy of any such
certifications, legal opinions, other information or document.
(j) Private Placement Legend. Upon the transfer, exchange or
------------------------
replacement of Securities not bearing the Private Placement Legend, the
Security Registrar shall deliver Securities that do not bear the Private
Placement Legend. Upon the transfer, exchange or replacement of Securities
bearing the Private Placement Legend, the Security Registrar shall deliver
only Securities that bear the Private Placement Legend unless (i) the
circumstances exist contemplated by the fourth paragraph of Section 201
(with respect to an Offshore Physical Security) or the requested transfer
is at least two years after the original issue date of the Initial Security
(with respect to any Physical Security), (ii) there is delivered to the
Security Registrar an Opinion of Counsel reasonably satisfactory to the
Trust and the Trustee to the effect that neither such legend nor the
related restrictions on transfer are required in order to maintain
compliance with the provisions of the Securities Act or (iii) such
Securities are exchanged for Exchange Securities pursuant to an Exchange
Offer.
<PAGE>
53
SECTION 308. Mutilated, Destroyed, Lost and Stolen Securities.
------------------------------------------------
If (i) any mutilated Security is surrendered to the Trustee, or (ii)
the Trust and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the Trust
and the Trustee such security or indemnity as may be required by them to save
each of them harmless, then, in the absence of notice to the Trust or the
Trustee that such Security has been acquired by a bona fide purchaser, the Trust
shall execute and upon Trust Order the Trustee shall authenticate and deliver,
in exchange for any such mutilated Security or in lieu of any such destroyed,
lost or stolen Security, a new Security of like tenor and principal amount,
bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Trust in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Trust
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Trust, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 309. Payment of Interest; Interest Rights Preserved.
----------------------------------------------
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name such Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest at the
office or agency of the Trust maintained for such purpose pursuant to Section
1002; provided that, payment of interest shall be made by check mailed to the
address of the Person entitled thereto as such address shall appear on the
Security Register; provided further that, in the case of any Holder of at least
$1,000,000 aggregate principal amount of Securities, any such Holder may elect,
such election to be made in writing and received by the Security Registrar prior
to the Regular Record Date and to include applicable account information (which
account shall be located in the United States), such interest payment to be made
by wire transfer to the account specified in the election notice.
<PAGE>
54
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date shall forthwith cease to
be payable to the Holder on the Regular Record Date by virtue of having been
such Holder, and such defaulted interest and (to the extent lawful) interest on
such defaulted interest at the rate borne by the Securities (such defaulted
interest and interest thereon herein collectively called "Defaulted Interest")
may be paid by the Trust, at its election in each case, as provided in clause
(1) or (2) below:
(1) The Trust may elect to make payment of any Defaulted Interest to
the Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record
Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Trust shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Security and the
date of the proposed payment, and at the same time the Trust shall deposit
with the Trustee an amount of money equal to the aggregate amount proposed
to be paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date for
the payment of such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Trust of such
Special Record Date, and in the name and at the expense of the Trust, shall
cause notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor to be given in the manner provided for in
Section 107, not less than 10 days prior to such Special Record Date.
Notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor having been so given, such Defaulted Interest shall be
paid to the Persons in whose names the Securities (or their respective
Predecessor Securities) are registered at the close of business on such
Special Record Date and shall no longer be payable pursuant to the
following clause (2).
(2) The Trust may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, and upon such notice as may
be required by such exchange, if, after notice given by the Trust to the
Trustee of the proposed payment pursuant to this clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
<PAGE>
55
SECTION 310. Persons Deemed Owners.
---------------------
Prior to the due presentment of a Security for registration of
transfer, the Trust, the Trustee and any agent of the Trust or the Trustee may
treat the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal of (and premium, if
any, on) and (subject to Sections 305 and 309) interest on such Security and for
all other purposes whatsoever, whether or not such Security be overdue, and none
of the Trust, the Trustee or any agent of the Trust or the Trustee shall be
affected by notice to the contrary.
SECTION 311. Cancellation.
------------
All Securities surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee and shall be promptly canceled by it. The Trust may
at any time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Trust may have acquired in any
manner whatsoever, and may deliver to the Trustee (or to any other Person for
delivery to the Trustee) for cancellation any Securities previously
authenticated hereunder which the Trust has not issued and sold, and all
Securities so delivered shall be promptly canceled by the Trustee. If the Trust
shall so acquire any of the Securities, however, such acquisition shall not
operate as a redemption or satisfaction of the indebtedness represented by such
Securities unless and until the same are surrendered to the Trustee for
cancellation. No Securities shall be authenticated in lieu of or in exchange for
any Securities canceled as provided in this Section, except as expressly
permitted by this Indenture. All canceled Securities held by the Trustee shall
be disposed of by the Trustee in accordance with its customary procedures and
certification of their disposal delivered to the Trust unless by Trust Order the
Trust shall direct that canceled Securities be returned to it.
SECTION 312. Computation of Interest.
-----------------------
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
SECTION 313. CUSIP Numbers
-------------
The Trust in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption or other notices to Holders as a convenience to Holders; provided
that any such notice may state that no representation in made as to the
correctness of such numbers either as printed on the Securities or as contained
in the notice of redemption and that reliance may be placed only on the other
identification numbers and other identifying information printed on the
Securities, and any such redemption shall not be affected by any defect in or
omission of such numbers. The Trust will promptly notify the Trustee of any
change in the CUSIP numbers.
<PAGE>
56
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall upon Trust Request cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of
Securities herein expressly provided for) and the Collateral shall be released
as provided in Section 1212, and the Trustee, at the expense of the Trust, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture, when:
(1) either
(a) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 308 and
(ii) Securities for whose payment money has theretofore been deposited
in trust with the Trustee or any Paying Agent or segregated and held
in trust by the Trust and thereafter repaid to the Trust or discharged
from such trust, as provided in Section 1003) have been delivered to
the Trustee for cancellation; or
(b) all such Securities not theretofore delivered to the Trustee
for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of
the Trust,
and the Trust, in the case of (i), (ii) or (iii) of this subclause
(b), has irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust for the purpose an amount sufficient
to pay and discharge the entire indebtedness on such Securities not
theretofore delivered to the Trustee for cancellation, for principal
(and premium, if any) and interest to the date of such deposit (in the
case of Securities which have become due and payable) or to the final
Stated Maturity or Redemption Date, as the case may be;
<PAGE>
57
(2) the Trust has paid or caused to be paid all other sums payable
hereunder by the Trust; and
(3) the Trust has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Trust to the Trustee under Section 607 and, if money shall
have been deposited with the Trustee pursuant to subclause (b) of clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
--------------------------
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Trust acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee; but such money need not be segregated from other funds except to the
extent required by law.
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
-----------------
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) default in the payment of any interest on any Security when it
becomes due and payable and continuance of such default for a period of 30
days;
(ii) default in the payment of the principal of or premium, if any,
on any Security at its Maturity (upon acceleration, optional redemption,
required purchase or otherwise);
(iii) failure to make or consummate a Change of Control Offer in
accordance with the provisions of Section 1021;
<PAGE>
58
(iv) failure by the Trust to perform or observe any other term,
covenant or agreement contained in the Securities or this Indenture (other
than a default specified in clause (i), (ii) or (iii) above or clause (ix)
below) for a period of 45 days after written notice of such failure
requiring the Trust to remedy the same shall have been given (x) to the
Trust by the Trustee or (y) to the Trust and the Trustee by the Holders of
at least 25% in aggregate principal amount of the Securities then
Outstanding;
(v) default (other than a default on Nonrecourse Indebtedness or on
less than $10,000,000 of Trust Nonrecourse Indebtedness at any one time)
under any instrument or any other obligation (x) representing indebtedness
for borrowed money of the Trust or any of its Restricted Subsidiaries, (y)
representing indebtedness evidenced by bonds, notes, debentures or other
similar instruments of the Trust or any of its Restricted Subsidiaries or
(z) constituting a guarantee by the Trust or any of its Restricted
Subsidiaries of Guaranteed Indebtedness of any other Person representing
money borrowed or any obligation of such other Person evidenced by bonds,
notes, debentures or other similar instruments, which default (a) consists
of the failure to pay an amount aggregating in excess of $10,000,000 if
such default continues for a period of 30 days after written notice of such
failure requiring the Trust to remedy the same shall have been given (A) to
the Trust by the Trustee or (B) to the Trust and the Trustee by the Holders
of at least 25% in aggregate principal amount of the Securities then
Outstanding, or (b) results in the acceleration of such indebtedness or
guarantee in an aggregate principal amount in excess of $10,000,000;
(vi) failure by the Bank to comply with any of its Regulatory
Capital Requirements set forth in clause (ii) of the definition thereof;
provided that an Event of Default under this clause (vi) shall not have
occurred until the expiration of a 90-day period commencing on the date of
the initial submission of a capital plan to the OTS by the Bank (unless
such capital plan is approved by the OTS on or prior to the expiration of
such 90-day period or, if the OTS has notified the Bank that it needs
additional time to determine whether to approve such capital plan and such
capital plan is approved by the OTS on or prior to the expiration of such
extended period); provided further that if the Bank meets the minimum
amount of capital required to meet each of the industry-wide regulatory
capital requirements pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation, notwithstanding the Bank's failure to meet an individual
minimum capital requirement pursuant to 12 U.S.C. Section 1464(s) and 12
C.F.R. Section 567.3 (and any amendment to either thereof) or any successor
law or regulation, no Event of Default shall have occurred pursuant to this
clause (vi) unless written notice thereof shall have been given (x) to the
Bank by the Trustee or (y) to the Bank and the Trustee by the Holders of
25% in aggregate principal amount of the Securities then outstanding;
(vii) existence of one or more judgments against the Trust or any of
its Subsidiaries for the payment of money in excess of $10,000,000, either
individually or
<PAGE>
59
in the aggregate, which remain undischarged 60 days after all rights to
review directly such judgment or judgments, whether by appeal or writ, have
been exhausted or have expired;
(viii) any provision of Article Twelve of this Indenture relating to
the Collateral (other than Section 1204, insofar as it relates to
obligations of the Trustee or the Custodian, or Section 1213(a)) shall
cease, for any reason (other than under the terms of a supplemental
indenture entered into pursuant to Section 902), to be in full force and
effect in any material respect, or the Trust shall so assert in writing; or
the Trustee shall cease to have a first priority perfected security
interest, for the benefit of the Trustee and the Holders, in the Collateral
(other than by reason of the release of any such security interest in
accordance with this Indenture), or any representation, warranty or
certification of the Trust made in or pursuant to Section 1203 or 1205
shall be false in any material respect as of the date when made;
(ix) failure by the Trust to perform or observe
(a) any term, covenant or agreement contained in Section
1214(a), to the extent that such failure relates to the creation or
existence of a non-consensual Lien on the Collateral, for a period of
45 days after the Trust shall have knowledge of such failure,
(b) any other term, covenant or agreement contained in Section
1214(a) or any term, covenant or agreement contained in Section
1214(b) or
(c) any other term, covenant or condition contained in Article
Twelve for a period of 30 days after written notice of such failure
requiring the Trust to remedy the same shall have been given to the
Trust by the Trustee or to the Trust and the Trustee by the Holders of
at least 25% in aggregate principal amount of the Securities then
Outstanding;
(x) the entry of a decree or order by a court having jurisdiction
in the premises adjudging the Trust or any Material Subsidiary a bankrupt
or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Trust or any Material Subsidiary under the Federal Bankruptcy Code or
any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
the Trust or any Material Subsidiary or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period
of 90 consecutive days; or
(xi) the institution by the Trust or any Material Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the consent by it
to the institution of
<PAGE>
60
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the
Federal Bankruptcy Code or any other applicable federal or state law, or
the consent by it to the filing of any such petition or to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Trust or any Material Subsidiary or of any
substantial part of its property, or the making of an assignment for the
benefit of creditors, or the admission by it in writing of its inability to
pay its debts generally as they become due.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
If an Event of Default (other than as specified in clause (x) or (xi)
of Section 501) occurs and is continuing, the Trustee or the Holders of not less
than 25% in aggregate principal amount of the Outstanding Securities may declare
the principal amount of all the Securities to be immediately due and payable by
notice to the Trust (and to the Trustee if given by the Holders), and upon any
such declaration such principal amount shall become immediately due and payable.
If an Event of Default specified in clause (x) or (xi) of Section 501 occurs and
is continuing, then the principal of, premium, if any, and accrued interest on
all of the outstanding Securities shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder of Securities.
At any time after a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article Five provided, the Holders of a
majority in aggregate principal amount of the Outstanding Securities, by written
notice to the Trust and the Trustee, may rescind and annul such declaration and
its consequences if:
(a) the Trust has paid or deposited with the Trustee a sum sufficient
to pay:
(i) all overdue interest on all Outstanding Securities;
(ii) all unpaid principal of (and premium, if any, on) any
Outstanding Securities which has become due otherwise than by such
declaration of acceleration, and interest on such unpaid principal at
the rate borne by the Securities;
(iii) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities;
and
(iv) all sums paid or advanced by the Trustee under this
Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and
<PAGE>
61
(b) all Events of Default, other than the non-payment of amounts of
principal of (or premium, if any, on) or interest on the Securities that
have become due solely by such declaration of acceleration, have been cured
or waived.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Notwithstanding the preceding paragraph, in the event of any Event of
Default specified in Section 501(v), such Event of Default and all consequences
thereof (including without limitation any acceleration or resulting payment
default) shall be annulled, waived and rescinded, automatically and without any
action by the Trustee or the Holders of the Securities, if within 30 days after
such Event of Default arose (x) the Indebtedness or guarantee that is the basis
for such event of default has been discharged, or (y) the holders thereof have
rescinded or waived the acceleration, notice or action (as the case may be)
giving rise to such Event of Default, or (z) the default that is the basis for
such Event of Default has been cured.
If a Default specified in clause (i), (ii), (iii), (v), (vi) of
Section 501, or specified in clause (iv) of Section 501 with respect to Sections
1010, 1011, 1015, 1020 and 1021 or specified in clauses (ix) of Section 501 with
respect to Sections 1203(b),(c) and (d) and Section 1214(c), occurs and is
continuing, or an Event of Default occurs and is continuing, the interest rate
borne by the Securities will increase by 2% per annum until such time when such
Defaults or Events of Default, as the case may be, have been cured or waived;
provided, however, that if after such Default or Event of Default has been cured
or waived a different Default specified in clause (i), (ii), (iii), (v), (vi) of
this Section 501, or specified in clause (iv) of Section 501 with respect to
Sections 1008(a), 1009 through 1021 or specified in clause (ix) of Section 501
with respect to Sections 1203(b),(c) and (d) and Sections 1214(c), occurs and is
continuing, or an Event of Default occurs and is continuing, the interest rate
may again be increased pursuant to the foregoing provision. Such interest will
accrue from the date of such Default or Event of Default, as the case may be,
and will be payable after the time the Trust has knowledge of such Default or
Event of Default as set forth in the next paragraph.
Any additional interest on any Security which is payable pursuant to
this Section 502, but is not punctually paid or duly provided for, on any
Interest Payment Date shall forthwith cease to be payable to the Holder on the
Regular Record Date by virtue of having been such Holder, and such additional
interest (such interest herein called "Additional Interest") may be paid by the
Trust, at its election in each case, as provided in clause (1) or (2) below:
(1) The Trust may elect to make payment of any Additional Interest to
the Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record
Date for the payment of such Additional Interest, which shall be fixed in
the following manner. The Trust shall notify the Trustee in writing of the
amount of Additional Interest proposed to be paid
<PAGE>
62
on each Security and the date of the proposed payment, and at the same time
the Trust shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Additional Interest
or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the Persons entitled to such Additional
Interest as in this clause provided. Thereupon the Trustee shall fix a
Special Record Date for the payment of such Additional Interest, which
shall be not more than 15 days and not less than 10 days prior to the date
of the proposed payment and not less than 10 days after the receipt by the
Trustee of the notice of the proposed payment. The Trustee shall promptly
notify the Trust of such Special Record Date, and in the name and at the
expense of the Trust, shall cause notice of the proposed payment of such
Additional Interest and the Special Record Date therefor to be given in the
manner provided for in Section 107, not less than 10 days prior to such
Special Record Date. Notice of the proposed payment of such Additional
Interest and the Special Record Date therefor having been so given, such
Additional Interest shall be paid to the Persons in whose names the
Securities (or their respective Predecessor Securities) are registered at
the close of business on such Special Record Date and shall not be payable
pursuant to the following clause (2).
(2) The Trust may make payment of any Additional Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Trust to the Trustee of the proposed payment pursuant to this clause (2),
such manner of payment shall be deemed practicable by the Trustee.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
-------------------------------------------------------
Trustee.
- -------
The Trust covenants that if
(a) default is made in the payment of any installment of interest on
any Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(b) default is made in the payment of the principal of (or premium,
if any, on) any Security at the Maturity thereof, the Trust will, upon
demand of the Trustee, pay to the Trustee for the benefit of the Holders of
such Securities, the whole amount then due and payable on such Securities
for principal thereof (and premium, if any, thereon) and interest thereon,
and interest on any overdue principal (and premium, if any) and, to the
extent that payment of such interest shall be legally enforceable, upon any
overdue installment of interest, at the rate borne by the Securities, and,
in addition thereto, such further amount as shall be sufficient to cover
the costs and expenses of
<PAGE>
63
collection, including the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel.
If the Trust fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name, as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Trust or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Trust or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
--------------------------------
In case of the pendency of any insolvency, bankruptcy, receivership,
liquidation, conservatorship, arrangement, adjustment, composition or other
judicial proceeding relative to the Trust or any other obligor upon the
Securities or the property of the Trust or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Trust for the payment of overdue principal, premium, if any, or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Securities
and to file such other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any custodian, receiver, conservator, assignee, trustee, liquidator,
sequestrator or similar official in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay the Trustee any amount due it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 607.
<PAGE>
64
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of
------------------------------------------------
Securities.
- ----------
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
and as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
SECTION 506. Application of Money Collected.
------------------------------
Any money collected by the Trustee pursuant to this Article Five shall
be applied in the following order, at the date or dates fixed by the Trustee
and, in case of the distribution of such money on account of principal (or
premium, if any) or interest, upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: to the payment of all amounts due to the Trustee under Section
607;
SECOND: to the payment of the amounts then due and unpaid for
principal of (and premium, if any, on) and interest on the Securities in
respect of which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Securities for principal (and premium, if
any) and interest, respectively; and
THIRD: the balance, if any, to the Person or Persons entitled thereto.
SECTION 507. Limitation on Suits.
-------------------
No Holder of any Securities shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
<PAGE>
65
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority
or more in principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal,
----------------------------------------------------
Premium and Interest.
- --------------------
Notwithstanding any other provision in this Indenture, but subject to
the provisions of Section 515, the Holder of any Security shall have the right,
which is absolute and unconditional, to receive payment, as provided herein and
in such Security, of the principal of (and premium, if any, on) and interest on
such Security on the respective Stated Maturities expressed in such Security
(or, in the case of redemption, on the Redemption Date) and to institute suit
for the enforcement of any such payment, and such rights shall not be impaired
without the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Trust, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
<PAGE>
66
SECTION 510. Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in the last paragraph
of Section 308, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder of any Security
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article Five or
by law to the Trustee or to the Holders may be exercised from time to time, and
as often as may be deemed expedient, by the Trustee or by the Holders, as the
case may be.
SECTION 512. Control by Holders.
------------------
The Holders of not less than a majority in principal amount of the
Outstanding Securities shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) the Trustee need not take any action which might involve it in
personal liability or be unjustly prejudicial to the Holders not
consenting.
SECTION 513. Waiver of Past Defaults.
-----------------------
Subject to Section 502, the Holders of not less than a majority in
principal amount of the Outstanding Securities may on behalf of the Holders of
all the Securities waive any past Default hereunder and its consequences, except
a Default
<PAGE>
67
(1) in respect of the payment of the principal of (or premium, if
any, on) or interest on any Security, or
(2) in respect of a covenant or provision hereof which under Article
Nine may not be modified or amended without the consent of the Holder of
each Outstanding Security affected.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
SECTION 514. Waiver of Stay or Extension Laws.
--------------------------------
The Trust covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Trust (to the extent that it may lawfully
do so) hereby expressly waives all benefit or advantage of any such law and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law had been enacted.
SECTION 515. Undertaking for Costs.
---------------------
All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for any enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in such suit, having due regard to the
merits and good faith of the claims or defenses made by such litigant party; but
the provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder or group of Holders holding in the
aggregate more than 25% in aggregate principal amount of the Outstanding
Securities, or to any suit instituted by any Holder for enforcement of the
payment of principal of (or premium, if any, on) or interest on any Security on
or after the respective Stated Maturities expressed in such Security (or, in the
case of redemption, on or after the Redemption Date).
SECTION 516. Nonrecourse Against the Trust or its Subsidiaries.
<PAGE>
68
The Securities are nonrecourse obligations of the Trust, and the sole
recourse for collection of principal, premium, if any, and interest on the
Securities will be against the Pledged Bank Stock and the other Collateral. The
Trust's obligations under the Securities are not guaranteed directly or
indirectly by the Trust or any of its subsidiaries, and the Trust is not liable
in any respect (except to the extent of its interest in the Pledged Bank Stock
and the other Collateral) for the payment of any obligation due under the
Securities.
ARTICLE SIX
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities.
-----------------------------------
(a) Except during the continuance of a Default or an Event of Default,
(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture, and no implied covenants
or obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith or willful misconduct on its part, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions, the
Trustee shall be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture, but not to verify
the contents thereof.
(b) In case a Default or an Event of Default has occurred and is
continuing of which a Responsible Officer of the Trustee has actual knowledge or
of which written notice of such Default or Event of Default shall have been
given to the Trustee by the Trust, any other obligor of the Securities or by any
Holder, the Trustee shall exercise such of the rights and powers vested in it by
this Indenture, and use the same degree of care and skill in their exercise, as
a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
------
(1) this paragraph (c) shall not be construed to limit the effect of
paragraph (a) of this Section;
<PAGE>
69
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction
of the Holders of a majority in aggregate principal amount of the
Outstanding Securities relating to the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred upon the Trustee, under this Indenture; and
(4) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any
of its rights or powers, if it shall have reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section 601.
SECTION 602. Notice of Defaults.
------------------
Within 90 days after the occurrence of any Default hereunder, the
Trustee shall transmit in the manner and to the extent provided in TIA Section
313(c), notice of such Default hereunder known to the Trustee, unless such
Default shall have been cured or waived; provided, however, that, except in the
case of a Default in the payment of the principal of (or premium, if any, on) or
interest on any Security, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interests of the
Holders; and provided further that in the case of any Default of the character
specified in Section 501(iv) no such notice to Holders shall be given until at
least 30 days after the occurrence thereof.
SECTION 603. Certain Rights of Trustee.
-------------------------
Subject to the provisions of TIA Sections 315(a) through 315(d), which
are incorporated herein by reference:
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report,
<PAGE>
70
notice, request, direction, consent, order, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or
parties;
(2) any request or direction of the Trust mentioned herein shall be
sufficiently evidenced by a Trust Request or Trust Order and any resolution
of the Board of Trustees may be sufficiently evidenced by a Board
Resolution;
(3) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(4) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(5) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(6) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the Trust,
personally or by agent or attorney;
(7) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder;
(8) the Trustee shall not be liable for any action taken, suffered or
omitted by it in good faith and believed by it to be authorized or within
the discretion or rights or powers conferred upon it by this Indenture;
<PAGE>
71
(9) the Trustee shall not be required to give any bond or surety in
respect of the performance of its powers and duties hereunder;
(10) the permissive rights of the Trustee to do things enumerated in
this Indenture shall not be construed as a duty; and
(11) except for a default under Section 501(i) or (ii) hereof, or any
other event of which the Trustee has "actual knowledge" and which event,
with the giving of notice or the passage of time or both, would constitute
an Event of Default under this Indenture, the Trustee shall not be deemed
to have notice of any Default or Event of Default unless specifically
notified in writing of such event by the Trust or the Holders of not less
than 25% in aggregate principal amount of the Securities then outstanding;
as used herein, the term "actual knowledge" means the actual fact or
statement of knowing, without any duty to make any investigation with
regard thereto.
The Trustee shall not be required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers if it shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
SECTION 604. Trustee Not Responsible for Recitals or Issuance of
---------------------------------------------------
Securities.
- ----------
The recitals contained herein and in the Securities, except for the
Trustee's certificates of authentication, shall be taken as the statements of
the Trust, and the Trustee assumes no responsibility for their correctness. The
Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Securities, except that the Trustee represents that it is
duly authorized to execute and deliver this Indenture, authenticate the
Securities and perform its obligations hereunder and that the statements made by
it in a Statement of Eligibility and Qualification of Form T-1 supplied to the
Trust are true and accurate, subject to the qualifications set forth therein.
The Trustee shall not be accountable for the use or application by the Trust of
Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
-------------------
The Trustee, any Paying Agent, any Security Registrar or any other
agent of the Trust or of the Trustee, in its individual or any other capacity,
may become the owner or pledgee of Securities and, subject to TIA Sections
310(b) and 311, may otherwise deal with the Trust with the same rights it would
have if it were not Trustee, Paying Agent, Security Registrar or such other
agent.
<PAGE>
72
SECTION 606. Money Held in Trust.
-------------------
All money received by the Trustee shall, until used or applied as
herein provided, be held in trust hereunder for the purposes for which they were
received. Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Trust.
SECTION 607. Compensation and Reimbursement.
------------------------------
The Trust agrees:
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability, damage, claim or expense, including taxes (other than
taxes based on the income of the Trustee) incurred without negligence or
bad faith on its part, arising out of or in connection with the acceptance
or administration of this trust, including the costs and expenses of
defending itself against any claim or liability in connection with the
exercise or performance of any of its powers or duties hereunder. The
Trustee shall notify the Trust promptly of any action, suit or proceeding
for which it may seek indemnity. The Trust shall defend such action, suit
or proceeding and the Trustee may have separate counsel. If the Trust has
failed to assume the defense and employ counsel, or if the named parties to
any such action, suit or proceeding (including any impleaded parties)
include both the Trustee and the Trust, and the Trustee shall have been
advised by its counsel that representation of the Trustee and the Trust by
the same counsel would be inappropriate under applicable standards of
professional conduct due to actual or potential differing interests between
them, the Trust shall pay the reasonable fees and expenses of one separate
counsel to the Trustee. The Trust need not pay for any settlement made
without its consent which shall not be unreasonably withheld.
The obligations of the Trust under this Section to compensate the
Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and
<PAGE>
73
hold harmless the Trustee shall constitute additional indebtedness hereunder and
shall survive the satisfaction and discharge of this Indenture. As security for
the performance of such obligations of the Trust, the Trustee shall have a claim
prior to the Securities upon all property and funds held or collected by the
Trustee as such, except funds held in trust for the payment of principal of (and
premium, if any, on) or interest on particular Securities.
The provisions of this Section 607 shall survive the termination of
this Indenture.
SECTION 608. Corporate Trustee Required; Eligibility.
---------------------------------------
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined
capital and surplus of at least $50,000,000. If the Trustee does not have an
office in The City of New York, the Trustee may appoint an agent in The City of
New York reasonably acceptable to the Trust to conduct any activities which the
Trustee may be required under this Indenture to conduct in The City of New York.
If such corporation publishes reports of condition at least annually, pursuant
to law or to the requirements of federal, state, territorial or District of
Columbia supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article Six.
SECTION 609. Resignation and Removal; Appointment of Successor.
-------------------------------------------------
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 610.
(b) The Trustee may resign at any time by giving written notice
thereof to the Trust. Upon receiving such notice of resignation, the Trust
shall promptly appoint a successor trustee by written instrument executed by
authority of the Board of Trustees, a copy of which shall be delivered to the
resigning Trustee and a copy to the successor trustee. If the instrument of
acceptance by a successor Trustee required by Section 610 shall not have been
delivered to the Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee with respect to the
Securities.
(c) The Trustee may be removed at any time with respect to the
Securities by Act of the Holders of not less than a majority in principal amount
of the Outstanding Securities, delivered to the Trustee and to the Trust. If the
instrument of acceptance by a
<PAGE>
74
successor Trustee required by Section 610 shall not have been delivered to the
Trustee within 30 days after the giving of such notice of removal, the Trustee
being removed may petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Securities.
(d) If the Trustee has or shall acquire any conflicting interest
within the meaning of Section 310(b) of the TIA, then
(i) within 90 days after ascertaining that it has such conflicting
interest, and if the Default to which such conflicting interest relates has
not been cured or duly waived or otherwise eliminated before the end of
such 90-day period, the Trustee shall either eliminate such conflicting
interest or, except as otherwise provided in Section 310(b) of the TIA,
resign, and the Trust shall take prompt steps to have a successor appointed
in the manner provided in this Indenture, and
(ii) in the event that the Trustee shall fail to comply with clause
(i) of this Subsection (d), the Trustee shall, within 10 days after the
expiration of such 90-day period, transmit notice of such failure to the
Holders in the manner provided in the TIA.
(e) If at any time:
(1) the Trustee shall fail to comply with the provisions of TIA
Section 310(b) after written request therefor by the Trust or by any Holder
who has been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 608 and shall
fail to resign after written request therefor by the Trust or by any Holder
who has been a bona fide Holder of a Security for at least six months, or
(3) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Trust, by a Board Resolution, may remove the
Trustee, or (ii) subject to Section 515, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(f) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause with
respect to the Securities, the
<PAGE>
75
Trust, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee with respect to the Securities
shall be appointed by Act of the Holders of a majority in principal amount of
the Outstanding Securities delivered to the Trust and the retiring Trustee, the
successor Trustee so appointed shall, forthwith upon its acceptance of such
appointment, become the successor Trustee with respect to the Securities and
supersede the successor Trustee appointed by the Trust. If no successor Trustee
shall have been so appointed by the Trust or the Holders and accepted
appointment in the manner hereinafter provided, any Holder who has been a bona
fide Holder of a Security for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee.
(g) The Trust shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee to the Holders of
Securities in the manner provided for in Section 107. Each notice shall include
the name of the successor Trustee with respect to the Securities and the address
of its Corporate Trust Office.
SECTION 610. Acceptance of Appointment by Successor.
--------------------------------------
(a) Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Trust and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on request of the Trust
or the successor Trustee, such retiring Trustee shall, upon payment of its
charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder.
(b) Upon request of any such successor Trustee, the Trust shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts.
(c) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and eligible
under this Article Six.
SECTION 611. Merger, Conversion, Consolidation or Succession to
--------------------------------------------------
Business.
- --------
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under
<PAGE>
76
this Article Six, without the execution or filing of any paper or any further
act on the part of any of the parties hereto. In case any Securities shall have
been authenticated, but not delivered, by the Trustee then in office, any
successor by merger, conversion or consolidation to such authenticating Trustee
may adopt such authentication and deliver the Securities so authenticated with
the same effect as if such successor Trustee had itself authenticated such
Securities; and in case at that time any of the Securities shall not have been
authenticated, any successor Trustee may authenticate such Securities either in
the name of any predecessor hereunder or in the name of the successor Trustee;
and in all such cases such certificates shall have the full force which it is
anywhere in the Securities or in this Indenture provided that the certificate of
the Trustee shall have; provided, however, that the right to adopt the
certificate of authentication of any predecessor Trustee or to authenticate
Securities in the name of any predecessor Trustee shall apply only to its
successor or successors by merger, conversion or consolidation.
SECTION 612. Appointment of Authenticating Agent.
-----------------------------------
At any time when any of the Securities remain Outstanding, the Trustee
may appoint an Authenticating Agent or Agents with respect to the Securities
which shall be authorized to act on behalf of the Trustee to authenticate
Securities and the Trustee shall give written notice of such appointment to all
Holders of Securities, in the manner provided for in Section 107. Securities so
authenticated shall be entitled to the benefits of this Indenture and shall be
valid and obligatory for all purposes as if authenticated by the Trustee
hereunder. Any such appointment shall be evidenced by an instrument in writing
signed by a Responsible Officer of the Trustee, and a copy of such instrument
shall be promptly furnished to the Trust. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Trust and shall at all times be a corporation organized and
doing business under the laws of the United States of America, any state thereof
or the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $50,000,000 and
subject to supervision or examination by federal or state authority. If such
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of said supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such corporation
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time an Authenticating Agent
shall cease to be eligible in accordance with the provisions of this Section
612, it shall resign immediately in the manner and with the effect specified in
this Section 612.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any
<PAGE>
77
corporation succeeding to the corporate agency or corporate trust business of an
Authenticating Agent, shall continue to be an Authenticating Agent, provided
such corporation shall be otherwise eligible under this Section 612, without the
execution or filing of any paper or any further act on the part of the Trustee
or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Trust. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Trust. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 612, the Trustee may appoint a successor
Authenticating Agent which shall be acceptable to the Trust and shall give
written notice of such appointment to all Holders of Securities, in the manner
provided for in Section 107. Any successor Authenticating Agent upon acceptance
of its appointment hereunder shall become vested with all the rights, powers and
duties of its predecessor hereunder, with like effect as if originally named as
an Authenticating Agent. No successor Authenticating Agent shall be appointed
unless eligible under the provisions of this Section.
The Trust agrees to pay to each Authenticating Agent from time to time
such compensation for its services under this Section as shall be agreed in
writing between the Trust and such Authenticating Agent.
If an appointment is made pursuant to this Section, the Securities may
have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternate certificate of authentication in the following
form:
<PAGE>
78
This is one of the Securities designated therein referred to in the
within-mentioned Indenture.
_______________________________,
as Trustee
By: __________________________
as Authenticating Agent
By: __________________________
Authorized Officer
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND TRUST
SECTION 701. Disclosure of Names and Addresses of Holders.
--------------------------------------------
Every Holder of Securities, by receiving and holding the same, agrees
with the Trust and the Trustee that none of the Trust or the Trustee or any
agent of either of them shall be held accountable by reason of the disclosure of
any information as to the names and addresses of the Holders in accordance with
TIA Section 312, regardless of the source from which such information was
derived, and that the Trustee shall not be held accountable by reason of mailing
any material pursuant to a request made under TIA Section 312(b).
SECTION 702. Reports by Trustee.
------------------
Within 60 days after May 15 of each year commencing with the first May
15 after the first issuance of Securities, the Trustee shall transmit to the
Holders, in the manner and to the extent provided in TIA Section 313(c), a brief
report dated as of such May 15 if required by TIA Section 313(a).
The Trustee also shall transmit to the holders, in the manner and to
the extent provided by TIA Section 313(c), within the times hereinafter
specified, a brief report with respect to
(a) the release, or release and substitution, of property subject to
the Lien of this Indenture (and the consideration therefor, if any), unless
the fair value of such property, as set forth in the certificate or opinion
required by Section 1213(a)(i), is less than 10% of the principal amount of
the Securities Outstanding at the time of such release, or such release and
substitution, such report to be so transmitted within 90 days after such
time, and
<PAGE>
79
(b) the character and amount of any advances made by it as such since
the date of the last report transmitted pursuant to the provisions of the
first paragraph of this Section 702 (or, if no such report has yet been so
transmitted, since the date of execution of this Indenture), for the
reimbursement of which it claims or may claim a lien or charge, prior to
that of the Securities, on the trust estate or on property or funds held or
collected by it as Trustee, and which it has not previously reported
pursuant to this Subsection (b), if such advances remaining unpaid at any
time aggregate more than 10% of the principal amount of the Securities
Outstanding at such time, such report to be so transmitted within 90 days
of such time.
SECTION 703. Reports by the Trust.
--------------------
The Trust shall:
(1) file with the Trustee, within 15 days after the Trust is required
to file the same with the Commission, copies of the annual reports and of
the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Trust may be required to file with the
Commission pursuant to Section 13 (a) or (c) or Section 15(d) of the
Exchange Act; or, if the Trust is not required to file information,
documents or reports pursuant to either of such Sections, then it shall
file with the Trustee and the Commission, in accordance with rules and
regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may be
required pursuant to Section 13 (a) or (c) of the Exchange Act in respect
of a security listed and registered on a national securities exchange as
may be prescribed from time to time in such rules and regulations;
(2) file with the Trustee and the Commission, in accordance with rules
and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by
the Trust with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(3) transmit by mail to all Holders, in the manner and to the extent
provided in TIA Section 313(c), within 30 days after the filing thereof
with the Trustee, such summaries of any information, documents and reports
required to be filed by the Trust pursuant to paragraphs (1) and (2) of
this Section as may be required by rules and regulations prescribed from
time to time by the Commission.
<PAGE>
80
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Trust May Consolidate, Etc., Only on Certain Terms.
--------------------------------------------------
Except with respect to the Substitution as set forth under Section
1401, the Trust will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets to any other Person or Persons or permit any of its
Restricted Subsidiaries to enter into any such transaction or series of related
transactions if such transaction or series of related transactions, in the
aggregate, would result in the sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of the properties and assets of
the Trust and its Restricted Subsidiaries on a consolidated basis to any other
Person or Persons, unless at the time and immediately after giving effect
thereto:
(a) either (1) the Trust will be the continuing Person or (2) the
Person (if other than the Trust) formed by such consolidation or into which
the Trust or such Restricted Subsidiary is merged or the Person that
acquires by sale, assignment, conveyance, transfer, lease or other
disposition all or substantially all the properties and assets of the Trust
and its Restricted Subsidiaries on a consolidated basis (the "Surviving
Entity") (i) will be a corporation duly organized and validly existing
under the laws of the United States of America, any state thereof or the
District of Columbia and (ii) will expressly assume, by a supplemental
indenture in form satisfactory to the Trustee, the Trust's obligation for
the due and punctual payment of the principal of, premium, if any, and
interest on all the Securities and the performance and observance of every
covenant of the Indenture on the part of the Trust to be performed or
observed;
(b) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (and treating
any obligation of the Trust or any Restricted Subsidiary incurred in
connection with or as a result of such transaction or series of
transactions as having been incurred at the time of such transaction), no
Default or Event of Default will have occurred and be continuing; and
(c) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (and treating any obligation of the Trust
or any Restricted Subsidiary incurred in connection with or as a result of
such transaction or series of transactions as having been incurred at the
time of such transaction), the Consolidated Net Worth of the Trust (or of
the Surviving Entity if the Trust is not a continuing obligor under the
Indenture) is equal to or greater than the Consolidated Net Worth of the
Trust immediately prior to such transaction or series of transactions less
<PAGE>
81
the aggregate amount of all reasonable transaction costs incurred in
connection with such transaction or series of transactions.
The Bank will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person,
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of the properties and assets of the Bank to any other Person
or permit any of its Subsidiaries to enter into any such transaction or series
of related transactions if such transaction or series of related transactions,
in the aggregate, would result in the sale, assignment, conveyance, transfer,
lease or other disposition of all or substantially all of the properties and
assets of the Bank and its Subsidiaries on a consolidated basis to any other
Person.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Trust or the Surviving
Entity shall deliver to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, sale, assignment, conveyance,
transfer, lease or other disposition, and if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
complies with the requirements of this Section 801 and that all conditions
precedent therein provided for relating to such transaction have been complied
with.
SECTION 802. Successor Substituted.
---------------------
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of the Trust in accordance with Section 801 in which the Trust is not the
continuing obligor under the Indenture, the Surviving Entity shall succeed to,
and be substituted for, and may exercise every right and power of, the Trust
under the Indenture with the same effect as if such successor had been named as
the Trust therein. When a successor assumes all the obligations of its
predecessor under this Indenture and the Securities, the predecessor shall be
released from those obligations; provided that in the case of a transfer by
lease, the predecessor shall not be released from the payment of principal and
interest on the Securities.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.
--------------------------------------------------
Without the consent of any Holders, the Trust, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more
<PAGE>
82
indentures supplemental hereto, in form satisfactory to the Trustee, for any of
the following purposes:
(1) to evidence the succession of another Person to the Trust or any
other obligor under the Securities and the assumption by any such successor
of the covenants of the Trust contained herein and in the Securities in
accordance with the provisions of Article Eight; or
(2) to evidence the substitution of the New Obligor, and the
assumption by the New Obligor of the obligations of the Trust in this
Indenture and the Securities in accordance with Article Fourteen; or
(3) to add to the covenants of the Trust or any other obligor upon
the Securities for the benefit of the Holders or to surrender any right or
power herein conferred upon the Trust or any other obligor upon the
Securities; or
(4) to add any additional Events of Default; or
(5) to cure any ambiguity, to correct or supplement any provision
herein or in the Securities which may be defective or inconsistent with any
other provision herein or in the Securities, or to make any other
provisions with respect to matters or questions arising under this
Indenture or the Securities; provided that, in each case, such provisions
shall not adversely affect in any material respect the interests of the
Holders; or
(6) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act or any similar federal statute hereafter enacted; or
(7) to secure further the Securities or add a guarantor of the Notes
under this Indenture; or
(8) to evidence and provide for the acceptance of the appointment of
a successor Trustee under this Indenture; or
(9) to mortgage, pledge, hypothecate or grant a security interest in
favor of the Trustee for the benefit of the Holders as additional security
for the payment and performance of the Trust's obligations under this
Indenture, in any property or assets, including any of which are required
to be mortgaged, pledged or hypothecated, or in which a security interest
is required to be granted, to the Trustee pursuant to this Indenture or
otherwise.
<PAGE>
83
SECTION 902. Supplemental Indentures with Consent of Holders.
-----------------------------------------------
With the consent of the Holders of a majority in aggregate principal
amount of the Outstanding Securities, by Act of said Holders delivered to the
Trust and the Trustee, the Trust, when authorized by a Board Resolution, and the
Trustee may enter into an indenture or indentures supplemental hereto for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Indenture or of modifying in any manner the rights of
the Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Security
affected thereby:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof or change the coin or currency in which any Security or
any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date); or
(2) amend, change or modify any of the provisions of Section 1021
including any definitions relating thereto, in a manner adverse to the
Holders; or
(3) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences provided for in this Indenture;
or
(4) modify any of the provisions of this Section 902, Sections 513,
1020 or 1214(a), (b) or (d), except to increase the percentage of
Outstanding Securities required for such action or to provide that certain
other provisions of this Indenture may not be modified or waived without
the consent of the Holder of each Outstanding Security affected thereby; or
(5) except as otherwise permitted under the provisions of Article
Eight and Article Fourteen, consent to the assignment or transfer by the
Trust of any of its rights and obligations under this Indenture; or
(6) make any change in any of the provisions of this Indenture
relating to the Collateral that adversely affects the Holders; or
(7) waive a default in payment with respect to any Security (other
than a rescission of acceleration of the Securities by the Holders of at
least a majority in
<PAGE>
84
aggregate principal amount of the Outstanding Securities as provided herein
and a waiver of the payment default that resulted from such acceleration);
provided, however, that a majority in aggregate principal amount of
Outstanding Securities may amend the provisions of Section 801 to permit the
Bank to merge or consolidate with another Person for the sole purpose of
obtaining a charter as a commercial bank or a state chartered thrift, so long as
such merger or consolidation does not adversely affect the rights of the Holders
of the Securities.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
------------------------------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and shall be fully protected in relying upon, an Opinion of Counsel stating that
the execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture under this Article
Nine, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes; and
every Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
-----------------------------------
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. Reference in Securities to Supplemental Indentures.
--------------------------------------------------
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article Nine may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Trust shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Trust, to any such supplemental indenture may be prepared and
<PAGE>
85
executed by the Trust and authenticated and delivered by the Trustee in exchange
for Outstanding Securities.
SECTION 907. Notice of Supplemental Indentures.
---------------------------------
Promptly after the execution by the Trust and the Trustee of any
supplemental indenture pursuant to the provisions of Section 902, the Trust
shall give notice thereof to the Holders of each Outstanding Security affected,
in the manner provided for in Section 107, setting forth in general terms the
substance of such supplemental indenture.
SECTION 908. Payment for Consent.
-------------------
Neither the Trust, any Affiliate of the Trust nor any of its
Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Securities unless such consideration is
offered to be paid or agreed to be paid to all Holders which so consent, waive
or agree to amend in the time frame set forth in solicitation documents relating
to such consent, waiver or amendment.
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if Any, Interest.
-----------------------------------------------
The Trust covenants and agrees for the benefit of the Holders that it
will duly and punctually pay the principal of (and premium, if any, on) and
interest on the Securities in accordance with the terms of the Securities and
this Indenture.
SECTION 1002. Maintenance of Office or Agency.
-------------------------------
The Trust will maintain in The City of New York, an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Trust in respect of the Securities and this Indenture
may be served. The Corporate Trust Office of the Trustee shall be such office
or agency of the Trust, unless the Trust shall designate and maintain some other
office or agency for one or more of such purposes. The Trust will give prompt
written notice to the Trustee of any change in the location of any such office
or agency. If at any time the Trust shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Trust
<PAGE>
86
hereby appoints the Trustee as its agent to receive all such presentations,
surrenders, notices and demands.
The Trust may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Securities
may be presented or surrendered for any or all such purposes and may from time
to time rescind any such designation; provided, however, that no such
designation or rescission shall in any manner relieve the Trust of its
obligation to maintain an office or agency in The City of New York for such
purposes. The Trust will give prompt written notice to the Trustee of any such
designation or rescission and any change in the location of any such other
office or agency.
SECTION 1003. Money for Security Payments to Be Held in Trust.
-----------------------------------------------
If the Trust shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (and premium, if any, on) or
interest on any of the Securities, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal (and
premium, if any) or interest so becoming due until such sums shall be paid to
such Persons or otherwise disposed of as herein provided and will promptly
notify the Trustee of its action or failure so to act.
Whenever the Trust shall have one or more Paying Agents for the
Securities, it will, on or before each due date of the principal of (and
premium, if any, on), or interest on, any Securities, deposit with a Paying
Agent a sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Trust will promptly notify the Trustee of such action or any
failure so to act.
The Trust will cause each Paying Agent (other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of (and
premium, if any, on) or interest on Securities in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such Persons
or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Trust (or any other
obligor upon the Securities) in the making of any payment of principal (and
premium, if any) or interest; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
<PAGE>
87
The Trust may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Trust Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Trust or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Trust or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Trust, in trust for the payment of the principal of (and premium, if any,
on) or interest on any Security and remaining unclaimed for two years after such
principal (and premium, if any) or interest has become due and payable shall be
paid to the Trust on Trust Request, or (if then held by the Trust) shall be
discharged from such trust; and the Holder of such Security shall thereafter, as
an unsecured general creditor, look only to the Trust for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Trust as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Trust cause to be
published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in the Borough of
Manhattan, The City of New York, notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Trust.
SECTION 1004. Existence.
---------
Subject to Article Eight, the Trust will do or cause to be done all
things necessary to preserve and keep in full force and effect the existence,
rights (charter and statutory) and franchises of the Trust and each Restricted
Subsidiary; provided, however, that, subject to the provisions of this
Indenture, the Trust shall not be required to preserve any such right or
franchise, or the existence of any Restricted Subsidiary (other than the Bank
and the Pledged Subsidiary), if the Board of Trustees shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Trust and its Subsidiaries as a whole and that the loss thereof is not
disadvantageous in any material respect to the Holders.
SECTION 1005. Payment of Taxes and Other Claims.
---------------------------------
The Trust will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all taxes, assessments and
governmental charges levied or imposed upon the Trust or any Subsidiary or upon
the income, profits or property of the Trust or any Subsidiary and (b) all
lawful claims for labor, materials and supplies, which, if unpaid, might by law
become a lien upon the property of the Trust or any Subsidiary; provided,
however, that the Trust shall not be required to pay or discharge or cause to be
paid or
<PAGE>
88
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings.
SECTION 1006. Maintenance of Properties.
-------------------------
The Trust will cause all properties owned by the Trust or any
Restricted Subsidiary or used or held for use in the conduct of its business or
the business of any Restricted Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Trust may be
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section 1006 shall prevent the Trust from discontinuing the
maintenance of any of such properties if such discontinuance is, in the judgment
of the Trust, desirable in the conduct of its business or the business of any
Restricted Subsidiary and not disadvantageous in any material respect to the
Holders.
SECTION 1007. Insurance.
---------
The Trust will at all times keep all of its and its Subsidiaries'
properties which are of an insurable nature insured with insurers, believed by
the Trust to be responsible, against loss or damage to the extent that property
of similar character is usually so insured by corporations similarly situated
and owning like properties.
SECTION 1008. Statement by Officers As to Default.
-----------------------------------
(a) The Trust will deliver to the Trustee, within 30 days after the
end of each fiscal quarter, a brief certificate from the principal executive
officer, principal financial officer or principal accounting officer as to his
or her knowledge of the Trust's compliance with all conditions and covenants
under this Indenture. For purposes of this Section 1008(a), such compliance
shall be determined without regard to any period of grace or requirement of
notice under this Indenture.
(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of the Trust or any Subsidiary gives any notice or takes any other
action with respect to a claimed default by the Trust or any Subsidiary in the
payment of an amount aggregating in excess of $10,000,000, the Trust shall
deliver to the Trustee by registered or certified mail, by courier or by
telegram, telex or facsimile transmission an officers' certificate specifying
such Default, notice or other action within five Business Days of its
occurrence.
<PAGE>
89
SECTION 1009. Provision of Financial Statements.
---------------------------------
(a) The Trust will file on a timely basis with the Commission, to the
extent such filings are accepted by the Commission, the annual, quarterly and
other reports and other documents required by Section 13(a), 13(c) or 15(d) of
the Exchange Act regardless of whether such Sections of the Exchange Act are
applicable to the Trust. The Trust also will (i) file with the Trustee, and
provide to each Holder of Securities upon request, copies of such reports and
documents within 15 days after the date on which the Trust files such reports
and documents with the Commission or the date on which the Trust would be
required to file such reports and documents if the Trust were so required and
(ii) if filing such reports and documents with the Commission is not accepted by
the Commission or is prohibited under the Exchange Act, to supply copies of such
reports and documents to any prospective holder of Securities promptly upon
request and at the Trust's cost.
(b) The Trust will provide to each Holder of Securities and any
prospective holder of Securities, promptly upon request, and at the Trust's
cost, copies of the consolidated financial statements of the Bank and its
subsidiaries on an annual and quarterly basis (audited in the case of such
annual statements).
SECTION 1010. Limitation on Indebtedness.
--------------------------
(a) The Trust will not create, issue, assume, guarantee or otherwise
in any other manner become directly or indirectly liable for the payment of, or
otherwise incur (collectively, "incur") any Indebtedness (including any Acquired
Indebtedness), other than Permitted Indebtedness, unless at the time of such
incurrence the Trust's Operating Cash Flow Coverage Ratio for the four full
fiscal quarters immediately preceding the incurrence of such Indebtedness, taken
as one period and after giving pro forma effect to (i) the incurrence of such
Indebtedness (and all other Indebtedness incurred since the end of the most
recently completed fiscal quarter of the Trust preceding the date of
determination) and (if applicable) the application of the net proceeds therefrom
(and from any such other Indebtedness), including to refinance other
Indebtedness, as if such Indebtedness (and any such other Indebtedness) had been
incurred on the first day of such four-quarter period and (ii) the acquisition
(whether by purchase, merger or otherwise) or disposition (whether by sale,
merger or otherwise) of any company, entity or business acquired or disposed of
by the Trust or its Restricted Subsidiaries, as the case may be, since the first
day of such four quarter period, as if such acquisition or disposition occurred
on the first day of such four quarter period, would have been greater than or
equal to (x) 2.0 to 1.0 prior to April 1, 1999, (y) 2.25 to 1.0 on and after
April 1, 1999 and prior to April 1, 2000 and (z) 2.50 to 1.0 thereafter.
(b) The Trust will not permit any of its Restricted Subsidiaries
(other than the Bank and its Subsidiaries) to incur any Indebtedness (including
any Acquired Indebtedness), other than Permitted Subsidiary Indebtedness.
<PAGE>
90
SECTION 1011. Limitation on Restricted Payments.
---------------------------------
(a) The Trust will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, take any of the following actions:
(i) declare or pay any dividend on, or make any distribution
to holders of, any shares of the Capital Stock of the Trust (other than
dividends or distributions payable solely in shares of the Qualified
Capital Stock of the Trust or in options, warrants or other rights to
acquire such shares of Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Capital Stock of the Trust or any direct or
indirect parent of the Trust or any options, warrants or other rights to
acquire such Capital Stock;
(iii) declare or pay any dividend on, or make any distribution
to holders of, any Capital Stock of any Restricted Subsidiary (other than
with respect to (A) any such Capital Stock held by the Trust or any of its
Wholly Owned Restricted Subsidiaries, (B) any such Capital Stock of the
Bank or any of its Subsidiaries or (C) to all holders of such Capital Stock
of any Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary on a pro rata basis or, with respect to such dividend or
distribution to the Trust or a Wholly Owned Restricted Subsidiary, on a
more advantageous basis) or purchase, redeem or otherwise acquire or retire
for value, any Capital Stock of any Subsidiary of the Trust (other than (A)
any such Capital Stock of any Wholly Owned Restricted Subsidiary, (B) any
Capital Stock held by the Bank or its Subsidiaries of any of their
Subsidiaries or (C) any Capital Stock of any Securitization Entity that is
a Subsidiary of the Bank);
(iv) make any principal payment on or repurchase, redeem,
defease or otherwise acquire or retire for value, prior to any scheduled
principal payment, scheduled sinking fund payment or maturity, any
Subordinated Indebtedness;
(v) incur, create or assume any guarantee of Indebtedness of
any Affiliate of the Trust (other than with respect to (A) guarantees of
Indebtedness of any Wholly Owned Restricted Subsidiaries of the Trust by
the Trust or by any Restricted Subsidiary (other than the Bank or any of
its Subsidiaries), (B) guarantees of Indebtedness of the Bank or any of its
Subsidiaries by another Subsidiary of the Bank or any guarantee by the Bank
of Indebtedness of its Subsidiaries), (C) guarantees of Indebtedness of the
Trust by any Restricted Subsidiary (other than the Bank and its
Subsidiaries) or (D) guarantees of Indebtedness of the Bank or its
Subsidiaries by any Affiliate of the Trust); or
(vi) make any Investment in any Person
<PAGE>
91
(each of the foregoing actions described in (but not excluded from) clauses (i)
through (vi), other than any such action that is a Permitted Payment (as defined
below), is referred to herein as a "Restricted Payment"), provided that such
Restricted Payments may be made by the Trust or any Restricted Subsidiary (other
than the Bank and its Subsidiaries) if, after giving effect to the proposed
Restricted Payment (the amount of any such Restricted Payment, if other than
cash, as determined in good faith by the Board of Trustees of the Trust, whose
determination shall be conclusive and evidenced by a Board Resolution), (1) no
Default or Event of Default shall have occurred and be continuing and (2) the
aggregate amount of all such Restricted Payments declared or made after the date
of the Indenture shall not exceed the sum (without duplication) of:
(A) 50% of the aggregate Consolidated Net Income (Loss) of the Trust
accrued on a cumulative basis during the period beginning on October 1,
1997 and ending on the last day of the Trust's last fiscal quarter ending
prior to the Interest Payment Date immediately preceding the date of such
proposed Restricted Payment (or, if such Consolidated Net Income (Loss)
shall be a loss, minus 100% of such loss);
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of shares of Qualified Capital Stock of the Trust or
warrants, options or rights to purchase such shares of Qualified Capital
Stock of the Trust;
(C) the aggregate net cash proceeds received after the date of the
Indenture by the Trust as capital contributions;
(D) the aggregate net cash proceeds received after the date of the
Indenture by the Trust (other than from any of its Subsidiaries) upon the
exercise of options, warrants or rights to purchase shares of Qualified
Capital Stock of the Trust;
(E) the aggregate net cash proceeds received after the date of the
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of debt securities that have been converted into or exchanged
for Qualified Capital Stock of the Trust, together with the aggregate net
cash proceeds received by the Trust at the time of such conversion or
exchange; and
(F) $20,000,000;
provided that the provisions of paragraph (a) will not restrict the payment of
any dividend within 60 days after the date of declaration thereof if, at such
date of declaration, such declaration and payment were permitted by the
provisions of paragraph (a).
(b) Notwithstanding paragraph (a) above, the Trust and its Restricted
Subsidiaries may take the following actions (each a "Permitted Payment") so long
as (other
<PAGE>
92
than with respect to (1) clause (v) below to the extent such exchange is
required by the OTS and (2) clause (ix) below with respect to the Investment of
funds by the Bank and its subsidiaries in the normal course of business) no
Default or Event of Default shall have occurred and be continuing:
(i) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Trust, in exchange for, or out
of the net cash proceeds of, a substantially concurrent issuance and sale
(other than to any of its Subsidiaries) of, shares of Qualified Capital
Stock of the Trust;
(ii) (A) the repurchase, redemption, defeasance or other acquisition
or retirement for value by the Bank of the 13% Preferred Stock or the
Series B Preferred Stock, in exchange for, or out of the net cash proceeds
of, a substantially concurrent issuance and sale (other than to a
Subsidiary of the Trust) of, shares of Qualified Capital Stock of the Bank
or out of the net cash proceeds of a substantially concurrent incurrence
(other than to a Subsidiary of the Trust) of new Indebtedness of the Bank
which has no Stated Maturity of principal (or any required repurchase,
redemption, defeasance or sinking fund payments, other than as a result of
a change of control provision similar to the Securities) on or prior to the
final Stated Maturity of principal of the Securities or (B) the acquisition
by an Affiliate of the Bank of the 13% Preferred Stock or the Series B
Preferred Stock (and the contribution thereof to the Bank for retirement
and cancellation) with the proceeds of a cash distribution from the Bank
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary of the Trust) of shares of Qualified
Capital Stock of the Bank or out of the net cash proceeds of a
substantially concurrent incurrence (other than to a Subsidiary of the
Trust) of new Indebtedness of the Bank which has no Stated Maturity of
principal (or any required repurchase, redemption, defeasance or sinking
fund payments, other than as a result of a change of control provision
similar to the Securities) on or prior to the final Stated Maturity of
principal of the Securities; provided that, after giving effect to such
issuance and sale or such incurrence and such repurchase, redemption,
defeasance or other acquisition or retirement, or such acquisition and
contribution and distribution, the Bank has (i) a leverage (core) capital
ratio equal to or in excess of 5.5%, (ii) a tier 1 risk-based capital ratio
equal to or in excess of 6.5% and (iii) a total risk-based capital ratio
equal to or in excess of 11%, as such ratios are calculated in accordance
with 12 C.F.R. Section 567 or any successor law or regulation;
(iii) the repurchase, redemption, defeasance or other acquisition or
retirement for value by the Bank or any of its Subsidiaries of Preferred
Stock of the Bank or its Subsidiaries (other than the 13% Preferred Stock
and the Series B Preferred Stock); provided that, after giving effect to
such repurchase, redemption, defeasance or other acquisition or retirement,
the Bank has (i) a leverage (core) capital ratio equal to or in excess of
5.5%, (ii) a tier 1 risk-based capital ratio equal to or in excess of 6.5%
and (iii) a total risk-based capital ratio equal to or in excess of 11%, as
such ratios are
<PAGE>
93
calculated in accordance with 12 C.F.R. Section 567 or any successor law or
regulation;
(iv) the redemption by the Bank of any of the PIK Preferred Stock;
(v) the exchange of the CCPCC Preferred Stock for the Series B
Preferred Stock;
(vi) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness (other than
Redeemable Capital Stock) in exchange for or out of the net cash proceeds
of a substantially concurrent issuance and sale (other than to a Subsidiary
of the Trust) of shares of Qualified Capital Stock of the Trust;
(vii) the repurchase of any Subordinated Indebtedness at a purchase
price not greater than 101% of the principal amount of such Subordinated
Indebtedness in the event of a Change of Control pursuant to a provision
similar to that of Section 1021; provided that prior to such repurchase the
Trust has made the Change of Control Offer as provided in Section 1021 with
respect to the Securities and has repurchased all Securities validly
tendered for payment in connection with such Change of Control Offer;
(viii) guarantees by the Trust or its Restricted Subsidiaries of
Indebtedness pursuant to the Reimbursement Agreement in an aggregate amount
not to exceed $150,000,000;
(ix) Permitted Investments;
(x) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any shares of Qualified Capital Stock of
the Bank (other than Preferred Stock) by the Bank; and
(xi) the repurchase, redemption or other acquisition or retirement
for value of Subordinated Indebtedness (other than Redeemable Capital
Stock), in exchange for, or out of the net cash proceeds of a substantially
concurrent issue and sale (other than to a Subsidiary of the Trust) of new
Subordinated Indebtedness (such a transaction, a "refinancing"); provided
that any such new Indebtedness of the Trust (A) shall be in a principal
amount that does not exceed an amount equal to the sum of (1) 101% of an
amount equal to the principal amount so refinanced less any discount from
the face amount of the Indebtedness to be refinanced expected to be
deducted from the amount payable to the holders of such Indebtedness in
connection with such refinancing, (2) the amount of any premium expected to
be paid in connection with such refinancing pursuant to the terms of the
Subordinated Indebtedness refinanced or the amount of any
<PAGE>
94
premium reasonably determined by the Trust as necessary to accomplish such
refinancing by means of a tender offer, privately negotiated repurchase or
otherwise and (3) the amount of expenses of the Trust incurred in
connection with such refinancing; provided further that for purposes of
this clause (A), the principal amount of any Indebtedness shall be deemed
to mean the principal amount thereof or, if such Indebtedness provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination; (B) (x) if such refinanced Subordinated Indebtedness has an
Average Life to Stated Maturity shorter than that of the Securities or a
final Stated Maturity earlier than the final Stated Maturity of the
Securities, such new Indebtedness shall have an Average Life to Stated
Maturity no shorter than the Average Life to Stated Maturity of such
refinanced Indebtedness and a final Stated Maturity no earlier than the
final stated Maturity of such refinanced Indebtedness or (y) in all other
cases, each Stated Maturity of principal (or any required repurchase,
redemption or sinking fund payments) of such new Indebtedness shall be on
or after the final Stated Maturity of principal of the Securities; and (C)
is (x) made expressly subordinate to the Securities to substantially the
same extent as the Subordinated Indebtedness being refinanced or (y)
expressly subordinated to such refinanced Subordinated Indebtedness.
The actions described in clauses (i), (vi) and (vii) of this paragraph (b) shall
be Restricted Payments that shall be permitted to be taken in accordance with
this paragraph (b) but shall reduce the amount that would otherwise be available
for Restricted Payments under clause (2) of paragraph (a) above to the extent,
in the case of clauses (i) and (vi), the Trust receives net cash proceeds and
applies them as described in such clauses (i) and (vi), and the actions
described in clauses (ii), (iii), (iv), (v), (viii), (ix), (x) and (xi) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (b) and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (2) of paragraph
(a).
SECTION 1012. Limitation on Issuances and Sales of Capital Stock of
-----------------------------------------------------
Restricted Subsidiaries.
- -----------------------
The Trust (i) will not permit any of its Restricted Subsidiaries
(other than the Bank and its Subsidiaries) to issue any Capital Stock (other
than to the Trust or a Wholly Owned Restricted Subsidiary of the Trust) and (ii)
other than with respect to Capital Stock of the Bank and its Subsidiaries, will
not permit any Person (other than the Trust, a Wholly Owned Restricted
Subsidiary of the Trust or the Bank and its Subsidiaries) to own any Capital
Stock of any of its Restricted Subsidiaries; provided, however, that this
Section 1012 shall not prohibit (1) the issuance and sale of all, but not less
than all, of the issued and outstanding Capital Stock of any Restricted
Subsidiary owned by the Trust or any of its Restricted Subsidiaries in
compliance with the other provisions of the Indenture, (2) the ownership by
directors of director's qualifying shares or the ownership by foreign nationals
of Capital Stock of any Restricted Subsidiary, to the extent mandated by
applicable law or (3) the ownership by
<PAGE>
95
any Person of any Capital Stock of any Restricted Subsidiary of the Trust that
is not a Wholly Owned Restricted Subsidiary on the date of the Indenture;
provided further, however, that the Bank will not, and will not permit any
Subsidiary of the Bank to, create any class of common stock if such class of
common stock provides for, or entitles any holder thereof to, the payment of
dividends or distributions of any kind on any basis other than on a pro rata
basis, consistent with the ownership interests of all the holders of the common
stock of the Bank or such Subsidiary, to the holders of all classes of common
stock of the Bank or such Subsidiary, as the case may be.
SECTION 1013. Limitation on Dividends from the Bank and Its
---------------------------------------------
Subsidiaries.
- ------------
Notwithstanding anything to the contrary contained herein, neither the
Bank nor any of its Subsidiaries will make any distribution on or with respect
to their respective shares of Capital Stock representing a return of capital to
the holder thereof; provided, however, this provision shall not prohibit (1) any
such distribution from a Wholly Owned Subsidiary of the Bank to the Bank or
another Wholly Owned Subsidiary of the Bank or (2) any such distribution by the
Bank or a Subsidiary of the Bank that is not a Wholly Owned Subsidiary of the
Bank (x) to a Person that is not an Affiliate of the Bank and (y) to a Person
that is an Affiliate of the Bank on a pro rata basis or a less advantageous
basis; provided that this clause (2) shall not prohibit a transaction otherwise
permitted pursuant to clause (b)(x) of Section 1011.
SECTION 1014. Limitation on Transactions with Affiliates.
------------------------------------------
(a) The Trust will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate of the
Trust (except that the Bank and any of its Subsidiaries may enter into any
transaction or series of related transactions with any Subsidiary of the Bank,
and the Trust and any Wholly Owned Restricted Subsidiary of the Trust may enter
into any transaction or series of related transactions with any other Wholly
Owned Restricted Subsidiary of the Trust without limitation under this covenant)
unless (1) such transaction or series of related transactions is in writing on
terms that are no less favorable to the Trust or such Restricted Subsidiary, as
the case may be, than would be available in a comparable transaction in an
arm's-length dealing with a Person that is not such an Affiliate or, in the
absence of such a comparable transaction, on terms that in good faith would be
offered to a Person that is not an Affiliate, (2) with respect to any
transaction or series of related transactions in which the Trust and its
Restricted Subsidiaries will receive or render value or incur obligations or
make aggregate payments in excess of $5,000,000, the Trust delivers an Officers'
Certificate to the Trustee certifying that such transaction or series of related
transactions complies with clause (1) above and such transaction or series of
related transactions has been approved by a majority of the Disinterested
Trustees of the Board of Trustees of the Trust and (3) with respect to any
transaction or series of related transactions in which the Trust and its
Restricted Subsidiaries will receive or render value or incur obligations or
make aggregate payments in excess of
<PAGE>
96
$20,000,000, or in the event no members of the Board of Trustees of the Trust
are Disinterested Trustees with respect to any transaction or series of related
transactions included in clause (2), the Trust delivers to the Trustee a written
opinion of a nationally recognized expert with experience in appraising the
terms and conditions of the type of transaction or series of transactions for
which approval is required to the effect that the transaction or series of
transactions are fair to the Trust and its Restricted Subsidiaries from a
financial point of view; provided, however, that this covenant will not restrict
(i) residential mortgage, credit card and other consumer loans to an Affiliate
who is an officer, director or employee of the Trust or any of its Subsidiaries,
(ii) any transaction or series of related transactions in which the total amount
involved does not exceed $100,000, (iii) payment of legal expenses incurred on
behalf of the Trust or its Subsidiaries; provided, however, that such expenses
paid by the Bank and its Subsidiaries for or on behalf of the Trust or any other
Restricted Subsidiary (other than a Subsidiary of the Bank) shall not exceed
$500,000 in any fiscal year, (iv) payment of construction and development fees
incurred on behalf of the Trust or its Restricted Subsidiaries in an aggregate
amount not to exceed $1,000,000 in any fiscal year, after adjustment for annual
increases in the consumer price index, as reported by the United States
Department of Labor, Bureau of Labor Statistics, (v) payment of financing fees
of up to 1% of the aggregate principal amount of Retail Notes issued and sold
after the date of the Indenture, (vi) transactions permitted under Section 1011,
(vii) payment of up to $4,200,000 of Advisory Fees in any fiscal year, after
adjustment for annual increases in the consumer price index, as reported by the
United States Department of Labor, Bureau of Labor Statistics, (viii)
transactions entered into pursuant to Management Agreements, (ix) checking or
other deposit products and investment management and advisory services and
insurance products, in each case that the Bank and its subsidiaries customarily
offer to their respective customers in the ordinary course of business, (x)
guarantees under the Reimbursement Agreement, (xi) payments pursuant to the Tax
Sharing Agreement and (xii) payments by the Trust to the Bank pursuant to the
Capital Maintenance Agreement; provided, however, that Advisory Fees may only be
paid so long as (A) the Trust does not hire employees and (B) no Default or
Event of Default shall have occurred and be continuing.
(b) If the Bank shall fail to comply with any of its Regulatory
Capital Requirements set forth in clauses (i) and (ii)(x) of the definition
thereof, then the Trust shall not and shall not permit any of its Restricted
Subsidiaries (other than the Bank or its Subsidiaries) to, directly or
indirectly, make any payments pursuant to clauses (a)(iii), (iv) or (v) above,
any Restricted Payments otherwise permitted by clause (a)(2) of Section 1011,
any Permitted Payments, other than actions permitted by clauses (iv), (v),
(viii) and (xi) of paragraph (b) of Section 1011, or any Investments in any
Person (other than Permitted Investments permitted by clauses (i), (v), or (vii)
of the definition thereof) or otherwise engage in any activity (including
purchases, acquisition by lease and other acquisitions of additional real
property and buildings) other than operating its then existing businesses in the
ordinary course until the Bank shall have complied with such Regulatory Capital
Requirements.
<PAGE>
97
(c) The Trust will not, and will not permit any of its Restricted
Subsidiaries, to amend, modify or in any way alter the terms of the Management
Agreements, the Reimbursement Agreement or the Advisory Agreement in a manner
adverse to the interests of the Holders of the Securities, except as otherwise
permitted by the Indenture or to change the properties subject to the Management
Agreements.
SECTION 1015. Limitation on Liens.
-------------------
The Trust will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, for the benefit of any Affiliate of the Trust (other
than the Trust or a Wholly Owned Restricted Subsidiary of the Trust) create,
incur, assume or suffer to exist any Lien of any kind on or with respect to any
of its or their property or assets, including any shares of stock or
indebtedness of any Restricted Subsidiary, whether owned at the date of the
Indenture or thereafter acquired or any income, profits or proceeds therefrom,
or assign or otherwise convey any right to receive income thereon; provided,
however, that (a) the Bank may create, incur, assume or suffer to exist such
Liens for the benefit of its Subsidiaries and Subsidiaries of the Bank may
create, incur, assume or suffer to exist such Liens for the benefit of the Bank
or any other Subsidiary of the Bank and (b) the Trust may create, incur, assume
or suffer to exist such Liens in favor of the Bank as required by the OTS to
secure the payment and performance of the Trust under the Tax Sharing Agreement
to repay payments made by the Bank to the Trust; provided further that this
covenant shall not apply to bankers' and securities intermediaries' Liens
arising in the ordinary course.
SECTION 1016. Restriction on Transfer of Assets to Subsidiaries.
-------------------------------------------------
The Trust will not sell, convey, transfer or otherwise dispose of its
assets or property to any of its Subsidiaries except for (i) sales, conveyances,
transfers or other dispositions of assets or property in an amount permitted by
Section 1011 and (ii) sales, conveyances, transfers or other distributions of
Real Estate Property to Single Asset Subsidiaries.
SECTION 1017. Limitation on Asset Sales.
-------------------------
The Trust will not, and will not permit any of its Restricted
Subsidiaries (other than the Bank and its Subsidiaries) to, engage in any Asset
Sale unless (i) the consideration received by the Trust or such Restricted
Subsidiary for such Asset Sale is not less than the fair market value of the
Capital Stock or assets sold (as determined by the Board of Trustees of the
Trust, whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) the consideration received by the Trust or the relevant
Restricted Subsidiary in respect of such Asset Sale consists of (a) at least 75%
Cash Equivalents or (b) like-kind property to be used in the business of the
Trust or such Restricted Subsidiary, as the case may be.
<PAGE>
98
SECTION 1018. Limitation on Restricted Subsidiaries.
-------------------------------------
The Trust will not (i) permit any of its Single Asset Subsidiaries to
acquire additional Real Estate Property or make Investments in any other Person
other than the Trust, or (ii) create any new Restricted Subsidiaries other than
Single Asset Subsidiaries and, to the extent permitted by clause (ii) of the
definition of Permitted Investments, Wholly Owned Restricted Subsidiaries;
provided, however, that such Single Asset Subsidiaries may (A) invest current
working capital in Cash Equivalents under clauses (a), (b), (c) and (d) of the
definition thereof and (B) to the extent required by third party lenders under
any loan agreement with such Subsidiary, invest cash balances in investments
other than Cash Equivalents under clause (a), (b), (c) and (d) of the definition
thereof to the extent required by such loan agreement.
SECTION 1019. Limitation on Dividend and Other Payment Restrictions
-----------------------------------------------------
Affecting Restricted Subsidiaries.
- ---------------------------------
The Trust will not, and will not permit any of its Restricted
Subsidiaries (other than (i) the Bank and its Subsidiaries and (ii) any
Restricted Subsidiary that was a subsidiary of the Trust on or before March 30,
1994 and has not received Real Estate Property from the Trust after such date)
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any such
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on or in respect of its Capital Stock or any other interest
or participation in, or measured by, its profits, (b) pay any Indebtedness owed
to the Trust or any other Restricted Subsidiary, (c) make loans or advances to
the Trust or any other Restricted Subsidiary, (d) transfer any of its properties
or assets to the Trust or any Restricted Subsidiary or (e) guarantee any
Indebtedness of the Trust or any Restricted Subsidiary, except for such
encumbrances or restrictions existing under or by reason of (i) any agreement in
effect on the date of the Indenture, (ii) applicable law, (iii) customary non-
assignment provisions of any lease governing a leasehold interest or equipment
of the Trust or any Restricted Subsidiary, (iv) customary due on sale and other
restrictions on transfer contained in mortgages and deeds of trust, (v) any
agreement entered into in connection with the acquisition, development,
construction or improvement of real property so long as such agreement is
required by a third party prior to extending credit, (vi) the Indenture and
(vii) any agreement that extends, renews, refinances or replaces the agreements
containing the encumbrances or restrictions in the foregoing clauses (i) and
(v), provided that the terms and conditions of any such encumbrance or
restriction are not materially less favorable to the Holders of the Securities
than those under or pursuant to the agreement so extended, renewed, refinanced
or replaced and, with respect to clause (v), such encumbrance or restriction is
required as a condition of such third party extending credit pursuant to such
extension, renewal, refinancing or replacement.
<PAGE>
99
SECTION 1020. Required Stock Ownership.
------------------------
(a) The Trust will at all times be the legal and beneficial owner of
the Pledged Bank Stock and will not sell, transfer or otherwise dispose of any
Capital Stock of the Bank regardless of when acquired. The Trust will at all
times be the legal and beneficial owner in the aggregate of at least 66 2/3% of
the issued and outstanding common stock of the Bank and Voting Stock
representing at least 66 2/3% of the voting power of the Voting Stock of the
Bank. All the Pledged Bank Stock and such shares of the common stock of the Bank
and Voting Stock representing at least 66 2/3% of the voting power of the Voting
Stock of the Bank as are necessary to ensure that the Trust beneficially and
legally owns 66 2/3% of the issued and outstanding Voting Stock and common stock
of the Bank will be referred to as "Restricted Shares."
(b) The Trust will not create or permit to exist any Lien on any
Restricted Shares directly owned by it, other than the Lien of the Indenture.
(c) The Trust will not create or permit to exist any Lien on the
Collateral other than the Lien of the Indenture.
SECTION 1021. Purchase of Securities upon a Change of Control.
-----------------------------------------------
(a) If a Change of Control shall occur at any time, then each Holder
of Securities will have the right to require that the Trust purchase such
Holder's Securities, in whole or in part in integral multiples of $1,000, at a
purchase price (the "Change of Control Purchase Price") in cash in an amount
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of purchase (the "Change of Control Purchase Date"),
pursuant to the offer described below (the "Change of Control Offer"). The
Change of Control Offer shall remain open until the close of business on the
Change of Control Purchase Date or such later date as may be necessary for the
Trust to comply with requirements under the Exchange Act.
(b) Within 30 days following any Change of Control, the Trust shall
notify the Trustee thereof and give written notice of such Change of Control to
each Holder of Securities by first-class mail, postage prepaid, at the address
of such Holder appearing in the Security Register, stating, among other things,
(i) that the Change of Control has occurred and that such Holder has the right
to require the Trust to repurchase such Holder's Securities at the Change of
Control Purchase Price; (ii) the circumstances and relevant facts regarding such
Change in Control (including but not limited to information with respect to pro
forma historical income, cash flow and capitalization after giving effect to
such Change in Control); (iii) the Change of Control Purchase Date, which shall
be a Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act or any applicable securities laws or
<PAGE>
100
regulations; (iv) that any Security not tendered will continue to accrue
interest; (v) that, unless the Trust defaults in the payment of the Change of
Control Purchase Price, any Securities accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date; and (vi) the instructions a Holder must follow in order
to have its Securities repurchased in accordance with paragraph (c) of this
Section
(c) Holders electing to have Securities purchased will be required to
surrender such Securities to the Trust at the address specified in the notice at
least five Business Days prior to the Change of Control Purchase Date. Holder
will be entitled to withdraw their election if the Trust receives, not later
than three Business Days prior to the Change of Control Purchase Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Securities delivered for purchase by the
Holder as to which his election is to be withdrawn and a statement that such
Holder is withdrawing his election to have such Securities purchased. Holders
whose Securities are purchased only in part will be issued new Securities equal
in principal amount to the unpurchased portion of the Securities surrendered.
(d) The Trust will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws and regulations in connection with a Change of Control Offer.
(e) Notwithstanding anything to the contrary contained herein, the
Substitution, made in compliance with the provisions of this Indenture, will not
constitute a Change of Control.
SECTION 1022. Obtaining a Rating on the Securities.
------------------------------------
The Trust will use its best efforts to obtain a rating on the Securities by S&P
and Moody's on or before June 30, 1998.
SECTION 1023. Payment of Tax Sharing Payment.
------------------------------
(a) On and after the Substitution Date, the New Obligor will cause the
B.F. Saul Real Estate Investment Trust to deposit, or cause to be deposited, in
a collateral account in favor of the New Obligor, that portion (the "Tax
Collateral") of any Tax Sharing Payment made by the Bank and its subsidiaries to
the B.F. Saul Real Estate Investment Trust and its subsidiaries (other than the
Bank and its subsidiaries), in an amount equal to the benefit, if any, under the
Tax Sharing Agreement, accruing to the New Obligor as a result of interest
expense on the Securities). The New Obligor will have a first priority security
interest in the Tax Collateral until the time such amounts are paid to the New
Obligor; provided that so long as no Event of Default has occurred and is
continuing, such amounts on deposit may be used, at the written direction of the
New Obligor, for the payment of interest on the Notes.
<PAGE>
101
(b) On and after the Substitution Date, the New Obligor will, will
cause the B.F. Saul Real Estate Investment Trust to or will cause any other
appropriate person to, at any time and from time to time at the expense of the
B.F. Saul Real Estate Investment Trust, promptly give, execute, deliver, file
and/or record any financing statement, notice, instruments, certificates and
other documents and take all further action that may be necessary or that the
New Obligor or the Trustee may reasonably request in order to create, preserve,
perfect or validate the first priority security interest in the Tax Collateral.
SECTION 1024. Amendments, Etc.
---------------
The Trust will not amend, modify, or change in any manner or permit
any of its Restricted Subsidiaries to amend, modify or change in any manner, any
term or condition of its or any of its Restricted Subsidiaries' certificates of
incorporation, charters, bylaws or other similar documents or instruments,
except amendments, modifications or changes that (i) would not have an adverse
effect on the rights and remedies of the Trustee or the Holders of the
Securities, (ii) are required by this Indenture or (iii) are required by law.
SECTION 1025. Waiver of Certain Covenants.
---------------------------
The Trust may omit in any particular instance to comply with any term,
provision or condition set forth in Sections 1007 through 1019, inclusive or
Section 1022, if before or after the time for such compliance the Holders of at
least a majority in principal amount of the Outstanding Securities, by Act of
such Holders, waive such compliance in such instance with such term, provision
or condition, but no such waiver shall extend to or affect such term, provision
or condition except to the extent so expressly waived, and, until such waiver
shall become effective, the obligations of the Trust, the Restricted
Subsidiaries and the duties of the Trustee in respect of any such term,
provision or condition shall remain in full force and effect.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Right of Redemption.
-------------------
The Securities will be redeemable at the option of the Trust, as a
whole or from time to time in part, subject to the conditions and at the
Redemption Prices specified in the form of Security, together with accrued and
unpaid interest, if any, to the Redemption Date (subject to the right of Holders
of record on the relevant record dates to receive interest due on an Interest
Payment Date), on the Redemption Date.
<PAGE>
102
SECTION 1102. Applicability of Article.
------------------------
Redemption of Securities at the election of the Trust or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article Eleven.
SECTION 1103. Election to Redeem; Notice to Trustee.
-------------------------------------
The election of the Trust to redeem any Securities pursuant to Section
1101 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Trust, the Trust shall, at least 60 days prior to the Redemption
Date fixed by the Trust (unless a shorter notice shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date and of the principal amount
of Securities to be redeemed and shall deliver to the Trustee such documentation
and records as shall enable the Trustee to select the Securities to be redeemed
pursuant to Section 1104.
SECTION 1104. Selection by Trustee of Securities to Be Redeemed.
-------------------------------------------------
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities not previously
called for redemption, by such method as the Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
of the principal of Securities; provided, however, that no such partial
redemption shall reduce the portion of the principal amount of a Security not
redeemed to less than $1,000.
The Trustee shall promptly notify the Trust in writing of the
Securities selected for redemption and, in the case of any Securities selected
for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Securities shall relate, in
the case of any Security redeemed or to be redeemed only in part, to the portion
of the principal amount of such Security which has been or is to be redeemed.
SECTION 1105. Notice of Redemption.
--------------------
Notice of redemption shall be given in the manner provided for in
Section 107 not less than 30 nor more than 60 days prior to the Redemption Date,
to each Holder of Securities to be redeemed.
<PAGE>
103
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all Outstanding Securities are to be redeemed, the
identification (and, in the case of a partial redemption, the principal
amounts) of the particular Securities to be redeemed,
(4) that on the Redemption Date the Redemption Price (together with
accrued interest, if any, to the Redemption Date payable as provided in
Section 1107) will become due and payable upon each such Security, or the
portion thereof, to be redeemed, and that interest thereon will cease to
accrue on and after said date, and
(5) the place or places where such Securities are to be surrendered
for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the Trust shall be given by the Trust or, at the Trust's request, by the Trustee
in the name and at the expense of the Trust.
SECTION 1106. Deposit of Redemption Price.
---------------------------
Prior to any Redemption Date, the Trust shall deposit with the Trustee
or with a Paying Agent (or, if the Trust is acting as its own Paying Agent,
segregate and hold in trust as provided in Section 1003) an amount of money
sufficient to pay the Redemption Price of, and (except if the Redemption Date
shall be an Interest Payment Date) accrued interest on, all the Securities which
are to be redeemed on that date.
SECTION 1107. Securities Payable on Redemption Date.
-------------------------------------
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified (together with accrued interest, if any, to
the Redemption Date), and from and after such date (unless the Trust shall
default in the payment of the Redemption Price and accrued interest) such
Securities shall cease to bear interest. Upon surrender of any such Security
for redemption in accordance with said notice, such Security shall be paid by
the Trust at the Redemption Price, together with accrued interest, if any, to
the Redemption Date; provided, however, that installments of interest whose
Stated Maturity is on or prior to the Redemption Date shall be payable to the
Holders of such Securities, or one or more
<PAGE>
104
Predecessor Securities, registered as such at the close of business on the
relevant Record Dates according to their terms and the provisions of Section
309.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Securities.
SECTION 1108. Securities Redeemed in Part.
---------------------------
Any Security which is to be redeemed only in part shall be surrendered
at the office or agency of the Trust maintained for such purpose pursuant to
Section 1002 (with, if the Trust or the Trustee so requires, due endorsement by,
or a written instrument of transfer in form satisfactory to the Trust and the
Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing), and the Trust shall execute, and the Trustee shall
authenticate and deliver to the Holder of such Security without service charge,
a new Security or Securities, of any authorized denomination as requested by
such Holder, in aggregate principal amount equal to and in exchange for the
unredeemed portion of the principal of the Security so surrendered.
ARTICLE TWELVE
SECURITY AND PLEDGE OF COLLATERAL
SECTION 1201. Grant of Security Interest.
--------------------------
The Trust grants to the Trustee, for the benefit of the Trustee and
the Holders, a security interest in all its present or future right, title and
interest in and to the following (the "Collateral"):
(a) the Custodian Accounts representing the Bank Collateral Account,
the Tax Payment Collateral Account and, from and after the Substitution,
the Bank Contribution Collateral Account;
(b) the shares of Bank Stock from time to time deposited to the Bank
Collateral Account pursuant to this Article Twelve (the "Pledged Bank
Stock"), together with the certificates representing the Pledged Bank
Stock, and, subject to Section 1207(a), all dividends, cash, instruments
and other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such Pledged
Bank Stock;
(c) cash and U.S. Government Securities and Financial Assets
deposited to a Custodian Account from time to time pursuant to Section
1203, Certificates of Deposit
<PAGE>
105
(whether or not they are deemed to be instruments) in which such Collateral
(or proceeds thereof) may be invested from time to time, all other
investments from time to time pursuant to Section 1203(e), all notes,
checks and other instruments and all Certificates of Deposit (whether or
not they are deemed to be instruments) from time to time held in a
Custodian Account in substitution for or in addition to or upon payment or
collection of any or all of the foregoing and, subject to Section 1207(a),
all interest, dividends, cash, instruments and other property and proceeds
from time to time received, receivable or otherwise distributed in respect
of or in exchange for any of the foregoing;
(d) all proceeds of any and all of the foregoing (including without
limitation proceeds constituting property of the types described above);
and
(e) all of the Trust's Security Entitlements with respect to the
foregoing.
SECTION 1202. Secured Obligations.
-------------------
This Indenture secures the payment of all obligations of the Trust now
or hereafter existing under this Indenture and the Securities, whether for
principal, interest, fees, expenses or otherwise (collectively, the "Secured
Obligations"). Without limiting the generality of the foregoing, this Indenture
secures the payment of all amounts that constitute part of the Secured
Obligations and would be owed by the Trust but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Trust.
SECTION 1203. Delivery, Investment and Release of Collateral.
----------------------------------------------
(a) On the date hereof, the Trust will deposit to the Bank Collateral
Account, as Collateral, to be credited to and accounted for in the Bank
Collateral Account, certificates evidencing all Bank Stock owned legally or
beneficially by the Trust on such date, indorsed in blank or accompanied by duly
executed instruments of indorsement in blank, all in form and substance
satisfactory to the Trustee.
(b) The Trust may, on any date, deposit to the Bank Collateral
Account, as additional Collateral, to be credited to and accounted for in the
Bank Collateral Account, cash, U.S. Government Securities, additional shares of
Bank Stock and/or the Trust's Security Entitlements with respect to any or all
of the foregoing.
At the time of any deposit of Bank Stock pursuant to this subsection
(b), the Trust shall deliver to the Custodian the same certificates and
documents with respect thereto as are referred to in Section 1203(a) with
respect to Bank Stock delivered to the Custodian on the date hereof.
<PAGE>
106
(c) Upon the occurrence and during the continuance of any Default or
Event of Default, the Trust will deposit, or cause to be deposited, to the Tax
Payment Collateral Account, as additional Collateral (the "Tax Payment
Collateral"), to be credited to and accounted for in the Tax Payment Collateral
Account, cash, U.S. Government Securities and/or the Trust's Security
Entitlements with respect to any or all of the foregoing, in an aggregate amount
equal to the Benefit Amount of each Tax Sharing Payment to be made by the Bank
and its subsidiaries to the Trust and its subsidiaries (other than the Bank and
its subsidiaries) pursuant to the Tax Sharing Agreement. The Trustee will have a
first priority lien on and security interest in the Tax Payment Collateral and
the Tax Payment Collateral Account to secure the Secured Obligations. If no
Default or Event of Default is continuing and the Tax Payment Collateral has not
been applied to the Secured Obligations pursuant to the terms of this Indenture
or applied pursuant to the terms of Section 1207(c), such Tax Payment Collateral
shall be released from the Lien of this Indenture and the Trustee shall direct
that such Collateral be returned to the Trust. For purposes of this Section
1203(c) "Benefit Amount" means, with respect to any Tax Sharing Payment, an
amount equal to the tax benefit to the Affiliated Group (as defined in the
definition of Tax Sharing Agreement) of the interest expense on the Securities
for the period to which such Tax Sharing Payment relates.
(d) The Trust will, on the Substitution Date, and immediately prior
to the Substitution, deposit or cause to be deposited to the Bank Contribution
Collateral Account established by the New Obligor with the Custodian, as
additional Collateral (the "Bank Contribution Collateral"), to be credited to
and accounted for in the Bank Contribution Collateral Account, cash in an
aggregate amount equal to the Bank Contribution Amount; provided, however, if
the Bank Contribution is paid by the Trust to the Bank at the Substitution Date
in accordance with and pursuant to the terms of this Indenture, no deposit will
be required pursuant to this Section 1203(d) and the establishment of a Bank
Contribution Collateral Account shall not be required pursuant to Section
1204(b). The Trustee will have a first priority lien on and security interest in
the Bank Contribution Collateral and the Bank Contribution Collateral Account to
secure the Secured Obligations.
(e) The Trust may from time to time direct the Trustee to exchange,
or cause to be exchanged, some of the Pledged Bank Stock for other Collateral to
be provided by the Trust on the basis specified in this Section 1203(e) and to
release, or cause to be released, the Pledged Bank Stock so exchanged from the
Lien of this Indenture. Such direction shall specify the number of shares of
Pledged Bank Stock to be exchanged and upon such exchange to be released from
the Lien of this Indenture. On the date on which it shall deliver such
direction to the Trustee, the Trust will deposit, or cause to be deposited, to
the Bank Collateral Account, as additional Collateral, to be credited to and
accounted for in the Bank Collateral Account, cash, U.S. Government Securities
and/or the Trust's Security Entitlements with respect to any or all of the
foregoing, the aggregate Collateral Value of which as of such date is at least
equal to $28,000 for each share of Pledged Bank Stock (adjusted to reflect any
splits or combinations of Bank Stock after the date hereof) that the Trust has
directed the Trustee to exchange for other Collateral.
<PAGE>
107
Promptly following its receipt of such direction, such substitute
Collateral, the Officers' Certificate required by Section 1203(g), the Opinion
of Counsel required by Section 1203(h) and any documents required by Sections
103 and 1213, and, if no Default or Event of Default shall have occurred and be
continuing, the Trustee will, or will cause the Custodian to, (if necessary,
after the Custodian has received from the Bank separate certificates evidencing
the Bank Stock to be delivered to the Trust and the Bank Stock that will
continue to be Pledged Bank Stock in exchange for the certificates evidencing
the Pledged Bank Stock) deliver to the Trust certificates evidencing the number
of shares of Pledged Bank Stock that the Trust shall have directed the Trustee
to release from the Lien of this Indenture. Any shares so released shall no
longer be included in the Pledged Bank Stock.
Collateral deposited to the Bank Collateral Account under this
subsection (e) shall be credited to and accounted for in the Bank Collateral
Account and shall not be released from the Lien of this Indenture except
pursuant to Section 1207(a) or Section 1212.
(f) The Trust may, from time to time, so long as no Default or Event
of Default shall have occurred and be continuing, direct the Custodian,
(i) to invest cash in the Bank Collateral Account, the Bank
Contribution Collateral Account and the Tax Payment Collateral Account, as
the case may be, in Certificates of Deposit and/or U.S. Government
Securities and to account for such investments in the applicable account,
and
(ii) to sell Certificates of Deposit and U.S. Government Securities
in, and account for the proceeds of such sale in, the Bank Collateral
Account, the Bank Contribution Collateral Account and the Tax Payment
Collateral Account, as the case may be.
Any brokerage costs and other fees or expenses related to such sale or
investment and amounts relating to accrued or accreted interest required to be
paid to purchase any investment shall be paid by the Trust at the time of its
direction to the Custodian pursuant to this subsection (f) and not from the
Collateral. If
(x) the principal amount paid to the applicable Custodian Account on
the maturity of any Certificate of Deposit or U.S. Government Security in
the Bank Collateral Account, the Bank Contribution Collateral Account or
the Tax Payment Collateral Account, as the case may be, shall be less than
the purchase price therefor paid by the Custodian and attributable to
principal, or
(y) the price paid to the applicable Custodian Account on the sale of
any Certificate of Deposit or U.S. Government Security in the Bank
Collateral Account, the Bank Contribution Collateral Account or the Tax
Payment Collateral Account, as the
<PAGE>
108
case may be, attributable to the principal amount thereof shall be less
than the purchase price therefor paid by the Custodian and attributable to
principal,
(such difference being a "Sale Deficit Amount"), the Trustee will so notify the
Trust and the Trust, within five days after its receipt from the Trustee of such
notice, will deposit or cause to be deposited to, to be credited to and
accounted for in the Bank Collateral Account, the Bank Contribution Collateral
Account or the Tax Payment Collateral Account, as the case may be, as additional
Collateral, cash or U.S. Government Securities, and/or the Trust's Securities
Entitlements with respect to any or all of the foregoing, the aggregate
Collateral Value of which is at least equal to such Sale Deficit Amount. Any
direction by the Trust to the Custodian pursuant to this subsection (f) shall
specify the investments to be made or sold by the Custodian and account from
which such investments are to be made or sold.
Any investments and any proceeds of any sale of Collateral pursuant to
this subsection (f) shall be recorded or held in the same account as the
Collateral that was used to purchase such investment or that was sold.
Any losses on investments of Collateral, or on Collateral deposited to
any Custodian Account, shall be for the account of the Trust.
(g) On each date (other than the date hereof) on which the Trust
shall deposit Collateral to a Custodian Account, and as a condition to the
release, exchange, sale or investment of any Collateral, the Trust will deliver
to the Trustee an Officers' Certificate, dated the date of such deposit or of
any direction to effect any such release, exchange, sale or investment (as
applicable), certifying, as of the date of such Officers' Certificate, to the
effect required by Section 103 and further certifying as follows:
(i) other than with respect to a deposit of Collateral, that no
Default or Event of Default has occurred and is continuing or would occur
after giving effect to any exchange, sale, investment or release of
Collateral to occur as of such date;
(ii) if such Officers' Certificate is being delivered in connection
with the deposit of any Collateral,
(A) to the effect set forth in Sections 1205(a), (b) and (c)
and, if the Collateral being deposited includes Bank Stock, the first
sentence of Section 1205(d),
(B) (1) if such Collateral consists of cash, that it has traced
the source of such cash (describing in reasonable detail such source)
and whether or not such cash constitutes direct or indirect proceeds
of the issue and sale of the Securities, and
<PAGE>
109
(2) if such Collateral consists of Bank Stock or U.S.
Government Securities, that it has traced the source of funds used for
the purchase of such Collateral (and describing in reasonable detail
the source of such funds) and whether or not such funds constitute the
direct or indirect proceeds of the issue and sale of the Securities;
(iii) if such Officers' Certificate is being delivered in connection
with the deposit of any Collateral to remedy a Sale Deficit Amount, that
the aggregate Collateral Value, as of the date of such Officers'
Certificate, of the cash and U.S. Government Securities and/or the Trust's
Security Entitlements with respect thereto being deposited is at least
equal to the Sale Deficit Amount then being remedied;
(iv) if such Officers' Certificate is being delivered in connection
with a direction that the Trustee exchange Pledged Bank Stock for other
Collateral, as to the aggregate number of shares of Voting Stock of the
Bank and Bank Common Stock outstanding as of the date of such Officers'
Certificate and that, immediately following the release of such Pledged
Bank Stock, the Pledged Bank Stock will constitute at least 66 2/3% of the
voting power of the Voting Stock of the Bank and at least 66 2/3% of such
aggregate number of shares of outstanding Bank Common Stock.
(h) On each date on which the Trust shall deliver Collateral
pursuant to this Section 1203, the Trust will deliver to the Trustee an Opinion
of Counsel with respect to such Collateral, substantially to the effect set
forth in Section 1213(c).
(i) Any Collateral released by the Trustee pursuant to this Section
1203 shall be assigned, transferred and delivered to the Trust at the Trust's
expense, together with any necessary assignment or endorsement, against receipt
but without any recourse, warranty or representation whatsoever. The Trustee
shall, in connection with any such release, at the request and expense of the
Trust, execute and deliver to the Trust an instrument or instruments
acknowledging the release of such Collateral from the Lien of this Indenture.
(j) In connection with any delivery of Collateral pursuant to this
Section 1203, the Trust will direct the Custodian to credit and to record such
Collateral in the Bank Collateral Account, the Bank Contribution Collateral
Account or the Tax Payment Collateral Account as required by this Indenture.
SECTION 1204. Delivery and Holding of Collateral.
----------------------------------
(a) If there shall occur a change in applicable law or regulations
regarding the steps necessary to obtain and maintain a perfected security
interest in U.S. Government Securities or any other Collateral, or if there is
Collateral for which the procedures set forth in this Article Twelve, the
applicable Custodian Agreement and any related agreement of the Custodian with
respect to control of such Custodian Account are not effective to perfect a
<PAGE>
110
security interest, immediately upon the Trust having knowledge thereof the Trust
will so notify the Trustee and will deliver to the Trustee an Opinion of Counsel
setting forth the steps necessary for the Trustee to obtain and maintain such a
perfected security interest in the Collateral affected by such change or for
which the foregoing procedures are not effective to perfect a security interest,
and the Trustee, instead of the actions set forth in this Article Twelve, the
applicable Custodian Agreement and any related agreement of the Custodian with
respect to control of such Custodian Account, shall take such other action, as
specified in such Opinion of Counsel, as will create and maintain such perfected
security interest.
(b) The Trust will establish with the Custodian the Custodian
Accounts (or one or more Custodian Accounts and sub-accounts; if any sub-account
is established, references herein to an account shall include such sub-account),
(i) the "Bank Collateral Account", (ii) at the time of the Substitution, if
there is Bank Contribution Collateral, the "Bank Contribution Collateral
Account", and (iii) the "Tax Payment Collateral Account", in which all of the
Collateral held, directly or indirectly, by the Custodian shall be credited,
recorded and deposited. Each Custodian Account shall be established in the name
of the Trust. Except as provided in this Indenture, no Collateral shall be paid,
delivered or released to or for the account of, or withdrawn by or for the
account of, the Trust or any other Person from such account.
(c) The Trustee shall not be obligated to, and shall not, accept any
Collateral from the Trust if it has knowledge of or has been advised by the
Trust of any adverse claim with respect thereto, that it is overdue or has been
dishonored or of any defense against or claim to it on the part of any Person.
(d) If and to the extent that any "money" (within the meaning of
Section 9-305 of the UCC) on deposit in a Custodian Account is not a Financial
Asset held by the Custodian as a Securities Intermediary under the applicable
Custodian Agreement, the Trust shall cause the Custodian, for the benefit of the
Trustee, to maintain possession and control of such money for the benefit of the
Trustee.
SECTION 1205. Representations, Warranties and Covenants.
-----------------------------------------
The Trust represents, warrants and covenants that:
(a) As of the time of its deposit of any Collateral in a Custodian
Account pursuant to this Indenture it will be the sole beneficial owner of
such Collateral, free and clear of any Lien, except for the Lien of this
Indenture.
(b) It has full power, authority and legal right to pledge all
Collateral in which a security interest is or shall be granted by it
pursuant to this Indenture.
<PAGE>
111
(c) Upon the credit and deposit of any Collateral to a Custodian
Account (indorsed in blank or accompanied by a duly executed indorsement in
blank, in the case of certificated securities), the crediting of such
account by the Custodian with respect to such Collateral and compliance by
the Custodian with the Custodian Agreement and the related agreement of the
Custodian with respect to control of such Custodian Account, the Trustee
will have a valid and perfected first-priority Lien on such Collateral,
securing payment of the Secured Obligations.
(d) The shares of Bank Stock owned by the Trust have been duly
authorized, are validly issued, fully paid and non-assessable. As of the
date of this Indenture (i) there are 10,000,000 shares of Bank Stock
authorized and 10,000 shares of Bank Stock outstanding; (ii) the Bank has
no Voting Stock or Bank Common Stock except for Bank Stock; (iii) there are
no outstanding options, warrants, calls, convertible securities or
commitments of any character relating to any authorized and unissued Bank
Stock; (iv) the Trust owns 8,000 shares of Bank Stock; and (v) such shares
constitute 80% of all shares of Bank Stock issued and outstanding.
(e) No authorization, approval or other action by, or notice to, or
filing with, any governmental authority or regulatory body is required
under existing laws and regulations on the date hereof
(i) for the grant or perfection of the security interests
contemplated hereby or for the execution, delivery or performance of
this Indenture by the Trust, except as may be set forth in Section
1204 with respect to actions to be taken by the Trustee, the Custodian
or another Securities Intermediary holding Collateral and except for
the filings referred to in Section 1206(b) that may be required in the
future, or
(ii) for the exercise by the Trustee of the voting or other
rights provided for in this Indenture or its rights and remedies in
respect of the Collateral pursuant to this Indenture, except
(A) as may be required in connection with the disposition
of Collateral by laws affecting the offering and sale of
securities generally, and
(B) with respect to Pledged Bank Stock, (i) for
authorizations, approvals, other actions, notices and filings
that may be required pursuant to 12 U.S.C. (S) 1817(j), 12 U.S.C.
(S) 1467a, 12 C.F.R. Part 563g, 12 C.F.R. (S) 567.13 or 12 C.F.R.
(S) 574, or any successor laws or regulations, (ii) for the
filing of copies of materials pursuant to 16 C.F.R. Section
802.8(b)(1) in the event of a sale by the Trustee of the Pledged
Bank Stock to one or more purchasers required to file a notice
<PAGE>
112
of change of control with the OTS pursuant to 12 U.S.C. Section
1817(j) and 12 C.F.R. Section 574.3(b) and (iii) for the filing
of a pre-merger notification pursuant to 15 U.S.C. Section 18a
and 16 C.F.R. Part 803 in the case of any purchaser of 15% or
more of the Pledged Bank Stock which purchaser would not be
required to obtain OTS approval for such purchase pursuant to 12
U.S.C. Section 1817(j), 12 U.S.C. 1467a or 12 C.F.R. Part 574.
(f) The chief executive office of the Trust is located at 8401
Connecticut Avenue, Chevy Chase, Maryland 20815. The Trust uses no trade
name in connection with its operations.
SECTION 1206. Further Assurances.
------------------
(a) The Trust, at any time and from time to time, at its expense,
will promptly give, execute, deliver, file and/or record any financing
statement, notice, instruments, certificates and other documents and take all
further action that may be necessary or that the Trustee may reasonably request
in order to create, preserve, perfect or validate the first-priority security
interest granted or purported to be granted hereby or to enable the Trustee to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral.
(b) Without limitation of the foregoing, the Trust will file or cause
to be filed, promptly following the date of this Indenture, in the appropriate
filing offices in the State of Maryland, Uniform Commercial Code financing
statements adequately describing the Collateral and, thereafter, such renewals,
amendments or continuations thereof or such additional financing statements in
such additional offices in such jurisdictions or in the appropriate filing
offices in such additional jurisdictions as shall be required from time to time
under the Uniform Commercial Code in order to perfect and to continue the
perfection of the security interest in the Collateral.
SECTION 1207. Dividends; Voting Rights; Etc.
-----------------------------
(a) So long as no Default or Event of Default shall have occurred and
be continuing, the Trust shall be entitled to receive, free of the Lien of this
Indenture, all cash dividends and distributions (other than any dividends or
distributions constituting a return of capital) and interest paid in respect of
the Collateral held in the Bank Collateral Account, and the Trustee, promptly
upon its receipt thereof, if the same are not paid directly to the Trust or the
Custodian, shall deliver the same to the Trust. Upon the occurrence and during
the continuance of a Default or an Event of Default the Trustee shall be
entitled to retain in the applicable Custodian Account and subject to the Lien
of this Indenture all such dividends, distributions and interest as additional
Collateral, and all such dividends, other distributions and interest shall, if
received by the Trust, be received in trust for the benefit of the Trustee,
<PAGE>
113
be segregated from the other property or funds of the Trust, and be forthwith
deposited to the applicable Custodian Account to be retained as additional
Collateral in the same form as so received (with any necessary endorsement or
assignment); provided that, if such Default or Event of Default, and all other
Defaults or Events of Default that shall have thereafter occurred, shall be
cured prior to the acceleration of the Securities or the exercise by the Trustee
or the Holders of any other remedies hereunder, any such dividends,
distributions and interest then being held as additional Collateral shall be
distributed to the Trust, free of the Lien of this Indenture, promptly following
the Trust's request therefor. Dividends and distributions that constitute a
return of capital and interest that is to be retained as additional Collateral
shall be retained in the Custodian Account holding the underlying security,
investment, instrument or account on which such dividend or distribution is made
or such interest is earned.
(b) The Trustee shall be entitled to retain in the applicable
Custodian Account and subject to the Lien of this Indenture all cash dividends
and distributions and interest paid in respect of the Collateral held in the Tax
Payment Collateral Account and the Bank Contribution Collateral Account as
additional Collateral, and all such dividends and other distributions and
interest shall, if received by the Trust, be received in trust for the benefit
of the Trustee, be segregated from the other property or funds of the Trust, and
be forthwith deposited to the applicable Custodian Account to be retained as
additional Collateral (with any necessary endorsement or assignment). Thereafter
such additional Collateral will be subject to the same provisions and
requirements of this Indenture as the other Collateral on deposit in such
Custodian Account.
(c) So long as no Event of Default shall have occurred and be
continuing, the Trust shall be entitled to direct the Trustee and the Custodian
in writing (or to cause the Trustee to direct the Custodian) to use the
Collateral held in the Bank Contribution Collateral Account and the Tax Payment
Collateral Account to pay interest on the Securities on any Interest Payment
Date and the Trustee, upon receipt of such written direction, shall cause such
Collateral to be sold and the proceeds thereof to be used to pay such interest.
(d) The Trust shall be entitled to exercise any and all voting and
other consensual rights relating to Collateral or any part thereof for any
purpose; provided that no vote shall be cast, and no consent, waiver or
ratification given or action taken, that would be inconsistent with or violate
Section 1214 or any other provision of this Indenture or the Securities; and
provided further that
(i) with respect to Collateral other than Pledged Bank Stock, the
Trust shall no longer have such rights, and such rights shall be vested in
the Trustee, upon notice from the Trustee to the Trust following the
occurrence and during the continuance of a Default or an Event of Default,
and
<PAGE>
114
(ii) with respect to Pledged Bank Stock, the Trust shall no longer
have such rights, and such rights shall be vested in the Trustee, on five-
day's advance notice from the Trustee to the Trust following the occurrence
and during the continuance of an Event of Default and subject to the
satisfaction of any regulatory requirements.
(e) In order to permit the Trustee to exercise the voting and other
consensual rights which it may be entitled to exercise pursuant to Section
1207(d), and to receive all dividends and distributions that it may be entitled
to receive under Section 1207(a), the Trust will, upon written notice from the
Trustee, from time to time execute and deliver to the Trustee such proxies and
other instruments as the Trustee may reasonably request.
SECTION 1208. Trustee Appointed Attorney-in-Fact.
----------------------------------
The Trust appoints the Trustee as its attorney-in-fact, with full
authority in the place and stead and in its name or otherwise, from time to time
in the Trustee's discretion, to take any action and to execute any instrument
which the Trustee may deem necessary or advisable in order to accomplish the
purposes of this Article Twelve, including to receive, endorse and collect all
instruments made payable to the Trust representing any dividend, interest
payment or other distribution in respect of the Collateral or any part thereof
and to give full discharge for the same. This power, being coupled with an
interest, is irrevocable.
SECTION 1209. Trustee May Perform.
-------------------
If the Trust fails to perform any agreement contained in this Article
Twelve, the Trustee may, but shall not be obligated to, itself perform, or cause
performance of, such agreement, and the expenses of the Trustee incurred in
connection therewith shall be payable by the Trust under Section 607.
SECTION 1210. Remedies upon Event of Default.
------------------------------
If any Event of Default shall have occurred and be continuing, the
Trustee may exercise in respect of the Collateral, subject, in the case of
Pledged Bank Stock, to the satisfaction of any regulatory requirements, in
addition to other rights and remedies provided for herein or otherwise available
to it, all the rights and remedies provided a secured party upon the default of
a debtor under the Uniform Commercial Code at that time, and the Trustee may
also, without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any exchange,
broker's board or at any of the Trustee's offices or elsewhere, for cash, on
credit or for future delivery, upon such terms as the Trustee may determine to
be commercially reasonable, and the Trustee or any Holder may be the purchaser
of any or all of the Collateral so sold and, subject to any applicable
requirements of Section 9-504(4) of the Uniform Commercial Code, thereafter hold
the same, absolutely, free from any right or claim of whatsoever kind. The
Trust agrees that, to the extent notice of sale shall be required by law, at
least 30 days' notice to it (in the case of
<PAGE>
115
Pledged Bank Stock) or 10 days' notice to it (in the case of any other
Collateral) of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. The Trustee
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. The Trustee may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and such sale
may, without further notice, be made at the time and place to which it was so
adjourned. The Trustee shall incur no liability as a result of the sale of the
Collateral, or any part thereof, at any private sale conducted in a commercially
reasonable manner and in accordance with Section 9-504(3) of the Uniform
Commercial Code and any other applicable legal requirements. The Trust hereby
waives any claims against the Trustee arising by reason of the fact that the
price at which any Collateral may have been sold at such a private sale was less
than the price which might have been obtained at the public sale, even if the
Trustee accepts the first offer received and does not offer such Collateral to
more than one offeree.
The Trust recognizes that, by reason of certain prohibitions contained
in the Securities Act and applicable state securities laws, the Trustee may be
compelled, with respect to any sale of certain of the Collateral, to limit
purchasers to those who will agree, among other things, to acquire such
securities for their own account, for investment, and not with a view to the
distribution or resale thereof. The Trust acknowledges and agrees that any such
sale may result in prices and other terms less favorable to the seller than if
such sale were a public sale without such restrictions. The Trustee shall be
under no obligation to delay the sale of any of the Pledged Shares for the
period of time necessary to permit the Trust to register such securities for
public sale under the Securities Act, or under applicable state securities laws,
even if the Trust would agree to do so.
In connection with the exercise of its rights and remedies under this
Article Twelve or otherwise available to it, the Trustee is authorized to file
such notices, applications and filings as may be necessary or appropriate in
respect of the Pledged Bank Stock.
The Trustee is not authorized or empowered to take any action or
exercise any rights or remedies under this Article Twelve or otherwise available
to it that would expose any Holder to liability under the Capital Maintenance
Agreement or any capital restoration plan guaranty applicable to the Bank.
Neither this Indenture, nor the exercise by the Trustee or any Holder of any
remedies hereunder, nor the acquisition of the Pledged Bank Stock by the Trustee
or any other Person in any foreclosure sale or otherwise, is intended to cause
the Trustee, any Holder or any other Person to have any successor liability
under the Capital Maintenance Agreement.
SECTION 1211. Application of Proceeds.
-----------------------
Upon the occurrence and during the continuance of an Event of Default
and after the acceleration of the Securities pursuant to Section 502 (so long as
such acceleration has not been rescinded) any cash held as Collateral and all
cash proceeds received in respect of any
<PAGE>
116
sale of, collection from, or other realization upon, all or any part of the
Collateral, shall be applied by the Trustee in the manner specified in Section
506.
SECTION 1212. Continuing Lien; Termination.
----------------------------
Except as provided in Section 1203 and 1207(a) and this Section 1212,
this Indenture shall create a continuing Lien on the Collateral that shall (a)
remain in full force and effect until the payment in full of all Secured
Obligations, (b) be binding upon the Trust and its successors and assigns and
(c) inure to the benefit of the Trustee and its successors, transferees and
assigns.
Notwithstanding anything to the contrary in this Article Twelve, upon
(a) satisfaction by the Trust of the conditions set forth in Article
Four to the satisfaction and discharge of this Indenture,
(b) the payment in full of all Secured Obligations, or
(c) the defeasance of the Securities and this Indenture as provided
in Section 1302,
the security interests created under this Indenture shall terminate, and the
Trustee shall, at the request and expense of the Trust, cause to be assigned,
transferred and delivered, against receipt but without any recourse, warranty or
representation whatsoever, any remaining Collateral, to or on the order of the
Trust and shall execute and deliver to the Trust an instrument or instruments
acknowledging the release of such Collateral from the Lien of this Indenture.
SECTION 1213. Certificates and Opinions.
-------------------------
(a) The Trust will furnish to the Trustee, a certificate or opinion
of an engineer, appraiser or other expert as to the fair value:
(i) of any property or securities to be released from the Lien of
this Indenture, which certificate or opinion shall state that in the
opinion of the Person making the same the proposed release will not impair
the security under this Indenture in contravention of the provisions
thereof, and which certificate or opinion shall be made by an independent
engineer, appraiser or other expert, if the fair value of such property or
securities and of all other property or securities released since the
commencement of the then-current calendar year, as set forth in the
certificates or opinions required by this subsection (i), is 10% or more of
the aggregate principal amount of the Securities at the time Outstanding;
but such a certificate or opinion of an independent engineer, appraiser or
other expert shall not be required in the case of any
<PAGE>
117
release of property or securities, if the fair value thereof as set forth
in the certificate or opinion required by this subsection (i) is less than
$25,000 or less than 1% of the aggregate principal amount of the Securities
at the time Outstanding;
(ii) to the Trust of any securities, the deposit of which is to be
made the basis for the withdrawal of cash constituting a part of the trust
estate or the release of property or securities subject to the Lien of this
Indenture, and if the fair value to the Trust of such securities and of all
other such securities made the basis of any such withdrawal or release
since the commencement of the then current calendar year, as set forth in
the certificates or opinions required by this subsection (ii), is 10% or
more of the aggregate principal amount of the Securities at the time
Outstanding, such certificate or opinion shall be made by an independent
engineer, appraiser or other expert; but such certificate of an independent
engineer, appraiser or other expert shall not be required with respect to
any securities so deposited, if the fair value thereof to the Trust as set
forth in the certificate or opinion required by this subsection (ii) is
less than $25,000 or less than 1% of the aggregate principal amount of the
Securities at the time Outstanding; and
(iii) to the Trust of any property the subjection of which to the
Lien of this Indenture is to be made the basis for the withdrawal of cash
constituting a part of the trust estate, or the release of property or
securities subject to the Lien of this Indenture, and if
(A) within six months prior to the date of acquisition thereof
by the Trust, such property has been used or operated by a person or
persons other than such obligor, in a business similar to that in
which it has been or is to be used or operated by the Trust, and
(B) the fair value to the Trust of such property as set forth
in such certificate or opinion is not less than $25,000 and not less
than 1% of the aggregate principal amount of the Securities at the
time Outstanding,
such certificate or opinion shall be made by an independent engineer,
appraiser or other expert.
Any such certificate or opinion may be made by an officer or employee
of the Trust who is duly authorized to make such certificates or opinions by the
Trust from time to time, except in cases in which this subsection (a) requires
that such certificate or opinion be made by an independent person. In such
cases, such certificate or opinion shall be made by an independent engineer,
appraiser or other expert selected or approved by the Trustee in the exercise of
reasonable care.
<PAGE>
118
At the time it shall deliver to the Trustee any certificate pursuant
to clause (i) of this subsection (a), the Trust also shall deliver to the
Trustee an Officers' Certificate as to whether or not a Default or an Event of
Default has occurred and is at such time continuing.
(b) Promptly after the execution and delivery of this Indenture, the
Trust will deliver to the Trustee an Opinion of Counsel either stating that in
the opinion of such counsel this Indenture has been properly recorded and filed
so as to make effective the Lien intended to be created hereby, and reciting the
details of such action, or stating that in the opinion of such counsel no such
action is necessary to make such Lien effective.
(c) Not later than the 120th day after the end of each of its fiscal
years, beginning with its fiscal year ending in 1998, the Trust will deliver to
the Trustee an Opinion of Counsel either stating that in the opinion of such
counsel such action has been taken with respect to the recording, filing, re-
recording and refiling of this Indenture as is necessary to maintain the Lien of
this Indenture, and reciting the details of such action, or stating that in the
opinion of such counsel no such action is necessary to maintain such Lien. Such
Opinion of Counsel shall also state such actions as may be necessary or
appropriate in order to obtain and maintain a perfected security interest in the
Collateral, if such actions are other than as provided in this Indenture, or
shall state that no such actions shall be necessary or appropriate other than as
provided in this Indenture.
SECTION 1214. Additional Covenants of the Trust.
---------------------------------
Until such time as the Secured Obligations shall have been paid in
full, the Trust shall
(a) not sell, assign (by operation of law or otherwise) or otherwise
dispose of, or grant any option or other right with respect to, any of the
Collateral, or create or permit to exist any Lien upon or with respect to
the Collateral, except (i) for the Lien of this Indenture, (ii) as
permitted under Section 1203(e) and (iii) for any such right that shall not
be effective until the Lien of this Indenture on the Collateral shall have
been terminated pursuant to Section 1212;
(b) not permit the Bank to adopt any resolution, by-law, charter
amendment or other proposal, or enter into any contractual restriction, the
effect of which would be to
(i) alter the number of shares of Voting Stock that must be
voted in favor of any matter to cause its adoption by the Bank or,
except to the extent required by law or that the charter of the Bank
may otherwise provide as of the date of this Indenture, permit any
charter, by-law or other provisions applicable to any class or series
of Voting Stock of the Bank to provide for a class or series vote or
that any action or resolution may be taken or adopted by holders of
the
<PAGE>
119
shares of such class or series other than by the vote of a majority
thereof at a meeting duly called and held at which a quorum is present
or the consent of holders of at least a majority of the shares of such
class or series then outstanding, or any class, or
(ii) classify any directors of the Bank (beyond any
classification in effect on the date hereof), permit cumulative voting
for directors or take any action that would diminish the ability of a
holder of Pledged Bank Stock to remove directors;
(c) not use any portion of the proceeds of the issue and sale of the
Securities for the purpose, whether immediate or incidental, of
(i) buying or carrying "margin stock" within the meaning of
Regulation G prior to April 1, 1998 or "Margin Stock" within the
meaning of Regulation U or any successor provision thereto on and
after April 1, 1998, or
(ii) buying, carrying or trading in "securities" within the
meaning of Regulation T (12 C.F.R. Part 220, as amended) or buying or
carrying any part of an investment contract security which shall be
deemed credit for the purpose of buying or carrying the entire
security; and
(d) not change its chief executive office, or change its name,
identity or corporate structure in any manner that might make any financing
or continuation statements filed hereunder seriously misleading within the
meaning of Section 9-402(7) of the Uniform Commercial Code (or any other
applicable provision of the Uniform Commercial Code), unless it shall have
given the Trustee at least 10 days' prior notice thereof (which notice also
shall specify the new principal place of business and chief executive
office of the Trust, if applicable) and an Opinion of Counsel to the effect
specified in Section 1213(c) and unless it shall have taken all such action
as may be required under Section 1206 as a result of such change.
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. Trust's Option to Effect Defeasance or Covenant
-----------------------------------------------
Defeasance.
- ----------
The Trust may, at its option by Board Resolution, at any time, with
respect to the Securities, elect to have either Section 1302 or Section 1303 be
applied to all Outstanding Securities upon compliance with the conditions set
forth below in this Article Thirteen.
<PAGE>
120
SECTION 1302. Defeasance and Discharge.
------------------------
Upon the Trust's exercise under Section 1301 of the option applicable
to this Section 1302, the Trust shall be deemed to have been discharged from its
obligations with respect to all Outstanding Securities on the date the
conditions set forth in Section 1304 are satisfied (hereinafter, "defeasance").
For this purpose, such defeasance means that the Trust shall be deemed to have
paid and discharged the entire indebtedness represented by the Outstanding
Securities, which shall thereafter be deemed to be "Outstanding" only for the
purposes of Section 1305 and the other Sections of this Indenture referred to in
(A) and (B) below, and to have satisfied all its other obligations under such
Securities and this Indenture insofar as such Securities are concerned (and the
Trustee, at the expense of the Trust, shall execute proper instruments
acknowledging the same), except for the following which shall survive until
otherwise terminated or discharged hereunder: (A) the rights of Holders of
Outstanding Securities to receive, solely from the trust fund described in
Section 1304 and as more fully set forth in such Section 1304, payments in
respect of the principal of (and premium, if any, on) and interest on such
Securities when such payments are due, (B) the Trust's obligations with respect
to such Securities under Sections 304, 305, 308, 1002 and 1003, (C) the rights,
powers, trusts, duties and immunities of the Trustee hereunder and (D) this
Article Thirteen. Subject to compliance with this Article Thirteen, the Trust
may exercise its option under this Section 1302 notwithstanding the prior
exercise of its option under Section 1303 with respect to the Securities.
SECTION 1303. Covenant Defeasance.
-------------------
Upon the Trust's exercise under Section 1301 of the option applicable
to this Section 1303, the Trust shall be released from its obligations under any
covenant contained in Sections 801 and 1009 through 1024 (inclusive) with
respect to the Outstanding Securities on and after the date the conditions set
forth below are satisfied (hereinafter, "covenant defeasance"), and the
Securities shall thereafter be deemed not to be "Outstanding" for the purposes
of any direction, waiver, consent or declaration or Act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "Outstanding" for all other purposes hereunder. For this
purpose, such covenant defeasance means that, with respect to the Outstanding
Securities, the Trust may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 501(iv),
but, except as specified above, the remainder of this Indenture and such
Securities shall be unaffected thereby.
<PAGE>
121
SECTION 1304. Conditions to Defeasance or Covenant Defeasance.
-----------------------------------------------
The following shall be the conditions to application of either Section
1302 or Section 1303 to the Outstanding Securities:
(1) The Trust shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 608 who shall agree to comply with the provisions of this
Article Thirteen applicable to it) as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Securities, (A)
money in United States dollars in an amount, or (B) U.S. Government
Obligations (as defined below) which through the scheduled payment of
principal and interest in respect thereof in accordance with their terms
will provide, not later than one day before the due date of any payment,
money in an amount, or (C) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to
pay and discharge, and which shall be applied by the Trustee (or other
qualifying trustee) to pay and discharge, the principal of (and premium, if
any, on) and interest on the Outstanding Securities on the Stated Maturity
(or Redemption Date, if applicable) of such principal (and premium, if any)
or installment of interest; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to said payments with respect to the Securities.
Before such a deposit, the Trust may give to the Trustee, in accordance
with Section 1103 hereof, a notice of its election to redeem all of the
Outstanding Securities at a future date in accordance with Article Eleven
hereof, which notice shall be irrevocable. Such irrevocable redemption
notice, if given, shall be given effect in applying the foregoing. For this
purpose, "U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which
its full faith and credit is pledged or (y) obligations of a Person
controlled or supervised by and acting as an agency or instrumentality of
the United States of America the timely payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United States of
America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and shall also include a depository receipt
issued by a bank (as defined in Section 3(a)(2) of the Securities Act of
1933, as amended), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such
U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal of or interest on the U.S. Government
Obligation evidenced by such depository receipt.
<PAGE>
122
(2) No Default or Event of Default with respect to the Securities
shall have occurred and be continuing on the date of such deposit or,
insofar as clause (x) and (xi) of Section 501 is concerned, at any time
during the period ending on the 91/st/ day after the date of such deposit
(it being understood that this condition shall not be deemed satisfied
until the expiration of such period).
(3) Such defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under, this Indenture or
any other material agreement or instrument to which the Trust is a party or
by which it is bound.
(4) In the case of an election under Section 1302, the Trust shall
have delivered to the Trustee an Opinion of Counsel stating that (x) the
Trust has received from, or there has been published by, the Internal
Revenue Service a ruling, or (y) since March 25, 1998, there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion shall confirm that, the Holders
of the Outstanding Securities will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred.
(5) In the case of an election under Section 1303, the Trust shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Outstanding Securities will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant
defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred.
(6) The Trust must deliver to the Trustee an Opinion of Counsel to
the effect that after the 91/st/ day following the deposit or after the
date such Opinion of Counsel is delivered the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
receivership, conservatorship, reorganization or similar laws affecting
creditors' rights generally (including, without limitation, laws relating
to fraudulent and avoidable transfers).
(7) The Trust must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Trust with the intent of
preferring the Holders of the Securities over the other creditors of the
Trust or with the intent of defeating, hindering, delaying or defrauding
creditors of the Trust.
(8) No event or condition may exist that would prevent the Trust from
making payments of the principal of (and premium, if any, on), and interest
on the Securities, on the date of such deposit.
<PAGE>
123
(9) The Trust shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance under Section 1302
or the covenant defeasance under Section 1303 (as the case may be) have
been complied with.
SECTION 1305. Deposited Money and U.S. Government Obligations to Be
-----------------------------------------------------
Held in Trust; Other Miscellaneous Provisions.
- ---------------------------------------------
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee--collectively for purposes of this
Section 1305, the "Trustee") pursuant to Section 1304 in respect of the
Outstanding Securities shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Trust acting
as its own Paying Agent) as the Trustee may determine, to the Holders of such
Securities of all sums due and to become due thereon in respect of principal
(and premium, if any) and interest, but such money need not be segregated from
other funds except to the extent required by law.
The Trust shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Governmental Obligations
deposited pursuant to Section 1304 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the Outstanding Securities.
Anything in this Article Thirteen to the contrary notwithstanding, the
Trustee shall deliver or pay to the Trust from time to time upon Trust Request
any money or U.S. Government Obligations held by it as provided in Section 1304
which, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent defeasance or covenant defeasance, as
applicable, in accordance with this Article.
SECTION 1306. Reinstatement.
-------------
If the Trustee or any Paying Agent is unable to apply any money in
accordance with Section 1305 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Trust's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to Section 1302 or 1303, as the case may be, until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
Section 1305; provided, however, that if the Trust makes any payment of
principal of (or premium, if any, on) or interest on any Security following the
reinstatement of its obligations, the Trust shall be
<PAGE>
124
subrogated to the rights of the Holders of such Securities to receive such
payment from the money held by the Trustee or Paying Agent.
ARTICLE FOURTEEN
SUBSTITUTION OF NEW OBLIGOR
SECTION 1401. Substitution of Obligor Under the Indenture.
-------------------------------------------
The Trust may at any time on or after January 1, 1999, so long as no
Default or Event of Default has occurred and is continuing under this Indenture,
without the consent of the Holders of the Securities and notwithstanding, except
as set forth below, the other provisions of this Indenture, transfer the Capital
Stock of the Bank and any other Collateral (in each case subject to the Lien of
the Indenture) owned by the Trust, make the Bank Contribution and contribute
capital in the form of Cash Equivalents, in each case to a corporation formed by
the Trust (the "New Obligor") and substitute (the "Substitution") the New
Obligor as the debtor in respect of all obligations arising from the Securities
and the Indenture (as amended pursuant to Section 1402), including the
obligation to make a Change of Control Offer and to purchase the Securities in
connection therewith, if:
(a) the New Obligor is a corporation duly organized and validly
existing under the laws of the United States of America, any state thereof
or the District of Columbia and, at the time of the Substitution and
immediately after giving effect thereto, the New Obligor has no assets,
other than ownership of the Capital Stock of the Bank, the Collateral, the
Bank Contribution and Cash Equivalents, no indebtedness other than the
Securities, and no operations;
(b) the New Obligor has obtained all necessary governmental approvals
and authorizations for the Substitution, including with respect to the
ownership of the common stock and the Voting Stock of the Bank;
(c) if the Securities have been registered for resale with the
Commission, such Securities will continue to be so registered after the
Substitution, and if the Securities have not been so registered, the New
Obligor will assume the obligations of the Trust under the Registration
Rights Agreement;
(d) no "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, is or, as a
result of the Substitution, becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or
<PAGE>
125
indirectly, of more than 50% of the total voting power of the Voting Stock
of the New Obligor;
(e) at the time of the Substitution, the New Obligor becomes the
direct legal and beneficial owner of all outstanding common stock and
Voting Stock of the Bank owned by the Trust immediately prior thereto;
(f) the obligations of the New Obligor under the Indenture and the
Securities are secured by a first priority perfected security interest in
the Pledged Bank Stock and the other Collateral, if any;
(g) legal opinions, in form and substance satisfactory to the
Trustee, shall have been delivered to the Trustee (from whom copies will be
available) (in each case dated the date of the Substitution) from
independent legal counsel selected by the Trust and reasonably satisfactory
to the Trustee, confirming, as appropriate and with respect to applicable
law, that upon the Substitution taking place (1) the requirements of the
Indenture and the Securities as to the giving of notice to the Holders of
the Securities have been met, (2) the Securities, the Indenture (as amended
pursuant to Section 1402) and the Registration Rights Agreement are legal,
valid and binding obligations of the New Obligor enforceable in accordance
with their terms under the laws of the State of New York and the
jurisdiction of organization of the New Obligor, (3) the Trustee, on behalf
of the Holders of the Securities, has a valid perfected first priority
security interest in the Collateral, (4) the New Obligor is not required to
be registered as an investment company under the Investment Company Act of
1940, (5) the new Obligor has all necessary government authorizations and
approvals with respect to the Substitution and no registration with respect
to the transfer is required by any state or federal securities law that has
not been obtained, (6) the Substitution and related transfers described
above will not constitute a fraudulent conveyance, and (7) the Holders of
the outstanding Securities will not recognize income, gain or loss for
federal income tax purposes as a result of the Substitution and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Substitution had not
occurred;
(h) immediately after giving effect to the Substitution on a pro
forma basis, no Default or Event of Default under the Securities or the
Indenture (as amended pursuant to Section 1402) will have occurred and be
continuing;
(i) immediately after giving effect to the Substitution on a pro
forma basis, the Consolidated Net Worth of the Bank is equal to or greater
than the Consolidated Net Worth of the Bank immediately prior to the
Substitution and the Consolidated Net Worth of the New Obligor is positive
(determined, in the case of the New Obligor, excluding the Bank and its
subsidiaries and the Securities), and the Trustee, on behalf of the Holders
of the Securities, will have received a solvency opinion from a nationally
<PAGE>
126
recognized expert as to the solvency of the New Obligor after giving effect
to the Substitution;
(j) the New Obligor expressly assumes, by a supplemental indenture in
form satisfactory to the Trustee, the Trust's obligation for the due and
punctual payment of the principal of, premium, if any, and interest on all
the Securities and the performance and observance of every covenant of the
Indenture (as amended pursuant to Section 1402) on the part of the Trust to
be performed or observed; and
(k) at the time of the Substitution the Trust will have delivered, or
caused to be delivered, in form and substance reasonably satisfactory to
the Trustee, an Officers' Certificate and an Opinion of Counsel, each
stating that the Substitution, and the supplemental indenture required in
connection therewith, comply with the requirements of the Indenture and
that all conditions precedent therein provided for relating to such
transaction have been complied with.
At the Substitution Date and immediately prior to the Substitution,
the Trust will, at its option, either (a) make a cash capital contribution to
the Bank or (b) make a cash payment or contribution to the New Obligor that will
be deposited into the Bank Contribution Collateral Account with the Custodian,
in either case in an amount equal to the Bank Contribution.
Upon consummation of the Substitution in accordance with the terms of
the Indenture, the New Obligor shall succeed to, and be substituted for, and may
exercise every right and power of, the Trust under the Indenture (as amended
pursuant to Section 1402) and the Securities, except as specifically provided in
the Indenture. When the New Obligor assumes all the obligations of the Trust
under this Indenture (as amended pursuant to Section 1402), the Securities and
the Registration Rights Agreement, the Trust shall be released from those
obligations.
Notice of the Substitution will be mailed at least 30 days but not
more than 60 days before the Substitution Date to each Holder of Securities at
such Holder's last address as it appears in the Security Register.
SECTION 1402. Supplemental Indenture.
----------------------
Upon the Substitution, and pursuant to the supplemental indenture to
be entered into by the New Obligor, the Trustee and the Trust in connection
therewith:
(a) all references in this Indenture and the Securities to the
"Trust" will be read to be references to the "New Obligor" and all
references to "Board of Trustees" will be read to be references to the
"Board of Directors";
<PAGE>
127
(b) The definitions of "Advisory Fees," "Disinterested Trustee,"
"Management Agreements," "Nonrecourse Indebtedness," "Permitted Subsidiary
Indebtedness," "Real Estate Property," "Reimbursement Agreement," "Retail
Notes" and "Single Asset Subsidiary" and Section 1018 and this Article
Fourteen will be deleted in their entirety.
(c) The following definitions will be added to the Indenture:
"Board of Directors" means either the board of directors of the New
Obligor or any duly authorized committee of that board.
"Current Interest Loan" means unsecured Indebtedness of the New
Obligor, the proceeds of which are used to pay interest on the Securities,
made pursuant to a loan that (a) does not mature prior to 2 years after the
final Stated Maturity of the Securities, (b) requires no payment of
principal or interest (except as provided under clause (b)(xi) of Section
1011) prior to the final Stated Maturity of the Securities, (c) will not
permit acceleration or the occurrence of an event of default thereunder
prior to the final Stated Maturity of the Securities and (d) requires the
maker of such loan to agree not to join in any petition for the involuntary
bankruptcy of the New Obligor.
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the Board of Directors of the
New Obligor who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of related
transactions.
"Pledged Subsidiary" has the meaning set forth in clause (b)(ix) of
Section 1011.
(d) The definitions of "Asset Sale", "Cash Flow--Indenture",
"Permitted Indebtedness", "Permitted Investment", "Restricted Subsidiary" and
"Unrestricted Subsidiary" will be amended and restated in their entirety to read
as follows:
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a
"transfer"), directly or indirectly, in one or a series of related
transactions, of (a) any Capital Stock of any Restricted Subsidiary; (b)
all or substantially all of the properties and assets of any division or
line of business of the New Obligor or its Restricted Subsidiaries; or (c)
any other properties or assets of the New Obligor or any Restricted
Subsidiary other than in the ordinary course of business. For the purposes
of this definition, the term "Asset Sale" shall not include any transfer of
properties or assets or Capital Stock (i) that is governed by the
provisions of the Indenture described under Article Eight, (ii) in
compliance with the Section 1011, or (iii) of any Restricted Subsidiary
(other than the Pledged Subsidiary) to the New Obligor or any other
Restricted Subsidiary.
<PAGE>
128
"Cash Flow--Indenture" means with respect to the New Obligor, for any
period, all as determined in accordance with GAAP on a consolidated basis
for the New Obligor and its Restricted Subsidiaries (other than the Bank
and its Subsidiaries) and without duplication, the sum of the following
items for such period: (a) consolidated net income (or loss), plus (b)
depreciation and amortization expense, plus (c) interest expense, plus (d)
equity in losses of investments, less (e) equity in earnings of
investments, plus (f) losses on sales of property, less (g) gains on sales
of property, plus (h) non-cash charges, less (i) non-cash gains, plus (j)
cash distributions received from investments, plus (k) the provision for
federal, state, local and foreign income taxes, plus (l) tax sharing
payments received by the New Obligor, plus (m) dividends received by the
New Obligor from the Bank or any other Restricted Subsidiary.
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the New Obligor pursuant to the Securities;
(b) obligations of the New Obligor or any Restricted Subsidiary
pursuant to Interest Rate Agreements designed to protect the New Obligor or
such Restricted Subsidiary, as the case may be, against fluctuations in
interest rates in respect of Indebtedness of the New Obligor or such
Restricted Subsidiary, as the case may be, which obligations do not exceed
the aggregate principal amount of such Indebtedness;
(c) Indebtedness of the New Obligor or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets;
(d) Indebtedness of any Restricted Subsidiary under any
warehouse lines of credit, repurchase agreements or similar facilities that
(a) is incurred for the purpose of funding the origination or purchase of
credit card receivables, home equity loan receivables, automobile loans,
leases or installment sales contracts, other consumer receivables, mortgage
loans or mortgage notes that are initially intended to be sold to investors
and (b) is secured by credit card receivables, home equity loan
receivables, automobile loans, leases or installment sales contracts, other
consumer receivables, mortgage loans, mortgage notes, mortgage-backed
securities or any combination thereof owned by such Restricted Subsidiary;
(e) Indebtedness of the New Obligor or any Restricted Subsidiary
in an aggregate principal amount outstanding at any one time (without
duplication) not in excess of $20,000,000 plus 50% of the increase in
Consolidated Net Worth of the New Obligor from the Substitution Date;
provided, however, that such increase in Consolidated Net Worth of the New
Obligor will exclude the
<PAGE>
129
effect of any change in the valuation of the initial investment in the Bank
as recorded on the Substitution Date;
(f) Indebtedness of the New Obligor (at such time as the New
Obligor is not a Wholly Owned Subsidiary of the Trust) to any Person (other
than the Bank or its Subsidiaries) under Current Interest Loans in an
aggregate amount outstanding at any time to all such Persons not in excess
of $40,000,000 (plus any accrued and unpaid interest);
(g) Indebtedness of any Wholly Owned Restricted Subsidiary
(other than the Bank and its Subsidiaries and the Pledged Subsidiary) to
the New Obligor, to the extent permitted by Section 1011, except that any
transfer of any such Indebtedness by the New Obligor to any other Person
shall be deemed to be an incurrence of Indebtedness;
(h) obligations of the New Obligor under the Capital Maintenance
Agreement; provided, however, that this clause (h) is not intended to
include any Indebtedness incurred by the New Obligor in connection with
complying with its obligations pursuant to such agreement;
(i) Indebtedness of the Pledged Subsidiary incurred pursuant to
clause (b)(ix) of Section 1011;
(j) obligations of the Pledged Subsidiary pursuant to hedge
transactions incurred in the ordinary course of business to protect such
Restricted Subsidiary's loan portfolio against fluctuations in prices
resulting from changes in interest rates;
(k) Indebtedness of the New Obligor to the Pledged Subsidiary,
the proceeds of which are used to pay interest on the Securities, except
that any transfer of such Indebtedness by the Pledged Subsidiary will be
deemed to be an incurrence of Indebtedness by the New Obligor; and
(l) any renewals, extensions, substitutions, refinancings or
replacements and any successive refinancings (each, for purposes of this
clause (l), a "refinancing") by the New Obligor or any Restricted
Subsidiary of any Indebtedness of the New Obligor or such Restricted
Subsidiary referred to in clause (e) of this definition and any
Indebtedness of the New Obligor or any Restricted Subsidiary incurred in
accordance with Section 1011 (other than Permitted Indebtedness), so long
as (i) any such new Indebtedness shall be in a principal amount that does
not exceed the principal amount (or, if such Indebtedness being refinanced
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof,
<PAGE>
130
such lesser amount as of the date of determination) so refinanced, plus the
amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness being so refinanced or the amount of any
premium reasonably determined by the New Obligor or such Restricted
Subsidiary, as the case may be, as necessary to accomplish such refinancing
through means of a tender offer or privately negotiated transaction and
(ii) in the case of any refinancing of Indebtedness that is Subordinated
Indebtedness, (A) such new Indebtedness is made subordinate to the
Securities at least to the same extent as the Subordinated Indebtedness
being refinanced and (B) such new Indebtedness has an Average Life to
Stated Maturity and final Stated Maturity of principal that exceeds the
Average Life to Stated Maturity and final Stated Maturity of the
Subordinated Indebtedness being refinanced).
"Permitted Investment" means any Investment (i) in cash, (ii) in Cash
Equivalents, (iii) of up to $10,000,000 in Wholly Owned Restricted
Subsidiaries, (iv) in or by the Bank or its Subsidiaries, (v) in
consideration, not constituting Cash Equivalents, received pursuant to an
Asset Sale made in compliance with Section 1017 in an aggregate amount of
up to 25% of the consideration received with respect to such Asset Sale,
(vi) constituting cash advances on an intercompany open account basis (A)
from the New Obligor to its Restricted Subsidiaries required for working
capital, the payment of interest and premium, if any, on and principal of
any Indebtedness, expenditures for maintenance and capital improvements,
and other operating expenses, to the extent Restricted Subsidiaries have
advanced cash to the New Obligor or (B) from any Restricted Subsidiary to
the New Obligor, of excess cash on hand from time to time, in each case
made in the ordinary course of business and consistent with past practice,
or (vii) in any Wholly Owned Restricted Subsidiary of the New Obligor
resulting from the acquisition of such Subsidiary for Qualified Capital
Stock of the New Obligor or for Qualified Capital Stock of the Trust, such
Subsidiary at the time of such acquisition owning Qualified Capital Stock
of the Bank and having no other assets in excess of $1,000,000 and no
Indebtedness or operations.
"Restricted Subsidiary" means the Bank and its Subsidiaries, the
Pledged Subsidiary and any other Subsidiary of the New Obligor that is not
an Unrestricted Subsidiary.
"Unrestricted Subsidiary" means (i) any Subsidiary of the New Obligor
that at the time of determination shall be an Unrestricted Subsidiary (as
designated by the Board of Directors as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may
designate (a "Designation") any Subsidiary of the New Obligor (other than
the Bank or any of its Subsidiaries, or a Subsidiary that owns any Capital
Stock of, or owns, or holds any Lien on, any property of the New Obligor or
any other Restricted Subsidiary of the New Obligor that is not a Subsidiary
of the Subsidiary to be so designated) to be an Unrestricted Subsidiary if:
(a) no
<PAGE>
131
Default or Event of Default shall have occurred and be continuing at the
time of or after giving effect to such Designation; and (b) the New Obligor
could make an Investment in such Unrestricted Subsidiary at the time of
such Designation (assuming the effectiveness thereof) in an amount (the
"Designation Amount") equal to the Fair Market Value of the Capital Stock
of such Subsidiary on such date. In the event of any such Designation, the
New Obligor shall be deemed to have made an Investment constituting a
Restricted Payment pursuant to Section 1011 of this Indenture for all
purposes of this Indenture in the Designation Amount. The Board of
Directors may revoke (a "Revocation") any Designation of a Subsidiary as an
Unrestricted Subsidiary if: (a) no Default or Event or Default shall have
occurred and be continuing at the time of and after giving effect to such
Revocation; and (b) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such Revocation would, if
incurred at such time, have been permitted to be incurred under the
Indenture. Any Designation or Revocation must be evidenced by a Board
Resolution certifying compliance with the foregoing provisions.
(e) Sections 1010, 1011, 1012, 1014, 1016, 1017, 1018 and 1019 will
be amended and restated in their entirety to read as follows:
Section 1010. Limitation on Indebtedness. The New Obligor will not,
--------------------------
and will not permit any Restricted Subsidiary (other than the Bank and its
Subsidiaries) to, create, issue, assume, guarantee or otherwise in any
other manner become directly or indirectly liable for the payment of, or
otherwise incur (collectively, "incur"), any Indebtedness (including any
Acquired Indebtedness), other than Permitted Indebtedness, unless at the
time of such incurrence the New Obligor's Operating Cash Flow Coverage
Ratio for the four full fiscal quarters immediately preceding the
incurrence of such Indebtedness (or, if the period since the Substitution
Date is less than four fiscal quarters, such shorter period on an
annualized basis; provided that in no event will such shorter period be
less than one fiscal quarter), taken as one period and after giving pro
forma effect to (i) the incurrence of such Indebtedness (and all other
Indebtedness incurred by the New Obligor and its Restricted Subsidiaries
since the end of the most recently completed fiscal quarter of the New
Obligor preceding the date of determination) and (if applicable) the
application of the net proceeds therefrom (and from any such other
Indebtedness), including to refinance other Indebtedness, as if such
Indebtedness (and any such other Indebtedness) had been incurred on the
first day of such four-quarter period (or, if the period since the
Substitution Date is less than four fiscal quarters, the first day of such
shorter period) and (ii) the acquisition (whether by purchase, merger or
otherwise) or disposition (whether by sale, merger or otherwise) of any
company, entity or business acquired or disposed of by the New Obligor or
its Restricted Subsidiaries, as the case may be, since the first day of
such four quarter period (or, if the period since the Substitution Date is
less than four fiscal quarters, the first day of such shorter period), as
if such acquisition or disposition occurred on the first day of such four
quarter period (or, if the period since the Substitution Date is less
<PAGE>
132
than four fiscal quarters, the first day of such shorter period), would
have been greater than or equal to (x) 2.0 to 1.0 prior to April 1, 1999,
(y) 2.25 to 1.0 on and after April 1, 1999 and prior to April 1, 2000 and
(z) 2.50 to 1.0 thereafter.
Section 1011. Limitation on Restricted Payments. (a) The New
---------------------------------
Obligor will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, take any of the following actions:
(i) declare or pay any dividend on, or make any distribution
to holders of, any shares of the Capital Stock of the New Obligor
(other than dividends or distributions payable solely in shares of the
Qualified Capital Stock of the New Obligor or in options, warrants or
other rights to acquire such shares of Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Capital Stock of the New Obligor or any
direct or indirect parent of the New Obligor or any options, warrants
or other rights to acquire such Capital Stock;
(iii) declare or pay any dividend on, or make any distribution
to holders of, any Capital Stock of any Restricted Subsidiary (other
than with respect to (A) any such Capital Stock held by the New
Obligor or any of its Wholly Owned Restricted Subsidiaries or (B) any
such Capital Stock of the Bank or any of its Subsidiaries) or
purchase, redeem or otherwise acquire or retire for value, any Capital
Stock of any Subsidiary of the New Obligor (other than (A) any such
Capital Stock of any Wholly Owned Restricted Subsidiary (other than
the Bank and its Subsidiaries), (B) any Capital Stock held by the Bank
or its Subsidiaries of any of their Subsidiaries or (C) any Capital
Stock of any Securitization Entity that is a Subsidiary of the Bank);
(iv) make any principal payment on or repurchase, redeem,
defease or otherwise acquire or retire for value, prior to any
scheduled principal payment, scheduled sinking fund payment or
maturity, any Subordinated Indebtedness;
(v) incur, create or assume any guarantee of Indebtedness of
any Affiliate of the New Obligor (other than with respect to (A)
guarantees of Indebtedness of any Wholly Owned Restricted Subsidiaries
of the New Obligor by the New Obligor or by any Restricted Subsidiary
(other than by the Bank or any of its Subsidiaries), (B) guarantees of
Indebtedness of the Bank or any of its Subsidiaries by another
Subsidiary of the Bank or any guarantee by the Bank of Indebtedness of
any of its Subsidiaries, (C) guarantees of Indebtedness of the New
Obligor by any Restricted Subsidiary (other than the Bank and its
<PAGE>
133
Subsidiaries) or (D) guarantees of Indebtedness of the Bank or its
Subsidiaries by any Affiliate of the New Obligor); or
(vi) make any Investment in any Person
(each of the foregoing actions described in (but not excluded from) clauses
(i) through (vi), other than any such action that is a Permitted Payment
(as defined below), is referred to herein as a "Restricted Payment"),
provided that such Restricted Payments may be made by the New Obligor or
any Restricted Subsidiary (other than the Bank and its Subsidiaries) if,
after giving effect to the proposed Restricted Payment (the amount of any
such Restricted Payment, if other than cash, as determined in good faith by
the Board of Directors of the New Obligor, whose determination shall be
conclusive and evidenced by a Board Resolution), (1) no Default or Event of
Default shall have occurred and be continuing and (2) the aggregate amount
of all such Restricted Payments declared or made after the date of the
Indenture shall not exceed the sum (without duplication) of:
(A) 50% of the aggregate Consolidated Net Income (Loss) of the
New Obligor accrued on a cumulative basis during the period beginning
on the Substitution Date and ending on the last day of the New
Obligor's last fiscal quarter ending prior to the Interest Payment
Date immediately preceding the date of such proposed Restricted
Payment (or, if such Consolidated Net Income (Loss) shall be a loss,
minus 100% of such loss);
(B) the aggregate net cash proceeds received after the
Substitution Date by the New Obligor from the issuance or sale (other
than to any of its Subsidiaries) of shares of Qualified Capital Stock
of the New Obligor or warrants, options or rights to purchase shares
of such Qualified Capital Stock of the New Obligor;
(C) the aggregate net cash proceeds received after the
Substitution Date by the New Obligor as capital contributions;
(D) the aggregate net cash proceeds received after the
Substitution Date by the New Obligor (other than from any of its
Subsidiaries) upon the exercise of options, warrants or rights to
purchase shares of Qualified Capital Stock of the New Obligor;
(E) the aggregate net cash proceeds received after the
Substitution Date by the New Obligor from the issuance or sale (other
than to any of its Subsidiaries) of debt securities that have been
converted into or exchanged for Qualified Capital Stock of the New
Obligor, together with the aggregate net
<PAGE>
134
cash proceeds received by the New Obligor at the time of such
conversion or exchange; and
(F) the sum of (i) the Available Amount on the Substitution
Date, if any, and (ii) $7,500,000;
provided that the provisions of paragraph (a) will not restrict the payment
of any dividend within 60 days after the date of declaration thereof if, at
such date of declaration, such declaration and payment were permitted by
the provisions of paragraph (a).
(b) Notwithstanding paragraph (a) above, the New Obligor and its
Restricted Subsidiaries may take the following actions (each a "Permitted
Payment") so long as (other than with respect to (1) clause (v) below to
the extent such exchange is required by the OTS and (2) clause (viii) below
with respect to the Investment of funds by the Bank and its Subsidiaries in
the normal course of business) no Default or Event of Default shall have
occurred and be continuing:
(i) the purchase, redemption or other acquisition or
retirement for value of any shares of Capital Stock of the New
Obligor, in exchange for, or out of the net cash proceeds of, a
substantially concurrent issuance and sale (other than to any of its
Subsidiaries) of shares of Qualified Capital Stock of the New Obligor;
(ii) (A) the repurchase, redemption, defeasance or other
acquisition or retirement for value by the Bank of the 13% Preferred
Stock or the Series B Preferred Stock, in exchange for, or out of the
net cash proceeds of, a substantially concurrent issuance and sale
(other than to a Subsidiary of the New Obligor) of, shares of
Qualified Capital Stock of the Bank or out of the net cash proceeds of
a substantially concurrent incurrence (other than to a Subsidiary of
the New Obligor) of new Indebtedness of the Bank which has no Stated
Maturity of principal (or any required repurchase, redemption,
defeasance or sinking fund payments, other than as a result of a
change of control provision similar to the Securities) on or prior to
the final Stated Maturity of principal of the Securities or (B) the
acquisition by an Affiliate of the Bank of the 13% Preferred Stock or
the Series B Preferred Stock (and the contribution thereof to the Bank
for retirement and cancellation) with the proceeds of a cash
distribution from the Bank out of the net cash proceeds of a
substantially concurrent issuance and sale (other than to a Subsidiary
of the New Obligor) of shares of Qualified Capital Stock of the Bank
or out of the net cash proceeds of a substantially concurrent
incurrence (other than to a Subsidiary of the New Obligor) of new
Indebtedness of the Bank which has no Stated Maturity of principal (or
any required repurchase, redemption, defeasance or sinking fund
payments, other than as a
<PAGE>
135
result of a change of control provision similar to the Securities) on
or prior to the final Stated Maturity of principal of the Securities;
provided that, after giving effect to such issuance and sale or such
incurrence and repurchase, redemption, defeasance or other acquisition
or retirement, or such acquisition and contribution and distribution,
the Bank has (i) a leverage (core) capital ratio equal to or in excess
of 5.5%, (ii) a tier 1 risk-based capital ratio equal to or in excess
of 6.5% and (iii) a total risk-based capital ratio equal to or in
excess of 11%, as such ratios are calculated in accordance with 12
C.F.R. Section 567 or any successor law or regulation;
(iii) the repurchase, redemption, defeasance or other
acquisition or retirement for value by the Bank or any of its
Subsidiaries of Preferred Stock of the Bank or its Subsidiaries (other
than the 13% Preferred Stock and the Series B Preferred Stock);
provided that, after giving effect to such repurchase, redemption,
defeasance or other acquisition or retirement, the Bank has (i) a
leverage (core) capital ratio equal to or in excess of 5.5%, (ii) a
tier 1 risk-based capital ratio equal to or in excess of 6.5% and
(iii) a total risk-based capital ratio equal to or in excess of 11%,
as such ratios are calculated in accordance with 12 C.F.R. Section 567
or any successor law or regulation;
(iv) the redemption by the Bank of any of the PIK Preferred
Stock;
(v) the exchange of the CCPCC Preferred Stock for the Series B
Preferred Stock;
(vi) the purchase, redemption, defeasance or other acquisition
or retirement for value of any Subordinated Indebtedness (other than
Redeemable Capital Stock) in exchange for or out of the net cash
proceeds of a substantially concurrent issuance and sale (other than
to a Subsidiary of the New Obligor) of shares of Qualified Capital
Stock of the New Obligor;
(vii) the repurchase of any Subordinated Indebtedness at a
purchase price not greater than 101% of the principal amount of such
Subordinated Indebtedness in the event of a Change of Control pursuant
to a provision similar to Section 1021; provided that prior to such
repurchase the New Obligor has made the Change of Control Offer as
provided in Section 1021 with respect to the Securities and has
repurchased all Securities validly tendered for payment in connection
with such Change of Control Offer;
(viii) Permitted Investments;
(ix) the transfer or distribution to the New Obligor or a
Wholly Owned Restricted Subsidiary of the New Obligor (other than the
Bank and its
<PAGE>
136
Subsidiaries) of all of the Capital Stock of one and only one
Subsidiary of the Bank (such Subsidiary or, in the event such
Subsidiary is merged with and into such Wholly Owned Restricted
Subsidiary, such Wholly Owned Restricted Subsidiary, is referred to as
the "Pledged Subsidiary"); provided that (1) the Fair Market Value of
the equity of the Pledged Subsidiary is not in excess of 5% of the sum
of (A) the Fair Market Value of the equity of such Subsidiary and (B)
the Fair Market Value of the Qualified Capital Stock of the Bank owned
by the New Obligor at the time of such transfer, (2) at the time of
such distribution the Trustee receives a first priority lien on and
security interest in the Capital Stock of the Pledged Subsidiary to
secure the payment of the Secured Obligations, (3) any Indebtedness
incurred in connection with, or in contemplation of such transfer or
distribution will not exceed the greater of (x) $10,000,000 or (y) 80%
of the Fair Market Value of the equity of the Pledged Subsidiary, (4)
the New Obligor will not, and will not permit the Pledged Subsidiary
to, directly or indirectly, create, incur, assume or suffer to exist
any kind of Lien on or with respect to the property or assets of such
Pledged Subsidiary or any income, profits or proceeds therefrom other
than a Lien in favor of the Bank or a Lien with respect to
Indebtedness incurred pursuant to clauses (d) and (j) of the
definition of Permitted Indebtedness (which Liens will be permitted
notwithstanding Section 1015), (5) the Pledged Subsidiary will not
have at the time of such transfer or thereafter any Subsidiaries, and
(6) the Pledged Subsidiary will not make loans to or Investments in
any Affiliate of the New Obligor (other than the Bank and except as
otherwise permitted by clause (a)(ii) of Section 1014) or make any
distributions on or with respect to, or redeem, its Capital Stock;
provided that the merger permitted by this clause (ix) will not be a
change in Collateral requiring amendment or consent under this
Indenture so long as the Consolidated Net Worth of the resulting
entity is not less than that of the Subsidiary distributed by the
Bank;
(x) the purchase, redemption or other acquisition or
retirement for value, directly or indirectly, of any shares of
Qualified Capital Stock of the Bank (other than Preferred Stock) by
the Bank;
(xi) the making of a Current Interest Loan pursuant to clause
(f) of the definition of Permitted Indebtedness and the repayment of
any such Current Interest Loan so long as at the time of such
repayment (a) the New Obligor has paid the interest on the Securities
for the two consecutive Interest Payment Dates immediately preceding
such repayment and (b) during such period the New Obligor has incurred
no additional Indebtedness pursuant to clause (f) of the definition of
Permitted Indebtedness; provided that until such time as all Current
Interest Loans have been repaid, the New Obligor will not be permitted
to make any Restricted Payment in cash pursuant to clause (a)(i) of
this Section
<PAGE>
137
1011; provided further that repayments of Current Interest Loans may
only be made pursuant to the conditions in this clause (b)(xi);
(xii) the making and repayment of any loan from the Pledged
Subsidiary pursuant to clause (k) of the definition of "Permitted
Indebtedness"; and
(xiii) the repurchase, redemption or other acquisition or
retirement for value of Subordinated Indebtedness (other than
Redeemable Capital Stock), in exchange for, or out of the net cash
proceeds of a substantially concurrent issue and sale (other than to a
Subsidiary) of new Subordinated Indebtedness of the New Obligor (such
a transaction, a "refinancing"); provided that any such new
Indebtedness of the New Obligor (A) shall be in a principal amount
that does not exceed an amount equal to the sum of (1) 101% of an
amount equal to the principal amount so refinanced less any discount
from the face amount of the Indebtedness to be refinanced expected to
be deducted from the amount payable to the holders of such
Indebtedness in connection with such refinancing, (2) the amount of
any premium expected to be paid in connection with such refinancing
pursuant to the terms of the Subordinated Indebtedness refinanced or
the amount of any premium reasonably determined by the New Obligor as
necessary to accomplish such refinancing by means of a tender offer,
privately negotiated repurchase or otherwise and (3) the amount of
expenses of the New Obligor incurred in connection with such
refinancing; provided further that for purposes of this clause (A),
the principal amount of any Indebtedness shall be deemed to mean the
principal amount thereof or, if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of
the date of determination; (B) (x) if such refinanced Subordinated
Indebtedness has an Average Life to Stated Maturity shorter than that
of the Securities or a final Stated Maturity earlier than the final
Stated Maturity of the Securities, such new Indebtedness shall have an
Average Life to Stated Maturity no shorter than the Average Life to
Stated Maturity of such refinanced Indebtedness and a final Stated
Maturity no earlier than the final Stated Maturity of such refinanced
Indebtedness or (y) in all other cases, each Stated Maturity of
principal (or any required repurchase, redemption or sinking fund
payments) of such new Indebtedness shall be on or after the final
Stated Maturity of principal of the Securities; and (C) is (x) made
expressly subordinate to the Securities to substantially the same
extent as the Subordinated Indebtedness being refinanced or (y)
expressly subordinated to such refinanced Subordinated Indebtedness.
The actions described in clauses (i), (vi) and (vii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be taken in
accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for
<PAGE>
138
Restricted Payments under clause (2) of paragraph (a) above to the extent,
in the case of clauses (i) and (vi), the New Obligor receives net cash
proceeds and applies them as described in such clauses (i) and (vi), and
the actions described in clauses (ii), (iii), (iv), (v), (viii), (ix), (x),
(xi), (xii) and (xiii) of this paragraph (b) shall be Restricted Payments
that shall be permitted to be taken in accordance with this paragraph and
shall not reduce the amount that would otherwise be available for
Restricted Payments under clause (2) of paragraph (a).
Section 1012. Limitation on Issuances and Sales of Capital Stock of
-----------------------------------------------------
Restricted Subsidiaries. The New Obligor (i) will not permit any of its
-----------------------
Restricted Subsidiaries (other than the Bank and its Subsidiaries) to issue
any Capital Stock (other than to the New Obligor or a Wholly Owned
Restricted Subsidiary of the New Obligor) and (ii) other than with respect
to Capital Stock of the Bank and its Subsidiaries, will not permit any
Person (other than the New Obligor or a Wholly Owned Restricted Subsidiary)
to own any Capital Stock of any of its Restricted Subsidiaries; provided,
however, that this covenant shall not prohibit (A) the issuance and sale of
all, but not less than all, of the issued and outstanding Capital Stock of
any Restricted Subsidiary owned by the New Obligor or any of its Restricted
Subsidiaries in compliance with the other provisions of the Indenture or
(B) the ownership by directors of director's qualifying shares or the
ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law; provided further,
however, that the Bank will not, and will not permit any Subsidiary of the
Bank to, create any class of common stock if such class of common stock
provides for, or entitles any holder thereof to, the payment of dividends
or distributions of any kind on any basis other than on a pro rata basis,
consistent with the ownership interests of all the holders of the common
stock of the Bank or of such Subsidiary, as the case may be, to the holders
of all classes of common stock of the Bank or such Subsidiary, as the case
may be.
Section 1014. Limitation on Transactions with Affiliates. (a) The
------------------------------------------
New Obligor will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any transaction or
series of related transactions (including, without limitation, the sale,
purchase, exchange or lease of assets, property or services) with any
Affiliate of the New Obligor (except that the Bank and any of its
Subsidiaries may enter into any transaction or series of related
transactions with any Subsidiary of the Bank and the New Obligor and any
Wholly Owned Restricted Subsidiary of the New Obligor (other than the Bank
and its Subsidiaries) may enter into any transaction or series of related
transactions with any other Wholly Owned Restricted Subsidiary without
limitation under this covenant) unless (1) such transaction or series of
related transactions is in writing on terms that are no less favorable to
the New Obligor or such Restricted Subsidiary of the New Obligor, as the
case may be, than would be available in a comparable transaction in an
arm's-length dealing with a Person that is not such an Affiliate or, in the
absence of such a comparable transaction, on terms that in good faith would
be offered to a Person that is not an Affiliate, (2) with respect to any
transaction
<PAGE>
139
or series of related transactions in which the New Obligor and its
Restricted Subsidiaries will receive or render value or incur obligations
or make aggregate payments in excess of $5,000,000, the New Obligor
delivers an Officers' Certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (1)
above and such transaction or series of related transactions has been
approved by a majority of the Disinterested Directors of the Board of
Directors of the New Obligor and (3) with respect to any transaction or
series of related transactions in which the New Obligor and its Restricted
Subsidiaries will receive or render value or incur obligations or make
aggregate payments in excess of $20,000,000, or in the event no members of
the Board of Directors of the New Obligor are Disinterested Directors with
respect to any transaction or series of related transactions included in
clause (2), the New Obligor delivers to the Trustee a written opinion of a
nationally recognized expert with experience in appraising the terms and
conditions of the type of transaction or series of transactions for which
approval is required to the effect that the transaction or series of
transactions are fair to the New Obligor and such Restricted Subsidiary
from a financial point of view; provided, however, that this covenant will
not restrict (i) transactions entered into pursuant to any agreement in
effect on the Substitution Date and not made in contemplation of the
Substitution, (ii) residential mortgage, credit card and other consumer
loans to an Affiliate who is an officer, director or employee of the New
Obligor or any of its Subsidiaries, (iii) any transaction or series of
related transactions in which the total amount involved does not exceed
$100,000, (iv) payment of legal expenses incurred on behalf of the New
Obligor or its Subsidiaries; provided, however, that such expenses paid by
the Bank and its Subsidiaries for or on behalf of the New Obligor or any
other Restricted Subsidiary (other than a Subsidiary of the Bank) shall not
exceed $500,000 in any fiscal year, (v) transactions permitted under
Section 1011, (vi) checking or other deposit products and investment
management and advisory services and insurance products, in each case that
the Bank and its subsidiaries customarily offer to their respective
customers in the ordinary course of business, (vii) payments pursuant to
the Tax Sharing Agreement, (viii) payments by the New Obligor to the Bank
pursuant to the Capital Maintenance Agreement, and (ix) the contribution of
Cash Equivalents to the New Obligor or any Restricted Subsidiary (other
than the Bank and its Subsidiaries) in return for Qualified Capital Stock
of the New Obligor or such Restricted Subsidiary.
(b) If the Bank shall fail to comply with any of its Regulatory
Capital Requirements set forth in clauses (i) and (ii)(x) of the definition
thereof, then the New Obligor shall not and shall not permit any of its
Restricted Subsidiaries (other than the Bank or its Subsidiaries) to,
directly or indirectly, make any payments pursuant to clause (a)(iv) above,
any Restricted Payments otherwise permitted by clause (a)(2) of Section
1011, any Permitted Payments, other than actions permitted by clauses (iv),
(v) and (xiii) of paragraph (b) of Section 1011, or any Investments in any
Person (other than Permitted Investments permitted by clause (i), (ii),
(iv) or (vi) of the definition thereof) or otherwise engage in any activity
(including purchases, acquisition by lease
<PAGE>
140
and other acquisitions of additional real property and buildings) other
than operating its then existing businesses in the ordinary course until
the Bank shall have complied with such Regulatory Capital Requirements.
Section 1016. Restriction on Transfer of Assets to Subsidiaries. The
-------------------------------------------------
New Obligor will not sell, convey, transfer or otherwise dispose of its
assets or property to any of its Subsidiaries except for sales,
conveyances, transfers or other dispositions of assets or property in an
amount permitted by Section 1011.
Section 1017. Limitation on Sale of Assets. The New Obligor will not,
----------------------------
and will not permit any of its Restricted Subsidiaries (other than the Bank
and its Subsidiaries) to, engage in any Asset Sale unless (i) the
consideration received by the New Obligor or such Restricted Subsidiary for
such Asset Sale is not less than the fair market value of the Capital Stock
or assets sold (as determined by the Board of Directors of the New Obligor,
whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) the consideration received by the New Obligor or the
relevant Restricted Subsidiary in respect of such Asset Sale consists of at
least 75% Cash Equivalents.
Section 1018. [Intentionally omitted]
Section 1019. Limitation on Dividend and Other Payment Restrictions
-----------------------------------------------------
Affecting Restricted Subsidiaries. The New Obligor will not, and will not
---------------------------------
permit any of its Restricted Subsidiaries (other than the Bank and its
Subsidiaries) to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any such Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distributions on or in respect of its Capital
Stock or any other interest or participation in, or measured by, its
profits, (b) pay any Indebtedness owed to the New Obligor or any other
Restricted Subsidiary, (c) make loans or advances to the New Obligor or any
other Restricted Subsidiary, (d) transfer any of its properties or assets
to the New Obligor or any Restricted Subsidiary or (e) guarantee any
Indebtedness of the New Obligor or any Restricted Subsidiary, except for
such encumbrances or restrictions existing under or by reason of (i)
applicable law, (ii) customary non-assignment provisions of any lease
governing a leasehold interest or equipment of the New Obligor or any
Restricted Subsidiary, (iii) customary due on sale and other restrictions
on transfer contained in mortgages and deeds of trust, (iv) the Indenture
and (v) any Indebtedness incurred by the Pledged Subsidiary pursuant to
clause (d) of the definition of "Permitted Indebtedness."
This Indenture may be signed in any number of counterparts each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Indenture.
<PAGE>
141
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
By__________________________
Title:
Attest:_______________________
Title:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By__________________________
Title:
<PAGE>
EXHIBIT A
[FACE OF NOTE]
B. F. SAUL REAL ESTATE INVESTMENT TRUST
9 3/4% [Series B]/*/ Senior Secured Note due 2008
CUSIP
No. ________ $
B. F. SAUL REAL ESTATE INVESTMENT TRUST, an unincorporated business
trust existing and operating under a declaration of trust governed by the laws
of the State of Maryland (the "Trust," which term includes any successor under
the Indenture hereinafter referred to), for value received, promises to pay to
________________, or its registered assigns, the principal sum of _________
($__________), on April 1, 2008.
[Initial Interest Rate: 9 3/4% per annum.]/**/
[Interest Rate: 9 3/4% per annum.]/*/
Interest Payment Dates: October 1 and April 1, commencing
October 1,1998.
Regular Record Dates: September 15 and March 15 .
This Note is a nonrecourse obligation of the Trust, and the sole
recourse for collection of principal, premium, if any, and interest on this Note
will be against the Pledged Bank Stock and the other Collateral. The Trust's
obligations under this Note are not guaranteed directly or indirectly by the
Trust or any of its subsidiaries (including the Bank and its subsidiaries), and
the Trust shall not be liable in any respect (except to the extent of its
interest in the Pledged Bank Stock and the other Collateral) for the payment of
any obligation due under this Note.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
__________________________
/*/ Include only for Exchange Securities.
/**/ Include only for Exchange Securities.
<PAGE>
A-2
IN WITNESS WHEREOF, the Trust has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
Date: B. F. SAUL REAL ESTATE
INVESTMENT TRUST
By:_________________________________________
Title:
Attest:________________________________
Title:
<PAGE>
A-3
(Form of Trustee's Certificate of Authentication)
CERTIFICATE OF AUTHENTICATION
This is one of the 9 3/4% [Series B]/*/ Senior Secured Notes due 2008 described
in the within-mentioned Indenture.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
as Trustee
By:________________________
Authorized Signatory
___________________
/*/ Include only for Exchange Securities.
<PAGE>
A-4
[REVERSE SIDE OF NOTE]
B. F. SAUL REAL ESTATE INVESTMENT TRUST
9 3/4% [Series B]/*/ Senior Secured Note due 2008
1. Principal and Interest.
----------------------
The Trust will pay the principal of this Note on April 1, 2008.
The Trust promises to pay interest on the principal amount of this
Note on each Interest Payment Date, as set forth below, at the rate of 9 3/4%
per annum (subject to adjustment as provided below) [except that interest
accrued on this Note (or the predecessor Note hereto) pursuant to the
penultimate paragraph of this Section 1 for periods prior to the applicable
Exchange Date (as such term is defined in the Registration Rights Agreement)
will accrue at the rate or rates borne by the predecessor Note hereto from time
to time during such periods pursuant to the Registration Rights Agreement as set
forth below]./*/
Interest will be payable semiannually on each Interest Payment Date,
commencing October 1, 1998, to the holders of record of the Notes or any
predecessor Notes at the close of business on the September 15 or March 15
immediately preceding the Interest Payment Date.
[The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of March 25, 1998, between the Trust and
the Initial Purchasers party thereto (the "Registration Rights Agreement"). In
the event that (i) the Exchange Offer Registration Statement is not filed with
the Commission on or prior to the 45th calendar day following the date hereof,
(ii) the Exchange Offer Registration Statement is not declared effective on or
prior to the 150th day following the date hereof, or (iii) the Exchange Offer is
not consummated prior to the 180th day following the date hereof or a Shelf
Registration Statement with respect to the Registrable Notes is not declared
effective on or prior to the 180th day following the date hereof, the interest
rate borne by the Notes shall be increased by one-half of one percent per annum
following such 45-day period in the case of clause (i) above, following such
150-day period in the case of clause (ii) above or following such 180-day period
in the case of clause (iii) above, which rate will be increased by an additional
one-half of one percent per annum for each 30-day period that any additional
interest continues to accrue, provided that the aggregate increase in such
interest rate will in no event exceed one percent per annum. Upon (x) the
filing of the Exchange Offer Registration Statement after the
_________________________
/*/ Include only for Exchange Securities.
<PAGE>
A-5
45-day period described in clause (i) above, (y) the effectiveness of the
Exchange Offer Registration Statement after the 150-day period described in
clause (ii) above or, (z) consummation of the Exchange Offer, or the
effectiveness of the Shelf Registration Statement, as the case may be, after the
180-day, period described in clause (iii) above, the interest rate borne by the
Notes from the date of such filing, effectiveness or consummation, as the case
may be, will be reduced to the original interest rate if the Trust is otherwise
in compliance with this paragraph; provided, however, that, if after any such
reduction in interest rate, a different event specified in clauses (i), (ii) or
(iii) above occurs, the interest rate will again be increased and thereafter
reduced pursuant to the foregoing conditions. If the Trust issues a notice that
the Shelf Registration Statement is unusable pending the announcement of a
material corporate transaction, or such a notice is required under applicable
securities laws to be issued by the Trust, and the aggregate number of days in
any consecutive twelve-month period for which all such notices are issued or
required to be issued exceeds 30 days per occurrence or more than 90 days in the
aggregate in a calendar year, then the interest rate borne by the Notes will be
increased by one-half of one percent per annum following the date that such
Shelf Registration Statement ceases to be usable beyond the period permitted
above, which rate shall be increased by an additional one-half of one percent
per annum for each subsequent 30-day period that such additional interest
continues to accrue; provided that the aggregate increase in such annual
interest rate may in no event exceed one percent per annum. Upon the Trust
declaring that the Shelf Registration Statement is usable after the interest
rate has been increased pursuant to the preceding sentence, the interest rate
borne by the Notes will be reduced to the original interest rate if the Trust is
otherwise in compliance with this paragraph; provided, however, that if after
any such reduction in interest rate a different event of the kind described in
the preceding event occurs, the interest rate will again be increased and
thereafter reduced pursuant to the foregoing conditions.]/*/
If certain Defaults specified in the Indenture, occurs and are
continuing, or an Event of Default occurs and is continuing, the interest rate
borne by the Notes will be increased by 2% per annum until such Default or Event
of Default, as the case may be, is cured or waived. Such interest will accrue
from the date of such Default or Event of Default, as the case may be, and will
be payable after the time the Trust has knowledge of such Default or Event of
Default. If not paid on any Interest Payment Date, the Trust may elect to make
payment of any such interest to the Persons in whose names the Note (or
predecessor Note) is registered at the close of business on a Special Record
Date or in any other lawful manner not inconsistent with the requirements of any
Securities exchange on which the notes are listed.
Interest on this Note will accrue from the most recent date to which
interest has been paid [on this Note or the Note surrendered in exchange
therefor]/**/ or, if no interest has
______________________
/*/ Include only for Initial Securities.
/**/ Include only for Initial Securities.
<PAGE>
A-6
been paid, from March 25, 1998; provided that, if there is no existing default
--------
in the payment of interest and if this Note is authenticated between a Regular
Record Date referred to on the face hereof and the next succeeding Interest
Payment Date, interest shall accrue from such Interest Payment Date. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
The Trust will pay interest on overdue principal and premium, if any,
and interest on overdue installments of interest, to the extent lawful, at a
rate per annum equal to the rate of interest applicable to the Notes.
2. Substitution of Obligor on the Notes
------------------------------------
The Indenture provides that, subject to certain conditions, the Trust
may elect to transfer the obligations under the Notes and the Indenture,
together with the ownership of the Pledged Bank Stock and the other Collateral,
to the New Obligor (as defined in the Indenture). Thereafter, the Note will be
a nonrecourse obligation of the New Obligor, and the sole recourse for
collection of principal, premium, if any, and interest on this Note will be
against the Pledged Bank Stock and the other Collateral. The New Obligor's
obligations under this Note will not be guaranteed directly or indirectly by the
New Obligor or any of its subsidiaries (including the Bank and its
subsidiaries), and the New Obligor shall not be liable in any respect (except to
the extent of its interest in the Pledged Bank Stock and the other Collateral)
for the payment of any obligations under this Note.
3. Method of Payment.
-----------------
The Trust will pay interest (except Defaulted Interest and Additional
Interest) on the principal amount of the Notes on each October 1 and April 1 to
the persons who are Holders (as reflected in the Security Register at the close
of business on the September 15 or March 15 immediately preceding the Interest
Payment Date), in each case, even if the Note is canceled on registration of
transfer or registration of exchange after such record date. The Trust will pay
the principal of this Note to the Holder that surrenders this Note to any Paying
Agent on or after April 1, 2008.
The Trust will pay principal, premium, if any, and interest in money
of the United States that at the time of payment is legal tender for payment of
public and private, debts. However, the Trust may pay principal, premium, if
any, and, except to the extent otherwise provided in the Indenture, interest by
its check payable in such money. The Trust will pay interest payable by check
by mailing such check to a Holder's registered address (as reflected in the
Security Register). If a payment date is a date other than a Business Day,
payment may be made on the next succeeding day that is a Business Day and,
subject to the provisions of the Indenture, no interest shall accrue for the
intervening period.
<PAGE>
A-7
4. Paying Agent and Registrar.
--------------------------
Initially, the Trustee will act as authenticating agent, Paying Agent
and Securities Registrar. The Trust may change any authenticating agent, Paying
Agent or Securities Registrar upon written notice thereto. The Trust, any
Subsidiary or any Affiliate of any of them may act as Paying Agent, Securities
Registrar or co-registrar.
5. Indenture; Limitations.
----------------------
The Trust issued the Notes under an Indenture, dated as of March 25,
1998 (the "Indenture"), between the Trust and Norwest Bank Minnesota, National
Association as trustee (the "Trustee"). Capitalized terms herein are used as
defined in the Indenture unless otherwise indicated. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act. The Notes are subject to all such terms,
and Holders are referred to the Indenture and the Trust Indenture Act for a
statement of all such terms. To the extent permitted by applicable law, in the
event of any inconsistency between the terms of this Note and the terms of the
Indenture, the terms of the Indenture shall control.
The Notes are secured general obligations of the Trust, secured by the
Collateral. The Indenture limits the aggregate principal amount of the Notes to
$200,000,000.
6. Redemption.
----------
The Notes may be redeemed at the option of the Trust, as a whole or
from time to time in part, at any time on or from time to time on or after April
1, 2003 at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to but excluding
the Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date to receive interest due on the applicable Interest Payment
Date), if redeemed during the 12-month period beginning April 1 of each of the
years set forth below:
Redemption
Year Price
---- ------
2003........................................ 104.875%
2004........................................ 103.250%
2005........................................ 101.625%
2006 and thereafter......................... 100.000%
Notice of a redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each Holder of Notes to be redeemed
at such Holder's last address as it appears in the Security Register. Notes in
original denominations larger than
<PAGE>
A-8
$1,000 may be redeemed in part in integral multiples of $1,000. On and after the
Redemption Date, interest ceases to accrue on Notes or portions of Notes called
for redemption, unless the Trust defaults in the payment of the Redemption
Price.
In addition to the optional redemption of the Notes in accordance with
the provisions of the preceding paragraph, at any time prior to April 1, 2003,
the Notes will be redeemable at the option of the Trust, in whole or in part, on
not less than 30 nor more than 60 days' prior written notice to each holder of
Notes to be redeemed, at a redemption price equal to the sum of (x) the
principal amount thereof, plus (y) accrued and unpaid interest, if any, to the
applicable date of redemption, plus (z) the Applicable Premium.
7. Repurchase upon a Change in Control.
-----------------------------------
Upon the occurrence of a Change in Control, the Trust shall be
obligated to make an offer to repurchase such Holder's Notes, in whole or in
part, in integral multiples of $1,000, at a purchase price in cash in an amount
equal to 101% of the principal amount thereof, plus accrued interest (if any) to
the date of purchase (the "Change in Control Payment").
A notice of each Change in Control will be mailed within 30 days after
such Change in Control occurs to each Holder at his last address as it appears
in the Security Register. Notes in original denominations larger than $1,000
may be sold to the Trust in part. On and after the Change in Control Purchase
Date, interest ceases to accrue on Notes or portions of Notes surrendered for
purchase by the Trust, unless the Trust defaults in the payment of the Change in
Control Payment.
8. Denominations; Transfer; Exchange.
---------------------------------
The Notes are in registered form without coupons, in denominations of
$1,000 and multiples of $1,000 in excess thereof. A Holder may register the
transfer or exchange of Notes in accordance with the Indenture. The Registrar
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay any taxes and fees required by law or
permitted by the Indenture. The Registrar need not register the transfer or
exchange of any Notes selected for redemption (except the unredeemed portion of
any Note being redeemed in part). Also, it need not register the transfer or
exchange of any Notes for a period of 15 days before a selection of Notes to be
redeemed is made.
9. Persons Deemed Owners.
---------------------
A Holder may be treated as the owner of a Note for all purposes.
10. Unclaimed Money.
---------------
<PAGE>
A-9
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay the
money back to the Trust. After that, Holders entitled to the money must look to
the Trust for payment, unless an abandoned property law designates another
Person, and all liability of the Trustee and such Paying Agent with respect to
such money shall cease.
11. Amendment; Supplement; Waiver.
-----------------------------
Subject to certain exceptions, the Indenture or the Notes may be
amended or supplemented with the consent of the Holders of greater than 50% in
aggregate principal amount of the Notes then outstanding, and any existing
default or compliance with any provision may be waived with the consent of the
Holders of greater than 50% in aggregate principal amount of the Notes then
outstanding. Without notice to or the consent of any Holder, the parties
thereto may amend or supplement the Indenture or the Notes to, among other
things, cure any ambiguity or inconsistency provided such change does not
adversely affect in any material respect the interests of the Holders of the
Notes.
12. Restrictive Covenants.
---------------------
The Indenture contains certain covenants, including but not limited
to, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
transactions with affiliates; (iv) limitation on asset sales; (v) restriction on
transfer of assets to subsidiaries; (vi) limitation on Restricted Subsidiaries;
(vii) limitation on dividend and other payment restrictions affecting Restricted
Subsidiaries; (viii) limitation on issuances and sales of Restricted Subsidiary
stock; (ix) required ownership of Bank common stock; (x) limitation on disposal
of, or liens on, the Collateral; (xi) restriction on use of proceeds to purchase
securities; (xii) change of control; and (xiii) restrictions on merger,
consolidation and sale of assets of the Trust. At the end of each fiscal
quarter, the Trust must report to the Trustee on compliance with such covenants.
13. Successor Persons.
-----------------
When a successor Person assumes all the obligations of its predecessor
under the Notes and the Indenture in accordance with the Indenture (including,
but not limited to, the New Obligor), the predecessor Person will be released
from those obligations.
<PAGE>
A-10
14. Defaults and Remedies.
---------------------
If an Event of Default shall occur and be continuing, the principal of
all the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
15. Security.
--------
This Note is secured by a security interest in certain Collateral, as
provided in the Indenture, and is entitled to the benefits thereof.
16. Trustee Dealings with Trust.
---------------------------
The Trustee under the Indenture, in its individual or any other
capacity, may become the owner or pledgee of Notes and may make loans to, accept
deposits from, perform services for, and otherwise deal with, the Trust and its
Affiliates as if it were not the Trustee.
17. Authentication.
--------------
This Note shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Note.
18. Abbreviations.
-------------
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
19. Defeasance.
----------
The Indenture contains provisions for defeasance, at any time, of the
Indebtedness represented by this Note or the covenants governing the
Indebtedness represented by this Note, upon compliance by the Trust with certain
conditions set forth in the Indenture.
20. Copy of Indenture.
------------------
The Trust will furnish a copy of the Indenture to any Holder upon
written request and without charge. Requests may be made to B. F. Saul Real
Estate Investment Trust, 8401 Connecticut Avenue, Chevy Chase, Maryland 20815,
Attention: Secretary.
21. No Personal Liability.
---------------------
<PAGE>
A-11
The covenants and obligations set forth in this Note and in the
Indenture as having been made by the Trust have been made or assumed by the
trustees or officers of the Trust acting as such trustees or officers pursuant
to the authority vested in them under the Declaration of Trust under which the
Trust is governed. This Note and the Indenture have been executed by trustees
or officers of the Trust in their capacities as trustees or officers under such
Declaration of Trust, and not individually, and, in accordance with the
provisions of the Declaration of Trust, the covenants and obligations of the
Trust or the trustees of the Trust hereunder and under the Indenture are not
personally binding upon, nor shall resort be had to the private property of, any
of the trustees or shareholders, officers, employees or agents of the Trust, but
the property of the Trust only shall be bound.
No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture or any indenture supplemental
thereto, personally, against any organizer of the Trust, holder of shares of
beneficial interest of the Trust, officer or trustee, past, present or future,
as such, of the Trust or of any predecessor or successor of the Trust whether by
virtue of any constitution, statute or rule of law or equity, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
22. Defined Terms.
-------------
Capitalized terms not otherwise defined in this Note shall have the
meaning ascribed to them in the Indenture.
<PAGE>
A-12
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- ----------------------------------
___________________________________________
___________________________________________
(Please print or typewrite name and address including zip code of assignee)
___________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing
___________________________________________
its attorney to transfer such Note on the books of the Trust with full power of
substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL CERTIFICATES
EXCEPT OFFSHORE PHYSICAL
CERTIFICATES]
In connection with any transfer of this Note occurring prior to the
date which is the earlier of the (i) date of an effective Registration Statement
or (ii) three years after the later of the original issuance of this Note or the
last date on which this Note was held by a Affiliate of the Trust, the
undersigned confirms that without utilizing any general solicitation or general
advertising:
[Check One]
---------
[_] (a) this Note is being transferred in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided by
Rule 144A thereunder,
or
--
<PAGE>
A-13
[_] (b) this Note is being transferred other than in accordance with (a) above
and documents are being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture.
If neither of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 307 of the Indenture shall have
been satisfied.
Date:___________
__________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the within-mentioned instrument in
every particular, without alteration or any
change whatsoever.
Signature Guarantee/*/:____________________________________________
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it or such account is a "qualified institutional
buyer" within the meaning of Rule 144A under the Securities Act of 1933, as
amended, and that each is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Trust as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that each is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:______________ _______________________________________
NOTICE: To be executed by an
executive officer
____________________________
/*/ Guarantor must be a member of the Securities Transfer Agents Medallion
Program ("STAMP"), the New York Stock Exchange Medallion Signature Program
("MSP") or the Stock Exchange Medallion Program ("SEMP").
<PAGE>
A-14
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Trust pursuant to
Section 1021 of the Indenture, check the Box: [_].
If you wish to have a portion of this Note purchased by the Trust
pursuant to Section 1021 of the Indenture, state the amount (in original
principal amount) below:
$__________.
Date:______________
Your Signature:______________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee/*/:___________________________________________________
____________________________
/*/ Guarantor must be a member of the Securities Transfer Agents Medallion
Program ("STAMP"), the New York Stock Exchange Medallion Signature Program
("MSP") or the Stock Exchange Medallion Program ("SEMP").
<PAGE>
EXHIBIT B
---------
Form of Certificate
to Be Delivered upon
Termination of Restricted Period
--------------------------------
On or after May 4, 1998
Norwest Bank Minnesota,
National Association, as Trustee
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Re: B. F. Saul Real Estate Investment Trust (the "Trust") 9
3/4%[Series B]/*/ Senior Secured Notes due 2008 (the
------------------------------------------------------
"Securities")
------------
Ladies and Gentlemen:
This letter relates to $____________________ principal amount of
Securities represented by the global note certificate (the "Offshore Global
Security"). Pursuant to Section 201 of the Indenture dated as of March 25, 1998
relating to the Securities (the "Indenture"), we hereby certify that (1) we are
the beneficial owner of such principal amount of Securities represented by the
Offshore Global Security and (2) we are a Non-U.S. Person to whom the Securities
could be transferred in accordance with Rule 904 of Regulation S promulgated
under the U.S. Securities Act of 1933, as amended ("Regulation S").
Accordingly, you are hereby requested to issue a Offshore Physical Security
representing the undersigned's interest in the principal amount of Securities
represented by the Offshore Global Security, all in the manner provided by the
Indenture.
You and the Trust are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:____________________________________
Authorized Signature
______________________
/*/ Include only for Exchange Securities
<PAGE>
EXHIBIT C
---------
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-QIB Institutional Accredited Investors
-------------------------------------------------------
[Date]
B. F. Saul Real Estate Investment Trust
c/o Norwest Bank Minnesota, N.A., as Trustee
Corporate Trust Services
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Re: B. F. Saul Real Estate Investment Trust (the "Trust")
9 3/4% Senior Secured Notes due 2008 (the "Securities")
-------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed purchase of $
aggregate principal amount of the Securities, we confirm that:
1. We have received such information regarding the Trust and Chevy
Chase Bank, F.S.B. as we deem necessary in order to make our investment
decision.
2. We understand that the Securities have not been registered under
the Securities Act of 1933, as amended (the "Securities Act") or any other
applicable law; and may not be offered, sold, or otherwise transferred
except as permitted in the following sentence. We agree on our own behalf
and on behalf of any investor account for which we are purchasing the
Securities to offer, sell or otherwise transfer such Securities prior to
the date which is two years after the later of the date of original issue
and the last date on which the Trust or any affiliate of the Trust was the
owner of such Securities, or any predecessor thereto (the "Resale
Restriction Termination Date") only (a) to the Trust, (b) pursuant to a
registration statement which has been declared effective under the
Securities Act, (c) for so long as the Securities are eligible for resale
pursuant to Rule 144A under the Securities Act, to a person we reasonably
believe is a qualified institutional buyer under Rule 144A (a "QIB") that
purchases for its own account or for the account of a QIB and to whom
notice is given that the transfer is being made in reliance on Rule 144A,
(d) pursuant to offers and sales to non-U.S.
<PAGE>
C-2
persons that occur outside the United States within the meaning of
Regulations S under the Securities Act, (e) to an institutional "accredited
investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of
Rule 501 of Regulation D under the Securities Act with total assets in
excess of $5,000,000 that is acquiring the Securities for its own account
or for the account of such an institutional "accredited investor" for
investment purposes and not with a view to, or for offer or sale in
connection with, any distribution thereof in violation of the Securities
Act or (f) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing cases
to any requirement of law that the disposition of our property and the
property of such investor account or accounts be at all times within our or
their control and to compliance with any applicable state securities laws.
The foregoing restrictions on resale will not apply subsequent to the
Resale Restriction Termination Date. If any resale or other transfer of the
Securities is proposed to be made pursuant to clause (e) above prior to the
Resale Restriction Termination Date, the transferor shall deliver a letter
to the Trustee (the "Trustee") under the Indenture pursuant to which the
Notes are being issued a letter from the transferee substantially in the
form of this letter, which shall provide, among other things, that the
transferee is an institutional "accredited investor" within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act
with total assets in excess of $5,000,000 and that it is acquiring such
Securities for investment purposes and not for distribution in violation of
the Securities Act. We acknowledge that the Trust and the Trustee reserve
the right prior to any offer, sale or other transfer prior to the Resale
Restriction Termination Date of the Securities pursuant to clauses (d), (e)
and (f) above to require the delivery of an opinion of counsel,
certifications and/or other information satisfactory to the Trust and the
Trustee.
3. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) with
total assets in excess of $5,000,000 purchasing for our own account or for
the account of such an institutional "accredited investor," and we are
acquiring the Securities for investment purposes and not with a view to, or
for offer or sale in connection with, any distribution in violation of the
Securities Act, and we have such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of our
investment in the Securities, and we and any accounts for which we are
acting are each able to bear the economic risk of our or its investment.
4. We are acquiring the Securities purchased by us for our own
account or for one or more accounts as to each of which we exercise sole
investment discretion.
5. You are entitled to rely upon this letter and you are irrevocably
authorized to produce this letter or a copy hereof to any interested party
in any administrative or legal proceeding or official inquiry with respect
to the matters covered hereby.
<PAGE>
C-3
Very truly yours,
By: (NAME OF PURCHASER)
Date:
Upon transfer, the Securities should be registered in the name of the
new beneficial owner as follows:
Name:________________________
Address:_____________________
Taxpayer ID Number:__________
<PAGE>
EXHIBIT D
---------
Form of Certificate to Be Delivered
in Connection with Transfers
Pursuant to Regulation S
------------------------
[Date]
Norwest Bank Minnesota,
National Association, as Trustee
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Re: B. F. Saul Real Estate Investment Trust (the "Trust")
9 3/4% Senior Secured Notes due 2008 (the "Securities")
-------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed sale of $____ aggregate principal amount of
Securities, we confirm that such sale has been effected pursuant to and in
accordance with Regulation S ("Regulation S") under the Securities Act of 1933,
as amended (the "Securities Act"), and accordingly, we hereby certify as
follows:
1. The offer of the Notes was not made to a person in the United
States (unless such person or the account held by it for which it is acting
is excluded from the definition of "U.S. person" pursuant to Rule 902(o) of
Regulation S under the circumstances described in Rule 902(i)(3) of
Regulation S) or specifically targeted at an identifiable group of U.S.
citizens abroad.
2. Either (a) at the time the buy order was originated, the buyer was
outside the United States or we and any person acting on our behalf
reasonably believed that the buyer was outside the United States or (b) the
transaction was executed in, on or through the facilities of a designated
offshore securities market, and neither we nor any person acting on our
behalf knows that the transaction was pre-arranged with a buyer in the
United States.
<PAGE>
D-2
3. Neither we, any of our affiliates, nor any person acting on our or
their behalf has made any directed selling efforts in the United States in
contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable.
4. The proposed transfer of Notes is not part of a plan or scheme to
evade the registration requirements of the Securities Act.
5. If we are a dealer or a person receiving a selling concession or
other fee or remuneration in respect of the Notes, and the proposed
transfer takes place before the Offshore Note Exchange Date referred to in
the Indenture, dated as of March 25 1998, among the Trust and the Trustee,
or we are an officer or director of the Trust or a distributor, we certify
that the proposed transfer is being made in accordance with the provisions
of Rules 903 and 904(c) of Regulation S.
You and the Trust are entitled to rely upon this Certificate and are
irrevocably authorized to produce this Certificate or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:_________________________________
Authorized Signature
<PAGE>
EXHIBIT E
---------
Rule 144A Certificate
To: Norwest Bank Minnesota,
National Association, as Trustee
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Attention: Corporate Trust Division
Re: B.F. Saul Real Estate Investment Trust (the "Trust")
9 3/4% Senior Subordinated Notes due 2008 (the "Notes")
-------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed sale of $____ aggregate principal
amount of Notes, we confirm that such sale has been effected pursuant to and in
accordance with Rule 144A ("Rule 144A") under the Securities Act of 1933, as
amended (the "Securities Act"). We are aware that the transfer of Notes to us
is being made in reliance on the exemption from the provisions of Section 5 of
the Securities Act provided by Rule 144A. If the Trust is not subject to
Section 13 or 15(d) of the Exchange Act, prior to the date of this Certificate
we have been given the opportunity to obtain from the Trust the information
referred to in Rule 144A(d)(4), and have either declined such opportunity or
have received such information.
You and the Trust are entitled to rely upon this Certificate and are
irrevocably authorized to produce this Certificate or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.
Very truly yours,
[NAME OF PURCHASER]
By:__________________________
Name:
Title:
Address:
Date of this Certificate: __________ __, 199_
<PAGE>
EXHIBIT F
---------
SUBORDINATION AGREEMENT
AGREEMENT, dated as of _______ __, ____ between B.F. SAUL REAL ESTATE
INVESTMENT TRUST, an unincorporated business trust existing and operating under
a declaration of trust governed by the laws of the State of Maryland (the
"Trust"), and ____________________, a _______________________________ (the
"Subsidiary")
RECITAL
A. The Trust has issued and may in the future issue its 9 3/4%
Senior Secured Notes due 2008 and 9 3/4% Series B Senior Secured Notes due 2008
pursuant to the Indenture (the "Indenture") dated as of March 25, 1998 between
the Trust and Norwest Bank Minnesota, National Association, as Trustee.
Capitalized terms used herein and not otherwise defined have the respective
meanings specified in the Indenture.
B. Indebtedness of the Trust to the Subsidiary at _____________, 1998
amounted in to $___________________ in aggregate principal amount (such
indebtedness in such principal amount being the "Initial Indebtedness"), which
such amount remains unchanged as of March 25, 1998 except with respect to such
changes as may be effected by the Tax Sharing Agreement.
C. The Subsidiary may, from time to time after _______________, 1998,
provide additional loans to the Trust (such loans, whether or not constituting a
refunding or refinancing of the Initial Indebtedness, being the "New Subsidiary
Loans").
D. It is a condition to permitting the New Subsidiary Loans under
certain covenants of the Indenture, and the Subsidiary and the Trust desire,
that all such loans from the Subsidiary to the Trust be, governed by and subject
to the provisions of this Agreement.
NOW, THEREFORE, in consideration of the premises hereof, and for other
good and valuable consideration, the parties agree as follows:
Section 1. Subordination. (a) Definition of Senior Indebtedness.
------------- ---------------------------------
For purposes of this Agreement, "Senior Indebtedness" means all principal of and
premium, if any, and interest on (such interest, wherever referred to in this
Agreement, being deemed to include interest accruing after the filing of a
petition initiating any proceeding pursuant to any bankruptcy law in accordance
with and at the rate (including any applicable default rate, to the
<PAGE>
F-2
extent lawful) specified in any document evidencing such Senior Indebtedness,
whether or not the claim for such interest is allowed as a claim after such
filing in any proceeding under such bankruptcy law) the Securities.
(b) Subordination of New Subsidiary Loans. The Trust and the
-------------------------------------
Subsidiary each covenants and agrees that, to the extent and in the manner
hereinafter set forth in this Section, the New Subsidiary Loans owing from time
to time by the Trust to the Subsidiary and the payment of the principal of and
premium, if any, and interest on the New Subsidiary Loans are hereby expressly
made subordinate and subject in right of payment to the prior payment in full,
in cash or cash equivalents, of the Senior Indebtedness.
This Agreement shall constitute a continuing offer to all persons who
become Holders, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and the Holders are made obligees hereunder and any one or
more of them may enforce such provisions. Holders need not prove reliance on
the subordination provisions hereof.
(c) Payment Over of Proceeds Upon Dissolution, etc. In the event of
----------------------------------------------
(i) any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection
therewith, relative to the Trust or to its creditors, as such, or to its assets,
or (ii) any liquidation, dissolution or other winding up of the Trust, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (iii) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of the Trust, then and in any such event:
(1) the holders of all Senior Indebtedness shall be entitled to
receive payment in full, in cash or cash equivalents, of all amounts due or
to become due on or in respect of all Senior Indebtedness, or provision
shall be made for such payment in cash or cash equivalents, before the
Subsidiary is entitled to receive any payment on account of principal of
(or premium, if any) or interest on the New Subsidiary Loans; and
(2) any payment or distribution of assets of the Trust of any kind or
character, whether in cash, property or securities, by set-off or
otherwise, to which the Subsidiary would be entitled but for the provisions
of this Agreement, including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other indebtedness
of the Trust being subordinated to the payment of the New Subsidiary Loans,
shall be paid by the liquidating trustee or agent or other person making
such payment or distribution, whether a trustee in bankruptcy, a receiver
or liquidating trustee or otherwise, directly to the Trustee, to the extent
necessary to make payment in full, in cash or cash equivalents, of all
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Indebtedness; and
(3) in the event that, notwithstanding the foregoing provisions of
this Section, the Subsidiary shall have received any such payment or
distribution of assets of the Trust of any kind or character, whether in
cash, property or securities, on account
<PAGE>
F-3
of the New Subsidiary Loans, including any such payment or distribution
which may be payable or deliverable by reason of the payment of any other
indebtedness of the Trust being subordinated to the payment of the New
Subsidiary Loans, before all Senior Indebtedness is paid in full, in cash
or cash equivalents, then and in such event such payment or distribution
shall be paid over or delivered forthwith to the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee, agent or other Person
making payment or distribution of assets of the Trust for application to
the payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Indebtedness.
(d) No Payment When Specified Senior Indebtedness in Default. (1)
--------------------------------------------------------
(i) In the event of and during the continuation of any default in the payment of
principal of (or premium, if any) or interest on any Senior Indebtedness beyond
any applicable grace period with respect thereto, or (ii) in the event that any
other Event of Default with respect to any Senior Indebtedness shall have
occurred and be continuing and shall have resulted in such Senior Indebtedness
becoming or being declared due and payable prior to the date on which it would
otherwise have become due and payable, then no payment shall be made by the
Trust on account of the principal of (or premium, if any) or interest on the New
Subsidiary Loans or on account of the purchase or redemption or other
acquisition of New Subsidiary Loans, unless and until such Event of Default
shall have been cured or waived or shall have ceased to exist or any
acceleration of the Senior Indebtedness shall have been rescinded or annulled or
the Holders or their agents shall have waived the benefits of this Section or
the Senior Indebtedness shall have been paid in full.
In the event that, notwithstanding the foregoing, the Trust shall make
any payment to the Subsidiary prohibited by the foregoing provisions of this
Section, then and in such event such payment shall be paid over and delivered
forthwith to the Trustee.
(e) Payment Permitted if No Default. Nothing contained in this
-------------------------------
Section shall prevent the Trust, at any time except during the pendency of any
case, proceeding, dissolution, liquidation or other winding up, assignment for
the benefit of creditors or other marshalling of assets and liabilities of the
Trust referred to in Subsection (c) above or under the conditions described in
Subsection (d) above, from making payments at any time of principal of (and
premium, if any) or interest on the New Subsidiary Loans.
(f) Subrogation to Rights of Holders of Senior Indebtedness. Subject
-------------------------------------------------------
to the payment in full, in cash or cash equivalents, of all Senior Indebtedness,
the Subsidiary shall be subrogated to the rights of the holders of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities applicable to the Senior Indebtedness until the principal of (and
premium, if any) and interest on the New Subsidiary Loans shall be paid in full.
(g) Provisions Solely to Define Relative Rights. The provisions of
-------------------------------------------
this Section are and are intended solely for the purpose of defining the
relative rights of the
<PAGE>
F-4
Subsidiary on the one hand and the holders of Senior Indebtedness on the other
hand. Nothing contained in this Article or elsewhere in this Agreement is
intended to or shall (1) impair, as among the Trust, its creditors other than
holders of Senior Indebtedness and the Subsidiary, the obligation of the Trust,
which is absolute and unconditional, to pay to the Subsidiary the principal of
(and premium, if any) and interest on the New Subsidiary Loans as and when the
same shall become due and payable in accordance with their terms; or (2) affect
the relative rights against the Trust of the Subsidiary and creditors of the
Trust other than the holders of Senior Indebtedness; or (3) prevent the
Subsidiary from exercising all remedies otherwise permitted by applicable law
upon default under the New Subsidiary Loans, subject to the rights, if any,
under this Section of the holders of Senior Indebtedness (i) in any case,
proceeding, dissolution, liquidation or other winding up, assignment for the
benefit of creditors or other marshalling of assets and liabilities of the Trust
referred to in Subsection (c) above, to receive, pursuant to and in accordance
with such Section, cash, property and securities otherwise payable or
deliverable to the Trustee or such Holder, or (ii) under the conditions
specified in Subsection (d), to prevent any payment prohibited by such
Subsection.
(h) No Waiver of Subordination Provisions. No right of any present or
-------------------------------------
future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Trust or by any act or failure to act, in good
faith, by any such holder, or by any non-compliance by the Trust with the terms,
provisions and covenants of this Indenture, regardless of any knowledge thereof
any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Subsidiary, without incurring
responsibility to the Subsidiary and without impairing or releasing the
subordination provided in this Section or the obligations hereunder of the
Subsidiary to the holders of Senior Indebtedness, do any one or more of the
following: (1) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Indebtedness or any instrument
evidencing the same or any agreement under which Senior Indebtedness is
outstanding; (2) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any
Person liable in any manner for the collection of Senior Indebtedness; and (4)
exercise or refrain from exercising any rights against the Trust and any other
Person.
(i) Notice to Subsidiary. The Trust shall give prompt written notice
--------------------
to the Subsidiary of any fact known to the Trust which would prohibit the making
of any payment to the Subsidiary in respect of the New Subsidiary Loans.
(j) Rescission. The provisions of this Section shall continue to be
----------
effective or be reinstated, as the case may be, if at any time any payment in
respect of any Senior Indebtedness is rescinded or must otherwise be returned by
the holder thereof upon the insolvency, bankruptcy or reorganization of the
Trust or otherwise, all as though such payment had not been made.
<PAGE>
F-5
Section 2. Allocation of Repayments First to Initial Indebtedness.
------------------------------------------------------
All repayments of Indebtedness owing by the Trust to the Subsidiary shall be
applied first to the Initial Indebtedness and second to the New Subsidiary
Loans.
Section 3. Amendments, Etc. No amendment or waiver of any
----------------
provision of this Agreement, or consent to depart therefrom is permitted at any
time for any reason, except with the consent of the Holders of greater than 50%
in aggregate principal amount of the Outstanding Securities.
Section 4. Assignment. No party to this Agreement may assign, in
----------
whole or in part, any of its rights and obligations under this Agreement, except
to its legal successor-in-interest.
Section 5. Third Party Beneficiaries. The Trustee and the Holders
-------------------------
shall be third party beneficiaries to this Agreement and shall have the right to
enforce this Agreement against the Trust and the Subsidiary.
Section 6. Headings. Section and Subsection headings in this
--------
Agreement are included for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 7. Entire Agreement. This Agreement sets forth the entire
----------------
agreement of the parties with respect to its subject matter and supersedes all
previous understandings, written or oral, in respect thereof.
Section 8. Governing Law. This agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
Section 9. Termination of Agreement. This Agreement shall
------------------------
terminate at such time as the Lien of the Indenture on the Collateral shall
terminate pursuant to Section 1212 of the Indenture or the Trust shall be
released from its obligations under the covenants contained in Section 1010 of
the Indenture upon the exercise of its option under Section 1301 thereof to
effectuate a covenant defeasance under Section 1303 thereof.
<PAGE>
F-6
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
day and year first above stated.
B.F. SAUL REAL ESTATE INVESTMENT TRUST
By____________________________________
Title:
______________________________________
By____________________________________
Title:
<PAGE>
Exhibit 4(c)
================================================================================
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
-----------------------------
among
B.F. SAUL REAL ESTATE INVESTMENT TRUST
and
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
INITIAL PURCHASERS
Dated: March 25, 1998
================================================================================
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of March 25, 1998, by and among B.F. Saul Real Estate Investment
Trust, an unincorporated Maryland business trust (the "Trust"), and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Friedman, Billings, Ramsey & Co., Inc. (collectively, the "Initial
Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated March
19, 1998 among the Trust and the Initial Purchasers (the "Purchase Agreement"),
which provides for the sale by the Trust to the Initial Purchasers of
$200,000,000 aggregate principal amount of the Trust's 9 3/4% Senior Secured
Notes due 2008 (the "Notes"). In order to induce the Initial Purchasers to
enter into the Purchase Agreement, the Trust has agreed to provide to the
Initial Purchasers and their direct and indirect transferees and assigns the
registration rights set forth in this Agreement. The execution and delivery of
this Agreement is a condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions. As used in this Agreement, the following
-----------
capitalized defined terms shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended from time
--------
to time, and the rules and regulations of the SEC promulgated thereunder.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended
--------
from time to time, and the rules and regulations of the SEC promulgated
thereunder.
"Closing Time" shall mean the Closing Time as defined in the Purchase
------------
Agreement.
"Depositary" shall mean The Depository Trust Company, or any other
----------
depositary appointed by the Trust, provided, however, that any such
depositary must have an address in the Borough of Manhattan, in the City of
New York.
"Exchange Notes" shall mean the 9 3/4% Series B Senior Secured Notes
--------------
due 2008 issued by the Trust under the Indenture containing terms identical
to the Notes (except that (i) interest thereon shall accrue from the last
date on which interest was paid on the Notes or, if no such interest has
been paid, from March 25, 1998, (ii) the transfer
<PAGE>
restrictions thereon shall be eliminated and (iii) certain provisions
relating to an increase in the stated rate of interest thereon shall be
eliminated) to be offered to Holders of Notes in exchange for Notes
pursuant to the Exchange Offer.
"Exchange Offer" shall mean the exchange offer by the Trust of
--------------
Exchange Notes for Registrable Notes pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under the 1933
---------------------------
Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean an exchange offer
-------------------------------------
registration statement on Form S-4 (or, if applicable, on another
appropriate form), and all amendments and supplements to such registration
statement, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"Holders" shall mean the Initial Purchasers, for so long as they own
-------
any Registrable Notes, and each of their successors, assigns and direct and
indirect transferees who become registered owners of Registrable Notes
under the Indenture.
"Indenture" shall mean the Indenture relating to the Notes dated as of
---------
March 25, 1998, among the Trust and Norwest Bank Minnesota, National
Association, as trustee, as the same may be amended from time to time in
accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the preamble
------------------
of this Agreement.
"Majority Holders" shall mean the Holders of a majority of the
----------------
aggregate principal amount of outstanding Registrable Notes; provided that
whenever the consent or approval of Holders of a specified percentage of
Registrable Notes is required hereunder, Registrable Notes held by the
Trust or any of its affiliates (as such term is defined in Rule 405 under
the 1933 Act) (other than the Initial Purchasers or subsequent holders of
Registrable Notes if such subsequent holders are deemed to be such
affiliates solely by reason of their holding of such Registrable Notes)
shall be disregarded in determining whether such consent or approval was
given by the Holders of such required percentage or amount.
"Person" shall mean an individual, partnership, limited liability
------
company, corporation, trust or unincorporated organization, or a government
or agency or political subdivision thereof.
2
<PAGE>
"Prospectus" shall mean the prospectus included in a Registration
----------
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a
prospectus supplement with respect to the terms of the offering of any
portion of the Registrable Notes covered by a Shelf Registration Statement,
and by all other amendments and supplements to a prospectus, including
post-effective amendments, and in each case including all material
incorporated by reference therein.
"Purchase Agreement" shall have the meaning set forth in the preamble
------------------
of this Agreement.
"Registrable Notes" shall mean the Notes; provided, however, that the
-----------------
Notes shall cease to be Registrable Notes when (i) a Registration Statement
with respect to such Notes shall have been declared effective under the
1933 Act and such Notes shall have been disposed of pursuant to such
Registration Statement, (ii) such Notes shall have been sold to the public
pursuant to Rule 144 (or any similar provision then in force, but not Rule
144A) under the 1933 Act, (iii) such Notes shall have ceased to be
outstanding or (iv) such Notes have been exchanged for Exchange Notes upon
consummation of the Exchange Offer.
"Registration Expenses" shall mean any and all expenses incident to
---------------------
performance of or compliance by the Trust with this Agreement, including
without limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. ("NASD") registration and filing fees, (ii) all
fees and expenses incurred in connection with compliance with state or
other securities or blue sky laws and compliance with the rules of the NASD
(including reasonable fees and disbursements of one counsel for any
underwriters and Holders in connection with state or other securities or
blue sky qualification of any of the Exchange Notes or Registrable Notes),
(iii) all expenses of any Persons in preparing, or assisting in preparing,
word processing, printing and distributing any Registration Statement, any
Prospectus, any amendments or supplements thereto, any underwriting
agreements, securities sales agreements, certificates representing the
Exchange Notes and other documents relating to the performance of and
compliance with this Agreement, (iv) all rating agency fees, (v) all fees
and expenses incurred in connection with the listing, if any, of any of the
Registrable Notes on any securities exchange or exchanges, (vi) all fees
and disbursements relating to the qualification of the Indenture under
applicable securities laws, (vii) the fees and disbursements of counsel for
the Trust and its subsidiaries and, in the case of a Shelf Registration
Statement, the reasonable fees and disbursements (including the expenses of
preparing and distributing any underwriting or securities sales agreement)
of one counsel for the Holders (which counsel shall be selected in writing
by the Majority Holders), (viii) the fees and expenses of the independent
public
3
<PAGE>
accountants of the Trust and any of its subsidiaries, including the
expenses of any special audits or "cold comfort" letters required by or
incident to such performance and compliance, (ix) the fees and expenses of
a "qualified independent underwriter" as defined by Conduct Rule 2720 of
the NASD, if required by the NASD rules, in connection with the offering of
the Registrable Securities, (x) the fees and expenses of the Trustee,
including its counsel, and any escrow agent or custodian, and (xi) any fees
and disbursements of the underwriters customarily required to be paid by
issuers or sellers of securities and the reasonable fees and expenses of
any special experts retained by the Trust in connection with any
Registration Statement, but excluding fees of counsel to the underwriters
or the Holders and underwriting discounts and commissions and transfer
taxes, if any, relating to the sale or disposition of Registrable Notes by
a Holder.
"Registration Statement" shall mean any registration statement of the
----------------------
Trust which covers any of the Exchange Notes or Registrable Notes pursuant
to the provisions of this Agreement, and all amendments and supplements to
any such Registration Statement, including post-effective amendments, in
each case including the Prospectus contained therein, all exhibits thereto
and all material incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
---
"Shelf Registration" shall mean a registration effected pursuant to
------------------
Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
----------------------------
statement of the Trust pursuant to the provisions of Section 2(b) of this
Agreement which covers all of the then Registrable Notes on an appropriate
form under Rule 415 under the 1933 Act, or any similar rule that may be
adopted by the SEC, and all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"Trust" shall have the meaning set forth in the preamble of this
-----
Agreement and also includes the Trust's successors.
"Trustee" shall mean the trustee with respect to the Notes under the
-------
Indenture.
2. Registration Under the 1933 Act. (a) Exchange Offer
------------------------------- --------------
Registration. The Trust shall (i) file within 45 days after the Closing Time an
- ------------
Exchange Offer Registration Statement covering the offer by the Trust to the
Holders to exchange all of the Registrable
4
<PAGE>
Notes for Exchange Notes, (ii) use its best efforts to cause such Exchange Offer
Registration Statement to be declared effective by the SEC within 150 days after
the Closing Time, (iii) use its best efforts to cause such Exchange Offer
Registration Statement to remain effective until the closing of the Exchange
Offer and (iv) use its best efforts to consummate the Exchange Offer within 180
days following the Closing Time. The Exchange Notes will be issued under the
Indenture. Upon the effectiveness of the Exchange Offer Registration Statement,
the Trust shall promptly commence the Exchange Offer, it being the objective of
such Exchange Offer to enable each Holder (other than Participating Broker-
Dealers (as defined in Section 3(f)) eligible and electing to exchange
Registrable Notes for Exchange Notes (assuming that such Holder (i) is not an
affiliate of the Trust within the meaning of Rule 405 under the 1933 Act, (ii)
acquires the Exchange Notes in the ordinary course of such Holder's business and
(iii) has no arrangements or understandings with any Person to participate in
the Exchange Offer for the purpose of distributing the Exchange Notes) to trade
such Exchange Notes from and after their receipt without any limitations or
restrictions under the 1933 Act and without material restrictions under the
securities laws of a substantial portion of the several states of the United
States.
In connection with the Exchange Offer, the Trust shall:
(i) mail to each Holder a copy of the Prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(ii) keep the Exchange Offer open for not less than 30 days after the
date notice thereof is mailed to the Holders (or longer if required by
applicable law);
(iii) use the services of the Depositary for the Exchange Offer with
respect to Notes evidenced by global certificates;
(iv) permit Holders to withdraw tendered Registrable Notes at any
time prior to the close of business, New York City time, on the last
business day on which the Exchange Offer shall remain open, by sending to
the institution specified in the notice, a telegram, telex, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Registrable Notes delivered for exchange, and a statement that
such Holder is withdrawing its election to have such Notes exchanged; and
(v) otherwise comply in all respects with all applicable laws
relating to the Exchange Offer.
As soon as practicable after the close of the Exchange Offer, the
Trust shall:
5
<PAGE>
(i) accept for exchange Registrable Notes duly tendered and not
validly withdrawn pursuant to the Exchange Offer in accordance with the
terms of the Exchange Offer Registration Statement and the letter of
transmittal which is an exhibit thereto;
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Registrable Notes so accepted for exchange by the Trust;
and
(iii) cause the Trustee promptly to authenticate and deliver Exchange
Notes to each Holder of Registrable Notes equal in amount to the
Registrable Notes of such Holder so accepted for exchange.
Interest on each Exchange Note will accrue from the last date on which
interest was paid on the Registrable Notes surrendered in exchange therefor or,
if no interest has been paid on the Registrable Notes, from March 25, 1998. The
Exchange Offer shall not be subject to any conditions, other than (A) that the
Exchange Offer, or the making of any exchange by a Holder, does not violate
applicable law or any applicable interpretation of the staff of the SEC (B) no
action or proceeding shall have been instituted or threatened in any court or
before any governmental agency with respect to the Exchange Offer which, in the
Trust's judgment, might impair the ability of the Trust to proceed with the
Exchange Offer or (C) there shall not have been adopted or enacted any law,
statute, rule or regulation which, in the Trust's judgment, would materially
impair the ability of the Trust to proceed with the Exchange Offer. Each Holder
of Registrable Notes (other than Participating Broker-Dealers) who wishes to
exchange such Registrable Notes for Exchange Notes in the Exchange Offer shall
have represented that (i) any Exchange Notes to be received by it were acquired
in the ordinary course of business, (ii) at the time of the commencement of the
Exchange Offer it has no arrangement with any Person to participate in the
distribution (within the meaning of the 1933 Act) of the Exchange Notes, (iii)
it is not an affiliate (as defined in Rule 405 under the 1933 Act) of the Trust
or, if it is such an affiliate, it will comply with the registration and
prospectus delivery requirements of the 1933 Act to the extent applicable and
(iv) it is not acting on behalf of any Person who could not make the
representations in clauses (i) through (iii). The Trust shall inform the
Initial Purchasers of the names and addresses of the Holders to whom the
Exchange Offer is made, and the Initial Purchasers shall have the right to
contact such Holders and otherwise facilitate the tender of Registrable Notes in
the Exchange Offer.
(b) Shelf Registration. (i) If, because of any change in law or
------------------
applicable interpretations thereof by the staff of the SEC, the Trust is not
permitted to effect the Exchange Offer as contemplated by Section 2(a) hereof,
or (ii) if for any other reason the Exchange Offer is not consummated within 180
days following the date hereof, or (iii) if any Holder (other than an Initial
Purchaser) is not eligible to participate in the Exchange Offer or (iv) upon the
written request of any Initial Purchaser (with respect to any Registrable Notes
which it
6
<PAGE>
acquired from the Trust) following the consummation of the Exchange
Offer if any such Initial Purchaser shall hold Registrable Notes which it
acquired directly from the Trust and if such Initial Purchaser is not permitted,
in the opinion of counsel to such Initial Purchaser, pursuant to applicable law
or applicable interpretation of the staff of the SEC to participate in the
Exchange Offer, the Trust shall, at its own cost:
(A) as promptly as practicable, file with the SEC a Shelf Registration
Statement relating to the offer and sale of the then outstanding
Registrable Notes by the Holders from time to time in accordance with the
methods of distribution elected by the Majority Holders of such Registrable
Notes and set forth in such Shelf Registration Statement, and use its best
efforts to cause such Shelf Registration Statement to be declared effective
by the SEC by the 180th day after the Closing Time (or promptly in the
event of a request by any Initial Purchaser pursuant to clause (iv) above).
In the event that the Trust is required to file a Shelf Registration
Statement upon the request of any Holder (other than an Initial Purchaser)
not eligible to participate in the Exchange Offer pursuant to clause (iii)
above or upon the request of any Initial Purchaser pursuant to clause (iv)
above, the Trust shall file and use its best efforts to have declared
effective by the SEC both an Exchange Offer Registration Statement pursuant
to Section 2(a) with respect to all Registrable Notes and a Shelf
Registration Statement (which may be a Registration Statement combined with
the Exchange Offer Registration Statement) with respect to offers and sales
of Registrable Notes held by such Holder or such Initial Purchaser after
completion of the Exchange Offer;
(B) use its best efforts to keep the Shelf Registration Statement
continuously effective in order to permit the Prospectus forming part
thereof to be usable by Holders for a period of two years from the Closing
Time (or one year from the date the Shelf Registration Statement is
declared effective if such Shelf Registration Statement is filed upon the
request of any Initial Purchaser pursuant to clause (iv) above) or such
shorter period which will terminate when all of the Registrable Notes
covered by the Shelf Registration Statement have been sold pursuant to the
Shelf Registration Statement or all of the Registrable Notes become
eligible for resale pursuant to Rule 144 under the 1933 Act without volume
restrictions; and
(C) notwithstanding any other provisions hereof, use its best efforts
to ensure that (i) any Shelf Registration Statement and any amendment
thereto and any Prospectus forming part thereof and any supplement thereto
complies in all material respects with the 1933 Act, (ii) any Shelf
Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) any Prospectus forming part of
any Shelf Registration Statement, and any supplement to such Prospectus (as
amended or supplemented from
7
<PAGE>
time to time), does not include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
The Trust further agrees, if necessary, to supplement or amend the
Shelf Registration Statement if reasonably requested by the Majority Holders
with respect to information relating to the Holders and otherwise as required by
Section 3(b) below, to use all reasonable efforts to cause any such amendment to
become effective and such Shelf Registration to become usable as soon as
practicable thereafter and to furnish to the Holders of Registrable Notes copies
of any such supplement or amendment promptly after its being used or filed with
the SEC.
(c) Expenses. The Trust shall pay all Registration Expenses in
--------
connection with the registration pursuant to Section 2(a) and 2(b) and, in the
case of an Exchange Offer Registration Statement, will reimburse the Initial
Purchasers, as applicable, for the reasonable fees and disbursements of one firm
or counsel in connection therewith. Each Holder shall pay all expenses of its
counsel other than as set forth in the preceding sentence, underwriting
discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of such Holder's Registrable Notes pursuant to the Shelf
Registration Statement.
(d) Effective Registration Statement. (i) The Trust will be deemed
--------------------------------
not to have used its best efforts to cause a Registration Statement to become,
or to remain, effective during the requisite periods set forth herein if the
Trust voluntarily takes any action that would result in any such Registration
Statement not being declared effective or in the Holders of Registrable Notes
covered thereby not being able to exchange or offer and sell such Registrable
Notes during that period unless (A) such action is required by applicable law or
(B) such action is taken by the Trust in good faith and for valid business
reasons (but not including avoidance of the Trust's obligations hereunder),
including a material corporate transaction, so long as the Trust promptly
complies with the requirements of Section 3(k) hereof, if applicable.
(ii) An Exchange Offer Registration Statement pursuant to Section 2(a)
hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will
not be deemed to have become effective unless it has been declared effective by
the SEC; provided, however, that if, after it has been declared effective, the
offering of Registrable Notes pursuant to a Registration Statement is interfered
with by any stop order, injunction or other order or requirement of the SEC or
any other governmental agency or court, such Registration Statement will be
deemed not to have been effective during the period of such interference, until
the offering of Registrable Notes pursuant to such Registration Statement may
legally resume.
8
<PAGE>
(e) Increase in Interest Rate. In the event that (i) the Exchange
-------------------------
Offer Registration Statement is not filed with the SEC on or prior to the 45th
day following the Closing Time, (ii) the Exchange Offer Registration Statement
is not declared effective on or prior to the 150th day following the Closing
Time or (iii) the Exchange Offer is not consummated on or prior to the 180th day
following the Closing Time or a Shelf Registration Statement with respect to the
Registrable Notes is not declared effective on or prior to the 180th day
following the Closing Time, the interest rate borne by the Notes shall be
increased by one-half of one percent per annum following such 45-day period in
the case of clause (i) above, following such 150-day period in the case of
clause (ii) above or following such 180-day period in the case of clause (iii)
above, which rate will be increased by an additional one-half of one percent per
annum for each 30-day period that any additional interest continues to accrue,
provided that the aggregate increase in such interest rate will in no event
exceed one percent per annum. Upon (x) the filing of the Exchange Offer
Registration Statement after the 45-day period described in clause (i) above,
(y) the effectiveness of the Exchange Offer Registration Statement, after the
150-day period described in clause (ii) above or (z) consummation of the
Exchange Offer, or the effectiveness of the Shelf Registration Statement, as the
case may be, after the 180-day period described in clause (iii) above, the
interest rate borne by the Notes from the date of such filing, effectiveness or
consummation, as the case may be, will be reduced to the original interest rate
if the Trust is otherwise in compliance with this paragraph; provided, however,
that, if after any such reduction in interest rate, a different event specified
in clauses (i), (ii) or (iii) above occurs, the interest rate will again be
increased and thereafter reduced pursuant to the foregoing conditions. If the
Trust issues a notice that the Shelf Registration Statement is unusable pending
the announcement of a material corporate transaction or otherwise pursuant to
Section 3(k) hereof, or such a notice is required under applicable securities
laws to be issued by the Trust, and the aggregate number of days in any
consecutive twelve-month period for which all such notices are issued or
required to be issued exceeds 30 days per occurrence or more than 90 days in the
aggregate, then the interest rate borne by the Notes will be increased by one-
half of one percent per annum following the date that such Shelf Registration
Statement ceases to be usable beyond the period permitted above, which rate
shall be increased by an additional one-half of one percent per annum for each
subsequent 30-day period that such additional interest continues to accrue;
provided that the aggregate increase in such annual interest rate may in no
event exceed one percent. Upon the Trust declaring that the Shelf Registration
Statement is usable after the interest rate has been increased pursuant to the
preceding sentence, the interest rate borne by the Notes will be reduced to the
original interest rate if the Trust is otherwise in compliance with this
paragraph; provided, however, that if after any such reduction in interest rate
the Shelf Registration Statement again ceases to be usable beyond the period
permitted above, the interest rate will again be increased and thereafter
reduced pursuant to the foregoing conditions.
(f) Specific Enforcement. Without limiting the remedies available to
--------------------
the Initial Purchasers and the Holders, the Trust acknowledges that any failure
by the Trust to
9
<PAGE>
comply with its respective obligations under Sections 2(a) and 2(b) hereof may
result in material irreparable injury to the Initial Purchasers or the Holders
for which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of any such
failure, the Initial Purchasers or any Holder may obtain such relief as may be
required to specifically enforce the Trust's obligations under Sections 2(a) and
2(b) hereof.
3. Registration Procedures. In connection with the obligations of
-----------------------
the Trust with respect to the Registration Statements pursuant to Sections 2(a)
and 2(b) hereof, the Trust shall:
(a) prepare and file with the SEC a Registration Statement, within the
time period specified in Section 2, on the appropriate form under the 1933
Act, which form (i) shall be selected by the Trust, (ii) shall, in the case
of a Shelf Registration, be available for the sale of the Registrable Notes
by the selling Holders thereof and (iii) shall comply as to form in all
material respects with the requirements of the applicable form required by
the SEC and include or incorporate by reference all financial statements
required by the SEC to be filed therewith, and use its best efforts to
cause such Registration Statement to become effective and remain effective
in accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary under
applicable law to keep such Registration Statement effective for the
applicable period; cause each Prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed pursuant to Rule
424 under the 1933 Act; and comply with the provisions of the 1933 Act with
respect to the disposition of all securities covered by each Registration
Statement during the applicable period in accordance with the intended
method or methods of distribution by the selling Holders thereof;
(c) in the case of a Shelf Registration, (i) notify each Holder of
Registrable Notes, at least five days prior to filing, that a Shelf
Registration Statement with respect to the Registrable Notes is being filed
and advise such Holders that the distribution of Registrable Notes will be
made in accordance with the method elected by the Majority Holders, (ii)
furnish to each Holder of Registrable Notes, to counsel for the Initial
Purchasers, to counsel for the Holders and to each underwriter of an
underwritten offering of Registrable Notes, if any, without charge, as many
copies of each Prospectus, including each preliminary Prospectus, and any
amendment or supplement thereto and such other documents as such Holder or
underwriter may reasonably request, including financial statements and
schedules and, if the Holder so requests, all exhibits (including those
incorporated by reference) in order to facilitate the public sale
10
<PAGE>
or other disposition of the Registrable Notes and (iii) subject to the last
paragraph of Section 3, hereby consent to the use of the Prospectus,
including each preliminary Prospectus, or any amendment or supplement
thereto by each of the selling Holders of Registrable Notes in connection
with the offering and sale of the Registrable Notes covered by the
Prospectus or any amendment or supplement thereto;
(d) use its best efforts to register or qualify the Registrable Notes
under all applicable state securities or "blue sky" laws of such
jurisdictions as any Holder of Registrable Notes covered by a Registration
Statement and each underwriter of an underwritten offering of Registrable
Notes shall reasonably request in writing by the time the applicable
Registration Statement is declared effective by the SEC, to cooperate with
the Holders in connection with any filings required to be made with the
NASD, keep each such registration or qualification effective during the
period such Registration Statement is required to be effective and do any
and all other acts and things which may be reasonably necessary or
advisable to enable such Holder to consummate the disposition in each such
jurisdiction of such Registrable Notes owned by such Holder; provided,
however, that the Trust shall not be required to (i) qualify as a foreign
corporation or as a dealer in securities in any jurisdiction where they
would not otherwise be required to qualify but for this Section 3(d) or
(ii) take any action which would subject it to general service of process
or taxation in any such jurisdiction if it is not then so subject;
(e) in the case of a Shelf Registration, notify each Holder of
Registrable Notes and counsel for such Holders promptly and, if requested
by such Holder or counsel, confirm such advice in writing promptly (i) when
a Shelf Registration Statement has become effective and when any post-
effective amendments and supplements thereto become effective, (ii) of any
request by the SEC or any state securities authority for post-effective
amendments and supplements to a Shelf Registration Statement and Prospectus
or for additional information after the Shelf Registration Statement has
become effective, (iii) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of a Shelf
Registration Statement or the initiation of any proceedings for that
purpose, (iv) if, between the effective date of a Shelf Registration
Statement and the closing of any sale of Registrable Notes covered thereby,
the representations and warranties of the Trust contained in any
underwriting agreement, securities sales agreement or other similar
agreement, if any, relating to such offering cease to be true and correct
in all material respects, (v) of the receipt by the Trust of any
notification with respect to the suspension of the qualification of the
Registrable Notes for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, (vi) of the happening of
any event or the discovery of any facts during the period a Shelf
Registration Statement is effective which makes any statement made in such
Shelf Registration
11
<PAGE>
Statement or the related Prospectus untrue in any material respect or which
requires the making of any changes in such Shelf Registration Statement or
Prospectus in order to make the statements therein not misleading and (vii)
of any determination by the Trust that a post-effective amendment to a
Registration Statement would be appropriate;
(f) (A) in the case of the Exchange Offer, (i) include in the
Exchange Offer Registration Statement a "Plan of Distribution" section
covering the use of the Prospectus included in the Exchange Offer
Registration Statement by broker-dealers who have exchanged their
Registrable Notes for Exchange Notes for the resale of such Exchange Notes,
(ii) furnish to each broker-dealer who desires to participate in the
Exchange Offer, without charge, as many copies of each Prospectus included
in the Exchange Offer Registration Statement, including any preliminary
prospectus, and any amendment or supplement thereto, as such broker-dealer
may reasonably request, (iii) include in the Exchange Offer Registration
Statement a statement that any broker-dealer who holds Registrable Notes
acquired for its own account as a result of market-making activities or
other trading activities (a "Participating Broker-Dealer"), and who
receives Exchange Notes for Registrable Notes pursuant to the Exchange
Offer, may be a statutory underwriter and must deliver a prospectus meeting
the requirements of the 1933 Act in connection with any resale of such
Exchange Notes, (iv) subject to the last paragraph of Section 3, hereby
consent to the use of the Prospectus forming part of the Exchange Offer
Registration Statement or any amendment or supplement thereto, by any
broker-dealer in connection with the sale or transfer of the Exchange Notes
covered by the Prospectus or any amendment or supplement thereto, and (v)
include in the transmittal letter or similar documentation to be executed
by an exchange offeree in order to participate in the Exchange Offer (x)
the following provision:
"If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer
that will receive Exchange Notes for its own account in exchange for
Registrable Notes, it represents that the Registrable Notes to be
exchanged for Exchange Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledges
that it will deliver a prospectus meeting the requirements of the 1933
Act in connection with any resale of such Exchange Notes pursuant to
the Exchange Offer; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the 1933 Act;"
and (y) a statement to the effect that by a broker-dealer making the
acknowledgment described in subclause (x) and by delivering a Prospectus in
connection with the
12
<PAGE>
exchange of Registrable Securities, the broker-dealer will not be deemed to
admit that it is an underwriter within the meaning of the 1933 Act; and
(B) to the extent any Participating Broker-Dealer participates in the
Exchange Offer, the Trust shall use its best efforts to cause to be
delivered at the request of an entity representing the Participating
Broker-Dealers (which entity shall be one of the Initial Purchasers, unless
it elects not to act as such representative) only one, if any, "cold
comfort" letter with respect to the Prospectus in the form existing on the
last date for which exchanges are accepted pursuant to the Exchange Offer
and with respect to each subsequent amendment or supplement, if any,
effected during the period specified in clause (C) below; and
(C) to the extent any Participating Broker-Dealer participates in the
Exchange Offer, the Trust shall use its best efforts to maintain the
effectiveness of the Exchange Offer Registration Statement for a period of
180 days following the closing of the Exchange Offer; and
(D) the Trust shall not be required to amend or supplement the
Prospectus contained in the Exchange Offer Registration Statement as would
otherwise be contemplated by Section 3(b), or take any other action as a
result of this Section 3(f), for a period exceeding 180 days after the last
date for which exchanges are accepted pursuant to the Exchange Offer (as
such period may be extended by the Trust) and Participating Broker-Dealers
shall not be authorized by the Trust to, and shall not, deliver such
Prospectus after such period in connection with resales contemplated by
this Section 3.
(g) (A) in the case of an Exchange Offer, furnish counsel for the
Initial Purchasers and (B) in the case of a Shelf Registration, furnish
counsel for the Holders of Registrable Notes copies of any request by the
SEC or any state securities authority for amendments or supplements to a
Registration Statement and Prospectus or for additional information;
(h) use its reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement at the earliest
possible moment and provide immediate notice to each Holder of the
withdrawal of any such order;
(i) in the case of a Shelf Registration, furnish to each Holder of
Registrable Notes, and each underwriter, if any, without charge, at least
one conformed copy of each Registration Statement and any post-effective
amendment thereto (without documents incorporated therein by reference or
exhibits thereto, unless requested);
13
<PAGE>
(j) in the case of a Shelf Registration, cooperate with the selling
Holders of Registrable Notes to facilitate the timely preparation and
delivery of certificates representing Registrable Notes to be sold and not
bearing any restrictive legends; and cause such Registrable Notes to be in
a form eligible for deposit with the Depositary, in such denominations
(consistent with the provisions of the Indenture) and registered in such
names as the selling Holders or the underwriters, if any, may reasonably
request at least three business days prior to the closing of any sale of
Registrable Notes;
(k) in the case of a Shelf Registration, upon the occurrence of any
event or the discovery of any facts, each as contemplated by Section
3(e)(vi) hereof, use its best efforts to prepare a supplement or post-
effective amendment to a Registration Statement or the related Prospectus
or any document incorporated therein by reference or file any other
required document so that, as thereafter delivered to the purchasers of the
Registrable Notes, such Prospectus will not contain at the time of such
delivery any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Trust agrees
to notify each Holder to suspend use of the Prospectus as promptly as
practicable after the occurrence of such an event, and each Holder hereby
agrees to suspend use of the Prospectus until the Trust has amended or
supplemented the Prospectus to correct such misstatement or omission. At
such time as such public disclosure is otherwise made or the Trust
determines that such disclosure is not necessary, in each case to correct
any misstatement of a material fact or to include any omitted material
fact, the Trust agrees promptly to notify each Holder of such determination
and to furnish each Holder such numbers of copies of the Prospectus, as
amended or supplemented, as such Holder may reasonably request;
(l) obtain CUSIP numbers for all Exchange Notes, or Registrable Notes,
as the case may be, not later than the effective date of a Registration
Statement, and provide the Trustee with printed certificates for the
Exchange Notes or the Registrable Notes, as the case may be, in a form
eligible for deposit with the Depositary;
(m) (i) cause the Indenture to be qualified under the Trust Indenture
Act of 1939, as amended (the "TIA"), in connection with the registration of
the Exchange Notes, or Registrable Notes, as the case may be, (ii)
cooperate with the Trustee and the Holders to effect such changes to the
Indenture as may be required for the Indenture to be so qualified in
accordance with the terms of the TIA and (iii) execute, and use its best
efforts to cause the Trustee to execute, all documents as may be required
to effect such changes, and all other forms and documents required to be
filed with the SEC to enable the Indenture to be so qualified in a timely
manner;
14
<PAGE>
(n) in the case of a Shelf Registration, enter into agreements
(including underwriting agreements) and take all other customary and
appropriate actions (including those reasonably requested by the Majority
Holders) in order to expedite or facilitate the disposition of such
Registrable Notes and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an
underwritten registration:
(i) make such representations and warranties to the Holders of
such Registrable Notes and the underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters
in similar underwritten offerings as may be reasonably requested by
them;
(ii) obtain opinions of counsel to the Trust and its
subsidiaries and updates thereof (which counsel and opinions (in form,
scope and substance) shall be reasonably satisfactory to the managing
underwriters, if any, and the holders of a majority in principal
amount of the Registrable Notes being sold) addressed to each selling
Holder and the underwriters, if any, covering the matters customarily
covered in opinions requested in sales of securities or underwritten
offerings and such other matters as may be reasonably requested by
such Holders and underwriters;
(iii) obtain "cold comfort" letters and updates thereof from the
Trust's and the Trust's subsidiaries' independent certified public
accountants addressed to the underwriters, if any, and use its best
efforts to have such letters addressed to the selling Holders of
Registrable Notes, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters to
underwriters in connection with similar underwritten offerings;
(iv) enter into a securities sales agreement with the Holders
and an agent of the Holders providing for, among other things, the
appointment of such agent for the selling Holders for the purpose of
soliciting purchases of Registrable Notes, which agreement shall be in
form, substance and scope customary for similar offerings;
(v) if an underwriting agreement is entered into, cause the
same to set forth indemnification provisions and procedures
substantially equivalent to the indemnification provisions and
procedures set forth in Section 5 hereof with respect to the
underwriters and all other parties to be indemnified pursuant to said
Section; and
15
<PAGE>
(vi) deliver such documents and certificates as are customarily
delivered in similar offerings and as may be reasonably requested by
the Holders of a majority in principal amount of the Registrable Notes
being sold and the managing underwriters, if any.
The above shall be done at (i) the effectiveness of such Shelf Registration
Statement (and, if appropriate, each post-effective amendment thereto) and
(ii) each closing under any underwriting or similar agreement as and to the
extent required thereunder. In the case of any underwritten offering, the
Trust shall provide written notice to the Holders of all Registrable Notes
of such underwritten offering at least 30 days prior to the filing of a
prospectus supplement for such underwritten offering. Such notice shall
(x) offer each such Holder the right to participate in such underwritten
offering, (y) specify a date, which shall be no earlier than 10 days
following the date of such notice, by which such Holder must inform the
Trust of its intent to participate in such underwritten offering and (z)
include the instructions such Holder must follow in order to participate in
such underwritten offering;
(o) in the case of a Shelf Registration, upon the execution of a
confidentiality agreement reasonably requested by the Trust, make available
for inspection by representatives of the Holders of the Registrable Notes
and any underwriters participating in any disposition pursuant to a Shelf
Registration Statement and any counsel or accountant retained by such
Holders or underwriters, upon reasonable notice, at reasonable times and in
a reasonable manner, all relevant financial and other records, pertinent
corporate documents and properties of the Trust reasonably requested by any
such persons, and cause the respective officers, directors, employees, and
any other agents of the Trust to supply all relevant information reasonably
requested by any such representative, underwriter, special counsel or
accountant in connection with such Shelf Registration Statement.
(p) (i) a reasonable time prior to the filing of any Exchange Offer
Registration Statement, any Prospectus forming a part thereof, any
amendment to an Exchange Offer Registration Statement or amendment or
supplement to a Prospectus, provide copies of such document to the Initial
Purchasers, and make such changes in any such document prior to the filing
thereof as any of the Initial Purchasers or their counsel may reasonably
request; (ii) in the case of a Shelf Registration, a reasonable time prior
to filing any Shelf Registration Statement, any Prospectus forming a part
thereof, any amendment to such Shelf Registration Statement or amendment or
supplement to such Prospectus, provide copies of such document to the
Holders of Registrable Notes, to the Initial Purchasers, to counsel on
behalf of the Holders and to the underwriter or underwriters of an
underwritten offering of Registrable Notes, if any, and make such changes
in any such document prior to the filing thereof as the
16
<PAGE>
Holders of Registrable Notes, the Initial Purchasers on behalf of such
Holders, their counsel and any underwriter may reasonably request; and
(iii) cause the representatives of the Trust and its subsidiaries to be
available for discussion of such document as shall be reasonably requested
by the Holders of Registrable Notes, the Initial Purchasers on behalf of
such Holders or any underwriter and not at any time make any filing of any
such document of which such Holders, the Initial Purchasers on behalf of
such Holders, their counsel or any underwriter shall not have previously
been advised and furnished a copy or to which such Holders, the Initial
Purchasers on behalf of such Holders, their counsel or any underwriter
shall reasonably object; provided that any party receiving any document
pursuant to this clause (ii) who does not raise any objections to the
filing of such document within five days after receipt of such document
shall be deemed to have no objection to the filing of such document;
(q) in the case of a Shelf Registration, use its best efforts to cause
all Registrable Securities to be listed on any securities exchange on which
similar debt securities issued by the Trust are then listed if requested by
the Majority Holders or by the underwriter or underwriters of an
underwritten offering of Registrable Securities, if any;
(r) in the case of a Shelf Registration, unless the rating in effect
for the Notes applies to the Exchange Notes and the Notes to be sold
pursuant to a Shelf Registration, use its best efforts to cause the
Registrable Notes to be rated with the appropriate rating agencies, if so
requested by the Majority Holders or by the underwriter or underwriters of
an underwritten offering of Registrable Notes, if any, unless the
Registrable Notes are already so rated;
(s) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering at least 12
months which shall satisfy the provisions of Section 11(a) of the 1933 Act
and Rule 158 thereunder; and
(t) cooperate and assist in any filings required to be made with the
NASD and in the performance of any due diligence investigation by any
underwriter and its counsel (including, any qualified independent
underwriter" that is required to be retained in accordance with the rules
and regulations of the NASD).
In the case of a Shelf Registration Statement, the Trust may (as a
condition to such Holder's participation in the Shelf Registration) require each
Holder of Registrable Notes to furnish to the Trust such information regarding
such Holder and the proposed distribution by such Holder of such Registrable
Notes as the Trust may from time to time reasonably request in writing.
17
<PAGE>
In the case of a Shelf Registration Statement, each Holder agrees
that, upon receipt of any notice from the Trust of the happening of any event or
the discovery of any facts, each of the kind described in Section 3(e)(ii)-(vi)
hereof, such Holder will forthwith discontinue disposition of Registrable Notes
pursuant to a Registration Statement until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 3(k) hereof,
and, if so directed by the Trust, such Holder will deliver to the Trust (at its
expense) all copies in its possession, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Registrable Notes
current at the time of receipt of such notice. If the Trust shall give any such
notice to suspend the disposition of Registrable Notes pursuant to a Shelf
Registration Statement as a result of the happening of any event or the
discovery of any facts, each of the kind described in Section 3(e)(vi) hereof,
the Trust shall be deemed to have used its best efforts to keep the Shelf
Registration Statement effective during such period of suspension provided that
the Trust shall use its best efforts to file and have declared effective (if an
amendment) as soon as practicable an amendment or supplement to the Shelf
Registration Statement and shall extend the period during which the Shelf
Registration Statement shall be maintained effective pursuant to this Agreement
by the number of days during the period from and including the date of the
giving of such notice to and including the date when the Holders shall have
received copies of the supplemented or amended Prospectus necessary to resume
such dispositions.
4. Underwritten Registrations. If any of the Registrable Notes
--------------------------
covered by any Shelf Registration are to be sold in an underwritten offering,
the investment banker or investment bankers and manager or managers that will
manage the offering will be selected by the Majority Holders of such Registrable
Notes included in such offering and shall be reasonably acceptable to the Trust.
No Holder of Registrable Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Notes on the basis provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
5. Indemnification and Contribution. (a) The Trust shall indemnify
--------------------------------
and hold harmless each Initial Purchaser, each Holder, including Participating
Broker-Dealers, their respective affiliates, and their respective directors,
officers, employees, agents and each Person, if any, who controls any of such
parties within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement
18
<PAGE>
of a material fact contained in any Registration Statement (or any
amendment thereto) pursuant to which Exchange Notes or Registrable Notes
were registered under the 1933 Act, including all documents incorporated
therein by reference, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any Prospectus (or
any amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
5(d) below) any such settlement is effected with the written consent of the
Trust; and
(iii) against any and all expenses whatsoever, as incurred (including
fees and disbursements of counsel chosen by any indemnified party),
reasonably incurred in investigating, preparing or defending against any
litigation, or investigation or proceeding by any court or governmental
agency or body, commenced or threatened, or any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue statement
or omission, to the extent that any such expense is not paid under
subparagraph (i) or (ii) of this Section 5(a);
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of an untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Trust by the
Initial Purchasers or any Holder, including Participating Broker-Dealers,
expressly for use in the Registration Statement (or any amendment or supplement
thereto) or the Prospectus (or any amendment or supplement thereto). The
foregoing indemnity with respect to any untrue statement contained in or any
omission from a Prospectus shall not inure to the benefit of any Initial
Purchaser or any Holder (in its capacity as Holder), including Participating
Broker-Dealers (or any Person who controls such party within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act), from whom the person
asserting any such loss, liability, claim, damage or expense purchased any of
the Notes that are the subject thereof and was not sent or given a copy of such
Prospectus (as amended or supplemented) by such Initial Purchaser or such
selling Holder (in its capacity as Holder) to the extent such Initial Purchaser
or such Holder (in its capacity as Holder) was required by law to deliver such
Prospectus as amended or supplemented at or prior to the written confirmation
19
<PAGE>
of the sale of such Notes and the untrue statement contained in or the omission
from such Prospectus was corrected in such amended or supplemented Prospectus,
unless such failure resulted from noncompliance by the Trust with its
obligations hereunder to furnish such Initial Purchaser or such Holder (in its
capacity as Holder), as the case may be, with copies of such Prospectus as
amended or supplemented.
(b) In the case of a Shelf Registration, each Holder agrees, severally
and not jointly, to indemnify and hold harmless the Trust the trustees of the
Trust, each Initial Purchaser and the other selling Holders and each of their
respective directors and officers (including each officer of the Trust who
signed the Shelf Registration Statement) and each Person, if any, who controls
the Trust, any Initial Purchaser or any other selling Holder within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all
loss, liability, claim, damage and expense whatsoever described in the indemnity
contained in Section 5(a) hereof, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Shelf Registration Statement (or any amendment thereto) or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Trust by such Holder, as the case may be,
expressly for use in the Shelf Registration Statement (or any amendment
thereto), or the Prospectus (or any amendment or supplement thereto); provided,
however, that no such Holder shall be liable for any claims hereunder in excess
of the amount of net proceeds received by such Holder from the sale of
Registrable Notes pursuant to such Shelf Registration Statement.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to either paragraph (a) or
paragraph (b) above, such person (the "indemnified party") shall give notice as
promptly as reasonably practicable to each person against whom such indemnity
may be sought (the "indemnifying party"), but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of such action; provided, however,
that counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. In no event shall
the indemnifying party or parties be liable for the fees and expenses of more
than one counsel (in addition to any local counsel) for all indemnified parties
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include
20
<PAGE>
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be one or more legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnifying party
shall not have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 5 for any subsequent legal or other expenses incurred pursuant to such
action, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
selected by any indemnified party in the case of Section 5(a), representing the
indemnified parties under such paragraph (a) who are parties to such action or
actions) or (ii) the indemnifying party does not promptly retain counsel
satisfactory to the indemnified party or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 5 hereof
(whether or not the indemnified parties are actual or potential parties
thereof), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Except with respect to fees and expenses not required to be
reimbursed pursuant to the assumption of the defense of an action in accordance
with Section 5(c) above, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel, such indemnifying party agrees that it shall be liable for
any settlement of the nature contemplated by Section 5(a)(ii) hereof effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have
21
<PAGE>
received notice of the terms of such settlement at least 30 days prior to such
settlement being entered into and (iii) such indemnifying party shall not have
reimbursed such indemnified party in accordance with such request prior to the
date of such settlement.
(e) If the indemnification provided for in any of the indemnity
provisions set forth in this Section 5 is for any reason unavailable to or
insufficient to hold harmless an indemnified party in respect of any losses,
liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party, as
incurred, in such proportion as is appropriate to reflect the relative faults of
such indemnifying party or parties on the one hand, and such indemnified party
or parties on the other hand, in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party or parties on the one hand, and such indemnified party or
parties on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by such indemnifying party or parties and such indemnified party or
parties and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Trust, the
Initial Purchasers and the Holders of the Registrable Securities agree that it
would not be just and equitable if contribution pursuant to this Section 5 were
determined by pro rata allocation (even if the Initial Purchasers were treated
as one entity, and the Holders were treated as one entity, for such purpose) or
by another method of allocation which does not take account of the equitable
considerations referred to above in Section 5. The aggregate amount of losses,
liabilities, claims, damages and expenses incurred by an indemnified party and
referred to above in this Section 5 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by an governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 5, each Person, if any, who
controls an Initial Purchaser or Holder within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as such Initial Purchaser or Holder, and each director of the
Trust, each officer of the Trust who signed the Registration Statement, and each
Person, if any, who controls the Trust within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Trust.
6. Miscellaneous. (a) Rule 144 and Rule 144A. For so long as the
------------- ----------------------
Trust is subject to the reporting requirements of Section 13 or 15(d) of the
1934 Act, the Trust
22
<PAGE>
covenants that it will file the reports required to be filed by it under Section
13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC
thereunder, that if it ceases to be so required to file such reports, it will
upon the request of any Holder of Registrable Notes (i) make publicly available
or cause to be made publicly available such information as is necessary to
permit sales pursuant to Rule 144 under the 1933 Act, (ii) deliver or cause to
be delivered such information to a prospective purchaser as is necessary to
permit sales pursuant to Rule 144A under the 1933 Act and it will take such
further action as any Holder of Registrable Notes may reasonably request in
writing, and (iii) take such further action or cause to be taken such further
action that is reasonable in the circumstances, in each case, to the extent
required from time to time to enable such Holder to sell its Registrable Notes
without registration under the 1933 Act within the limitation of the exemptions
provided by (x) Rule 144 under the 1933 Act, as such Rule may be amended from
time to time, (y) Rule 144A under the 1933 Act, as such Rule may be amended from
time to time, or (z) any similar rules or regulations hereafter adopted by the
SEC. Upon the request of any Holder or proposed holder of Registrable Notes, the
Trust will deliver or cause to be delivered to such Holder or proposed holder,
to the extent not included in the filings of the Trust under Section 13(a) or
15(d) of the 1934 Act, audited consolidated financial statements of the Bank, of
its subsidiaries on an annual basis and quarterly financial statements of the
Bank and its subsidiaries. Upon the written request of any Holder of Registrable
Notes, the Trust will deliver to such Holder a written statement as to whether
it has complied with such requirements.
(b) No Inconsistent Agreements. The Trust has not entered into nor
--------------------------
will the Trust on or after the date of this Agreement enter into any agreement
which is inconsistent with the rights granted to the Holders of Registrable
Notes in this Agreement or otherwise conflicts with the provisions hereof. The
rights granted to the Holders hereunder do not in any way conflict with and are
not inconsistent with the rights granted to the holders of the Trust's other
issued and outstanding securities under any such agreements.
(c) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Trust has obtained the written consent of Holders of
at least a majority in aggregate principal amount of the outstanding Registrable
Notes affected by such amendment, modification, supplement, waiver or departure;
provided, however, that no amendment, modification, supplement or waiver or
consent to any departure from the provisions of Section 5 hereof shall be
effective as against any Holder of Registrable Notes unless consented to in
writing by such Holder.
(d) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, registered first-
class mail, telecopier, or any courier guaranteeing overnight delivery (i) if to
a Holder (other than an Initial Purchaser), at the most current address set
forth on the records of the Registrar under
23
<PAGE>
the Indenture, (ii) if to an Initial Purchaser, at the most current address
given by such Initial Purchaser to the Trust by means of a notice given in
accordance with the provisions of this Section 6(d), which address initially is
the address set forth in the Purchase Agreement; and (iii) if to the Trust,
initially at the address set forth in the Purchase Agreement and thereafter at
such other address, notice of which is given in accordance with the provisions
of this Section 6(d).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when receipt
is acknowledged, if telecopied; and on the next business day if timely delivered
to a courier guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the benefit
----------------------
of and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; provided that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Notes in
violation of the terms hereof or of the Purchase Agreement or the Indenture. If
any transferee of any Holder shall acquire Registrable Notes, in any manner,
whether by operation of law or otherwise, such Registrable Notes shall be held
subject to all of the terms of this Agreement, and by taking and holding such
Registrable Notes, such Person shall be conclusively deemed to have agreed to be
bound by and to perform all of the terms and provisions of this Agreement,
including the restrictions on resale set forth in this Agreement and, if
applicable, the Purchase Agreement, and such Person shall be entitled to receive
the benefits hereof.
(f) Third Party Beneficiary. The Holders shall be third party
-----------------------
beneficiaries to the agreements made hereunder between the Trust, on the one
hand, and the Initial Purchasers, on the other hand, and shall have the right to
enforce such agreements directly to the extent they deem such enforcement
necessary or advisable to protect their rights.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
24
<PAGE>
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(j) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Execution of Agreement by Trust. The name "B.F. Saul Real Estate
-------------------------------
Investment Trust" is the designation of the trustees of the Trust under the
Declaration of Trust. All Persons dealing with the Trust must look solely to the
property and assets of the Trust for the enforcement of any claims against the
Trust; neither the trustees, shareholders, officers, employees or agents of the
Trust in their individual capacities assume any personal liability for the
obligations of the Trust; and the respective properties of the trustees,
shareholders, officers, employees and agents of the Trust in their individual
capacities shall not be subject to the claims of any such Persons with respect
to any such obligations.
25
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
B.F. SAUL REAL ESTATE INVESTMENT TRUST
By /s/ Stephen Halpin
-------------------------------
Name: Stephen R. Halpin, Jr.
Title: Vice President and
Chief Financial Officer
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By:/s/ Bertram Michel
--------------------------
Name: Bertram Michel
Title: Associate
26
<PAGE>
Exhibit 4(d)
EXECUTION COPY
Bank Stock Registration Rights Agreement
Dated as of March 25, 1998
between
B F. Saul Real Estate Investment Trust
and
Norwest Bank Minnesota, National Association, as Trustee
<PAGE>
BANK STOCK REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into this 25th day of March, 1998, between B.F. Saul Real Estate
Investment Trust, an unincorporated Maryland business trust (the "Trust"), and
Norwest Bank Minnesota, National Association, as trustee (the "Trustee").
The Trust has entered into an Indenture dated as of March 25, 1998 (as
amended from time to time, the "Indenture") with the Trustee in connection with
the Trust's issuance of $200,000,000 aggregate principal amount of its 9 3/4%
Senior Secured Notes due 2008 (the "Notes"). Pursuant to Article Twelve of the
Indenture, the Trust has, among other things, pledged to the Trustee certain
shares of Bank Stock (such term and other capitalized terms used herein and not
otherwise defined having the respective meanings specified in the Indenture).
This Agreement is intended to permit the Trustee to exercise its remedies under
Article Twelve in respect of the Pledged Bank Stock through a public offering
thereof. The execution and delivery of this Agreement by the Trust is a
condition to the issuance of the Notes under the Indenture.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Registration Rights. If the Trustee shall have determined to
-------------------
exercise its right to sell all or any of the Pledged Bank Stock pursuant to
Article Twelve of the Indenture, the Trust agrees that, upon request of the
Trustee and at the Trust's expense, the Trust will use its best efforts to cause
Chevy Chase Bank, F.S.B. (the "Bank") to, and, if possible under applicable law,
will:
(a) execute and deliver, and cause the directors and officers of the
Bank or the Trust to execute and deliver, all such instruments and
documents, and do or cause to be done all such other acts and things, as
may be necessary or, in the opinion of the Trustee, advisable to register
the Pledged Bank Stock pursuant to the rules and regulations of the Office
of Thrift Supervision (the "OTS") or the rules and regulations of any
successor to the OTS or the appropriate federal regulator having
jurisdiction over the Bank if such is not the OTS (all of the rules and
regulations of the OTS set forth in Chapter V of Title 12 of the Code of
Federal Regulations, including, without limitation, 12 C.F.R. (S) 563g, and
the rules and regulations of the Securities and Exchange Commission (the
"Commission") made applicable to offering circulars by the rules and
regulations of the OTS, and all amendments to such regulations and
successor regulations and other applicable law (including regulations and
other law applicable as a result of any successor to the OTS or other
regulatory authority regulating the public offering of the Pledged Bank
Stock), are hereinafter collectively referred to as the "Rules and
Regulations"), to cause the offering circular on Form OC (or similar
offering circular required by any successor to the OTS or other regulatory
authority
<PAGE>
regulating the public offering of the Pledged Stock) relating thereto (the
"Offering Circular") to become effective under the Rules and Regulations
(such Form OC (or similar offering circular required by any successor to
the OTS or other regulatory authority), as amended at the time the Offering
Circular becomes effective under the Rules and Regulations, the "Form OC")
and to remain effective for such period as offering circulars are required
by law to be furnished and to make all amendments and supplements thereto
and to the related offering circular that, in the opinion of the Trustee,
are necessary or advisable, all in conformity with the Rules and
Regulations;
(b) use its best efforts to qualify the Pledged Bank Stock under all
applicable state securities or "Blue Sky" laws, and to obtain all necessary
governmental approvals for the sale of the Pledged Bank Stock, as requested
by the Trustee;
(c) if required by applicable law, make available to the security
holders of the Bank, as soon as practicable, an earnings statement that
will satisfy the provisions of Section 11(a) of the Securities Act of 1933,
as amended (the "1933 Act") and Rule 158 thereunder;
(d) provide the Trustee with such other information as may be
necessary or, in the opinion of the Trustee, advisable to enable the
Trustee to effect the sale of the Pledged Bank Stock; and
(e) do or cause to be done all such other acts and things as may be
necessary to make such sale of the Pledged Bank Stock or any part thereof
valid and binding and in compliance with applicable law, including the
Rules and Regulations.
The Trustee is authorized, in connection with any sale of the Pledged
Bank Stock pursuant to Article Twelve of the Indenture, to the extent permitted
by applicable law, to deliver or otherwise disclose to any prospective purchaser
of the Pledged Bank Stock (i) any Form OC or offering circular, and all
supplements and amendments thereto, prepared pursuant to clause (a) above, (ii)
any information provided to it pursuant to clause (d) above and (iii) any other
information in its possession relating to the Pledged Bank Stock.
Without limiting the remedies available to the Trustee and the
Holders, the Trust acknowledges that any failure by the Trust to comply with its
obligations under this Section 1 may result in material irreparable injury to
the Trustee or the Holders for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuries precisely and that, in
the event of any such failure, the Trustee or any Holder may obtain such relief
as may be required to specifically enforce the Trust's obligations under this
Section 1.
2
<PAGE>
2. Indemnification and Contribution. (a) The Trust agrees, and
--------------------------------
agrees to use its best efforts to cause the Bank to agree, to indemnify and hold
harmless the Trustee, each participating Holder, each other person who
participates in the offering of the Pledged Bank Stock, including underwriters
(as defined in the 1933 Act and referred to herein as "Underwriters"), and each
person, if any, who controls the Trustee or any participating Holder or other
participating person within the meaning of Section 15 of the 1933 Act or Section
20 of the Securities Exchange Act of 1934, as amended (the "1934 Act") (each of
the foregoing being an "Indemnitee"), as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any preliminary Form OC or
the Form OC (or any amendment or supplement thereto) including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary offering circular or Offering Circular (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage, and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
2(e) below) any such settlement is effected with the written consent of the
Trust and the Bank; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by any Indemnitee), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under subparagraph (i) or (ii)
of this Section 2(a);
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage, or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information
3
<PAGE>
furnished to the Trust or the Bank by any Indemnitee expressly for use in any
preliminary Form OC or the Form OC (or any amendment or supplement thereto) or
any preliminary offering circular or Offering Circular (or any amendment or
supplement thereto). The foregoing indemnity with respect to any untrue
statement contained in or any omission from a preliminary Form OC or the Form OC
shall not inure to the benefit of any Underwriter or any Holder, including
Participating Broker-Dealers (or any person who controls such party within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act), from whom
the person asserting any such loss, liability, claim, damage or expense
purchased any of the Notes that are the subject thereof and was not sent or
given a copy of such preliminary Form OC or such Form OC (as amended or
supplemented) by such Underwriter or such selling Holder (in its capacity as
Holder) to the extent such Underwriter or such selling Holder (in its capacity
as Holder) was required by law to deliver such preliminary Form OC or such Form
OC, as amended or supplemented, at or prior to the written confirmation of the
sale of such Notes and the untrue statement contained in or the omission from
such preliminary Form OC or such Form OC was corrected in such amended or
supplemented preliminary Form OC or such Form OC, unless such failure resulted
from noncompliance by the Trust with its obligations hereunder to furnish such
Underwriter or such Holder (in its capacity as Holder), as the case may be, with
copies of such Form OC or such Form OC, as amended or supplemented.
(b) In connection with any underwritten offering, the Trust also
will, and will use its best efforts to cause the Bank to agree to, indemnify
each person who participates as an Underwriter, if any, and each Person who
controls such Persons within the meaning of either Section 15 of the 1933 Act or
Section 20 of the 1934 Act to the same extent as provided above with respect to
the indemnification of the Holders, if requested in connection with any
Registration Statement.
(c) Each Indemnitee shall be required to severally agree to indemnify
and hold harmless the Trust, the Bank and each of their respective trustees or
directors and each officer of the Bank who signed the Form OC and each person,
if any, who controls the Trust, the Bank or any other Indemnitee within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in Section 2(a) hereof, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in any
preliminary Form OC or the Form OC (or any amendment or supplement thereto) or
any preliminary offering circular or Offering Circular included therein (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Trust and the Bank expressly for use in any
preliminary Form OC or the Form OC (or any amendment or supplement thereto) or
any such preliminary offering circular or Offering Circular (or any amendment or
supplement thereto); provided, however, that no such Indemnitee shall be liable
-------- -------
for any amount hereunder in excess of the amount of net proceeds received by
such Indemnitee from the sale of Pledged Bank Stock.
4
<PAGE>
(d) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to paragraph (a), (b) or (c)
above, such person (the "indemnified party") shall give notice as promptly as
reasonably practicable to each person against whom such indemnity may be sought
(the "indemnifying party") of such action, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of such action; provided, however,
that counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. In no event shall
the indemnifying party or parties be liable for the fees and expenses of more
than one counsel (in addition to any local counsel) for all indemnified parties
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 2 for any subsequent legal
or other expenses incurred pursuant to such action, other than reasonable costs
of investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, selected by any indemnified party in
the case of Section 2(a), representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by
5
<PAGE>
such indemnified party without the consent of the indemnifying party. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 2 (whether or not the indemnified parties are actual or potential
parties thereof), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(e) Except with respect to fees and expenses not required to be
reimbursed pursuant to the assumption of the defense of an action in accordance
with Section 2(d) above, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel, such indemnifying party agrees that it shall be liable for
any settlement of the nature contemplated by Section 2(a)(ii) hereof effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(f) If the indemnification provided for in any of the indemnity
provisions set forth in this Section 2 is for any reason unavailable to or
insufficient to hold harmless an indemnified party in respect of any losses,
liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall, and the Trust shall use its best efforts to cause the
Bank to agree to, contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party, as
incurred, in such proportion as is appropriate to reflect the relative fault of
the Trust and the Bank on the one hand, and such indemnified party or parties on
the other hand, in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations. The relative fault of the Trust and the Bank
on the one hand, and such indemnified party or parties on the other hand shall
be determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by such indemnifying party
or parties and such indemnified party or parties and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree, and the Trust shall use
its best efforts to cause the Bank to agree, that it would not be just and
equitable if contribution pursuant to this Section 2 were determined by pro rata
allocation or by another method of allocation which does not take account of the
equitable considerations referred to above in Section 2. The aggregate amount
6
<PAGE>
of losses, liabilities, claims, damages and expenses incurred by an indemnified
party and referred to above in this Section 2 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by an governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 2, each person, if any, who
controls an Indemnitee within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
Indemnitee, and each trustee of the Trust, each director of the Bank, each
officer of the Bank who signed the Form OC, and each person, if any, who
controls the Trust or the Bank within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act shall have the same rights to contribution as the
Trust and the Bank.
3. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders, Indemnitees and the Bank.
4. Third Party Beneficiaries. The Holders, Indemnitees and the Bank shall
-------------------------
be third party beneficiaries to the agreements made hereunder and shall have the
right to enforce such agreements directly to the extent they deem such
enforcement necessary or advisable to protect their rights hereunder.
5. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which when taken
together shall constitute one and the same agreement.
6. Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
8. Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
7
<PAGE>
9. Execution of Agreement by Trust. The name "B.F. Saul Real Estate
-------------------------------
Investment Trust" is the designation of the trustees of the trust under a
Declaration of Trust. All Persons dealing with the Trust must look solely to the
property and assets of the Trust for the enforcement of any claims against the
Trust; neither the trustees, shareholders, officers, employees and agents of the
Trust in their individual capacities assume any personal liability for the
obligations of the Trust; and the respective properties of the trustees,
shareholders, officers, employees and agents of the Trust in their individual
capacities shall not be subject to the claims of any such Persons with respect
to any such obligations.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
By: /s/Stephen Halpin
--------------------------------
Name: Stephen R. Halpin, Jr.
Title: Vice President and
Chief Financial Officer
Confirmed and accepted as
of the date first above
written:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, as trustee
By: /s/ Jane Y. Schweiger
-----------------------------
Name: Jane Y. Schweiger
Title: Corporate Trust Officer
9
<PAGE>
Exhibit 5
SHAW PITTMAN
POTTS & TROWBRIDGE
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
2300 N Street, N.W.
Washington, D.C. 20037-1128
202.663.8000
Facsimile 202.663.8007
April 10, 1998
B.F. Saul Real Estate Investment Trust
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Ladies and Gentlemen:
We have acted as counsel to B.F. Saul Real Estate Investment Trust, an
unincorporated business trust existing and operating under a declaration of
trust governed by the laws of the State of Maryland (the "Trust"), in connection
with the preparation of Registration Statement No. 333-________ on Form S-4
(the "Registration Statement"). The Registration Statement registers an
exchange offer (the "Exchange Offer") pursuant to which $200,000,000 principal
amount of the Trust's 9-3/4% Series B Senior Secured Notes due 2008 (the "New
Notes") will be offered in exchange for $200,000,000 principal amount of the
Trust's outstanding 9-3/4% Senior Secured Notes due 2008 (the "Old Notes"). The
New Notes will be issued pursuant to an Indenture dated as of March 25, 1998
(the "Indenture") between the Trust and the trustee named therein (the
"Trustee").
This opinion is being rendered pursuant to the requirements of Item 21 of
Form S-4 and Items 601(a) and 601(b)(5) of Regulation S-K under the Securities
Act of 1933, as amended.
For purposes of rendering this opinion, we have examined:
(i) the Amended and Restated Declaration of Trust of the Trust (the
"Declaration of Trust"), as amended through the date hereof, as
certified on March 31, 1998 by the Maryland State Department of
Assessments and Taxation;
(ii) the By-laws of the Trust, as amended through the date hereof (the
"Trust By-laws"), as certified by the Secretary or an Assistant
Secretary of the Trust as of the date hereof;
<PAGE>
April 10, 1998
Page 2
Page PPaP
(iii) resolutions of the Board of Trustees of the Trust adopted effective
April 10, 1998 by unanimous written consent in lieu of a meeting as
certified by the Secretary or an Assistant Secretary of the Trust as
of the date hereof;
(iv) an executed copy of the Indenture, including the form of the New Notes
contained therein; and
(v) such other documents as we have deemed necessary or appropriate as a
basis for the opinion set forth below.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified, photostatic or facsimile copies and the
authenticity of the originals of such copies. As to any facts material to the
opinion set forth below, we have relied upon statements and representations of
officers and other representatives of the Trust.
Based upon and subject to the foregoing, and having due regard for such
legal considerations as we deem relevant, it is our opinion that:
1. The Indenture has been duly and validly authorized, executed and
delivered by the Trust and constitutes a legal, valid and binding obligation of
the Trust, enforceable against the Trust in accordance with its terms, except
that (A) enforcement of the Indenture may be limited by (1) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent
transfer or other similar laws, regulations or procedures of general
applicability relating to or affecting the enforcement of creditors' rights and
(2) the application of general equity principles and the discretion of the court
before which any proceeding is brought (regardless of whether enforceability is
considered in a proceeding in equity or at law), (B) certain remedial or
procedural provisions contained in Article Twelve of the Indenture may be
limited or rendered unenforceable by applicable law, (C) rights to
indemnification and contribution may be limited by applicable law or equitable
principles or otherwise may be unenforceable as against public policy, and (D)
under certain circumstances, provisions imposing penalties, forfeitures, late
payment charges or an increase in interest rate upon delinquency in payment or
the occurrence of any default, event of default or other specified event may be
rendered unenforceable.
<PAGE>
April 10, 1998
Page 3
2. The New Notes have been duly and validly authorized by the Trust and
assuming the conformity of the New Notes with the form thereof examined by us,
valid execution of the New Notes in accordance with the Indenture by the Trust,
authentication of the New Notes in accordance with the Indenture by the Trustee
and delivery of the New Notes in exchange for Old Notes pursuant to the Exchange
Offer as described in the Registration Statement, the New Notes will be legally
issued, fully paid and nonassessable and will constitute legal, valid and
binding obligations of the Trust, enforceable against the Trust in accordance
with their terms, except that (A) enforcement of the New Notes may be limited by
(1) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance,
fraudulent transfer or other similar laws, regulations or procedures of general
applicability relating to or affecting the enforcement of creditors' rights and
(2) the application of general equity principles and the discretion of the court
before which any proceeding is brought (regardless of whether enforceability is
considered in a proceeding in equity or at law), (B) certain remedial or
procedural provisions of Article Twelve of the Indenture incorporated by
reference into the New Notes may be limited or rendered unenforceable by
applicable law, (C) rights to indemnification and contribution may be limited
by applicable law or equitable principles or otherwise may be unenforceable as
against public policy, and (D) under certain circumstances, provisions imposing
penalties, forfeitures, late payment charges or an increase in interest rate
upon delinquency in payment or the occurrence of any default, event of default
or other specified event may be rendered unenforceable; and the New Notes will
be entitled to the benefits of the Indenture.
The foregoing opinions are based upon and are limited to applicable federal
law and the laws of the State of Maryland and the State of New York (excluding
the choice of law provisions thereof, except for, with respect to the State of
New York, the New York General Obligations Law Sections 5-1401 and 5-1402).
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement. We also consent to the reference to Shaw Pittman Potts
& Trowbridge under the caption "Legal Matters" in the Prospectus which is part
of the Registration Statement.
Very truly yours,
SHAW PITTMAN POTTS & TROWBRIDGE
<PAGE>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - REAL ESTATE
TRUST ONLY
<TABLE>
<CAPTION>
For the Three
Months Ended
December 31 For the Twelve Months Ended September 30
-------------------------------------------------------------------------
(Dollars in thousands) 1997 1997 1996 1995 1994 1993
- ----------------------------------- -------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest and debt expense $ 10,222 $ 40,819 $ 40,514 $ 41,040 $ 40,576 $ 53,499
Ground rent 25 101 101 109 115 506
-------------- ------------- ------------- ------------- ------------- -------------
Total fixed charges for ratio $ 10,247 $ 40,920 $ 40,615 $ 41,149 $ 40,691 $ 54,005
============== ============= ============= ============= ============= =============
EARNINGS:
Operating loss $ (7,430) $ (18,987) $ (24,176) $ (27,341) $ (34,305) $ (44,495)
Total fixed charges for ratio 10,247 40,920 40,615 41,149 40,691 54,005
-------------- ------------- ------------- ------------- ------------- -------------
Total earnings for ratio $ 2,817 $ 21,933 $ 16,439 $ 13,808 $ 6,386 $ 9,510
============== ============= ============= ============= ============= =============
RATIO OF EARNINGS TO FIXED CHARGES Less than 1 Less than 1 Less than 1 Less than 1 Less than 1 Less than 1
============== ============= ============= ============= ============= =============
Deficiency of available earnings
to fixed charges $ (7,430) $ (18,987) $ (24,176) $ (27,341) $ (34,305) $ (44,495)
============== ============= ============= ============= ============= =============
</TABLE>
<PAGE>
Exhibit 21
B. F. SAUL REAL ESTATE INVESTMENT TRUST
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Current
Date of Principal
Site of Acquisition/ Business
Incorporation Formation Activity
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
100% OWNED SUBSIDIARIES
Arlington Hospitality Corp Virginia 1997 Hotel Owner
Auburn Hills Hotel Corporation Maryland 1994 Hotel Owner
Auburn Hills Land Corp. Maryland 1997 Land Owner
Avenel Executive Park Phase II, Inc. Maryland 1987 Real Estate
Investor
Commerce Center Development Corp. Florida 1980 Office Park
Owner
Crystal City Hospitality Corp. Virginia 1989 Hotel Owner
Dallas San Simeon Incorporated Texas 1993 Apartment
Project
Owner
Dearborn Corporation Delaware 1992 Land Owner
Dulles Airport Hotel Corporation Virginia 1989 Inactive
Dulles Hospitality Corp. Virginia 1997 Hotel Owner
Flagship Centre Corporation Maryland 1985 Land Owner
Herndon Hotel Corporation Virginia 1996 Hotel Owner
MHC Airport Inn, Inc. (a) New York 1980/1976 Hotel
Operator
MHC Corporation Maryland 1980/1974 Hotel
Operator
Metairie Office Towers, Inc. (b) Louisiana 1995 Office Bldg
Owner
NVA Development Corporation Virginia 1984 Gen'l Part/
Real Est.
P/ship
Peachtree/Northeast Corp. Georgia 1979 Land Owner
Pueblo Hotel Corp. Colorado 1985 Hotel Owner
Rochester Airport Hotel Corporation New York 1986 Inactive
Scope Hospitality Corp. Virginia 1989 Inactive
Sharonville Hotel Corporation Ohio 1986 Inactive
Sterling Hotel Corporation Virginia 1997 Hotel Owner
Tysons Corner Hospitality Corp. Virginia 1989 Inactive
Wheeler Road, Inc. Maryland 1992 Inactive
900 Corporation Georgia 1981 Office Bldg
Owner
1100 Corporation Georgia 1979 Office Bldg
Owner
1113 Corporation Florida 1984 Gen'l Part/
Real Est.
P/ship
</TABLE>
- ----------------------
(a) Subsidiary of MHC Corporation
(b) Subsidiary of Dearborn Corporation
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
LIST OF SUBSIDIARIES (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Ashburn Village Development Corporation (A) Maryland
Bailey's Corporation (sold property 11/95) (A) Maryland
Balmoral Golf Corporation (B) Maryland
B. F. Saul Mortgage Company (C) Maryland
Bondy Way Development Corporation (A) Maryland
Brambleton Land Corporation (A) Maryland
Brooke Manor Land Corporation (sold
property 8/96) (A) Maryland
CCB Holding Corporation (C) Delaware
CCRE, Inc. (D) Maryland
Cherrytree Corporation (A) Maryland
Chevy Chase Bank, F.S.B. United States
Chevy Chase Financial Services Corporation (C) Virginia
Chevy Chase Insurance Agency, Inc. ("CCIA") (E) Maryland 1
Chevy Chase Mortgage Company (F) Maryland
Chevy Chase Mortgage Company of Virginia (C) Virginia
Chevy Chase Preferred Capital Corporation (C) Maryland
Chevy Chase Real Estate Corporation (C) Virginia
Chevy Chase Securities, Inc. ("CCS") (E) Maryland
Consumer Finance Corporation (C) Virginia
Duvall Village Corporation (A) Maryland
First Balmoral Corporation (A) Maryland
Great Seneca Development Corporation (A) Maryland
Hamlets at Brambleton, Inc. (A) Virginia
Inglewood Corporation (sold property 11/95) (A) Maryland
Manor Holding Corporation (C) Virginia
Manor Investment Company (G) Maryland
Marbury I Corporation (A) Maryland
Marbury II Corporation (A) Maryland
NML Corporation (A) Maryland
North Ode Street Development Corporation (D) Maryland
Oak Den, Inc. (sold remaining lots 10/94) (A) Maryland
Old Chapel Corporation (A) Maryland
Presley Corporation (C) Maryland
Primrose Development Corporation (A) Maryland
Ridgeview Centre Corp. (A) Maryland
Ronam Corporation, Inc. (C) Maryland
Sully Park Corporation (sold property 6/96) (A) Maryland
Sully Station Corporation (sold property 9/97) (A) Maryland
Sycolin - Leesburg Corporation (A) Maryland
Terminal Drive Properties Corporation (A) Maryland
</TABLE>
- -----------------------------------
(A) Subsidiary of Chevy Chase Real Estate Corporation
(B) Subsidiary of First Balmoral Corporation
(C) Subsidiary of Chevy Chase Bank, F.S.B.
(D) Subsidiary of Manor Investment Company
(E) Subsidiary of Chevy Chase Financial Services Corporation
(F) Subsidiary of Chevy Chase Mortgage Company of Virginia
(G) Subsidiary of Manor Holding Company
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
included in or made part of this registration statement and to the incorporation
by reference in this registration statement of our reports dated October 22,
1997, except with respect to the matter discussed in Note 24, as to which the
date is November 12, 1997 included in Chevy Chase Bank, F.S.B.'s consolidated
financial statements for the years ended September 30, 1997 and 1996 and our
reports dated December 9, 1997 included in B.F. Saul Real Estate Investment
Trust's Form 10-K for the years ended September 30, 1997 and 1996 and all
references to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
April 10, 1998
<PAGE>
Exhibit 25
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
-----------------------------
_____ CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b) (2)
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
A U.S. NATIONAL BANKING ASSOCIATION 41-1592157
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
SIXTH STREET AND MARQUETTE AVENUE
MINNEAPOLIS, MINNESOTA 55479
(Address of principal executive offices) (Zip code)
Stanley S. Stroup, General Counsel
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
(612) 667-1234
(Agent for Service)
-----------------------------
B.F. SAUL REAL ESTATE INVESTMENT TRUST
(Exact name of obligor as specified in its charter)
MARYLAND 52-6053341
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 CONNECTICUT AVENUE
CHEVY CHASE, MD 20815
(Address of principal executive offices) (Zip code)
-----------------------------
$200,000,000 9.75% SENIOR SECURED NOTES DUE 2008
(Title of the indenture securities)
================================================================================
<PAGE>
Item 1. General Information. Furnish the following information as to the
--------------------
trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve System
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with Obligor. If the obligor is an affiliate of the
--------------------------
trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-14 of this Form T-1 because the obligor is
not in default as provided under Item 13.
Item 15. Foreign Trustee. Not applicable.
----------------
Item 16. List of Exhibits. List below all exhibits filed as a part of this
-----------------
Statement of Eligibility.
Norwest Bank incorporates by reference into this
Form T-1 the exhibits attached hereto.
Exhibit 1. a. A copy of the Articles of Association of the trustee
now in effect.*
Exhibit 2. a. A copy of the certificate of authority of the trustee
to commence business issued June 28, 1872, by the
Comptroller of the Currency to The Northwestern
National Bank of Minneapolis.*
b. A copy of the certificate of the Comptroller of the
Currency dated January 2, 1934, approving the
consolidation of The Northwestern National Bank of
Minneapolis and The Minnesota Loan and Trust Company
of Minneapolis, with the surviving entity being titled
Northwestern National Bank and Trust Company of
Minneapolis.*
c. A copy of the certificate of the Acting Comptroller of
the Currency dated January 12, 1943, as to change of
corporate title of Northwestern National Bank and
Trust Company of Minneapolis to Northwestern National
Bank of Minneapolis.*
<PAGE>
d. A copy of the letter dated May 12, 1983 from the
Regional Counsel, Comptroller of the Currency,
acknowledging receipt of notice of name change
effective May 1, 1983 from Northwestern National Bank
of Minneapolis to Norwest Bank Minneapolis, National
Association.*
e. A copy of the letter dated January 4, 1988 from the
Administrator of National Banks for the Comptroller of
the Currency certifying approval of consolidation and
merger effective January 1, 1988 of Norwest Bank
Minneapolis, National Association with various other
banks under the title of "Norwest Bank Minnesota,
National Association."*
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued January 2, 1934, by the
Federal Reserve Board.*
Exhibit 4. Copy of By-laws of the trustee as now in effect.*
Exhibit 5. Not applicable.
Exhibit 6. The consent of the trustee required by Section 321(b) of
the Act.
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.**
Exhibit 8. Not applicable.
Exhibit 9. Not applicable.
* Incorporated by reference to exhibit number 25 filed with registration
statement number 33-66026.
** Incorporated by reference to exhibit number 25 filed with registration
statement number 333-47427.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Minneapolis and State of Minnesota on the 7th day of April 1998.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Jane Y. Schweiger
------------------------
Jane Y. Schweiger
Corporate Trust Officer
<PAGE>
EXHIBIT 6
April 7, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
In accordance with Section 321(b) of the Trust Indenture Act of 1939, as
amended, the undersigned hereby consents that reports of examination of the
undersigned made by Federal, State, Territorial, or District authorities
authorized to make such examination may be furnished by such authorities to the
Securities and Exchange Commission upon its request therefor.
Very truly yours,
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Jane Y. Schweiger
-----------------------
Jane Y. Schweiger
Corporate Trust Officer
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008
OF
B.F. SAUL REAL ESTATE INVESTMENT TRUST
PURSUANT TO THE EXCHANGE OFFER IN RESPECT OF
ALL OF ITS OUTSTANDING 9 3/4% SENIOR SECURED NOTES DUE 2008
FOR
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008
PURSUANT TO THE PROSPECTUS DATED , 1998
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT P.M., NEW YORK CITY TIME, ON
, , 1998 UNLESS THE EXCHANGE OFFER IS EXTENDED (SUCH TIME AND
DATE, AS SO EXTENDED, THE "EXPIRATION DATE"). TENDERS OF OLD NOTES
MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
The Exchange Agent and Information Agent for the Exchange Offer is:
For Information Telephone:
By Mail: By Facsimile Transmission By Hand or Overnight
(for Eligible Institutions only): Delivery:
Confirm by Telephone:
Delivery of this Letter of Transmittal to an address, or transmission of
instructions via telegram, telex or facsimile, other than as set forth above
will not constitute a valid delivery.
The instructions contained herein should be read carefully before this
Letter of Transmittal is completed.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR
OLD NOTES PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
(the "Prospectus"), dated , 1998, of B.F. Saul Real Estate Investment
Trust (the "Trust"), which, together with this Letter of Transmittal and the
instructions hereto (the "Letter of Transmittal"), constitutes the Trust's
offer (the "Exchange Offer") to exchange $1,000 principal amount of its 9 3/4%
Series B Senior Secured Notes due 2008 (the "New Notes") that have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which the Prospectus
constitutes a part, for each $1,000 principal amount of its outstanding 9 3/4%
Senior Secured Notes due 2008 (the "Old Notes"), upon the terms and subject to
the conditions set forth in the Prospectus and this Letter of Transmittal.
This Letter of Transmittal is to be used by Holders if: (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent
herewith by Holders; (ii) tender of Old Notes is to be made by book-entry
transfer to the account maintained by the Exchange Agent at The Depository
Trust Company, the Midwest Securities Trust Company or the Philadelphia
Depository Trust Company (each a "Book-Entry Transfer Facility") pursuant to
the procedures set forth in the Prospectus under "The Exchange Offer--
Procedures for Tendering"; or (iii) tender of Old Notes is to be made
according to the guaranteed delivery procedures set forth in the Prospectus
under "The Exchange Offer--Guaranteed Delivery Procedures." DELIVERY OF
DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT.
<PAGE>
The term "Holder" with respect to the Exchange Offer means (i) any person in
whose name Old Notes are registered on the books of the Trust or any other
person who has obtained a properly completed bond power from the registered
Holder or (ii) any participant in a Book-Entry Transfer Facility whose name
appears on a security position listing as the owner of Old Notes.
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Prospectus.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery
may be directed to , as Exchange Agent and Information Agent. See
Instruction 8 herein.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with
respect to the Exchange Offer. HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER
AND TENDER THEIR OLD NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS
ENTIRETY.
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, list the certificate numbers and principal
amounts on a separately executed schedule and affix the schedule to this
Letter of Transmittal. Tenders of Old Notes will be accepted only in principal
amounts equal to $1,000 or integral multiples thereof.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- -----------------------------------------------------------------------------------------------------
CERTIFICATE NUMBER(S)* AGGREGATE PRINCIPAL
NAME(S) AND ADDRESS(ES) OF HOLDER(S) (ATTACH SIGNED AMOUNT TENDERED
(PLEASE FILL IN, IF BLANK) LIST, IF NECESSARY) (IF LESS THAN ALL)**
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
- -----------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT OF OLD NOTES TENDERED
- -----------------------------------------------------------------------------------------------------
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders who wish to tender with respect to all Old
Notes listed. See Instruction 2.
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
Check Box of Book-Entry Transfer Facility:
[_] The Depository Trust Company
[_] Midwest Securities Trust Company
[_] Philadelphia Depository Trust Company
Account Number _____________________________________________________________
Transaction Code Number ____________________________________________________
If Holders desire to tender Old Notes pursuant to the Exchange Offer and (i)
certificates representing such Old Notes are not immediately available, (ii)
time will not permit this Letter of Transmittal, certificates representing
such Old Notes or other required documents to reach the Exchange Agent prior
to the Expiration Date or (iii) the procedures for book-entry transfer cannot
be completed prior to the Expiration Date, such Holders may effect a tender of
such Old Notes in accordance with the guaranteed delivery procedures set forth
in the Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures."
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COM-
PLETE THE FOLLOWING:
Name(s) of Holder(s) of Old Notes __________________________________________
Window Ticket No. (if any) _________________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Name of Eligible Institution that Guaranteed Delivery ______________________
If Delivered by Book-Entry Transfer, Check Box of Applicable Book-Entry
Transfer Facility:
[_] The Depository Trust Company
[_] Midwest Securities Trust Company
[_] Philadelphia Depository Trust Company
Account Number (If Delivered by Book-Entry Transfer) _______________________
Transaction Code Number (If Delivered by Book-Entry Transfer) ______________
LADIES AND GENTLEMEN:
Subject to the terms of the Exchange Offer, the undersigned hereby tenders
to the Trust the principal amount of Old Notes indicated above. Subject to and
effective upon the acceptance for exchange of the principal amount of Old
Notes tendered in accordance with this Letter of Transmittal, the undersigned
sells, assigns and transfers to, or upon the order of, the Trust all right,
title and interest in and to the Old Notes tendered hereby. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Trust) with respect to the tendered Old Notes, with full power of
substitution, to (i) deliver certificates for such Old Notes to the Trust, or
transfer ownership of such Old Notes on the account books maintained by a
Book-Entry Transfer Facility, together, in either such case, with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Trust and (ii) present such Old Notes for transfer on the books of the
Trust and receive all benefits and otherwise exercise all rights of beneficial
ownership of such Old Notes, all in accordance with the terms of the Exchange
Offer. The power of attorney granted in this paragraph shall be deemed
irrevocable and coupled with an interest.
<PAGE>
The undersigned hereby represents and warrants that it has full power and
authority to tender, sell, assign and transfer the Old Notes tendered hereby
and that the Trust will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim, when the same are acquired by the Trust. The undersigned
will, upon request, execute and deliver any additional documents deemed by the
Exchange Agent or the Trust to be necessary or desirable to complete the
assignment and transfer of the Old Notes tendered hereby.
The undersigned acknowledges that this Exchange Offer is being made in
reliance upon an interpretation by the staff of the Securities and Exchange
Commission issued to third parties that the New Notes issued in exchange for
the Old Notes pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by any holder thereof (other than (i) a broker-
dealer who purchased such Old Notes directly from the Trust for resale
pursuant to Rule 144A or other available exemption under the Securities Act or
(ii) a person that is an "affiliate" of the Trust within the meaning of Rule
405 under the Securities Act), except in the circumstances referred to in the
last sentence of this paragraph, without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not participating, does not intend to participate and has no
arrangement or understanding with any person to participate in the
distribution of such New Notes. The undersigned hereby represents that (i) the
New Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving the New Notes, whether or
not such person is the Holder, (ii) neither the Holder nor any such person is
participating, intends to participate or has an arrangement or understanding
with any person to participate in the distribution of such New Notes and (iii)
neither the Holder nor any such person is an "affiliate" of the Trust within
the meaning of Rule 405 under the Securities Act or, if the Holder or such
person is an affiliate, that such Holder or person will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. If the undersigned is not a broker-dealer, the undersigned
represents that the person receiving the New Notes, whether or not such person
is the Holder, is not engaged in, and does not intend to engage in, a
distribution of New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, it represents
that the Old Notes to be exchanged for New Notes were acquired by it as a
result of market-making activities or other trading activities and
acknowledges that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For purposes of the Exchange Offer, the Trust shall be deemed to have
accepted validly tendered Old Notes when, as and if the Trust has given oral
or written notice thereof to the Exchange Agent. If any tendered Old Notes are
not accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such Old Notes not accepted shall be returned (except as
noted below with respect to tenders through a Book-Entry Transfer Facility),
without expense, to the undersigned at the address shown below or at a
different address as may be indicated under "Special Issuance Instructions" as
promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall be
binding upon the heirs, personal representatives, executors, administrators,
successors, assigns, trustees in bankruptcy and other legal representatives of
the undersigned.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described in the Prospectus under "The Exchange Offer" and in the
instructions hereto shall constitute a binding agreement between the
undersigned and the Trust upon the terms and subject to the conditions of the
Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the certificates representing the New Notes issued in exchange for the
Old Notes accepted for exchange, and return any Old Notes not tendered or not
exchanged, in the name(s) of the undersigned (or in either such event in the
case of the Old Notes tendered by book-entry transfer, please credit the
account maintained at the Book-Entry Transfer Facility indicated herein).
Similarly, unless otherwise indicated under "Special Delivery Instructions,"
please send the certificates representing the New Notes issued in exchange for
the Old Notes accepted for exchange and any certificates for Old Notes not
tendered or not exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signatures, unless,
in either
<PAGE>
event, tender is being made by book-entry transfer. In the event that both
"Special Issuance Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New Notes issued in
exchange for the Old Notes accepted for exchange and return any certificates
for Old Notes not tendered or not exchanged in the name(s) of, and send such
certificates to, the person(s) so indicated. The undersigned recognizes that
the Trust has no obligation pursuant to the "Special Issuance Instructions"
and "Special Delivery Instructions" to transfer any Old Notes from the name of
the registered holder(s) thereof if the Trust does not accept for exchange any
of the Old Notes so tendered.
- -------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF OLD NOTES REGARDLESS OF WHETHER
OLD NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH)
This Letter of Transmittal must be signed by the Holder(s) of Old Notes
exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if
tendered by a participant in a Book-Entry Transfer Facility, exactly as such
participant's name appears on a security position listing as the owner of Old
Notes or by person(s) authorized to become registered Holder(s) by
endorsements and documents transmitted with this Letter of Transmittal. If
signature is by a trustee, executor, administrator, guardian, attorney-in-
fact, officer of a corporation or other person acting in a fiduciary or
representative capacity, such person must set forth his full title below
under "Capacity" and submit evidence satisfactory to the Trust of such
person's authority to so act. See Instruction 3 herein.
x ______________________________ Date: ________________
x ______________________________ Date: ________________
Signature(s)
of Holder(s)
or Authorized
Signatory
Name(s) ________________________ Address: ________________________________
___________________________ _____________________________________
(Please Print) (Including Zip Code)
Capacity _______________________ Area Code and Telephone No.: ____________
Social Security No.:____________
SIGNATURE GUARANTEE (SEE INSTRUCTION 3 HEREIN)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
------------------------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures)
------------------------------------------------------------------------------
(Address (including zip code) and Telephone Number
(including area code) of Firm))
------------------------------------------------------------------------------
(Authorized Signature)
------------------------------------------------------------------------------
(Printed Name)
------------------------------------------------------------------------------
(Title)
Date: _______________
- -------------------------------------------------------------------------------
<PAGE>
- ------------------------------------- ----------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 4 HEREIN) (SEE INSTRUCTION 4 HEREIN)
To be completed ONLY if certifi- To be completed ONLY if certifi-
cates for Old Notes in a princi- cates for Old Notes in a princi-
pal amount not tendered or not pal amount not tendered or not
exchanged are to be issued in the exchanged or the New Notes issued
name of, or the New Notes issued pursuant to the Exchange Offer
pursuant to the Exchange Offer are to be sent to someone other
are to be issued to the order of, than the person or persons whose
someone other than the person or signature(s) appear(s) within
persons whose signature(s) ap- this Letter of Transmittal or to
pear(s) within this Letter of an address different from that
Transmittal or sent to an address shown in the box entitled "De-
different from that shown in the scription of Old Notes" within
box entitled "Description of Old this Letter of Transmittal.
Notes" within this Letter of
Transmittal, or if Old Notes ten-
dered by book-entry transfer that
are not accepted are to be cred-
ited to an account maintained at
a Book-Entry Transfer Facility.
Name: ____________________________ Name: ____________________________
(PLEASE PRINT) (PLEASE PRINT)
Address: _________________________ Address: _________________________
(PLEASE PRINT) (PLEASE PRINT)
__________________________________ ___________________________________
ZIP CODE ZIP CODE
__________________________________ __________________________________
TAXPAYER IDENTIFICATION OR SOCIAL
SECURITY NUMBER
- ------------------------------------- ----------------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES. The certificates
for the tendered Old Notes (or a confirmation of a book-entry delivery of Old
Notes into the Exchange Agent's account at the applicable Book-Entry Transfer
Facility), as well as properly completed and duly executed copy of this Letter
of Transmittal or facsimile hereof and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address
set forth herein prior to the Expiration Date.
THE METHOD OF DELIVERY OF THE TENDERED OLD NOTES, THIS LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL
BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
TRUST.
Holders who wish to tender their Old Notes must follow the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange Offer--
Guaranteed Delivery Procedures" if (i) certificates representing the Old Notes
to be tendered are not immediately available, (ii) time will not permit this
Letter of Transmittal, certificates representing such Old Notes or other
required documents to reach the Exchange Agent prior to the Expiration Date or
(iii) the procedures for book-entry transfer cannot be completed prior to the
Expiration Date. Pursuant to such procedures: (i) such tender must be made by
or through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
Holder of the Old Notes, the certificate number or numbers of such Old Notes
and the principal amount of Old Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five business days after the
Expiration Date, this Letter of Transmittal (or facsimile thereof), together
with the certificate(s) representing the Old Notes in proper form for transfer
(or confirmation of book-entry delivery of Old Notes into the Exchange Agent's
account at the applicable Book-Entry Transfer Facility) and any other
documents required by this Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly
completed and executed Letter of Transmittal (or facsimile hereof), together
with the certificate(s) representing all tendered Old Notes in proper form for
transfer (or a confirmation of book-entry delivery of Old Notes into the
Exchange Agent's account at the applicable Book-Entry Transfer Facility) and
all other documents required by this Letter of Transmittal, must be received
by the Exchange Agent within five business days after the Expiration Date. Any
Holder of Old Notes who wishes to tender such Holder's Old Notes pursuant to
the guaranteed delivery procedures described above must ensure that the
Exchange Agent receives the Notice of Guaranteed Delivery prior to the
Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be
determined in the sole discretion of the Trust, whose determination will be
final and binding. The Trust reserves the absolute right in its sole
discretion to reject any and all Old Notes not properly tendered or any Old
Notes the Trust's acceptance of which would, in the opinion of counsel for the
Trust, be unlawful. The Trust also reserves the absolute right in its sole
discretion to waive any of the conditions of the Exchange Offer or any defect
or irregularity in any tender with respect to particular Old Notes. The
Trust's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) will be final and
binding. Unless waived, any defects or irregularities in connection with
tenders of Old Notes must be cured within such time as the Trust shall
determine. None of the Trust, the Exchange Agent or any other person shall be
under any duty to give notification of any defects or irregularities with
respect to tenders of Old Notes, nor shall any of them incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned without cost by the Exchange Agent to the tendering Holders
of Old Notes, unless otherwise provided in this Letter of Transmittal, as soon
as practicable following the Expiration Date.
2. PARTIAL TENDERS. Tenders of Old Notes will be accepted in denominations
of $1,000 and integral multiples thereof. If less than the entire principal
amount of any Old Notes is tendered, the tendering Holder should fill in the
principal
<PAGE>
amount tendered in the third column of the chart entitled "Description of Old
Notes." The entire principal amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. If the
entire principal amount of all Old Notes is not tendered, Old Notes for the
principal amount of Old Notes delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise indicated. If the entire principal
amount of all Old Notes is not tendered, Old Notes for the principal amount of
Old Notes not tendered and a certificate or certificates representing New
Notes issued in exchange for any Old Notes accepted will be sent to the Holder
at its registered address, unless a different address is provided in the
appropriate box on this Letter of Transmittal or unless tender is made through
a Book-Entry Transfer Facility, promptly after the Old Notes are accepted for
exchange.
3. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof)
is signed by the registrant Holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement of any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of Old Notes tendered and the certificate(s) for New
Notes issued in exchange therefor is to be issued (or any untendered principal
amount of Old Notes is to be reissued) to the registered Holder, such Holder
need not and should not endorse any tendered Old Note, nor provide a separate
bond power. In any other case, such Holder must either properly endorse the
Old Notes tendered or transmit a properly completed separate bond power with
this Letter of Transmittal, with the signatures on the endorsement or bond
power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder(s) of any Old Notes listed, such Old Notes
must be endorsed or accompanied by appropriate bond powers signed as the name
of the registered Holder(s) appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Trust, evidence satisfactory to the Trust of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or facsimile hereof) must be
guaranteed by an Eligible Institution unless the Old Notes tendered pursuant
hereto are tendered (i) by a registered Holder (including any participant in a
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of Old Notes) who has not completed the box set forth herein
entitled "Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" or (ii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders should
indicate, in the applicable box(es) in this Letter of Transmittal, the name
and address to which New Notes or substitute Old Notes for principal amounts
not tendered or not accepted for exchange are to be issued or sent, if
different from the name and address of the person signing this Letter of
Transmittal. Holders tendering by book-entry transfer may request that Old
Notes not exchanged be credited to such account maintained at a Book-Entry
Transfer Facility as any such Holder may designate herein. If no such
instructions are given, such Old Notes not exchanged will be returned by
crediting the account at a Book-Entry Transfer Facility designated above. In
the case of issuance in a different name, the taxpayer identification or
social security number of the person named must also be indicated. Such named
person may be required to furnish Norwest Bank Minnesota, National
Association, the Trustee under the Indenture pursuant to which the Old Notes
were, and the New Notes will be, issued, with a completed Internal Revenue
Service Form W-9 certifying as to such person's taxpayer identification or
social security number and certain other matters prior to receipt of payments
of interest or principal on the applicable Notes.
5. TRANSFER TAXES. Except as set forth in this Instruction 5, the Trust will
pay all transfer taxes, if any, applicable to the exchange of Old Notes
pursuant to the Exchange Offer. If, however, certificates representing New
Notes or Old Notes
<PAGE>
for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be registered or issued in the name of, any person
other that the registered Holder of the Old Notes tendered hereby, or if
tendered Old Notes are to be registered in the name of any person other than
the person signing this Letter of Transmittal, or if a transfer tax is imposed
for any reason other than the exchange of Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other person) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with this Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
6. WAIVER OF CONDITIONS. The Trust reserves the absolute right in its sole
discretion to waive any of the specified conditions in the Exchange Offer, in
whole or in part.
7. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose certificates representing Old Notes have been mutilated, lost, stolen or
destroyed should promptly notify Norwest Bank Minnesota, National Association,
the Trustee under the Indenture pursuant to which the Old Notes were issued,
at telephone number (612) 667-5786. The Holder will then be instructed as to
the procedure to be followed in order to replace such certificates. This
Letter of Transmittal and related documents cannot be processed until
procedures for replacing such certificates have been followed.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to , as Exchange Agent and Information
Agent, at the address and telephone specified herein and in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company
or other nominee for assistance concerning the Exchange Offer.
The Exchange Agent and Information Agent for the Exchange Offer is:
For Information Telephone:
By Mail: By Facsimile Transmission By Hand or Overnight
(for Eligible Institutions only): Delivery:
Confirm by Telephone:
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008
OF
B.F. SAUL REAL ESTATE INVESTMENT TRUST
As set forth in the Prospectus, dated , 1998 (the "Prospectus"), of
B.F. Saul Real Estate Investment Trust (the "Trust") in the accompanying
Letter of Transmittal and instructions thereto (the "Letter of Transmittal"),
this form or one substantially equivalent hereto must be used to accept the
Trust's exchange offer (the "Exchange Offer") in respect of all of its
outstanding 9 3/4 Senior Secured Notes due 2008 (the "Old Notes") if (i)
certificates representing the Old Notes to be tendered are not immediately
available, (ii) time will not permit the Letter of Transmittal, certificates
representing such Old Notes or other required documents to reach the Exchange
Agent Prior to the Expiration Date (iii) the procedures for book-entry
transfer cannot be completed prior to the Expiration Date. This form may be
delivered by an Eligible Institution by mail or hand delivery or transmitted,
via telegram, telex or facsimile, to the Exchange Agent as set forth below.
All capitalized terms used herein but not defined herein shall have the
meanings ascribed to them in the Prospectus.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT P.M., NEW YORK CITY TIME, ON
, , 1998 UNLESS THE EXCHANGE OFFER IS EXTENDED (SUCH TIME
AND DATE, AS SO EXTENDED, THE "EXPIRATION DATE"). TENDERS OF OLD
NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
The Exchange Agent and Information Agent for the Exchange Offer is:
For Information Telephone:
By Mail: By Facsimile Transmission By Hand or Overnight
(for Eligible Institutions only): Delivery:
Confirm by Telephone:
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA A TELEGRAM,
TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
LADIES AND GENTLEMEN:
The undersigned hereby tender(s) to the Trust, upon the terms and subject to
the conditions set forth in the Exchange Offer and the Letter of Transmittal,
receipt of which is hereby acknowledged, the aggregate principal amount of Old
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus.
The undersigned understands that tenders of Old Notes will be accepted only
in denominations of $1,000 and integral multiples thereof. The undersigned
understands that tenders of Old Notes pursuant to the Exchange Offer may not
be withdrawn after the Expiration Date. Tenders of Old Notes may be withdrawn
if the Exchange Offer is terminated without any such Old Notes being exchanged
thereunder or as otherwise provided in the Prospectus.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death, incapacity or dissolution of the
undersigned and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assigns, trustees in bankruptcy and
other legal representatives of the undersigned.
<PAGE>
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Owner(s) Name(s) of Registered Holders(s):
or Authorized
Signatory: ___________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
Address: _____________________________
Principal Amount of Old Notes ______________________________________
Tendered: Area Code and Telephone No.: _________
If Old Notes will be delivered by
book-entry transfer at a Book-Entry
Transfer Facility, complete the
following:
Certificate No(s). of Old Notes (if
available):___________________________
______________________________________
______________________________________ Check Box of Book-Entry Transfer
______________________________________ Facility:
Date: ________________________________ [_] The Depository Trust Company
[_] Midwest Securities Trust Company
[_] Philadelphia Depository Trust
Company
Account Number: ______________________
Transaction Code Number: _____________
- -------------------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Old Notes exactly as its (their) name(s) appear on certificates
for Old Notes or on a security position listing as the owner of Old Notes,
or by person(s) authorized to become registered Holder(s) by endorsements
and documents transmitted with this Notice of Guaranteed Delivery. If
signature is by a trustee, executor, administrator, guardian, attorney-in-
fact, officer of a corporation or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):_____________________________________________________________________
_____________________________________________________________________________
Capacity:____________________________________________________________________
Address(es):_________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
DO NOT SEND OLD NOTES WITH THIS FORM. OLD NOTES SHOULD BE SENT TO THE
EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER
OF TRANSMITTAL.
- -------------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or a correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act, hereby (a) represents that each holder
of Old Notes on whose behalf this tender is being made "own(s)" the Old
Notes covered hereby within the meaning of Rule 14e-4 under the Exchange
Act, (b) represents that such tender of Old Notes complies with such Rule
14e-4 and (c) guarantees that, within five business days after the
Expiration Date, a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof), together with certificates
representing the Old Notes covered hereby in proper form for transfer (or
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at the applicable Book-Entry Transfer Facility, pursuant to
the procedure for book-entry transfer set forth in the Prospectus) and all
other documents required by the Letter of Transmittal, will be deposited by
the undersigned with the Exchange Agent.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF
TRANSMITTAL AND OLD NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE
TIME PERIOD SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN
FINANCIAL LOSS TO THE UNDERSIGNED.
Name of Firm: ______________________ ____________________________________
Authorized Signature
Address: ___________________________ Name: ______________________________
____________________________________ Title: _____________________________
Area Code and Telephone No: ________ Date: ______________________________
- -------------------------------------------------------------------------------
2
<PAGE>
EXHIBIT 99.3
, 1998
B.F. SAUL REAL ESTATE INVESTMENT TRUST
OFFER TO EXCHANGE
ALL OUTSTANDING
9 3/4% SENIOR SECURED NOTES DUE 2008
FOR
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008
To Our Clients:
Enclosed for your consideration is the Prospectus dated , 1998 (the
"Prospectus") and the related Letter of Transmittal in connection with the
offer by B.F. Saul Real Estate Investment Trust (the "Trust") to exchange
$1,000 principal amount of its 9 3/4% Series B Senior Secured Notes due 2008
(the "New Notes") for each $1,000 principal amount of the Trust's outstanding
9 3/4% Senior Secured Notes due 2008 (the "Old Notes"), upon the terms and
subject to the conditions set forth in the Prospectus and Letter of
Transmittal (which together constitute the "Exchange Offer").
The Prospectus states that the Trust is making the Exchange Offer pursuant
to a Registration Rights Agreement dated as of March 30, 1998 executed by the
Trust for the benefit of the holders of the Old Notes. The Prospectus further
states that the terms of the New Notes are identical in all material respects
to the terms of the Old Notes, except that the New Notes have been registered
under the Securities Act of 1933 and will not bear legends restricting the
transfer thereof and will not be subject to certain provisions regarding an
increase in interest rate.
We are the registered holders of Old Notes held by us for your account. The
tender of any or all of your Old Notes pursuant to the Exchange Offer may be
made by us as the holder of record pursuant to your instructions. The Letter
of Transmittal is furnished to you for your information only and may not be
used by you to tender Old Notes held by us for your account unless we execute
and deliver to you an appropriate bond power which authorizes you to tender
with respect to such Old Notes. Accordingly, we request your instructions as
to whether you wish us to (i) tender any or all of the Old Notes held by us
for your account upon the terms and subject to the conditions set forth in the
Prospectus and Letter of Transmittal or (ii) execute and deliver to you a bond
power so that you may tender your Old Notes.
YOUR INSTRUCTIONS MUST BE FORWARDED TO US IN AMPLE TIME TO PERMIT US, PRIOR
TO THE EXPIRATION OF THE EXCHANGE OFFER, TO (I) TENDER ANY OR ALL OF YOUR OLD
NOTES ON YOUR BEHALF OR (II) EXECUTE AND DELIVER A BOND POWER WHICH AUTHORIZES
YOU TO TENDER YOUR OLD NOTES. UNLESS EXTENDED, THE EXCHANGE OFFER WILL EXPIRE
AT P.M., NEW YORK CITY TIME, ON , 1998 (SUCH TIME AND DATE, AS SO
EXTENDED, THE "EXPIRATION DATE"). AFTER THE EXPIRATION DATE, THE EXCHANGE
OFFER WILL NO LONGER BE EFFECTIVE. IF YOU WISH TO HAVE US TENDER ANY OR ALL OF
YOUR OLD NOTES, OR EXECUTE AND DELIVER A BOND POWER SO THAT YOU MAY TENDER
YOUR OLD NOTES, PLEASE SO INSTRUCT US BY COMPLETING, EXECUTING AND RETURNING
TO US IN THE ENCLOSED ENVELOPE THE INSTRUCTION FORM ON THE NEXT PAGE.
Your attention is directed to the following:
1. A tender of Old Notes may be withdrawn at any time prior to the
Expiration Date.
2. Tenders of Old Notes will be accepted in denominations of $1,000 and
integral multiples thereof. Less than the entire principal amount of your Old
Notes may be tendered.
3. The Trust will pay all charges and expenses of the Exchange Offer, except
as otherwise provided in Instruction 5 of the Letter of Transmittal.
The Exchange Offer is being made upon all of the terms and conditions set
forth in the Trust's Prospectus and Letter of Transmittal. To assist you, a
summary of the Exchange Offer is given on pages 6 through 8 of the Prospectus.
If you wish to obtain an additional copy of the Prospectus, or if you have any
questions concerning how to tender your Old Notes, please feel free to
telephone your account representative or , the Trust's Exchange Agent and
Information Agent, at .
The Exchange Offer is not being made to, nor will the Trust accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
THE INSTRUCTION FORM ON THE NEXT PAGE MUST BE COMPLETED AND
EXECUTED BY YOU AND RETURNED TO US IN THE ENCLOSED ENVELOPE.
<PAGE>
INSTRUCTIONS TO HOLDER
FOR EXCHANGE OF
9 3/4% SENIOR SECURED NOTES DUE 2008
FOR
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008
OF
B.F. SAUL REAL ESTATE INVESTMENT TRUST
The undersigned acknowledge(s) receipt of your letter dated , 1998 and the
enclosed material referred to therein relating to the Exchange Offer.
This will instruct you whether to (i) tender any or all Old Notes held by
you for the account of the undersigned, upon the terms and subject to the
conditions set forth in the Prospectus and the related Letter of Transmittal,
or (ii) execute and deliver a bond power which authorizes the undersigned to
tender Old Notes.
Box 1. [_]Please DO NOT TENDER ANY OLD NOTES pursuant to the Exchange Offer.
Box 2. [_]Please TENDER OLD NOTES pursuant to the Exchange Offer as set forth
below:
Aggregate principal amount of
Old Notes to be tendered:
Box 3. [_]Please EXECUTE AND DELIVER A BOND POWER to the undersigned
authorizing the undersigned to tender Old Notes.
DATE AND SIGN HERE:
---------------------------------------
---------------------------------------
---------------------------------------
Signature(s)
Please type or print name(s) below:
---------------------------------------
---------------------------------------
---------------------------------------
Please type or print address below:
---------------------------------------
---------------------------------------
---------------------------------------
Dated: _________________________ , 1998
<PAGE>
EXHIBIT 99.4
, 1998
B.F. SAUL REAL ESTATE INVESTMENT TRUST
OFFER TO EXCHANGE
ALL OUTSTANDING
9 3/4% SENIOR SECURED NOTES DUE 2008
FOR
9 3/4% SERIES B SENIOR SECURED NOTES DUE 2008
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
B.F. Saul Real Estate Investment Trust (the "Trust") is offering to exchange
(the "Exchange Offer") $1,000 principal amount of its 9 3/4% Series B Senior
Secured Notes due 2008 (the "New Notes") for each $1,000 principal amount of
the Trust's outstanding 9 3/4% Senior Secured Notes due 2008 (the "Old
Notes"), upon the terms and subject to the conditions set forth in the Trust's
Prospectus dated , 1998 (the "Prospectus") and related Letter of
Transmittal (which together constitute the "Exchange Offer"). The Trust is
making the Exchange Offer pursuant to a Registration Rights Agreement dated as
of March 25, 1998 executed by the Trust for the benefit of the holders of the
Old Notes. The terms of the New Notes are identical in all material respects
to the terms of the Old Notes, except that the New Notes have been registered
under the Securities Act of 1933 and will not bear legends restricting the
transfer thereof or contain certain provisions regarding an increase in
interest rates.
We are asking you to contact your clients for whom you hold Old Notes
registered in your name (or in the name of your nominee) or who hold Old Notes
registered in their own names. The Trust will not pay any commissions or fees
to you or any other person for soliciting holders of the Old Notes pursuant to
the Exchange Offer.
PLEASE BRING THE EXCHANGE OFFER TO THE ATTENTION OF YOUR CLIENTS AS PROMPTLY
AS POSSIBLE. UNLESS EXTENDED, THE EXCHANGE OFFER WILL EXPIRE AT P.M., NEW
YORK CITY TIME, ON , 1998 (SUCH TIME AND DATE, AS SO EXTENDED, THE
"EXPIRATION DATE"). AFTER THE EXPIRATION DATE, THE EXCHANGE OFFER WILL NO
LONGER BE EFFECTIVE.
To tender Old Notes in the Exchange Offer, a Holder (as such term is defined
in the Prospectus) must complete, sign and date the Letter of Transmittal, or
a facsimile thereof, have the signatures thereof guaranteed if required by the
Letter of Transmittal, and mail or otherwise deliver such Letter of
Transmittal or such facsimile, together with the Old Notes (unless such tender
is being effected pursuant to the procedure for book-entry transfer described
below) and any other required documents, to , the Trust's Exchange Agent,
at its address set forth in the Letter of Transmittal prior to the Expiration
Date. A tender of Old Notes may be withdrawn at any time prior to the
Expiration Date.
Any financial institution that is a participant in The Depository Trust
Company, the Midwest Securities Trust Company or the Philadelphia Depository
Trust Company (each a "Book-Entry Transfer Facility") may make a book-entry
delivery of Old Notes by causing the applicable Book-Entry Transfer Facility
to transfer such Old Notes to the account maintained by the Exchange Agent at
such Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
applicable Book-Entry Transfer Facility, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received or
confirmed by the Exchange Agent at its address set forth in the Letter of
Transmittal prior to the Expiration Date. DELIVERY OF DOCUMENTS TO A BOOK-
ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
<PAGE>
Any inquiries you may have with respect to the Exchange Offer should be
addressed to , as Exchange Agent and Information Agent, at the address
and telephone number set forth in the Prospectus and the Letter of
Transmittal.
Enclosed for your information and forwarding to your clients are copies of
the following documents:
1. The Prospectus.
2. The Letter of Transmittal.
3. The Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if (i) certificates representing the Old Notes to be tendered are
not immediately available, (ii) time will not permit the Letter of
Transmittal, certificates representing such Old Notes or other required
documents to reach the Exchange Agent prior to the Expiration Date or
(iii) the procedure for book-entry transfer cannot be completed prior to
the Expiration Date.
4. A printed form letter which may be sent to your clients for whose
account you hold Old Notes in your name or in the name of your nominee,
with space provided for obtaining such clients' instructions with regard
to the Exchange Offer.
Very truly yours,
B.F. SAUL REAL ESTATE INVESTMENT
TRUST
By:Stephen R. Halpin, Jr.
Vice President and
Chief Financial Officer
- --------------------------------------------------------------------------------
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY PERSON AS AGENT OF THE TRUST, THE EXCHANGE AGENT OR THE INFORMATION
AGENT, OR AS AGENT OF ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO
THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE TRUST'S
PROSPECTUS.
- --------------------------------------------------------------------------------
