<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20579
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-----------------------------------------------
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
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(Exact name of registrant as specified in the charter)
Maryland 52-6053341
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 Connecticut Avenue,
Chevy Chase, Maryland 20815
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(Address of principal executive office) (Zip Code)
(301) 986-6000
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(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 August 11, 1998, was 4,826,910.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
(a) Consolidated Balance Sheets at June 30, 1998 and
September 30, 1997
(b) Consolidated Statements of Operations for the
three-month and nine-month periods ended June 30,
1998 and 1997
(c) Consolidated Statements of Cash Flows for the
nine-month periods ended June 30, 1998 and 1997
(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 June 30, 1998 compared to three
months ended June 30, 1997
Nine months ended June 30, 1998 compared to nine
months ended June 30, 1997
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K:
(a) Exhibit 27: Financial Data Schedule
(b) Form 8-K filed April 3, 1998
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<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
June 30 September 30
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(In thousands) 1998 1997
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<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 158,252 $ 128,557
Office and industrial 109,901 109,628
Other 3,877 4,265
-------------- --------------
272,030 242,450
Accumulated depreciation (94,118) (85,915)
-------------- --------------
177,912 156,535
Land parcels 43,124 42,160
Construction in progress 6,466 2,480
Cash and cash equivalents 18,615 18,248
Other assets 74,999 81,150
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Total real estate assets 321,116 300,573
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Banking
Cash and other deposits 396,549 286,891
Federal funds sold and securities purchased under agreements to resell 135,000 365,000
Loans held for sale 35,156 102,749
Loans held for securitization and sale 240,000 220,000
Trading securities 13,770 7,899
Investment securities (market value $44,036 and $5,012, respectively) 43,999 4,998
Mortgage-backed securities (market value $2,284,220 and $1,984,667, respectively) 2,304,696 1,985,707
Loans receivable (net of allowance for losses of $104,091 and $105,679, respectively) 2,231,020 2,104,240
Federal Home Loan Bank stock 30,666 33,170
Real estate held for investment or sale (net of allowance for losses of $144,471 and $140,936,
respectively) 80,625 94,290
Property and equipment, net 295,735 273,562
Goodwill and other intangible assets, net 32,331 8,846
Interest-only strips, net 151,372 105,812
Other assets 598,719 464,249
-------------- --------------
Total banking assets 6,589,638 6,057,413
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TOTAL ASSETS $ 6,910,754 $ 6,357,986
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LIABILITIES
Real Estate
Mortgage notes payable $ 201,252 $ 180,204
9 3/4% Senior Secured Notes 200,000 --
11 5/8% Senior Secured Notes -- 175,000
Notes payable - unsecured 49,235 46,633
Deferred gains - real estate 113,006 112,883
Accrued dividends payable - preferred shares of beneficial interest 34,694 36,231
Other liabilities and accrued expenses 33,336 39,959
-------------- --------------
Total real estate liabilities 631,523 590,910
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Banking
Deposit accounts 4,916,144 4,893,756
Borrowings 446,060 81,840
Federal Home Loan Bank advances 344,983 188,511
Other liabilities and accrued expenses 157,269 168,060
Capital notes -- subordinated 250,000 250,000
-------------- --------------
Total banking liabilities 6,114,456 5,582,167
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Commitments and contingencies
Minority interest held by affiliates 51,375 51,388
Minority interest -- other 218,307 218,306
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TOTAL LIABILITIES 7,015,661 6,442,771
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SHAREHOLDERS' DEFICIT
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares
authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million 516 516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
6,641,598 shares issued 6,642 6,642
Paid-in surplus 92,943 92,943
Deficit (163,300) (142,642)
Net unrealized holding gains (losses) 140 (396)
-------------- --------------
(63,059) (42,937)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (104,907) (84,785)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 6,910,754 $ 6,357,986
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
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<TABLE>
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Three Months For the Nine Months
Ended June 30 Ended June 30
----------------------------- ------------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 21,462 $ 17,366 $ 52,340 $ 43,717
Office and industrial properties 5,727 5,442 16,949 15,496
Other 1,644 640 3,460 1,908
-------------- -------------- -------------- --------------
Total income 28,833 23,448 72,749 61,121
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Expenses
Direct operating expenses:
Hotels 12,276 10,142 33,117 28,410
Office and industrial properties 1,684 1,944 5,495 5,579
Land parcels and other 433 395 1,221 1,305
Interest expense 11,440 10,056 32,387 30,098
Amortization of debt expense 157 189 449 525
Depreciation 2,931 2,571 8,420 7,876
Advisory, management and leasing fees - related parties 2,364 2,107 6,496 5,932
General and administrative 215 175 821 920
-------------- -------------- -------------- --------------
Total expenses 31,500 27,579 88,406 80,645
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Equity in earnings of unconsolidated entities 1,021 1,240 1,039 2,779
Gain (loss) on sale of property (329) 724 (329) 724
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REAL ESTATE OPERATING LOSS $ (1,975) $ (2,167) $ (14,947) $ (16,021)
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BANKING
Interest income
Loans $ 75,219 $ 99,753 $ 223,530 $ 292,877
Mortgage-backed securities 29,690 16,573 81,891 55,206
Trading securities 466 284 1,576 902
Investment securities 570 118 1,522 404
Other 3,850 4,570 14,445 11,140
-------------- -------------- -------------- --------------
Total interest income 109,795 121,298 322,964 360,529
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Interest expense
Deposit accounts 43,626 43,674 137,916 120,700
Borrowings 17,980 17,572 37,162 60,001
-------------- -------------- -------------- --------------
Total interest expense 61,606 61,246 175,078 180,701
-------------- -------------- -------------- --------------
Net interest income 48,189 60,052 147,886 179,828
Provision for loan losses (28,298) (36,129) (79,972) (89,891)
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Net interest income after provision for loan losses 19,891 23,923 67,914 89,937
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Other income
Loan and deposit servicing fees 28,713 51,600 147,177 166,766
Credit card fees 14,511 14,930 37,641 42,498
Gain (loss) on sales of trading securities, net (181) 487 811 976
Loss on real estate held for investment or sale, net (2,292) (4,460) (7,398) (13,854)
Gain on sales of loans, net 38,431 21,488 99,496 50,693
Net unrealized gain on interest-only strips -- -- 11,464 --
Other 8,348 5,563 23,528 17,562
-------------- -------------- -------------- --------------
Total other income 87,530 89,608 312,719 264,641
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Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Three Months For the Nine Months
Ended June 30 Ended June 30
----------------------------- ------------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 50,385 $ 41,657 $ 143,157 $ 117,128
Loan 9,632 7,258 28,694 18,519
Property and equipment 7,126 6,427 20,933 18,123
Marketing 23,294 16,463 64,032 55,211
Data processing 11,526 11,813 33,006 36,309
Depreciation and amortization 8,780 7,301 24,882 20,869
Deposit insurance premiums 1,140 988 3,731 4,024
Amortization of goodwill and other intangible assets 947 320 2,648 1,056
Other 12,215 10,632 35,267 32,583
-------------- -------------- -------------- --------------
Total operating expenses 125,045 102,859 356,350 303,822
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BANKING OPERATING INCOME (LOSS) $ (17,624) $ 10,672 $ 24,283 $ 50,756
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TOTAL COMPANY
Operating income (loss) $ (19,599) $ 8,505 $ 9,336 $ 34,735
Income tax provision (benefit) (10,071) 5,061 (3,807) 13,223
-------------- -------------- -------------- --------------
Income before extraordinary item and minority interest (9,528) 3,444 13,143 21,512
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- -- (9,601) --
-------------- -------------- -------------- --------------
Income (loss) before minority interest (9,528) 3,444 3,542 21,512
Minority interest held by affiliates 2,558 (194) (1,153) (3,197)
Minority interest -- other (6,329) (6,329) (18,985) (16,348)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME (LOSS) (13,299) (3,079) (16,596) 1,967
DEFICIT
Beginning of period (148,647) (153,746) (142,642) (156,084)
Dividends
Preferred shares of beneficial interest 1,354 1,354 4,062 4,062
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End of period $ (163,300) $ (158,179) $ (163,300) $ (158,179)
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NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (14,653) $ (4,433) $ (20,658) $ (2,095)
NET INCOME (LOSS) PER COMMON SHARE
Income before extraordinary item and minority interest $ (2.26) $ 0.44 $ 1.88 $ 3.62
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- -- (1.99) --
-------------- -------------- -------------- --------------
Income (loss) before minority interest (2.26) 0.44 (0.11) 3.62
Minority interest held by affiliates 0.53 (0.04) (0.24) (0.66)
Minority interest -- other (1.31) (1.31) (3.93) (3.39)
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NET LOSS PER COMMON SHARE $ (3.04) $ (0.91) (4.28) $ (0.43)
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Nine Months
Ended June 30
------------------------------
(In thousands) 1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (21,208) $ (10,819)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 8,420 7,876
(Gain) loss on sale of property 329 (724)
Early extinguishment of debt, net of taxes 9,601 --
Decrease (increase) in accounts receivable and accrued income (2,245) 818
Increase in deferred tax asset (3,440) (5,417)
Decrease in accounts payable and accrued expenses (3,835) (4,474)
Decrease in tax sharing receivable 4,591 3,167
Amortization of debt expense 449 525
Equity in earnings of unconsolidated entities (1,039) (2,779)
Decrease in liquidity maintenance escrow 12,838 2,984
Other 3,586 4,909
-------------- --------------
8,047 (3,934)
-------------- --------------
Banking
Net income 4,612 12,784
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 5,733 (1,470)
Depreciation and amortization 25,058 21,041
Provision for loan losses 79,972 89,891
Capitalized interest on real estate under development (1,463) (1,670)
Proceeds from sales of trading securities 276,464 348,519
Net fundings of loans held for sale and/or securitization (319,239) (523,645)
Proceeds from sales of loans held for sale and/or securitization 1,612,197 2,068,460
Earnings on real estate (2,385) (1,996)
Provision for losses on real estate held for investment or sale 9,564 15,660
Gain on sales of trading securities, net (811) (976)
Increase in interest-only strips (45,560) (88,684)
Decrease in excess spread assets -- 42,602
Decrease (increase) in servicing assets 8,495 (2,612)
(Increase) decrease in goodwill and other intangible assets (23,476) 1,071
Increase in other assets (138,774) (4,323)
Decrease in other liabilities and accrued expenses (11,273) (22,736)
Minority interest held by affiliates 1,153 3,197
Minority interest - other 7,313 7,313
Decrease in tax sharing payable (4,591) (3,167)
Other (32,689) 11,748
-------------- --------------
1,450,300 1,971,007
-------------- --------------
Net cash provided by operating activities 1,458,347 1,967,073
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (11,854) (4,998)
Property sales -- 1,245
Property acquisitions (26,309) (4,709)
Equity investment in unconsolidated entities, net 731 254
Other investing activities, net 1 43
-------------- --------------
(37,431) (8,165)
-------------- --------------
Banking
Net proceeds from redemption of Federal Home Loan Bank stock 2,504 9,482
Net proceeds from maturities of investment securities 5,000 5,000
Net proceeds from sales of real estate 20,364 19,784
Net fundings of loans receivable (1,892,915) (1,561,452)
Principal collected on mortgage-backed securities 903,268 552,591
Purchases of investment securities (44,001) --
Purchases of Federal Home Loan Bank stock -- (10,712)
Purchases of mortgage-backed securities -- (311,554)
Purchases of loans receivable (1,034,645) (547,717)
Purchases of property and equipment (47,843) (58,008)
Disbursements for real estate held for investment or sale (10,776) (15,672)
Other (1,349) 650
-------------- --------------
(2,100,393) (1,917,608)
-------------- --------------
Net cash used in investing activities (2,137,824) (1,925,773)
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Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Nine Months
Ended June 30
------------------------------
(In thousands) 1998 1997
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 57,860 $ 25,000
Principal curtailments and repayments of mortgages (33,155) (17,272)
Proceeds from issuance of secured notes 224,075 --
Repayments of secured notes (199,075) (2,500)
Proceeds from sales of unsecured notes 8,259 4,417
Repayments of unsecured notes (5,657) (1,393)
Costs of obtaining financings (6,901) --
Loan prepayment fees (10,055) --
Dividends paid - preferred shares of beneficial interest (5,600) (750)
Other financing activities, net -- (469)
-------------- --------------
29,751 7,033
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Banking
Proceeds from customer deposits and sales of certificates of deposit 18,468,003 13,941,389
Customer withdrawals of deposits and payments for maturing certificates of deposit (18,445,615) (13,268,604)
Net increase (decrease) in securities sold under repurchase agreements 335,165 (574,253)
Advances from the Federal Home Loan Bank 666,295 863,767
Repayments of advances from the Federal Home Loan Bank (509,823) (757,410)
Proceeds from other borrowings 11,147,745 4,160,549
Repayments of other borrowings (11,118,690) (4,148,871)
Cash dividends paid on preferred stock (7,313) (7,313)
Cash dividends paid on common stock (6,500) (9,000)
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 484 6,221
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529,751 436,587
-------------- --------------
Net cash provided by financing activities 559,502 443,620
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Net increase (decrease) in cash and cash equivalents (119,975) 484,920
Cash and cash equivalents at beginning of period 670,139 281,941
-------------- --------------
Cash and cash equivalents at end of period $ 550,164 $ 766,861
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Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) $ 221,380 $ 202,588
Income taxes 6,232 1,134
Shares of Saul Centers, Inc. common stock 4,010 5,421
Saul Holdings Limited Partnership units 1,405 --
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 2,218 1,849
Distributions from Saul Holdings Limited Partnership 4,131 4,090
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 3,916 3,600
Loans held for sale exchanged for trading securities 282,625 347,887
Loans held for sale and/or securitization transferred to trading securities 9,203 --
Loans receivable transferred to loans held for sale and/or securitization 1,526,831 1,645,177
Loans made in connection with the sale of real estate 5,226 1,775
Loans receivable transferred to real estate acquired in settlement of loans 3,792 3,091
Loans receivable exchanged for mortgage-backed securities held-to-maturity 1,223,598 --
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements reflect
all adjustments necessary for a fair presentation of the Trust's financial
position and results of operations. All such adjustments are of a normal
recurring nature. These financial statements and the accompanying notes should
be read in conjunction with the Trust's audited consolidated financial
statements included in its Form 10-K for the fiscal year ended September 30,
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 Real Estate 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. In March 1998, the Real Estate Trust issued $200.0 million aggregate
principal amount of 9 3/4% Senior Secured Notes due 2008 (the "1998 Notes").
From the proceeds of the sale, the Real Estate Trust provided for the retirement
of the $175.0 million aggregate principal amount of 11 5/8% Senior Secured Notes
due 2002 (the "1994 Notes"), including a prepayment premium of $10.0 million and
debt issuance costs of approximately $5.9 million. The Real Estate Trust
realized approximately $9.1 million in net proceeds. In addition, the Real
Estate Trust received approximately $13.2 million in cash which had been held as
additional collateral by the indenture agent under the 1994 Notes. The 1998
Notes are secured by a first priority perfected security interest in 80% (8,000
Shares) of the issued and outstanding common stock of the Bank. The 1998 Notes
are nonrecourse obligations of the Real Estate Trust. The Real Estate Trust
realized a $9.6 million loss, net of taxes, on the retirement of the 1994 Notes.
See the Consolidated Statements of Operations where the loss on this early
extinguishment of debt has been recorded as an extraordinary item.
<PAGE>
5. BANKING:
LOANS HELD FOR SALE:
Loans held for sale are composed of the following:
June 30, September 30,
1998 1997
(In thousands) ------------- -------------
Single-family residential $ 29,641 $ 102,749
Home improvement and related loans 5,515 --
------------- -----------
$ 35,156 $ 102,749
============= ===========
LOANS HELD FOR SECURITIZATION AND SALE:
Loans held for securitization and sale are composed of the following:
June 30, September 30,
1998 1997
(In thousands) ------------- -------------
Credit card $ 80,000 $ 90,000
Automobile 55,000 80,000
Home equity credit line 85,000 50,000
Home improvement and related loans 20,000 --
------------- ------------
Total $ 240,000 $ 220,000
============= ============
LOANS RECEIVABLE:
June 30, September 30,
1998 1997
(In thousands) ------------- -------------
Single-family residential $ 967,108 $ 747,070
Home equity credit line 30,856 44,088
Commercial real estate and multifamily 79,975 53,816
Real estate construction 145,208 77,221
Ground 26,254 29,592
Commercial 213,656 152,483
Credit card 858,688 987,149
Automobile 123,918 137,111
Home improvement and related loans 11,929 49,551
Overdraft lines of credit and
other consumer 32,813 36,029
------------- ------------
2,490,405 2,314,110
------------- ------------
Less:
Undisbursed portion of loans 164,058 106,217
Unearned discounts 163 449
Net deferred loan origination costs (8,927) (2,475)
Allowance for loan losses 104,091 105,679
------------ ------------
259,385 209,870
------------ ------------
Total $ 2,231,020 $ 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:
June 30, September 30,
1998 1997
(In thousands) ------------- -------------
Real estate held for investment $ 3,819 $ 3,819
------------- -------------
Real estate held for sale 221,277 231,407
------------- -------------
Less:
Allowance for losses on real estate
held for investment 200 198
Allowance for losses on real estate
held for sale 144,271 140,738
------------- -------------
144,471 140,936
------------- -------------
Total real estate held for
Investment or sale $ 80,625 $ 94,290
============= =============
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED:
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") was issued in June
1998 and establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The impact of adoption of SFAS 133
on the Bank's financial statements has not yet been determined.
SUBSEQUENT EVENT:
On September 2, 1998, Chevy Chase Bank, F.S.B., a federally chartered stock
savings bank (the "Bank"), executed a Purchase and Sale Agreement with First USA
Bank, N.A., a nationally chartered banking association ("FUSA"), pursuant to
which the Bank will sell its credit card portfolio and related operations to
FUSA. The B.F. Saul Real Estate Investment Trust (the "Trust") owns 80% of the
outstanding common stock of the Bank and consolidates the Bank's financial
statements with those of the Trust. The Bank's credit card portfolio to be
purchased by FUSA includes approximately $4.9 billion in managed credit card
loans and 3.1 million Visa and Mastercard credit card accounts. In addition, the
Bank's approximately 1,300 credit card employees will be offered employment by
FUSA. The Bank will receive cash from the sale that exceeds, by a specified
amount, the net book value of the assets and liabilities being transferred.
Consummation of the transaction is subject to several conditions, including the
receipt of required regulatory approvals from the Office of Thrift Supervision,
and is scheduled to close in late September or early October 1998.
<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 June 30 1998, the Bank's assets accounted for approximately 95%
of the Trust's consolidated assets. The Trust recorded a net loss of $16.6
million for the nine-month period ended June 30, 1998 compared to net income of
$2.0 million for the nine-month period ended June 30, 1997. The net loss in the
current period included the recognition of a loss on early extinguishment of
debt, after taxes, of $9.6 million. See Results of Operations for additional
explanations of variances.
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 June
30,1998, 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.
The nine hotel properties owned by the Real Estate Trust throughout the first
nine-month periods of fiscal 1998 and 1997 experienced average occupancy rates
of 68.4% and 68.6% and average room rates of $78.76 and $71.82, respectively.
Three of these hotels registered improved occupancies and eight registered
higher average room rates in the current period. Overall, the hotel portfolio
experienced an average occupancy rate of 67.6% and an average room rate of
$80.54 during the nine-month period ended June 30, 1998. On December 10, 1997,
the Real Estate Trust purchased a 308-room Holiday Inn hotel located in
Arlington, Virginia, near the Reagan 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.
The Real Estate Trust's office and industrial portfolio was 98% leased at June
30, 1998, compared to leasing rates of 99% at September 30, 1997 and at June
30,1997. At June 30,1998, the office and industrial portfolio had a total gross
leasable area of 1.3 million square feet, of which 55,900 (4.4%)and
256,000(20.1%), are subject to leases whose terms expire in the balance of
fiscal 1998 and in fiscal 1999, respectively.
<PAGE>
BANKING
General. The Bank recorded an operating loss of $17.6 million during the June
1998 quarter, compared to operating income of $10.7 million in the prior
corresponding period. The decrease in income for the current quarter was
primarily a result of an increase in the Bank's salaries and employee benefits
and marketing expenses and a decrease in interest income attributable primarily
to a shift in the Bank's portfolio to lower yielding mortgage-backed securities.
Partially offsetting the negative effect these changes had on income were
decreases in the provision for loan losses and the provision for income taxes.
See "Results of Operations."
Gains on sales of loans of $38.4 million continued to be a large component of
the Bank's non-interest income (approximately 43.9%) during the current quarter
and resulted primarily from the Bank's securitization activity. During the June
1998 quarter, the Bank securitized and sold $542.0 million of credit card
receivables, $153.6 million of automobile loan receivables and $163.3 million of
mortgage loan receivables (consisting of fixed- and variable-rate home equity
receivables and home loan receivables). Gains of $8.9 million, $5.5 million and
$8.8 million, respectively, were recognized in connection with these sales. See
"Liquidity." Gains of $16.4 million were also recognized during the quarter
primarily on sales of credit card loans that were transferred to existing
securitization trusts. Amortization of the interest-only strips related to prior
gains on sales of loans amounted to $35.7 million for the June 1998 quarter, and
contributed to a decline in loan and deposit servicing fees.
At June 30, 1998, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.90%, 5.90%, 6.18% and 12.25%,
respectively. The Bank's regulatory 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."
As part of its capital and liquidity management plans, in June 1998, the Bank
exchanged $598.3 million of single-family residential loans held in its
portfolio for lower risk-weighted mortgage-backed securities which the Bank
retained for its own portfolio.
Subsequent Event. On September 2, 1998, Chevy Chase Bank, F.S.B., a federally
chartered stock savings bank (the "Bank"), executed a Purchase and Sale
Agreement with First USA Bank, N.A., a nationally chartered banking association
("FUSA"), pursuant to which the Bank will sell its credit card portfolio and
related operations to FUSA. The B.F. Saul Real Estate Investment Trust (the
"Trust") owns 80% of the outstanding common stock of the Bank and consolidates
the Bank's financial statements with those of the Trust. The Bank's credit card
portfolio to be purchased by FUSA includes approximately $4.9 billion in managed
credit card loans and 3.1 million Visa and Mastercard credit card accounts. In
addition, the Bank's approximately 1,300 credit card employees will be offered
employment by FUSA. The Bank will receive cash from the sale that exceeds, by a
specified amount, the net book value of the assets and liabilities being
transferred. Consummation of the transaction is subject to several conditions,
including the receipt of required regulatory approvals from the Office of Thrift
Supervision, and is scheduled to close in late September or early October 1998.
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)
June 30, March 31, September 30,
1998 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 8,862 $ 10,762 $ 9,617
Commercial 100 104 --
Consumer and other 4,082 4,834 4,226
----------------- ----------------- -----------------
Total non-accrual loans (1) 13,044 15,700 13,843
----------------- ----------------- -----------------
Real estate acquired in settlement of loans 221,277 227,569 231,407
Allowance for losses on real estate acquired in
settlement of loans (144,271) (144,450) (140,738)
----------------- ----------------- -----------------
Real estate acquired in settlement of loans, net 77,006 83,119 90,669
----------------- ----------------- -----------------
Total non-performing assets 90,050 98,819 104,512
Accruing credit card loans 90 days or more past due 25,474 24,596 25,700
----------------- ----------------- -----------------
Total non-performing assets and accruing credit card
loans 90 days or more past due $ 115,524 $ 123,415 $ 130,212
================= ================= =================
Allowance for losses on loans $ 104,091 $ 103,998 $ 105,679
Allowance for losses on real estate held for investment 200 201 198
Allowance for losses on real estate acquired in settlement
of loans 144,271 144,450 140,738
----------------- ----------------- -----------------
Total allowances for losses $ 248,562 $ 248,649 $ 246,615
================= ================= =================
Ratios:
Non-performing assets and accruing credit card loans
90 days or more past due, net to total assets (2) 0.17% 0.31% 0.40%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 100.05% 86.40% 99.80%
Allowance for losses on commercial loans to non-accrual
commercial loans (1) 586.00% 444.23% --
Allowance for losses on consumer and other loans to
non-accrual consumer and other loans (1) 172.22% 137.15% 148.37%
Allowance for losses on loans to non-accrual loans (1) 798.00% 662.41% 763.41%
Allowance for losses on loans to total loans receivable (3) 3.99% 3.87% 4.17%
(1) Before deduction of allowances for losses.
(2) Non-performing assets and credit card loans 90 days or more past due are
presented after all allowances for losses on loans and real estate held for
investment or sale.
(3) Includes loans receivable and loans held for sale and/or securitization,
before deduction of 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 $90.1 million, after valuation allowances on real
estate held for sale or real estate owned ("REO") of $144.3 million, at June 30,
1998, compared to $98.8 million, after valuation allowances on REO of $144.5
million, at March 31, 1998. In addition to the valuation allowances on REO, the
Bank maintained $2.7 million of valuation allowances on its non-accrual loans at
June 30, 1998. The $8.8 million decrease in non-performing assets for the
current quarter was attributable to net decreases in REO and non-accrual loans
of $6.1 million and $2.7 million, respectively. See "Non-accrual Loans" and
"REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $13.0 million at June
30, 1998, as compared to $15.7 million at March 31, 1998. At June 30, 1998,
non-accrual loans consisted of $8.9 million of real estate loans and $4.1
million of other consumer loans.
REO. At June 30, 1998, the Bank's REO totaled $77.0 million, after valuation
allowances on such assets of $144.3 million as set forth in the following table.
The principal component of REO consists of five planned unit developments (the
"Communities"), four of which are under active development. Only commercial
ground remains in two of the four active Communities. The fifth Community,
consisting of approximately 2,400 acres in Loudoun County, Virginia, is in the
pre-development stage.
Balance Balance
Before All After Percent
Number of Valuation Valuation Valuation of
Properties Allowances Allowances Allowances Total
(Dollars in thousands) ---------- ---------- ---------- ---------- -------
Communities 5 $201,997 $142,156 $ 59,841 77.7%
Residential ground 3 6,392 1,200 5,192 6.8%
Commercial ground 3 9,941 915 9,026 11.7%
Single-family
residential properties 22 2,947 -- 2,947 3.8%
---------- ---------- ---------- ---------- -------
Total REO 33 $221,277 $144,271 $ 77,006 100.0%
========== ========== ========== ========== =======
During the three months ended June 30, 1998, REO decreased $6.1 million, which
was primarily attributable to additional sales in the Communities and other
properties, partially offset by additional capitalized costs.
During the three months ended June 30, 1998, the Bank received revenues of $8.8
million from the disposition of REO, which consisted primarily of 249
residential lots or units in the Communities and one commercial ground property.
At June 30, 1998, the Bank had an executed contract to sell one residential
ground property at its book value of $1.2 million.
<PAGE>
Delinquent Loans. At June 30, 1998, delinquent loans totaled $72.9 million (or
2.8% of loans) compared to $69.7 million (or 2.6% of loans) at March 31, 1998.
The following table sets forth information regarding the Bank's delinquent loans
at June 30, 1998.
Principal Balance
------------------------------------------
Total as a
Mortgage Non-Mortgage Percentage
Loans Loans Total of Loans (1)
(Dollars in thousands) ------------- ---------------- ----------- ------------
Loans delinquent for:
30-59 days.......... $4,612 $26,454 $31,066 1.2%
60-89 days.......... 1,849 14,495 16,344 0.6%
90 days or more and
still accruing......... -- 25,474 25,474 1.0%
------- -------- -------- -----
Total.................. $6,461 $66,423 $72,884 2.8%
======= ======== ======== =====
(1) Includes loans held for sale and/or securitization, before deduction of
allowance for losses.
Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity credit line
loans. Total delinquent mortgage loans increased from $5.1 million at March 31,
1998 to $6.5 million at June 30, 1998.
Non-mortgage loans (principally credit card loans) delinquent 30- 89 days
increased to $40.9 million at June 30, 1998 from $40.0 million at March 31,
1998. As a result of more stringent underwriting and other lending policies
which the Bank implemented in recent periods, non-mortgage loans delinquent 30-
89 days has decreased from $48.7 million at December 31, 1997.
Non-mortgage loans delinquent 90 days or more and still accruing, which consists
entirely of credit card loans, increased to $25.5 million for the current
quarter from $24.6 million at March 31, 1998.
Troubled Debt Restructurings. At June 30, 1998, loans accounted for as troubled
debt restructurings totaled $11.8 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 $0.1 million. The $0.1 million decrease, from
$11.9 million at March 31, 1998, was a result of net principal reductions. The
Bank had commitments to lend $0.1 million of additional funds on loans that have
been restructured.
Real Estate Held for Investment. At June 30, 1998 and March 31, 1998, real
estate held for investment consisted of two properties with an aggregate book
value of $3.6 million, net of valuation allowances of $0.2 million.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and the allowance for
losses on real estate held for investment or sale. These tables reflect
charge-offs taken against assets during the periods indicated and may include
charge-offs taken against assets which the Bank disposed of during such periods.
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of Loans
(Dollars in thousands)
Three Months
Nine Months Ended Ended
June 30, June 30,
----------------------------------
1998 1997 1998
--------------- ------------- ---------------------
<S> <C> <C> <C>
Balance at beginning of period $ 105,679 $ 95,523 $ 103,998
--------------- ------------- ---------------------
Provision for loan losses 79,972 89,891 28,298
--------------- ------------- ---------------------
Increase due to acquisition of loans -- 118 --
--------------- ------------- ---------------------
Charge-offs:
Single-family residential 1,318 658 748
Credit card 81,136 88,860 29,120
Other 9,961 6,499 2,597
--------------- ------------- ---------------------
Total charge-offs 92,415 96,017 32,465
--------------- ------------- ---------------------
Recoveries:
Single-family residential 25 31 7
Credit card 10,037 7,380 4,039
Other 793 800 214
--------------- ------------- ---------------------
Total recoveries 10,855 8,211 4,260
--------------- ------------- ---------------------
Charge-offs, net of recoveries 81,560 87,806 28,205
--------------- ------------- ---------------------
Balance at end of period $ 104,091 $ 97,726 $ 104,091
=============== ============= =====================
Provision for loan losses to average loans (1) (2) 3.84% 3.33% 3.85%
Net loan charge-offs to average loans (1) (2) 3.92% 3.25% 3.84%
Ending allowance for losses on loans to total
loans (2) (3) 3.99% 2.78% 3.99%
(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)
June 30, March 31, September 30,
1998 1998 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 $ 688 38.3% $ 747 37.0% $ 661 33.5%
Home equity credit line 376 4.4 772 4.8 683 3.7
Commercial real estate and multifamily 7,487 3.0 7,530 2.6 7,705 2.1
Real estate construction and ground 315 3.1 248 2.3 550 2.2
Commercial 586 5.5 462 4.4 364 3.9
Credit card 87,609 36.1 87,609 38.6 89,446 42.6
Automobile 3,780 6.9 2,380 6.1 3,080 8.6
Home improvement and related loans 2,750 1.4 3,650 2.9 2,415 2.0
Overdraft lines of credit and
other consumer 500 1.3 600 1.3 775 1.4
------------ ------------ ------------
Total $ 104,091 $ 103,998 $ 105,679
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowances for Losses
Three Months
Nine Months Ended Ended
June 30, June 30,
--------------------------
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 198 $ 191 $ 201
Real estate held for sale 140,738 126,519 144,450
------------ ------------ ------------
Total 140,936 126,710 144,651
------------ ------------ ------------
Provision for real estate losses:
Real estate held for investment 2 4 (1)
Real estate held for sale 9,563 15,656 3,480
------------ ------------ ------------
Total 9,565 15,660 3,479
------------ ------------ ------------
Charge-offs:
Real estate held for sale:
Ground 6,030 -- 3,659
------------ ------------ ------------
Total charge-offs on real estate
held for investment or sale 6,030 -- 3,659
------------ ------------ ------------
Balance at end of period:
Real estate held for investment 200 195 200
Real estate held for sale 144,271 142,175 144,271
------------ ------------ ------------
Total $ 144,471 $ 142,370 $ 144,471
============ ============ ============
Components of Allowance for Losses
June 30, March 31, September 30,
1998 1998 1997
------------ ------------ ------------
Allowance for losses on real estate
held for investment $ 200 $ 201 $ 198
------------ ------------ ------------
Allowance for losses on real estate held for sale:
Ground 144,271 144,450 140,738
------------ ------------ ------------
Total 144,271 144,450 140,738
------------ ------------ ------------
Total allowance for losses on real
estate held for investment or sale $ 144,471 $ 144,651 $ 140,936
============ ============ ============
</TABLE>
<PAGE>
At June 30, 1998, the Bank's total valuation allowances for losses on loans and
real estate held for investment or sale increased to $248.6 million from $246.6
million at September 30, 1997. The $2.0 million increase was primarily
attributable to increased valuation allowances on the Communities.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $153.3 million at June 30, 1998, which
constituted 66.6% of total non-performing real estate assets, before valuation
allowances. This amount represented a $2.8 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 nine months ended June 30, 1998, the Bank provided an additional
$10.1 million of valuation allowances on loans secured by real estate and real
estate held for investment or sale and recorded net charge-offs of $7.3 million
on these assets. The allowance for losses on real estate held for sale at June
30, 1998 is in addition to approximately $48.8 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at June 30,
1998.
During the nine months ended June 30, 1998, the Bank provided an additional $3.5
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 nine months ended June 30, 1998
were $71.1 million, compared to $81.5 million for the nine months ended June 30,
1997. The Bank believes that the decrease in net charge-offs over the prior
nine-month period partially reflects the impact of more stringent underwriting
and other lending policies which the Bank implemented in recent periods. At June
30, 1998, the allowance for losses on credit card loans was $87.6 million
compared to $89.4 million at September 30, 1997. The ratio of the allowance for
such losses to outstanding credit card loans increased to 9.3% at June 30, 1998
from 8.3% at September 30, 1997.
The combined allowance for losses on consumer and other loans (automobile, home
improvement and related loans, overdraft lines of credit and other consumer
loans) increased to $7.0 million at June 30, 1998 from $6.3 million at September
30, 1997, primarily due to increased delinquencies on automobile 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 increased to 172.2% and 2.8%, respectively, at June 30, 1998 from 148.4%
and 2.1%, respectively, at September 30, 1997.
Asset and Liability Management. The following table presents the interest rate
sensitivity of the Bank's interest-earning assets and interest-bearing
liabilities at June 30, 1998, 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 June 30, 1998 Real estate loans:
Adjustable-rate $ 368,754 $ 220,270 $ 33,596 $ 1,542 $ -- $ 624,162
Fixed-rate 23,436 23,319 88,014 63,720 271,861 470,350
Loans held for sale 35,156 -- -- -- -- 35,156
Home equity credit lines and second
mortgages 44,311 1,752 5,966 4,833 18,395 75,257
Credit card and other 985,568 32,336 81,004 52,790 13,644 1,165,342
Loans held for securitization and sale 240,000 -- -- -- -- 240,000
Mortgage-backed securities 700,872 426,967 805,108 179,561 192,188 2,304,696
Trading securities 13,770 -- -- -- -- 13,770
Other investments 422,451 -- 43,999 -- -- 466,450
-------------- -------------- -------------- ------------- ------------- -------------
Total interest-earning assets 2,834,318 704,644 1,057,687 302,446 496,088 5,395,183
Total non-interest earning assets -- -- -- -- 1,194,455 1,194,455
-------------- -------------- -------------- ------------- ------------- -------------
Total assets $ 2,834,318 $ 704,644 $ 1,057,687 $ 302,446 $ 1,690,543 $ 6,589,638
============== ============== ============== ============= ============= =============
Deposits:
Fixed maturity deposits $ 937,233 $ 300,083 $ 243,827 $ 58,281 $ -- $ 1,539,424
NOW, statement and passbook accounts 1,565,363 45,161 150,416 102,377 218,177 2,081,494
Money market deposit accounts 1,005,065 -- -- -- -- 1,005,065
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 746,667 2,698 9,156 14,361 18,161 791,043
-------------- -------------- -------------- ------------- ------------- -------------
Total interest-bearing liabilities 4,254,328 347,942 403,399 175,019 486,338 5,667,026
Total non-interest bearing liabilities -- -- -- -- 591,430 591,430
Stockholders' equity -- -- -- -- 331,182 331,182
-------------- -------------- -------------- ------------- ------------- -------------
Total liabilities & stockholders'
equity $ 4,254,328 $ 347,942 $ 403,399 $ 175,019 $ 1,408,950 $ 6,589,638
============== ============== ============== ============= ============= =============
Gap $ (1,420,010) $ 356,702 $ 654,288 $ 127,427 $ 9,750
Cumulative gap $ (1,420,010) $ (1,063,308) $ (409,020) $ (281,593) $ (271,843)
Adjustment for interest rate caps (1) $ 205,556 $ 200,000 $ -- $ -- $ --
Adjusted cumulative gap $ (1,214,454) $ (863,308) $ (409,020) $ (281,593) $ (271,843)
Adjusted cumulative gap as a
percentage of total assets (18.4)% (13.1)% (6.2)% (4.3)% (4.1)%
(1) At June 30, 1998, the Bank had $238,889 notional amount of interest rate
caps. The adjustments reflect the average notional amount outstanding for each
period until the last cap expires June 30, 1999.
</TABLE>
<PAGE>
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, adjusted for the effect of
the Bank's interest rate caps, as a percentage of total assets, was a negative
13.0% at June 30, 1998. There have been no material changes to the Bank's market
risk disclosures from September 30, 1997.
Tax Sharing Payments. During the June 1998 quarter, the Bank made a tax sharing
payment of $1.9 million to B. F. Saul Real Estate Investment Trust (the
"Trust"), which owns 80% of the Bank's Common Stock. Subsequent to June 30,
1998, the Bank made an additional tax sharing payment of $1.0 million to the
Trust.
Capital. At June 30, 1998, 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 June 30, 1998
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 $ 360,973
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding gains (2) (178)
------------
504,795
Adjustments for tangible and core capital:
Intangible assets (65,406)
Non-allowable minority interest in
REIT Subsidiary (1) (47,347)
Non-includable subsidiaries (3) (3,820)
Non-qualifying purchased/originated
loan servicing (1,611)
------------
Total tangible capital 386,611 5.90% $ 98,308 1.50% $ 288,303 4.40%
------------ ========== ============ ========= ============ ==========
Total core capital (4) 386,611 5.90% $ 262,154 4.00% $ 124,457 1.90%
------------ ========== ============ ========= ============ ==========
Tier 1 risk-based capital (4) 386,611 6.18% $ 250,275 4.00% $ 136,336 2.18%
------------ ========== ============ ========= ============ ==========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 92,535
------------
Total supplementary capital 342,535
Excess allowance for loan losses (14,148)
------------
Adjusted supplementary capital 328,387
------------
Total available capital 714,998
Equity investments (3) (12,543)
------------
Total risk-based capital (4) $ 702,455 12.25% $ 500,549 8.00% $ 201,906 4.25%
============ ========== ============ ========= ============ ==========
(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 $0.9 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 June 30, 1998, after valuation
allowances of $144.3 million, by the fiscal year in which the property was
acquired through foreclosure.
Fiscal Year (In thousands)
1990 (1) (2)............ $ 19,981
1991 (2)................ 41,902
1992 (2)................ 2,903
1993 .................... -
1994 .................... 1,217
1995 .................... 8,056
1996 .................... -
1997 .................... 2,947
-----------
Total REO......... $ 77,006
===========
(1) Includes REO with an aggregate net book value of $12.5 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $52.3 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 to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes ("Unsecured Notes") sold to the public, the payment
of interest on its Senior Secured Notes (the "Secured Notes"), and the payment
of capital improvement costs. In the past, the Real Estate Trust 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 of the Bank, as well
as the Bank's board resolution adopted in connection with the release of its
written agreement with the OTS will enable the Real Estate Trust to receive tax
sharing payments and dividends from the Bank. In the first nine-month period
ended June 30, 1998, the Bank made tax sharing payments of $4.6 million and
dividend payments of $5.2 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 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.
<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
"1994 Notes"). In March 1998, the Real Estate Trust issued $200.0 million
aggregate principal amount of 9 3/4% Senior Secured Notes due 2008 (the "1998
Notes"). After providing for the retirement of the 1994 Notes, including a
prepayment premium of $10.0 million and debt issuance costs of approximately
$5.9 million, the Real Estate Trust realized approximately $9.1 million in new
funds. In addition, the Real Estate Trust received about $13.2 million in cash
which had been held as additional collateral by the indenture agent under the
1994 Notes. The 1998 Notes are secured by a first priority perfected security
interest in 80% (8,000 shares) of the issued and outstanding common stock of the
Bank, which constitute all of the Bank common stock held by the Real Estate
Trust. The 1998 Notes are nonrecourse obligations of the Real Estate Trust.
The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of maturing Unsecured Notes, it will finance such repayments from
other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility 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 June 30, 1998, there were no borrowings under this facility and
unrestricted availability was $9.3 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 is computed by reference to a
floating rate index. At June 30,1998, there were no borrowings under the
facility and unrestricted availability was $4.4 million. Management and the bank
are currently holding discussions to increase the amount of this facility to
$20.0 million and extend its term.
The maturity schedule for the Real Estate Trust's outstanding debt at June 30,
1998 for the balance of fiscal 1998 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
-----------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
-----------------------------------------------------------------
1998 (1) $ 2,847 $ -- $ 1,953 $ 4,800
1999 9,987 -- 16,139 26,126
2000 12,852 -- 8,868 21,720
2001 10,579 -- 5,395 15,974
2002 14,507 -- 5,279 19,786
Thereafter 150,480 200,000 11,601 362,081
-----------------------------------------------------------------
Total $201,252 $200,000 $ 49,235 $450,487
=================================================================
(1) June 1, 1998 - September 30, 1998
<PAGE>
Of the $201.3 million of mortgage debt outstanding at June 30, 1998, $171.0
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 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 nine-month period
ended June 30, 1998, the Real Estate Trust received total cash distributions of
$4.1 million from Saul Holdings Partnership. The Real Estate Trust reinvested
its April 30, 1998 distribution of $1.4 million and obtained additional
partnership units in Saul Holdings.
Development and Capital Expenditures. During 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 ("Avenel Phase IV"). The Real Estate Trust
financed the project with a construction/permanent loan. The project was
substantially completed in January 1998 and was offered to Saul Holdings in
accordance with the Real Estate Trust's obligations under the Right of First
Refusal Agreement. An independent appraisal of the project indicated a market
value of $5,600,000. The fully funded balance of the loan was $3,657,000,
resulting in an equity position of $1,943,000 for the Real Estate Trust. The
Board of Directors of Saul Centers, Inc., general partner of Saul Holdings,
agreed to purchase the Real Estate Trust's equity position through the issuance
of additional limited partnership units in Saul Holdings. Accordingly, as of
April 1, 1998, Saul Holdings issued 105,922 new limited partnership units and a
corresponding limited partnership interest to the Real Estate Trust in exchange
for the ownership of Avenel Phase IV and the assumption of the loan. At the date
of the transfer of Avenel Phase IV, liabilities exceeded assets transferred by
approximately $123,000 on an historical cost basis. Because of the Real Estate
Trust's guarantee under the Saul Centers reimbursement agreement, the gain of
$123,000 has been deferred and is included in "Deferred gains - real estate" in
the financial statements. The deferred gains relating to properties transferred
to Saul Holdings will be recognized in future periods to the extent the Real
Estate Trust's obligations are terminated under the reimbursement agreement.
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 open for business in August
1998. Development costs are projected to be $5.8 million to be financed by a
construction loan of $4.5 million. The loan is for two years with two extension
options for two years and one year respectively. The Real Estate Trust obtained
a construction loan which is expected to cover all costs except for the land,
fees to related parties, taxes and insurance.
<PAGE>
During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels:
TownePlace Suites by Marriott containing 91 units to be
located on a 1.7 acre site owned by the Trust in Avenel
Business Park in Gaithersburg, Maryland.
TownePlace Suites by Marriott containing 91 units to be
located on part of an 8.98 acre site owned by the Real Estate
Trust in the Arvida Park of Commerce in Boca Raton, Florida.
Fairfield Suites by Marriott containing 146-units to be
located on part of an 8.98 acre site owned by the Real Estate
Trust in the Arvida Park of Commerce in Boca Raton, Florida.
TownePlace Suites by Marriott containing 95-units to be
located on a 2.5 acre site owned by the Real Estate Trust in
Fort Lauderdale Commerce Center, Fort Lauderdale, Florida.
The projected costs for the four hotels aggregate $32 million and will largely
be funded by the proceeds of a three year bank loan in the amount of $23.0
million. The loan has two one-year renewal options. Construction will begin on
all the projects between June and September 1998 with completion expected in
spring 1999.
During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 78,000 square foot single-story office/research and development
building to be located on a 7 acre site owned by the Real Estate Trust in Dulles
North Corporate Park, Sterling, Virginia. This project is adjacent to the Real
Estate Trust's Dulles North office building and near three of the Real Estate
Trust's hotel properties. The development cost is $8.1 million with estimated
bank financing of $6.5 million for a five-year term and a two-year extension
option. Completion is expected in early fiscal 1999.
The Real Estate Trust believes that its capital improvement costs in the next
several fiscal years for its income-producing properties will be in range of
$6.0 to $8.0 million per year.
<PAGE>
BANKING
Liquidity. The required liquidity level under OTS regulations at June 30, 1998
was 4.0%. The Bank's average liquidity ratio for the quarter ended June 30, 1998
was 12.3%, compared to 23.1% for the quarter ended March 31, 1998.
The Bank securitized and sold $1.0 billion of credit card receivables, $534.7
million of automobile loan receivables, $298.8 million of home equity
receivables and $49.9 million of home loan receivables, during the first nine
months of fiscal 1998. At June 30, 1998, the Bank was considering the
securitization and sale of the following receivables: (i) approximately $590.0
million of credit card receivables, including $80.0 million of receivables
outstanding at June 30, 1998 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 December 31, 1998; (ii)
approximately $415.0 million of automobile loan receivables, including $55.0
million of receivables outstanding at June 30, 1998 and $360.0 million of
receivables which the Bank expects to become available through additional
fundings during the six months ending December 31, 1998; (iii) approximately
$200.0 million of home equity credit line receivables, including $85.0 million
of receivables outstanding at June 30, 1998 and $115.0 million of receivables
which the Bank expects to become available through additional fundings during
the six months ending December 31, 1998; and (iv) approximately $20.0 million of
home loan 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 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 $6.0 billion of outstanding trust certificate balances at June
30, 1998, approximately $168.5 million represented amounts on deposit in such
spread accounts subject to risk of loss. 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 June 30, 1998, recourse to the Bank under these
arrangements was approximately $0.9 million.
There were no material commitments for capital expenditures at June 30, 1998. In
April 1998, the Bank entered into an agreement to lease, develop and occupy an
office building in Bethesda, Maryland which it intends to use as its new
corporate headquarters. The cost and scale of this project has not yet been
determined.
<PAGE>
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, management is working with the Bank's outside
service providers to evaluate their year 2000 readiness. The Bank has evaluated
the exposure resulting from year 2000 problems faced by all of its new customers
and has established controls related to the year 2000 exposure faced by its
existing customers. As part of these controls, the Bank will evaluate its
customers on an ongoing basis. Nevertheless, 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 could be adversely affected.
SFAS 125. Effective January 1, 1997, the Bank adopted SFAS No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS 125 addresses whether a transfer of financial assets is a
sale or a secured borrowing. To achieve sale accounting under SFAS 125, the
transferred assets must be outside the reach of the transferor and its creditors
in bankruptcy. However, SFAS 125 made an exception for FDIC-insured
institutions, which are not subject to the Bankruptcy Code, but rather to
receivership laws and regulations administered by the FDIC. The FASB staff is
currently reviewing whether the exception is appropriate in light of a change in
the staff's understanding of the FDIC's receivership powers. Unless and until
further guidance is provided by the FASB, the Bank will continue to treat such
transfers as sales in accordance with the existing provisions of SFAS 125. The
Bank is unable to determine at this time whether, or in what form the FASB will
take any further action on this issue. Moreover, the FASB has not indicated
whether or how any such changes would apply to existing transactions.
Accordingly, management is not able to determine the impact, if any, that any
FASB action on SFAS 125 may have on the Bank.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 (the "1998 quarter") COMPARED TO THREE MONTHS
ENDED JUNE 30, 1997 (the "1997 quarter")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$1.1 million and an operating loss of $2.0 million in the 1998 quarter compared
to income before depreciation and amortization of $600,000 and an operating loss
of $2.2 million in the 1997 quarter. The decrease in the operating loss of
$200,000 was largely attributable to improved results from income-producing
properties of $2.5 million less unfavorable variances in interest expense and
loss on sale of property.
Income after direct operating expenses from hotel properties increased
$1,962,000 (27.2%) in the 1998 quarter over the level achieved in the 1997
quarter. $756,000 (11.0%)of this increase reflected improved results from the
nine hotels owned throughout both quarters and $1,206,000 reflected results from
acquisition properties. The increase in total revenue of $4,096,000 (23.6%)
exceeded the increase of $2,134,000 (21.0%) in direct operating expenses. For
the nine hotels owned throughout both periods, the increase in total revenue was
$1,296,000 (7.7%) and the increase in direct operating expenses was $540,000
(5.5%). 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 $545,000(15.6%) in the 1998 quarter compared to such income in the
1997 quarter. This increase reflected both higher income and a reduction in
property tax expense. Gross income in the 1998 quarter was $285,000 (5.2%) above
its level in the 1997 quarter. Expenses decreased by $260,000(-13.4%).
Other income increased $1,004,000 (156.9%) in the 1998 quarter compared to such
income in the 1997 quarter, primarily due to higher interest income earned on
higher cash balances.
Interest expense increased $1,384,000(13.8%)in the 1998 quarter, primarily
because of the higher level of borrowings in the current quarter and an overlap
of interest expense of approximately 24 days when both issues of Senior Secured
Notes were outstanding. The average balance of the Real Estate Trust's
outstanding borrowings increased to $451.0 million for the 1998 quarter from
$402.4 million for the 1997 quarter. The increase in average borrowings was the
result of mortgage loan refinancings and new issue of $200.0 million of Senior
Secured Notes due 2008 and the retirement of $175.0 million of Senior Secured
Notes due 2002. The weighted average cost of borrowings was 10.47% in the 1998
quarter compared to 10.31% in the 1997 quarter.
Amortization of debt expense decreased $32,000(16.9%)in the 1998 quarter,
primarily due to the lower costs experienced in the renewal of lines of credit.
Depreciation increased $360,000 (14.0%)in the 1998 quarter as a result of new
assets placed in service and the addition of a new hotel.
<PAGE>
Advisory, management and leasing fees paid to related parties increased $257,000
(12.2%)in 1998 quarter from their expense level in the 1997 quarter. The monthly
advisory fee in the 1998 quarter was $317,000 compared to $311,000 in the 1997
quarter, which resulted in an aggregate increase of $19,000. Management fees
were higher in the current quarter, reflecting both higher hotel sales and
office rents on which the fees are based.
General and administrative expense increased $40,000 (22.9%)in the 1998 quarter,
principally as a result of higher administrative and accounting expenses.
Equity in earning of unconsolidated entities represents the Real Estate Trust's
share of earnings on its partnership investments. For the 1998 period, the Real
Estate Trust recorded earnings of $1,021,000 from such investments compared to
earnings of $1,240,000 in the 1997 period. The reduction was largely
attributable to a change in the method of accounting for percentage rentals.
Gain (loss) on sale of property reflected a loss of $329,000 in the 1998 period
due to the termination of the Real Estate Trust's lease on a property located in
Oxon Hill, Maryland. The gain reported in the 1997 period represented 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 an operating loss of $17.6 million for the 1998
quarter, compared to operating income of $10.7 million for the 1997 quarter. The
decrease in income for the 1998 quarter was primarily a result of a $22.2
million increase in the Bank's operating expenses and an $11.5 million decrease
in interest income. Partially offsetting the negative effect such items had on
income was a $7.8 million decrease in the provision for loan losses.
Net Interest Income. Net interest income, before the provision for loan losses,
decreased $11.9 million (or 19.8%) in the 1998 quarter. The Bank would have
recorded additional interest income of $0.4 million for the 1998 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 June 30,
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
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) $ 2,834,634 $ 75,219 10.61% $ 3,679,076 $ 99,753 10.85%
Mortgage-backed securities 2,075,536 29,690 5.72 1,200,042 16,573 5.52
Federal funds sold and securities
purchased under agreements to resell 65,473 947 5.79 86,669 1,187 5.48
Trading securities 19,737 466 9.44 15,754 284 7.21
Investment securities 40,653 570 5.61 8,173 118 5.78
Other interest-earning assets 212,457 2,903 5.47 244,646 3,383 5.53
------------- ----------- ------------ -----------
Total 5,248,490 109,795 8.37 5,234,360 121,298 9.27
----------- --------- ----------- ---------
Noninterest-earning assets:
Cash 230,752 193,765
Real estate held for investment or sale 84,571 112,058
Property and equipment, net 294,514 256,453
Goodwill and other intangible assets, net 24,036 1,516
Other assets 760,170 416,178
------------- ------------
Total assets $ 6,642,533 $ 6,214,330
============= ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,036,376 4,774 1.84 $ 921,860 5,594 2.43
Savings deposits 1,034,345 7,474 2.89 987,812 8,370 3.39
Time deposits 1,608,399 21,585 5.37 1,507,664 20,070 5.32
Money market deposits 1,005,095 9,793 3.90 986,999 9,640 3.91
------------- --------- ------------ ---------
Total deposits 4,684,215 43,626 3.73 4,404,335 43,674 3.97
Borrowings 1,128,723 17,980 6.37 1,097,919 17,572 6.40
------------- ----------- ------------ -----------
Total liabilities 5,812,938 61,606 4.24 5,502,254 61,246 4.45
----------- --------- ----------- ---------
Noninterest-bearing items:
Noninterest-bearing deposits 283,348 196,480
Other liabilities 65,240 65,806
Minority interest 144,000 144,000
Stockholders' equity 337,007 305,790
------------- ------------
Total liabilities and stockholders'
equity $ 6,642,533 $ 6,214,330
============= ============
Net interest income $ 48,189 $ 60,052
=========== ===========
Net interest spread (2) 4.13% 4.82%
========= =========
Net yield on interest-earning assets (3) 3.67% 4.59%
========= =========
Interest-earning assets to interest-bearing
liabilities 90.29% 95.13%
========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
(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 June 30, 1998
Compared to
Three Months Ended June 30, 1997
Increase (Decrease)
Due to Change in (1)
--------------------------------------------------
Total
Volume Rate Change
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (22,460) $ (2,074) $ (24,534)
Mortgage-backed securities 12,496 621 13,117
Federal funds sold and securities
purchased under agreements to resell (631) 391 (240)
Trading securities 82 100 182
Investment securities 476 (24) 452
Other interest-earning assets (443) (37) (480)
-------------- -------------- --------------
Total interest income (10,480) (1,023) (11,503)
-------------- -------------- --------------
Interest expense:
Deposit accounts 10,809 (10,857) (48)
Borrowings 914 (506) 408
-------------- -------------- --------------
Total interest expense 11,723 (11,363) 360
-------------- -------------- --------------
Decrease in net interest income $ (22,203) $ 10,340 $ (11,863)
============== ============== ==============
- ---------------------------------------------------------------------------------------------------------
(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 1998 quarter decreased $11.5 million (or 9.5%) from the
level in the 1997 quarter as a result of lower average balances of loans
receivable, and lower average yields on loans receivable, particularly credit
card loans receivable. Higher average balances and yields of mortgage-backed
securities partially offset the negative effect on interest income of the lower
average balances and yields on loans receivable.
The Bank's net yield on interest-earning assets decreased to 3.68% in the 1998
quarter from 4.59% in the 1997 quarter. The decrease in the net yield primarily
reflected lower yields resulting from a shift in the composition of
interest-earning assets from loans receivable to lower yielding mortgage-backed
securities, as well as a lower average rate on credit card loans receivable
reflecting the Bank's efforts to reprice its credit card portfolio as a result
of competitive pressures in the credit card industry.
Interest income on loans, the largest category of interest-earning assets,
decreased by $24.5 million (or 24.6%) from the 1997 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 $689.8 million (or 38.4%), resulted primarily from the $1.1 billion,
$560.2 million and $598.3 million 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, March 1998, and June 1998,
respectively. The decrease was primarily responsible for a $10.6 million (or
34.0%) decrease in interest income from single-family residential loans. Average
balances of home equity loans and home improvement and related loans decreased
$26.5 million and $46.0 million, respectively, largely because of additional
securitization activity in recent periods, which resulted in a $0.3 million and
$2.1 million decline in interest income from such loans, respectively. An
increase in the securitization of automobile loans was the primary reason for
the $35.6 million (or 16.7%) decline in average balances of automobile loans.
The average yield on the loan portfolio in the 1998 quarter decreased 23 basis
points (to 10.62% from 10.85%) from the average yield in the 1997 quarter.
Contributing to the lower net yield was a decrease in the average yield on
credit card loans which, when coupled with an $83.7 million decrease in average
balances, resulted in a $13.9 million (or 30.4%) decrease in interest income
from such loans. In addition, an increase in the average yield on single-family
residential loans (from 6.92% to 7.41%) resulted from the $1.1 billion in
September 1997, $560.2 million in March 1998, and $598.3 million in June 1998
exchange of single-family residential loans for mortgage-backed securities.
Prior to the exchange, these loans had a weighted average interest rate of
6.89%, 6.99%, and 6.84%, respectively.
Interest income on mortgage-backed securities increased $13.1 million (or 79.1%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1998 quarter reflected the $1.1 billion, $560.2
million and $598.3 million exchange of single-family residential loans for
mortgage-backed securities in September 1997, March 1998 and June 1998,
respectively. The effect of the higher average balances was coupled with an
increase in the average interest rates on these securities from 5.52% to 5.72%.
Interest expense increased $0.4 million (or 0.6%) primarily due to increased
average balances. Increases of $105.3 million and $41.1 million (or 28.4% and
85.5%) in the average balances of repurchase agreement transactions and other
borrowings, respectively, were partially offset by a decrease in the average
balance of Federal Home Loan Bank advances of $108.9 million (or 25.8%).
<PAGE>
The increase in interest expense on borrowings was partially offset by a
decrease in interest expense on deposits. An increase in average deposit
balances of $279.9 million was offset by a 24 basis point reduction in the
average rate on deposits (to 3.73% from 3.97%). The decrease in average rates
reflected a shift in the composition of the Bank's deposits to lower yielding
demand deposits.
Provision for Loan Losses. The Bank's provision for loan losses decreased to
$28.3 million in the 1998 quarter from $36.1 million in the 1997 quarter. The
$7.8 million decrease was primarily due to an $8.1 million decrease in the
provision for losses on credit card loans resulting from decreased
delinquencies. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other (non-interest) operating income decreased to $87.5 million
in the 1998 quarter from $89.6 million in the 1997 quarter. The $2.1 million (or
2.3%) decrease was primarily attributable to a decrease in loan and deposit
servicing fees. Also contributing to the decrease in other income were decreases
in credit card fees and gains on sales of trading securities. Partially
offsetting these decreases were an increase in gain on sales of loans and a
decrease in loss on real estate held for investment or sale.
During the 1998 quarter, $35.7 million in amortization of interest-only strips
related to prior gains on sales of loans was deducted from loan and deposit
servicing fees. Gains on sales of loans increased by $16.9 million to $38.4
million from $21.5 million, primarily because of an $18.0 million increase in
gains recognized on the securitization and sale of credit card loan receivables.
An increase of $1.7 million in home loan gains also contributed to the $16.9
million increase during the quarter. Partially offsetting these amounts were
decreases of $1.0 million and $2.1 million recognized on the securitization and
sale of automobile loan receivables and home equity loan receivables,
respectively.
The $2.2 million (or 48.6%) decrease in loss on real estate held for investment
or sale was primarily attributable to a decrease of $1.9 million in the
provision for losses on such assets. See "Financial Condition - Asset Quality -
Allowances for Losses."
Loan and deposit servicing fees decreased $22.9 million (or 44.4%) during the
1998 quarter primarily due to a $26.8 million increase in the amortization of
interest-only strips. Fees recognized for servicing deposit accounts also
increased by $2.8 million and resulted primarily from fees generated through the
Bank's ATM network.
Credit card fees, consisting of annual fees, late charges, cash advance charges,
interchange income, net of rebate expenses, and overlimit fees decreased to
$14.5 million in the 1998 quarter from $14.9 million in the 1997 quarter. The
$0.4 million (or 2.8%) decrease was primarily attributable to decreases in cash
advance fees and increased rebate expenses.
Operating Expenses. Operating expenses for the 1998 quarter increased $22.2
million (or 21.6%) from the level in the 1997 quarter. The primary component of
the higher operating expenses was an $8.7 million increase in salaries and
employee benefits resulting primarily from the addition of staff to the Bank's
consumer lending and branch operations. Also contributing to the increase in
operating expenses was an increase of $6.8 million (or 41.5%) in marketing
expenses, primarily credit card marketing expenses.
<PAGE>
NINE MONTHS ENDED JUNE 30, 1998(the "1998 period") COMPARED TO NINE MONTHS ENDED
JUNE 30, 1997 (the "1997 period").
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$6.1 million and an operating loss of $15.0 million in the 1998 period compared
to a loss before depreciation and amortization of $7.6 million and an operating
loss of $16.0 million in the 1997 period. The decrease in the operating loss of
$1.1 million was largely attributable to improved results from income-producing
properties of $5.5 million less unfavorable variances in interest expense,
equity in earnings of unconsolidated entities and loss on sale of property.
Income after direct operating expenses from hotels increased $3,916,000
(25.6%)in the 1998 period over the level achieved in the 1997 period. $1,951,000
(13.2%)of this increase reflected improved results from nine hotels owned
throughout both periods and $1,965,000 reflected results from acquisition
properties. The increase in total revenue of $8,623,000 (19.7%) exceeded the
increase of $4,707,000 (16.6%) in direct operating expenses. For the nine hotels
owned throughout both periods, the increase in total revenue was $3,557,000
(8.4%)and the increase in direct operating expenses was $1,606,000 (5.8%). The
revenue increase was attributable to improved market conditions which permitted
the Real Estate Trust to raise average room rates while maintaining occupancy
levels.
Income after direct operating expenses from office and industrial properties
increased $1,537,000 (15.5%)in the 1998 period compared to such income in the
1997 period. The increase was caused by higher gross income of $1,453,000
(9.4%). Expenses for the current period were $84,000 (-1.5%) below last year due
to a reduction in property tax expense.
Other income increased $1,552,000 (81.3%) in the 1998 period compared to such
income in the 1997 period, primarily due to higher interest income earned on
higher cash balances.
Interest expense increased $2,289,000 (7.6%)in the 1998 period, primarily
because of the higher level of borrowings in the current period. Average
balances of the Real Estate Trust's outstanding borrowings increased to $429.3
million for the 1998 period from $400.0 million for the 1997 period. The
increase in average borrowings occurred as a result of mortgage loan
refinancings and new issue of $200.0 million of Senior Secured Notes due 2008
and the retirement of $175.0 million of Senior Secured Notes due 2002. The
weighted average cost of borrowings was 10.37% in the 1998 period compared to
10.33% in the 1997 period.
Amortization of debt expense decreased $76,000 (-14.5%)in the 1998 period,
primarily due to the lower costs experienced in the renewal of lines of credit.
Depreciation increased $544,000(6.9%)in the 1998 period as a result of new
assets placed in service and the addition of a new hotel.
<PAGE>
Advisory, management and leasing fees paid to related parties increased $564,000
(9.5%)in 1998 period from their expense level in the 1997 period. The monthly
advisory fee in the 1998 period was $317,000 compared to $311,000 in the prior
period, which resulted in an aggregate increase of $57,000. Management and
leasing fees were higher in the current period, reflecting both higher hotel
sales and office rents on which fees are based.
General and administrative expense decreased $99,000 (10.8%)in the 1998 period,
principally as a result of lower legal and insurance expense costs.
Equity in earnings of unconsolidated entities reflected earnings of $1,039,000
for the 1998 period and earnings of $2,779,000 for the 1997 period. The lower
earnings in the current period were attributable to nonrecurring charges for
losses on sales of interest rate protection agreements and losses on early
extinguishment of debt.
Gain (loss) on sale of property reflected a loss of $329,000 in the 1998 period
due to the termination of the Real Estate Trust's lease on a property located in
Oxon Hill, Maryland. The gain reported in the 1997 period represented 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 $24.3 million for the 1998
period, compared to operating income of $50.8 million for the 1997 period. The
decrease in income for the 1998 period was primarily attributable to a $52.5
million increase in operating expenses resulting primarily from increased salary
and employee benefits. Contributing to the decrease was a $37.6 million decrease
in interest income caused primarily by a decrease in credit card interest
income. Offsetting these amounts was a $48.1 million increase in other
(non-interest) operating income which was primarily attributable to gains on
sales of loans.
Net Interest Income. Net interest income, before the provision for loan losses,
decreased $31.9 million (or 17.8%) in the 1998 period. The Bank would have
recorded additional interest income of $1.4 million for the 1998 period if
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)
Nine Months Ended June 30,
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
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) $ 2,668,701 $ 223,530 11.17% $ 3,602,641 $ 292,877 10.84%
Mortgage-backed securities 1,932,249 81,891 5.65 1,286,758 55,206 5.72
Federal funds sold and securities
purchased under agreements to resell 163,136 6,897 5.64 83,506 3,348 5.35
Trading securities 26,478 1,576 7.94 16,778 902 7.17
Investment securities 35,822 1,522 5.67 9,316 404 5.78
Other interest-earning assets 186,465 7,548 5.40 200,349 7,792 5.19
------------- ----------- ------------ -----------
Total 5,012,851 322,964 8.59 5,199,348 360,529 9.25
----------- --------- ----------- ---------
Noninterest-earning assets:
Cash 215,111 189,045
Real estate held for investment or sale 88,651 117,407
Property and equipment, net 284,247 242,946
Cost in excess of net assets acquired, net 20,797 1,886
Other assets 615,467 374,090
------------- ------------
Total assets $ 6,237,124 $ 6,124,722
============= ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 982,952 15,633 2.12 $ 891,589 16,259 2.43
Savings deposits 1,014,075 23,789 3.13 968,895 24,568 3.38
Time deposits 1,708,625 69,537 5.43 1,308,972 51,015 5.20
Money market deposits 986,452 28,957 3.91 994,029 28,858 3.87
------------- --------- ------------ ---------
Total deposits 4,692,104 137,916 3.92 4,163,485 120,700 3.87
Borrowings 720,512 37,162 6.88 1,311,484 60,001 6.10
------------- ----------- ------------ -----------
Total liabilities 5,412,616 175,078 4.31 5,474,969 180,701 4.40
----------- --------- ----------- ---------
Noninterest-bearing items:
Noninterest-bearing deposits 255,379 177,292
Other liabilities 87,859 53,857
Minority interest 144,000 111,168
Stockholders' equity 337,270 307,436
------------- ------------
Total liabilities and stockholders'
equity $ 6,237,124 $ 6,124,722
============= ============
Net interest income $ 147,886 $ 179,828
=========== ===========
Net interest spread (2) 4.28% 4.84%
========= =========
Net yield on interest-earning assets (3) 3.93% 4.61%
========= =========
Interest-earning assets to interest-bearing
liabilities 92.61% 94.97%
========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
(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)
Nine Months Ended June 30, 1998
Compared to
Nine Months Ended June 30, 1997
Increase (Decrease)
Due to Change in (1)
--------------------------------------------------
Total
Volume Rate Change
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ (83,338) $ 13,991 $ (69,347)
Mortgage-backed securities 27,808 (1,123) 26,685
Federal funds sold and securities
purchased under agreements to resell 3,358 191 3,549
Trading securities 568 106 674
Investment securities 1,131 (13) 1,118
Other interest-earning assets (685) 441 (244)
-------------- -------------- --------------
Total interest income (51,158) 13,593 (37,565)
-------------- -------------- --------------
Interest expense:
Deposit accounts 15,626 1,590 17,216
Borrowings (33,727) 10,888 (22,839)
-------------- -------------- --------------
Total interest expense (18,101) 12,478 (5,623)
-------------- -------------- --------------
Decrease in net interest income $ (33,057) $ 1,115 $ (31,942)
============== ============== ==============
- ---------------------------------------------------------------------------------------------------------
(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 1998 period decreased $37.6 million (or 10.4%) from the
level in the 1997 period 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 4.28% in the 1998
period from 4.85% in the 1997 period. The decrease in the net yield primarily
reflected lower yields resulting from a shift in the composition of
interest-earning assets from loans receivable to lower yielding mortgage-backed
securities, 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. The shift to higher yielding certificates was 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 $69.4 million (or 23.7%) from the 1997 period 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 $701.5 million (or 40.7%), resulted primarily from the $1.1 billion,
$560.2 million and $598.3 million 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, March 1998, and June 1998,
respectively. The decrease was primarily responsible for a $33.6 million (or
37.0%) decrease in interest income from single-family residential loans. Average
balances of home improvement and related loans decreased $49.2 million, largely
because of additional securitization activity during recent periods. An increase
in the securitizations of credit card loans and automobile loans was the primary
reason for the $134.1 million and $60.3 million decline (or 11.2% and 23.9%),
respectively, in average balances of credit card loans and automobile loans.
The average yield on the loan portfolio in the 1998 period increased 33 basis
points (to 11.17% from 10.84%) from the average yield in the 1997 period.
Contributing to the higher net yield was an increase in the average yield on
automobile loans which was largely responsible for a $4.2 million increase in
interest income from such loans, and resulted from higher yields earned on loans
originated by one of the Bank's operating subsidiaries. An increase in the
average yield on home equity credit line loans (from 6.91% to 7.74%) contributed
to a $0.4 million increase in interest income from such loans. In addition, an
increase in the average yield on single-family residential loans (from 7.02% to
7.46%) resulted from the September 1997, March 1998, and June 1998 exchange of
single-family residential loans for mortgage-backed securities discussed above.
Prior to the exchange, these loans had a weighted average interest rate of
6.89%, 6.99%, and 6.84%, respectively. Offsetting these amounts was a decrease
in the average yield on credit card loans, which, when coupled with the
decreased average balance on such loans, resulted in a $36.6 million decline in
interest income from such loans for the 1998 period. During fiscal 1998, the
Bank repriced its credit card portfolio as a result of competitive pressures in
the credit card industry.
<PAGE>
Interest income on mortgage-backed securities increased $26.7 million (or 48.3%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1998 period reflected the $1.1 billion, $560.2
million and $598.3 million exchange of single-family residential loans for
mortgage-backed securities in September 1997, March 1998 and June 1998,
respectively. The positive effect of the higher average balances was partially
offset by a decrease in the average interest rates on these securities from
5.72% to 5.65%.
Interest expense decreased $5.6 million (or 3.1%) for the 1998 period primarily
because of a $440.4 million decline in the average balances of repurchase
agreement transactions and a $196.1 million decline in the average balances of
Federal Home Loan Bank advances. Excess funds generated from securitization
activity during the current period and additional deposits facilitated the
paydown of such borrowings.
The decrease in interest expense on borrowings was partially offset by an
increase of $17.2 million (or 14.3%) in interest expense on deposits, resulting
from an increase in average deposit balances of $528.6 million (or 12.7%), and,
to a lesser extent, an increase in the average rates on deposits (to 3.92% from
3.87%). The increase in average rates reflected the shift in the composition of
the Bank's deposits to higher yielding certificates of deposit.
Provision for Loan Losses. The Bank's provision for loan losses decreased to
$80.0 million in the 1998 period from $89.9 million in the 1997 period. The $9.9
million decrease was primarily due to a $14.1 million decrease in the provision
for losses on credit card loans resulting from decreased delinquencies. See
"Financial Condition - Asset Quality - Allowances for Losses."
Other Income. Other (non-interest) operating income increased to $312.7 million
in the 1998 period from $264.6 million in the 1997 period. The $48.1 million
increase in such income was primarily attributable to increases in gain on sales
of loans and net unrealized gain on interest-only strips. Also contributing to
the increase in other income was a decrease in the loss on real estate held for
investment or sale. Partially offsetting such increases were decreases in loan
and deposit servicing fees and credit card fees.
Gain on sales of loans increased by $48.8 million to $99.5 million from $50.7
million, primarily because of a $38.8 million increase in 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 $6.4 million and $3.6 million, respectively,
also contributed to the $48.8 million increase during the current period. During
the 1998 period, $75.3 million in amortization of interest-only strips related
to prior gains on sales of loans was deducted from loan and deposit servicing
fees.
The Bank recognized an $11.5 million net unrealized gain on its interest-only
strips reflecting market-value adjustments on the interest-only strips related
to securitized credit card assets.
The $6.5 million (or 46.6%) decrease in loss on real estate held for investment
or sale was primarily attributable to a decrease of $6.1 million in the
provision for losses on such assets. See "Financial Condition - Asset Quality -
Allowances for Losses."
<PAGE>
Loan and deposit servicing fees decreased $19.6 million (or 11.7%) during the
1998 period primarily due to a $23.5 million decrease in servicing fees earned
by the Bank for servicing its portfolio of securitized credit card loans. Fees
recognized for servicing deposit accounts also increased by $6.7 million and
resulted primarily from fees generated through the Bank's ATM network.
Credit card fees, consisting of annual fees, late charges, cash advance charges,
interchange income, net of rebate expenses, and overlimit fees decreased to
$37.6 million in the 1998 period from $42.5 million in the 1997 period. The $4.9
million (or 11.4%) decrease was primarily attributable to a $9.4 million
increase in rebate expenses, the effects of which were due principally to the
introduction of additional programs and products designed to encourage greater
usage of the Bank's credit cards. Partially offsetting the increase in rebate
expenses were increases in certain fees resulting from changes to the fee
structure for the Bank's credit card programs which were implemented in fiscal
1997.
Operating Expenses. Operating expenses for the 1998 period increased $52.5
million (or 17.3%) from the level in the 1997 period. The primary component of
the higher operating expenses was a $26.0 million increase in salaries and
employee benefits resulting primarily from the addition of staff to the Bank's
consumer lending and branch operations. The $10.2 million increase in loan
expenses was primarily attributable to increased credit card collection and
retention costs and to an increase in the valuation allowance against mortgage
servicing rights. Also contributing to the increase in operating expenses was an
increase of $8.8 million in marketing expenses, primarily credit card marketing
expenses.
PART II
Item 6. Exhibits and report on Form 8-K
(a) Exhibit 27: Financial Data Schedule
(b) Report on Form 8-K filed on April 3, 1998: Item 5 - Other Events (Issuance
of 1998 Notes and redemption of 1994 Notes)
<PAGE>
SIGNATURES
Pursuant to the requirements 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: September 15, 1998 Stephen R. Halpin, Jr.
------------------- -----------------------------------------------
Stephen R. Halpin, Jr.
Vice President and Chief Financial Officer
Date: September 15, 1998 Ross E. Heasley
------------------- -----------------------------------------------
Ross E. Heasley
Vice President and Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the period
ended June 30, 1998 of B. F. Saul Real Estate Investment Trust and is qualified
in its entirety by reference to such financial statements, schedules and other
disclosure.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 18615
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 315154
<DEPRECIATION> 94118
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 72420
<CGS> 0
<TOTAL-COSTS> 39833
<OTHER-EXPENSES> 15737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32836
<INCOME-PRETAX> (14947)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the period
ended June 30, 1998 of B. F. Saul Real Estate Investment Trust and is qualified
in its entirety by reference to such financial statements, schedules and other
disclosure.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 396549
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 135000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 43999
<INVESTMENTS-MARKET> 44036
<LOANS> 2506176
<ALLOWANCE> 104091
<TOTAL-ASSETS> 0
<DEPOSITS> 4916144
<SHORT-TERM> 747083
<LIABILITIES-OTHER> 157269
<LONG-TERM> 293960
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 223530
<INTEREST-INVEST> 84989
<INTEREST-OTHER> 14445
<INTEREST-TOTAL> 322964
<INTEREST-DEPOSIT> 137916
<INTEREST-EXPENSE> 175078
<INTEREST-INCOME-NET> 147886
<LOAN-LOSSES> 79972
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 355962
<INCOME-PRETAX> 24671
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.93
<LOANS-NON> 13044
<LOANS-PAST> 0
<LOANS-TROUBLED> 11800
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 105679
<CHARGE-OFFS> 92415
<RECOVERIES> 10855
<ALLOWANCE-CLOSE> 104091
<ALLOWANCE-DOMESTIC> 104091
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> CT
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the period
ended June 30, 1998 of B. F. Saul Real Estate Investment Trust and is qualified
in its entirety by reference to such financial statements, schedules and other
disclosure.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<TOTAL-ASSETS> 6910754
516
0
<COMMON> 6642
<OTHER-SE> (112065)
<TOTAL-LIABILITY-AND-EQUITY> 6910754
<TOTAL-REVENUES> 0
<INCOME-TAX> (3419)
<INCOME-CONTINUING> 13143
<DISCONTINUED> 0
<EXTRAORDINARY> (9601)
<CHANGES> 0
<NET-INCOME> (16596)
<EPS-PRIMARY> (4.28)
<EPS-DILUTED> (4.28)
</TABLE>
