<PAGE>
Registration No. 333-70753
Rule 424(b)(3)
Supplement Dated August 16, 1999 to
Prospectus Dated April 15, 1999
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
JUNE 30, 1999
----------------------------
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Statements:
(a) Consolidated Balance Sheets at June 30, 1999 and
September 30, 1998
(b) Consolidated Statements of Operations for the three-month and
nine-month periods ended June 30, 1999 and 1998
(c) Consolidated Statements of Comprehensive Income and Changes in
Shareholders' Deficit for the three-month and
nine-month periods ended June 30, 1999 and 1998
(d) Consolidated Statements of Cash Flows for the nine-month periods
ended June 30, 1999 and 1998
(e) Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three months ended June 30, 1999 compared to three months
ended June 30, 1998
Nine months ended June 30, 1999 compared to nine months
ended June 30, 1998
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
======================================================================================================================
June 30 September 30
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 172,849 $ 165,805
Office and industrial 111,022 110,257
Other 3,908 3,889
------------ -------------
287,779 279,951
Accumulated depreciation (104,973) (96,072)
------------ -------------
182,806 183,879
Land parcels 40,633 40,110
Construction in progress 35,047 8,694
Cash and cash equivalents 7,591 13,950
Other assets 74,490 76,799
------------ -------------
Total real estate assets 340,567 323,432
- ----------------------------------------------------------------------------------------------------------------------
Banking
Cash and other deposits 250,444 836,456
Federal funds sold and securities purchased under agreements to resell 13,000 380,000
Loans held for sale 134,494 56,287
Loans held for securitization and sale -- 125,000
Trading securities 6,927 11,319
Investment securities (market value $44,481 and $44,528, respectively) 44,396 43,999
Mortgage-backed securities (market value $1,415,508 and $2,014,819, respectively) 1,438,104 2,025,817
Loans receivable (net of allowance for losses of $58,467 and $60,157, respectively) 5,517,972 2,533,957
Federal Home Loan Bank stock 67,487 49,036
Real estate held for investment or sale (net of allowance for losses of $86,236
and $153,766, respectively) 56,429 69,025
Property and equipment, net 299,535 285,916
Goodwill and other intangible assets, net 28,474 30,879
Interest only strips, net 9,146 13,508
Other assets 297,633 259,950
------------ -------------
Total banking assets 8,164,041 6,721,149
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TOTAL ASSETS $ 8,504,608 $ 7,044,581
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LIABILITIES
Real Estate
Mortgage notes payable $ 209,563 $ 198,874
Notes payable - secured 200,000 200,000
Notes payable - unsecured 45,553 50,335
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred shares of beneficial interest 34,112 34,049
Other liabilities and accrued expenses 35,107 39,895
------------ -------------
Total real estate liabilities 637,218 636,036
- ----------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 5,341,366 4,888,230
Borrowings 481,514 492,184
Federal Home Loan Bank advances 1,349,692 352,027
Other liabilities 159,575 159,195
Capital notes -- subordinated 250,000 250,000
------------ -------------
Total banking liabilities 7,582,147 6,141,636
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Commitments and contingencies
Minority interest held by affiliates 72,717 72,242
Minority interest -- other 218,306 218,306
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TOTAL LIABILITIES 8,510,388 7,068,220
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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 (64,046) (81,936)
Net unrealized holding gains 13 44
------------ -------------
36,068 18,209
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------ -------------
TOTAL SHAREHOLDERS' DEFICIT (5,780) (23,639)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 8,504,608 $ 7,044,581
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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) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
REAL ESTATE
Income:
Hotels $ 22,585 $ 21,462 $ 58,360 $ 52,340
Office and industrial properties 6,134 5,727 18,064 16,949
Other 673 1,644 2,180 3,460
--------------- ------------ ------------ -------------
Total income 29,392 28,833 78,604 72,749
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Direct operating expenses:
Hotels 13,078 12,276 36,497 33,117
Office and industrial properties 1,951 1,684 5,743 5,495
Land parcels and other 358 433 605 1,221
Interest expense 9,830 11,496 29,951 32,512
Captalized interest (305) (56) (680) (125)
Amortization of debt expense 58 157 222 449
Depreciation 3,120 2,931 8,901 8,420
Advisory, management and leasing fees - related parties 2,501 2,364 7,006 6,496
General and administrative 256 215 743 821
--------------- ------------ ------------ -------------
Total expenses 30,847 31,500 88,988 88,406
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Equity in earnings of unconsolidated entities 1,636 1,021 4,409 1,039
Loss on sale of property -- (329) (1) (329)
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REAL ESTATE OPERATING INCOME (LOSS) $ 181 $ (1,975) $ (5,976) $ (14,947)
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BANKING
Interest income:
Loans $ 107,298 $ 75,219 $ 277,874 $ 223,530
Mortgage-backed securities 22,494 29,690 76,173 81,891
Trading securities 1,106 466 2,708 1,576
Investment securities 618 570 1,847 1,522
Other 3,021 4,125 10,611 15,466
--------------- ------------ ------------ -------------
Total interest income 134,537 110,070 369,213 323,985
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Interest expense:
Deposit accounts 35,148 43,626 107,267 137,916
Borrowings 27,412 17,980 64,992 37,162
--------------- ------------ ------------ -------------
Total interest expense 62,560 61,606 172,259 175,078
--------------- ------------ ------------ -------------
Net interest income 71,977 48,464 196,954 148,907
Provision for loan losses (5,727) (28,298) (16,116) (79,972)
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 66,250 20,166 180,838 68,935
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Other income:
Servicing and securitization income 9,898 52,826 23,480 218,022
Credit card fees -- 14,511 -- 37,641
Deposit servicing fees 18,139 13,523 49,849 37,272
Gain on sales of trading securities, net 1,928 (181) 5,256 811
Gain (loss) on real estate held for investment or sale, net 891 (2,292) 33,264 (7,398)
Gain on sales of loans, net 140 520 4,135 1,822
Other 5,616 8,348 17,793 23,528
--------------- ------------ ------------ -------------
Total other income 36,612 87,255 133,777 311,698
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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) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses:
Salaries and employee benefits $ 44,835 $ 50,385 $ 128,053 $ 143,157
Loan 3,053 9,632 9,405 28,694
Property and equipment 6,405 7,243 19,037 20,933
Marketing 3,576 23,294 9,447 64,032
Data processing 4,568 11,526 12,945 33,006
Depreciation and amortization 8,519 8,663 24,826 24,882
Deposit insurance premiums 1,131 1,140 3,297 3,731
Amortization of goodwill and other intangible assets 745 947 2,365 2,648
Other 10,057 12,215 28,279 35,267
--------------- ------------ ------------ -------------
Total operating expenses 82,889 125,045 237,654 356,350
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BANKING OPERATING INCOME (LOSS) $ 19,973 $ (17,624) $ 76,961 $ 24,283
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TOTAL COMPANY
Operating income (loss) $ 20,154 $ (19,599) $ 70,985 $ 9,336
Income tax provision 7,611 (10,071) 23,563 (3,807)
--------------- ------------ ------------ -------------
Income (loss) before extraordinary item and minority interest 12,543 (9,528) 47,422 13,143
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- -- -- (9,601)
--------------- ------------ ------------ -------------
Income (loss) before minority interest 12,543 (9,528) 47,422 3,542
Minority interest held by affiliates (1,291) 2,558 (6,485) (1,153)
Minority interest -- other (6,329) (6,329) (18,985) (18,985)
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TOTAL COMPANY NET INCOME (LOSS) $ 4,923 $ (13,299) $ 21,952 $ (16,596)
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NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 3,569 $ (14,653) $ 17,890 $ (20,658)
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item and minority interest $ 2.31 $ (2.26) $ 8.98 $ 1.88
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- -- -- (1.99)
--------------- ------------ ------------ -------------
Income (loss) before minority interest 2.31 (2.26) 8.98 (0.11)
Minority interest held by affiliates (0.26) 0.53 (1.34) (0.24)
Minority interest -- other (1.31) (1.31) (3.93) (3.93)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.74 $ (3.04) $ 3.71 $ (4.28)
- ----------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Comprehensive Income and Changes in Shareholders' Deficit
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
======================================================================================================================
For the Three Months For the Nine Months
Ended June 30 Ended June 30
----------------------------- ---------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME
Net income (loss) $ 4,923 $ (13,299) $ 21,952 $ (16,596)
Other comprehensive income:
Net unrealized holding gains (losses) (3) 116 (31) 536
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TOTAL COMPREHENSIVE INCOME (LOSS) $ 4,920 $ (13,183) $ 21,921 $ (16,060)
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CHANGES IN SHAREHOLDERS' DEFICIT
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516 $ 516 $ 516
--------------- ------------ ------------ -------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642 6,642
--------------- ------------ ------------ -------------
PAID-IN SURPLUS
Beginning and end of period 92,943 92,943 92,943 92,943
--------------- ------------ ------------ -------------
DEFICIT
Beginning of period (67,615) (148,647) (81,936) (142,642)
Net income (loss) 4,923 (13,299) 21,952 (16,596)
Dividends:
Real Estate Trust preferred shares of beneficial
interest:
Distributions payable (1,354) (1,354) (4,062) (4,062)
--------------- ------------ ------------ -------------
End of period (64,046) (163,300) (64,046) (163,300)
--------------- ------------ ------------ -------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period 16 24 44 (396)
Net unrealized holding gains (losses) (3) 116 (31) 536
--------------- ------------ ------------ -------------
End of period 13 140 13 140
--------------- ------------ ------------ -------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848) (41,848)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT $ (5,780) $ (104,907) $ (5,780) $ (104,907)
- ----------------------------------------------------------------------------------------------------------------------
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) 1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (3,563) $ (21,208)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 8,901 8,420
Loss on sale of property 1 329
Early extiguishment of debt, net of taxes -- 9,601
Increase in accounts receivable and accrued income (125) (2,245)
Increase in deferred tax asset (2,504) (3,440)
Decrease in accounts payable and accrued expenses (3,258) (3,835)
Decrease in tax sharing receivable 6,610 4,591
Amortization of debt expense 941 449
Equity in earnings of unconsolidated entities (4,409) (1,039)
Decrease in liquidity maintenance escrow 729 12,838
Other 22,060 3,586
------------ -------------
25,383 8,047
------------ -------------
Banking
Net income 25,938 4,612
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of premiums, discounts and net deferred loan fees 1,703 5,733
Depreciation and amortization 24,826 25,058
Provision for loan losses 16,116 79,972
Capitalized interest on real estate under development (2,508) (1,463)
Proceeds from sales of trading securities 709,071 276,464
Net fundings of loans held for sale and/or securitization (808,908) (319,239)
Proceeds from sales of loans held for sale and/or securitization 34,966 1,612,197
Gain on sales of real estate held for sale (31,175) (2,385)
Provision for losses on real estate held for investment or sale -- 9,564
Gain on sales of trading securities, net (5,256) (811)
(Increase) decrease in interest-only strips 4,362 (45,560)
(Increase) decrease in servicing assets (1,012) 8,495
(Increase) decrease in goodwill and other intangible assets 2,413 (23,476)
Increase in other assets (29,938) (138,774)
Decrease in other liabilities (15,736) (11,273)
Minority interest held by affiliates 6,485 1,153
Minority interest - other 7,313 7,313
Decrease in tax sharing payable (6,610) (4,591)
Other (10,814) (32,689)
------------ -------------
(78,764) 1,450,300
------------ -------------
Net cash provided by (used in) operating activities (53,381) 1,458,347
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (34,564) (11,854)
Property acquisitions -- (26,309)
Equity investment in unconsolidated entities 1,500 731
Other 2 1
------------ -------------
(33,062) (37,431)
------------ -------------
Banking
Net proceeds from maturities of investment securities -- 5,000
Net proceeds from redemption of Federal Home Loan Bank stock 24,165 2,504
Net proceeds from sales of real estate 32,347 20,364
Net fundings of loans receivable (1,024,186) (1,892,915)
Principal collected on mortgage-backed securities 584,706 903,268
Purchases of Federal Home Loan Bank stock (42,615) --
Purchases of investment securities (398) (44,001)
Purchases of loans receivable (1,814,575) (1,034,645)
Purchases of property and equipment (38,738) (47,843)
Disbursements for real estate held for investment or sale (6,879) (10,776)
Other (7,010) (1,349)
------------ -------------
(2,293,183) (2,100,393)
------------ -------------
Net cash used in investing activities (2,326,245) (2,137,824)
- ----------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
======================================================================================================================
For the Nine Months
Ended June 30
---------------------------
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 18,227 $ 57,860
Principal curtailments and repayments of mortgages (7,538) (33,155)
Proceeds from issuance of secured notes -- 224,075
Repayments of secured notes -- (199,075)
Proceeds from sales of unsecured notes 4,162 8,259
Repayments of unsecured notes (8,944) (5,657)
Costs of obtaining financings (587) (6,901)
Loan prepayment fees -- (10,055)
Dividends paid - preferred shares of beneficial interest (4,000) (5,600)
------------ -------------
1,320 29,751
------------ -------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 31,962,603 18,468,003
Customer withdrawals of deposits and payments for maturing certificates of deposit (31,509,467) (18,445,615)
Net increase in securities sold under repurchase agreements 3,200 335,165
Advances from the Federal Home Loan Bank 2,256,590 666,295
Repayments of advances from the Federal Home Loan Bank (1,258,925) (509,823)
Proceeds from other borrowings 19,602,641 11,147,745
Repayments of other borrowings (19,616,510) (11,118,690)
Cash dividends paid on preferred stock (7,313) (7,313)
Cash dividends paid on common stock (30,000) (6,500)
Other 16,116 484
------------ -------------
1,418,935 529,751
------------ -------------
Net cash provided by financing activities 1,420,255 559,502
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (959,371) (119,975)
Cash and cash equivalents at beginning of period 1,230,406 670,139
------------ -------------
Cash and cash equivalents at end of period $ 271,035 $ 550,164
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the period for:
Interest (net of amount capitalized) $ 205,801 $ 221,380
Income taxes paid (refunded) 94,595 6,232
Shares of Saul Centers, Inc. common stock 2,511 4,010
Limited partnership units of Saul Holdings Limited Partnership 4,530 1,405
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 2,511 2,218
Distributions from Saul Holdings Limited Partnership 4,530 4,131
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 4,928 3,916
Loans held for sale exchanged for trading securities 702,006 282,625
Loans held for sale and/or securitization transferred to trading securities -- 9,203
Loans receivable transferred to (from) loans held for sale and/or securitization (125,000) 1,526,831
Loans made in connection with the sale of real estate 30,109 5,226
Loans receivable transferred to real estate acquired in settlement of loans 1,381 3,792
Loans receivable exchanged for mortgage-backed securities held to maturity 1,792 1,223,598
- ----------------------------------------------------------------------------------------------------------------------
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,
1998. 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. BANKING:
LOANS HELD FOR SALE:
Loans held for sale is composed of the following:
June 30, September 30,
1999 1998
---------- ----------
(In thousands)
Single-family residential $ 130,591 $ 49,502
Home improvement and related loans 3,903 6,785
---------- ----------
$ 134,494 $ 56,287
========== ==========
LOANS HELD FOR SECURITIZATION AND SALE:
At September 30, 1998, loans held for securitization and sale totaled $125
million and was composed of automobile loans. At June 30, 1999, there were no
loans held for securitization and sale.
<PAGE>
LOANS RECEIVABLE:
June 30, September 30,
1999 1998
------------ ------------
(In thousands)
Single-family residential $3,537,953 $1,772,784
Home equity 228,393 135,122
Real estate construction and ground 355,255 209,247
Commercial real estate and multifamily 82,090 75,877
Commercial 498,518 279,416
Automobile 1,032,064 232,826
Home improvement and related loans 96,626 60,570
Overdraft lines of credit and
other consumer 30,898 33,484
------------ ------------
5,861,797 2,799,326
Less:
Undisbursed portion of loans 305,282 207,921
Net deferred loan origination
costs (19,924) (2,709)
Allowance for loan losses 58,467 60,157
------------ ------------
343,825 265,369
------------ ------------
Total $5,517,972 $2,533,957
============ ============
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 or real estate owned ("REO") 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,
(In thousands) 1999 1998
------------ ------------
Real estate held for investment $ 3,819 $ 3,819
Real estate held for sale 138,846 218,972
------------ ------------
Subtotal 142,665 222,791
------------ ------------
Less:
Allowance for losses on real estate
held for investment 202 202
Allowance for losses on real estate
held for sale 86,034 153,564
------------ ------------
Subtotal 86,236 153,766
------------ ------------
Total real estate held for
investment or sale $ 56,429 $ 69,025
============ ============
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal business conducted by the Trust and its wholly-owned subsidiaries
is the ownership and development of income-producing properties. The Trust owns
80% of the outstanding common stock of Chevy Chase Bank, F.S.B. ("Chevy Chase"
or the "Bank"). At June 30 1999, the Bank's assets accounted for approximately
96% of the Trust's consolidated assets. The Trust recorded net income of $22.0
million for the nine-month period ended June 30, 1999 compared to a net loss of
$16.6 million for the nine-month period ended June 30, 1998.
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B.F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. 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, 1999, which consisted primarily of hotels, office and industrial projects
and land parcels, was unchanged from the number at September 30, 1998.
The ten hotel properties owned by the Real Estate Trust throughout the first
nine months of fiscal 1999 and 1998 experienced average occupancy rates of 68.1%
and 68.6% and average room rates of $84.21 and $78.63, respectively. Seven of
these hotels registered improved occupancies and eight registered higher average
room rates in the current period. In December 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 Johnson hotel. In
August 1998, the Real Estate Trust opened its newly-constructed 95-room Marriott
TownePlace Suites hotel located near Washington Dulles International Airport.
The hotel portfolio, which includes the two new properties, experienced an
average occupancy rate of 67.5% and an average room rate of $86.06 during the
nine-month period ended June 30, 1999.
The Real Estate Trust's office and industrial portfolio was 97% leased at June
30, 1999, compared to leasing rates of 100% and 98% at September 30, 1998 and at
June 30, 1998, respectively. At June 30, 1999, the office and industrial
portfolio had a total gross leasable area of 1.3 million square feet, of which
115,000(9.1%)and 187,000(14.7%), are subject to leases whose terms expire in the
balance of fiscal 1999 and in fiscal 2000, respectively.
<PAGE>
BANKING
General. The Bank continued its pattern of growth during the current quarter
with total assets increasing to $8.2 billion, an increase of $394 million from
the quarter ended March 31, 1999. Total loans increased $687 million during the
quarter, funded primarily through an increase in Federal Home Loan Bank advances
and increased deposits. The Bank recorded operating income of $20.0 million
during the quarter ended June 30, 1999, compared to an operating loss of $17.6
million in the prior corresponding quarter. Contributing to the increased income
for the current quarter were an increase in single-family loan interest income
and decreases in the provision for loan losses and operating expenses which
partially offset the loss of revenues attributable to the Bank's credit card
portfolio which was sold on September 30, 1998.
Servicing and securitization income decreased $42.9 million (or 81.3%) during
the current quarter primarily as a result of decreased securitization activity
and decreased credit card servicing fees due to the prior sale of the credit
card portfolio. The Bank did not securitize and sell any loan receivables during
the quarter ended June 30, 1999. During the quarter ended June 30, 1998, the
Bank securitized and sold $542.0 million, $153.6 million and $163.3 million of
credit card, automobile and mortgage loan receivables (consisting of fixed- and
variable-rate home equity receivables and home loan receivables), respectively.
Gains of $8.9 million, $5.5 million and $8.8 million, respectively, were
recognized on these transactions. No credit card loan servicing fees were
recognized in the current quarter as a result of the September 30, 1998 sale of
the credit card portfolio as compared to $11.3 million in the quarter ended June
30, 1998.
At June 30, 1999, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.60%, 6.60%, 9.03% and 14.19%,
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."
During the quarter ended June 30, 1999, the Bank declared and paid out of the
retained earnings of the Bank, a cash dividend on its Common Stock in the amount
of $400 per share. Effective May 18, 1999, the Bank's board of directors
rescinded its March 1996 resolution which, among other things, limited the
amount of dividends payable by the Bank to 50% of net income, reflecting the
improvement in the Bank's overall condition since adoption of the March 1996
resolution. The Bank's ability to pay dividends remains subject to other
regulatory and contractual limitations.
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 REO, after all valuation
allowances.
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)
June 30, March 31, September 30,
1999 1999 1998
--------------------- ------------------ ------------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 5,698 $ 6,145 $ 8,106
Commercial 24 -- --
Consumer 5,600 5,327 4,501
--------------------- ------------------ ------------------
Total non-accrual loans (1) 11,322 11,472 12,607
--------------------- ------------------ ------------------
Real estate owned 138,847 140,977 218,972
Allowance for losses on real estate owned (86,034) (86,804) (153,564)
--------------------- ------------------ ------------------
Real estate owned, net 52,813 54,173 65,408
--------------------- ------------------ ------------------
Total non-performing assets $ 64,135 $ 65,645 $ 78,015
===================== ================== ==================
Troubled debt restructurings $ 11,764 $ 11,764 $ 11,800
===================== ================== ==================
Allowance for losses on loans $ 58,467 $ 58,414 $ 60,157
Allowance for losses on real estate held for investment 202 202 202
Allowance for losses on real estate owned 86,034 86,804 153,564
--------------------- ------------------ ------------------
Total allowances for losses $ 144,703 $ 145,420 $ 213,923
===================== ================== ==================
Ratios:
Non-performing assets, net to total assets (2) 0.07% 0.09% 0.26%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 289.68% 267.75% 204.18%
Allowance for losses on consumer loans to
non-accrual consumer loans (1) 579.93% 609.65% 758.08%
Allowance for losses on loans to non-accrual loans (1) 516.40% 509.19% 477.17%
Allowance for losses on loans to total loans receivable (3) 1.02% 1.16% 2.17%
(1) Before deduction of allowances for losses.
(2) Non-performing assets, net 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 totaled $64.1 million, after valuation allowances on REO
of $86.0 million, at June 30, 1999, compared to $65.6 million, after valuation
allowances on REO of $86.8 million, at March 31, 1999. In addition to the
valuation allowances on REO, the Bank maintained $58.5 million of valuation
allowances on its loan portfolio at June 30, 1999. The $1.5 million decrease in
non-performing assets for the current quarter was attributable to net decreases
in REO and non-accrual loans of $1.3 million and $0.2 million, respectively. See
"Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $11.3 million at June
30, 1999, as compared to $11.5 million at March 31, 1999. At June 30, 1999,
non-accrual loans consisted of $5.7 million of real estate loans and $5.6
million of consumer loans compared to non-accrual real estate loans of $6.2
million and non-accrual consumer loans of $5.3 million at March 31, 1999.
REO. At June 30, 1999, the Bank's REO totaled $52.8 million, after valuation
allowances on such assets of $86.0 million as set forth in the following table.
The principal component of REO consists of four planned unit developments (the
"Communities"), all of which are under active development. Only commercial
ground remains in two of the four Communities.
<TABLE>
Balance Balance
Before All After Percent
Number of Gross Charge- Valuation Valuation Valuation of
Properties Balance Offs Allowance Allowance Allowance Total
---------- -------- -------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Communities 4 $155,379 $ 32,509 $122,870 $ 77,534 $ 45,336 85.9%
Residential ground 3 5,901 493 5,408 2,700 2,708 5.1%
Commercial ground 3 17,750 7,646 10,104 5,800 4,304 8.1%
Single-family
residential properties 5 530 66 464 -- 464 0.9%
-- -------- -------- --------- --------- --------- ----------
Total REO 14 $179,560 $ 40,714 $138,846 $ 86,034 $ 52,812 100.0%
== ======== ======== ========= ========= ========= ==========
</TABLE>
During the three months ended June 30, 1999, REO decreased $1.3 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, 1999, the Bank received revenues of $4.4
million from dispositions of 92 residential lots or units in the Communities
($3.7 million), approximately 1.3 acres of commercial land in one of the
Communities ($0.5 million) and various single-family residential properties
($0.2 million). At June 30, 1999, the Bank had an executed contract to sell one
residential ground property at its approximate book value of $0.9 million.
<PAGE>
Delinquent Loans. At June 30, 1999, delinquent loans totaled $41.2 million (or
0.7% of loans) compared to $30.0 million (or 0.6% of loans) at March 31, 1999.
The following table sets forth information regarding the Bank's delinquent loans
at June 30, 1999.
Principal Balance Total as a
---------------------------------- Percentage
Mortgage Non-Mortgage of
Loans Loans Total Loans (1)
-------- ------------ --------- ---------
(Dollars in thousands)
Loans delinquent for:
30-59 days.......... $ 6,396 $27,078 $33,474 0.6%
60-89 days.......... 991 6,720 7,711 0.1%
-------- -------- --------- -----
Total................ $ 7,387 $33,798 $41,185 0.7%
======== ======== ======== =====
(1) Includes loans held for sale, before deduction of allowance for loan losses
and deferred loan origination costs.
Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity loans. Total
delinquent mortgage loans increased from $5.8 million at March 31, 1999 to $7.4
million at June 30, 1999 primarily as a result of growth in the mortgage loan
portfolio.
Non-mortgage loans delinquent 30-89 days increased to $33.8 million at June 30,
1999 from $24.2 million at March 31, 1999, primarily as a result of growth in
the sub-prime segment of the automobile portfolio.
Troubled Debt Restructurings. At June 30, 1999 and March 31, 1999, 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 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, 1999 and March 31, 1999, 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. At June 30,
1999, the Bank had an executed contract to sell one of these properties at its
approximate book value of $2.1 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,
----------------------------------------------
1999 1998 1999
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Balance at beginning of period $ 60,157 $ 105,679 $ 58,414
--------------------- ---------------------- ----------------------
Provision for loan losses 16,116 79,972 5,727
--------------------- ---------------------- ----------------------
Charge-offs:
Single-family residential and home equity (424) (1,318) (108)
Credit card -- (81,136) --
Consumer (18,649) (9,961) (6,073)
--------------------- ---------------------- ----------------------
Total charge-offs (19,073) (92,415) (6,181)
--------------------- ---------------------- ----------------------
Recoveries:
Single-family residential 37 25 4
Credit card -- 10,037 --
Consumer 1,230 793 503
--------------------- ---------------------- ----------------------
Total recoveries 1,267 10,855 507
--------------------- ---------------------- ----------------------
Charge-offs, net of recoveries (17,806) (81,560) (5,674)
--------------------- ---------------------- ----------------------
Balance at end of period $ 58,467 $ 104,091 $ 58,467
===================== ====================== ======================
Provision for loan losses to average loans (1) (2) (3) 0.48% 3.84% 0.44%
Net loan charge-offs to average loans (1) (2) (3) 0.53% 3.92% 0.43%
Ending allowance for losses on loans to total
loans (2) (3) 1.02% 3.96% 1.02%
(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,
1999 1999 1998
------------------------------ ------------------------------- -------------------------------
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 $ 1,751 64.5 % $ 1,769 68.2 % $ 1,822 65.7 %
Home equity 702 4.0 631 4.2 676 4.9
Commercial real estate
and multifamily 10,830 1.3 10,830 1.5 10,828 2.7
Real estate construction
and ground 3,222 3.6 3,222 4.0 3,225 3.9
Commercial 3,623 6.2 3,623 5.0 3,623 6.3
Automobile 27,400 18.1 27,400 14.7 29,044 12.9
Home improvement and
related loans 3,403 1.8 3,403 1.8 3,403 2.4
Overdraft lines of credit
and other consumer 1,674 0.5 1,674 0.6 1,674 1.2
Unallocated 5,862 -- 5,862 -- 5,862 --
----------- ------------ ------------
Total $ 58,467 $ 58,414 $ 60,157
=========== ============ ============
</TABLE>
<PAGE>
<TABLE>
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowance for Losses
Three Months
Nine Months Ended Ended
June 30, June 30,
----------------------------------
1999 1998 1999
-------------- -------------- ----------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 202 $ 198 $ 202
Real estate held for sale 153,564 140,738 86,804
-------------- -------------- ----------------
Total 153,766 140,936 87,006
-------------- -------------- ----------------
Provision for real estate losses:
Real estate held for investment -- 2 --
Real estate held for sale -- 9,563 --
-------------- -------------- ----------------
Total -- 9,565 --
-------------- -------------- ----------------
Charge-offs:
Real estate held for sale:
Communities (67,530) -- (770)
Commercial ground -- (6,030) --
-------------- -------------- ----------------
Total charge-offs on real estate
held for investment or sale (67,530) (6,030) (770)
-------------- -------------- ----------------
Balance at end of period:
Real estate held for investment 202 200 202
Real estate held for sale 86,034 144,271 86,034
-------------- -------------- ----------------
Total $ 86,236 $ 144,471 $ 86,236
============== ============== ================
Components of Allowance for Losses
June 30, March 31, September 30,
1999 1999 1998
-------------- -------------- ----------------
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202
-------------- -------------- ----------------
Allowance for losses on real estate held for sale:
Communities 77,534 77,825 144,641
Residential ground 2,700 3,179 3,123
Commercial ground 5,800 5,800 5,800
-------------- -------------- ----------------
Total ground 86,034 86,804 153,564
-------------- -------------- ----------------
Total allowance for losses on real
estate held for investment or sale $ 86,236 $ 87,006 $ 153,766
============== ============== ================
</TABLE>
<PAGE>
At June 30, 1999 and March 31, 1999, the Bank's total valuation allowances for
losses on loans and real estate held for investment or sale was $144.7 million
and $145.4 million, respectively. Management reviews the adequacy of the
valuation allowances on loans and real estate using a variety of measures and
tools including historical loss performance, delinquent status, current economic
conditions and current underwriting policies and procedures. Using this
analysis, management determines a range of acceptable valuation allowances.
Although the amount of delinquent and non-accrual consumer loans increased
during the current quarter, the provision for loan losses approximated the
amount of net charge-offs for the quarter, reflecting management's determination
that the overall level of the allowance remained appropriate.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $102.7 million at June 30, 1999, which
constituted 71.1% of total non-performing real estate assets, before valuation
allowances. During the three months ended June 30, 1999, the Bank recorded net
charge-offs of $0.9 million on these assets. The allowance for losses on real
estate held for sale at June 30, 1999 is in addition to approximately $40.7
million of cumulative charge-offs previously taken against assets remaining in
the Bank's portfolio at June 30, 1999.
At June 30, 1999, the combined allowance for losses on consumer loans
(automobile, home improvement and related loans, overdraft lines of credit and
other consumer loans) did not change from the level at March 31, 1999 of $32.5
million. The ratios of the allowance for losses on consumer loans to
non-performing consumer loans and to outstanding consumer loans were 579.9% and
2.8%, respectively, at June 30, 1999 compared to 609.7% and 3.8%, respectively,
at March 31, 1999.
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, 1999, 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, 1999 Real estate loans:
Adjustable-rate $ 859,165 $ 744,603 $ 88,938 $ 213 $ -- $ 1,692,919
Fixed-rate 91,395 83,852 293,231 250,904 1,374,542 2,093,924
Home equity credit lines
and second mortgages 246,221 2,332 8,275 6,795 28,264 291,887
Commercial 235,829 10,645 35,390 26,015 41,758 349,637
Consumer and other 224,449 185,766 489,761 226,672 21,424 1,148,072
Loans held for sale 134,494 -- -- -- -- 134,494
Mortgage-backed securities 501,524 211,901 441,801 73,271 209,607 1,438,104
Trading securities 6,927 -- -- -- -- 6,927
Other investments 179,071 -- 44,396 -- -- 223,467
-------------- --------------- ---------------- --------------- -------------- --------------
Total interest-earning assets 2,479,075 1,239,099 1,401,792 583,870 1,675,595 7,379,431
Total non-interest earning assets -- -- -- -- 784,610 784,610
-------------- --------------- ---------------- --------------- -------------- --------------
Total assets $ 2,479,075 $ 1,239,099 $ 1,401,792 $ 583,870 $ 2,460,205 $ 8,164,041
============== =============== ================ =============== ============== ==============
Deposits:
Fixed maturity deposits $ 943,056 $ 490,176 $ 158,217 $ 49,340 $ -- $ 1,640,789
NOW, statement and passbook
accounts 1,666,537 45,501 151,545 103,145 219,815 2,186,543
Money market deposit accounts 1,106,605 -- -- -- -- 1,106,605
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 608,315 229 10,830 1,115,083 96,749 1,831,206
-------------- --------------- ---------------- --------------- -------------- --------------
Total interest-bearing liabilities 4,324,513 535,906 320,592 1,267,568 566,564 7,015,143
Total non-interest bearing liabilities -- -- -- -- 711,004 711,004
Stockholders' equity -- -- -- -- 437,894 437,894
-------------- --------------- ---------------- --------------- -------------- --------------
Total liabilities & stockholders'
equity $ 4,324,513 $ 535,906 $ 320,592 $ 1,267,568 $ 1,715,462 $ 8,164,041
============== =============== ================ =============== ============== ==============
Gap $ (1,845,438) $ 703,193 $ 1,081,200 $ (683,698) $ 1,109,031
Cumulative gap $ (1,845,438) $ (1,142,245) $ (61,045) $ (744,743) $ 364,288
Cumulative gap as a percentage
of total assets (22.6)% (14.0)% (0.7)% (9.1)% 4.5 %
</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 as a percentage of total
assets, was a negative 14.0% at June 30, 1999 compared to a negative 17.4% at
March 31, 1999. The improvement in the Bank's one-year gap during this period
reflected the Bank's ongoing efforts to replace short-term borrowings with
borrowings of greater duration. The Bank continues to consider a variety of
strategies to manage its interest rate risk position.
Capital. At June 30, 1999, 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, 1999
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 $ 464,880
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding gains (2) (17)
-------------
608,863
Adjustments for tangible and core capital:
Intangible assets (58,308)
Non-allowable minority interest in
REIT Subsidiary (1) (9,798)
Non-includable subsidiaries (3) (3,949)
-------------
Total tangible capital 536,808 6.60% $ 121,936 1.50% $ 414,872 5.10%
------------- ========== ============= ========== ============= ===========
Total core capital (4) 536,808 6.60% $ 325,163 4.00% $ 211,645 2.60%
------------- ========== ============= ========== ============= ===========
Tier 1 risk-based capital (4) 536,808 9.03% $ 238,892 4.00% $ 297,916 5.03%
------------- ========== ============= ========== ============= ===========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 51,347
-------------
Total supplementary capital 301,347
-------------
Total available capital 838,155
Equity investments (3) (6,515)
-------------
Total risk-based capital (4) $ 831,640 14.19% $ 477,784 8.00% $ 353,856 6.19%
============= ========== ============= ========== ============= ===========
(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 $0.6 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. The following table sets forth the Bank's REO at June 30, 1999, after
valuation allowances of $86.0 million, by the fiscal year in which the property
was acquired through foreclosure.
Fiscal Year (In thousands)
------------------------
1990 (1) (2)............ $ 15,258
1991 (2)................ 30,963
1992 (2)................ 123
1993 ................... -
1994 ................... -
1995 ................... 6,004
1996 ................... -
1997 ................... -
1998 ................... 113
1999 ................... 351
----------
Total REO $ 52,812
==========
- -----------------------
(1) Includes REO with an aggregate net book value of $6.5 million, which the
Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $39.8 million, for which
the Bank received an extension of the holding periods through May 14, 2000.
<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 1999 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 on such payments, and (in the case of tax sharing
payments), the continued consolidation of the Bank and the Bank's subsidiaries
with the Trust for federal income tax purposes.
The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods, should enhance prospects for the Real
Estate Trust to receive tax sharing payments and dividends from the Bank. In the
nine-month period ended June 30, 1999, the Bank made a tax sharing payment of
$6.6 million and dividend payments of $ 24.0 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. 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 8,000 shares (80%) 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.
Through June 30, 1999, the Real Estate Trust has purchased either in the open
market or through dividend reinvestment approximately 2.3 million shares of
common stock of Saul Centers, Inc. (representing 17.3% of such company's
outstanding common stock). As of June 30, 1999, the market value of this
unpledged stock was approximately $37.3 million.
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, 1999, there were no borrowings under this facility. The
Real Estate Trust is currently negotiating with this lender to renew this
facility for a three year term and increase its amount to $50.0 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would be repaid over a two-year
period. In fiscal 1997, the line of credit was increased to $10.0 million and
was extended for a year. During fiscal 1998, the credit was increased to $20.0
million and was extended for an additional year. Interest is computed by
reference to a floating rate index. At June 30,1999, there were no borrowings
under the facility. Management and the bank are currently holding discussions to
extend the term of this facility.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at June 30,
1999 for the balance of fiscal 1999 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
-----------------------------------------------------------------
1999 (1) $ 2,449 $ -- $ 2,277 $ 4,726
2000 14,598 -- 8,893 23,491
2001 24,049 -- 5,961 30,010
2002 14,117 -- 6,676 20,793
2003 15,372 -- 9,159 24,531
Thereafter 138,978 200,000 12,587 351,565
-----------------------------------------------------------------
Total $209,563 $200,000 $45,553 $455,116
=================================================================
(1) June 1, 1999 - September 30, 1999
Of the $209.6 million of mortgage debt outstanding at June 30, 1999, $166.0
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, 1999, the Real Estate Trust received total cash distributions of
$4.5 million from Saul Holdings Partnership. Beginning in April 1998, the Real
Estate Trust has chosen to reinvest its quarterly distributions and obtain
additional partnership units in Saul Holdings.
Development and Capital Expenditures. 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 near the Washington Dulles
International Airport in Sterling, Virginia. The new hotel was franchised as a
TownePlace Suites by Marriott and opened for business in August 1998.
Development costs were $5.8 million and were largely financed by a construction
loan of $4.5 million. The loan is for two years with two extension options for a
two-year and one-year period, respectively. The loan covered all costs except
for the land, fees to related parties, taxes and insurance.
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 located on a 1.7 acre site
owned by the Real Estate Trust in Avenel Business Park in Gaithersburg,
Maryland. This hotel opened for business on June 24, 1999.
TownePlace Suites by Marriott containing 91 units 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. This hotel opened for business on June 28, 1999.
<PAGE>
SpringHill Suites by Marriott containing 146 units 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. This hotel opened for business on July 9, 1999.
TownePlace Suites by Marriott containing 95 units located on a 2.5 acre site
owned by the Real Estate Trust in the Fort Lauderdale Commerce Center, Fort
Lauderdale, Florida. This hotel is expected to be completed and open for
business in early October, 1999.
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 $25.9
million. The loan has two one-year renewal options.
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 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 $7.3 million with bank financing of
$6.5 million for a five-year term and a two-year extension option. The project
was 100% leased as of June 30, 1999, and tenant improvements are now underway.
The project will become operational on October 1, 1999.
During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia. The
present 308-room Crystal City Holiday Inn is being converted into a Holiday Inn
Crown Plaza, while the present 279-room Howard Johnson is being converted into a
Holiday Inn. The new brands are expected to position the hotels to generate
higher room rates and revenues along with improved occupancy levels consistent
with the overall market. The renovations are largely an acceleration of normal
capital improvement work as well as some exterior and interior signage, new
marketing materials and a facade upgrade at the Howard Johnson hotel. A
restaurant, which had been operated by an unaffiliated company, will also be
renovated. The incremental costs for the two conversions are being funded by the
Real Estate Trust in part from its internal resources and in part from its lines
of credit.
During the quarter ended June 30, 1999, the Real Estate Trust commenced the
development of an 11-story 229-room hotel on a site adjacent to its Tysons
Corner Holiday Inn in McLean, Virginia. The new hotel will be franchised as a
Courtyard by Marriott and will cost approximately $30.0 million. Financing of
$25.0 million has been obtained for an initial period of three years with two
one-year extension options. Completion is projected for December 2000.
Also during the quarter ended June 30, 1999, the Real Estate Trust began
development of an 80,000 square foot single-story office/research and
development building to be located on a 6.5 acre site owned by the Real Estate
Trust in Dulles North Corporate Park, Sterling, Virginia. The development cost
is $8.4 million, with estimated bank financing of $7.5 million for a three-year
term. Completion is projected for the third quarter of fiscal 2000.
The Real Estate Trust believes that its capital improvement costs during the
next several years for its income-producing properties will be in range of $6.5
to $8.0 million per year.
<PAGE>
Year 2000 Statement - Pursuant to The Year 2000 Information and Readiness
Disclosure act.
The Real Estate Trust has reviewed all its financial and accounting systems, as
well as physical systems with embedded microprocessors, for the purpose of
assessing the impact of Year 2000 on both internally developed and externally
provided systems. The Real Estate Trust currently uses an IBM AS/400, which has
been certified by the manufacturer to be Year 2000 compliant. All software
purchased over the past five years has been certified by the various
manufacturers to be Year 2000 compliant. All internally developed software has
already been modified to make it Year 2000 compliant. Property management
systems for shopping centers, office buildings, hotels, and construction and
development have been certified as Year 2000 compliant by applicable vendors.
The Real Estate Trust has no information which would suggest that its financial
systems will not continue to function effectively after the turn of the century.
Using the Building Owners and Manager Association's guidelines to identify
building systems, including physical systems with embedded microprocessors, and
critical services that might be vulnerable to the Year 2000 software problem,
the Real Estate Trust has contacted the manufacturer, supplier, or vendor
supporting the system and requested information regarding Year 2000 compliance.
The majority of the replies have indicated that the systems or services are Year
20000 compliant. We are presently assessing whether any of the internal systems
should be tested or whether further investigation is necessary. The Real Estate
Trust has no information which would suggest that any system will not continue
to function effectively after the turn of the century. Except with regard to
internally developed software, all information regarding Year 2000 compliance is
based on a republication (as defined in The Year 2000 Information and Readiness
Disclosure Act) of Year 2000 statements or disclosures made by others.
The Real Estate Trust believes that there is risk that its operations may be
affected by vendors and tenants who are unable to perform as contracted due to
their own Year 2000 exposure. It is very difficult to identify the most
reasonable likely worst case scenario at this time. Although the Real Estate
Trust's potential exposure is widespread, there is no known major direct
exposure. The Real Estate Trust's commercial leases contain provisions
empowering it to take certain actions to enforce its right to the timely payment
of rent regardless of the tenant's Year 2000 exposure. While it is not possible
at this time to determine the likely impact of these potential problems, the
Real Estate Trust will continue to evaluate these areas and develop contingency
plans as appropriate. The Real Estate Trust estimates that its incremental cost
to meet Year 2000 compliance is less than $250,000.
<PAGE>
BANKING
Liquidity. The required liquidity level under OTS regulations at June 30, 1999
was 4.0%. The Bank's average liquidity ratio for the quarter ended June 30, 1999
was 9.0%, compared to 8.6% for the quarter ended March 31, 1999.
The Bank did not securitize and sell any loan receivables during the current
quarter. As part of its operating strategy, the Bank will continue to explore
opportunities to sell assets and to securitize and sell home equity, 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 (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the Bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $77.4 million and
$12.2 million, respectively, at June 30, 1999, and $91.9 million and $12.8
million, respectively, at March 31, 1999, both of which are included in other
assets in the Consolidated Balance Sheets. In addition, the Bank owned
subordinated automobile receivables-backed securities with carrying values of
$6.9 million and $8.3 million at June 30, 1999 and March 31, 1999, respectively,
which were classified as trading securities in the Consolidated Balance Sheets.
The Bank is also obligated under various recourse provisions related to the swap
of single family residential loans for mortgage-backed securities issued by the
Bank. At June 30, 1999, recourse to the Bank under these arrangements was $12.1
million, consisting of restricted cash accounts of $6.6 million and
overcollateralization of receivables of $5.5 million.
There were no material commitments for capital expenditures at June 30, 1999.
During fiscal 1998, the Bank leased 3.5 acres of land at 7501 Wisconsin Avenue
in Bethesda, Maryland, on which the Bank intends to develop and occupy an office
building to use as its new corporate headquarters. Excavation of this site began
during April 1999 with construction set to begin in October 1999.
The Bank's liquidity requirements in fiscal 1999 and for years subsequent to
fiscal 1999 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 will be sufficient to meet the Bank's foreseeable long-term liquidity
needs. The mix of funding sources utilized from time to time will be determined
by a number of factors, including capital planning objectives, lending and
investment strategies and market conditions.
<PAGE>
YEAR 2000 ISSUES
All phases of the Bank's Year 2000 program (the "Program") have been completed
as of June 30, 1999 with respect to the Bank's mission critical systems. To be
sure that the Bank remains ready for the Year 2000, ongoing validation is
planned.
Year 2000 test results indicate that remediation efforts have been successful.
The Bank has nonetheless planned for the possibility that Year 2000 failures may
occur. For example, the Bank has developed contingency plans to address problems
which may be created by external parties who may not be Year 2000 compliant.
The Bank is working to mitigate external risks through a variety of projects.
The Bank has assessed, and will continue to assess, the Year 2000 readiness of
key counterparties and of customers. In addition, the Bank has assessed the Year
2000 readiness of critical vendors and service providers, including
telecommunications, hardware and software, office equipment and financial
services providers.
The Bank has developed a coordinated management strategy to facilitate detection
and resolution of Year 2000 disruptions, and to ensure efficient communications
with the Bank's management, staff, customers, and third parties during the weeks
leading up to and following January 1, 2000.
The Bank does not expect to incur a material loss as a result of the Year 2000
problem. However, because the Bank ultimately has no control over the
remediation of systems of third parties with whom the Bank has relationships,
there can be no assurance that the Bank's Program, including its contingency
plans, will fully mitigate the effects of third-party failures.
As part of the Program, the Bank charged $2.9 million and $2.3 million,
respectively to expense during the nine months ended June 30, 1999 and the year
ended September 30, 1998 and expects that an additional $1.6 million will be
charged to expense during the remainder of fiscal 1999 and fiscal 2000.
The Bank's cost estimates are based on variables and assumptions that could
cause actual results to differ from these projections.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 (the "1999 quarter") COMPARED TO THREE MONTHS
ENDED JUNE 30, 1998 (the "1998 quarter")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$3,302,000 and operating income of $182,000 in the 1999 quarter compared to
income before depreciation and amortization of $956,000 and an operating loss of
$2.0 million in the 1998 quarter. The variance in operating results was largely
attributable to lower interest expense and improved results from
income-producing properties.
Income after direct operating expenses from hotel properties increased $321,000
(3.5%) in the 1999 quarter over the level achieved in the 1998 quarter. The
eleven hotels owned throughout both quarters reflected a decline of $66,000
(0.7%) in operating income, while the acquisition property produced $387,000 in
operating income. The increase in total revenue of $1,123,000 (5.2%)exceeded the
increase of $802,000(6.5%)in direct operating expenses. For the eleven hotels
owned throughout both periods, the increase in total revenue was $500,000(2.3%)
and the increase in direct operating expenses was $566,000 (4.6%).
Income after direct operating expenses from office and industrial properties
increased $139,000 (3.4%) in the 1999 quarter compared to such income in the
1998 quarter. The increase reflected higher base rents in the current period.
Gross income in the 1999 quarter was $407,000(7.1%) above its level in the 1998
quarter. Expenses increased by $267,000(15.9%)due to higher property taxes.
Other income decreased $971,000(59.1%) during the 1999 quarter due to lower
interest income on cash balances.
Land parcels and other expense decreased $75,000(17.4%) during the 1999 quarter
due to lower property taxes and the sale of a property in 1998.
Interest expense decreased $1,666,000(14.5%) in the 1999 quarter, primarily
because of lower senior secured debt expense. The average balance of the Real
Estate Trust's outstanding borrowings increased to $436.0 million for the 1999
quarter from $429.3 million for the 1998 quarter. The increase in average
borrowings was the result of mortgage loan refinancings and the issuance of
$200.0 million of senior secured notes due 2008 and the retirement of $175.0
million of senior secured notes due 2002 during the 1998 quarter. The weighted
average cost of borrowings was 9.24% in the 1999 quarter compared to 10.37% in
the 1998 quarter. Average borrowings and average cost of borrowings exclude
loans made on properties under development, which totaled $19.6 million as of
June 30, 1999. Interest on these loans is capitalized as long as the properties
remain under development.
Capitalized interest increased $249,000(444.6%) during the 1999 quarter due to
the higher level of development activity in the current period.
Amortization of debt expense decreased $99,000(63.1%) in the 1999 quarter,
primarily due to the lower costs experienced in the renewal of senior secured
debt.
Depreciation increased $189,000(6.4%) in the 1999 quarter as a result of new
assets placed in service and the addition of a new hotel.
<PAGE>
Advisory, management and leasing fees-related parties increased $137,000
(5.8%)in the 1999 quarter from their expense level in the 1998 quarter. The
monthly advisory fee in the 1999 quarter was $337,000 compared to $317,000 in
the 1998 quarter, which resulted in an aggregate increase of $59,000. Management
and leasing fees increased $78,000(5.5%) in the 1999 quarter, reflecting both
higher hotel sales and office rents on which fees are based.
General and administrative expense increased $40,000(18.5%) in the 1999 quarter
as a result of higher legal expense due to increased activity.
Equity in earnings of unconsolidated entities reflected earnings of $1,636,000
in the 1999 quarter, an increase of $615,000(60.2%) over the amount recorded in
the 1998 quarter. Most of the increase was due to higher base rents earned in
the current period.
BANKING
Overview. The Bank recorded operating income of $20.0 million for the 1999
quarter, compared to an operating loss of $17.6 million for the 1998 quarter.
Contributing to the increased income were an increase in single-family loan
interest income and decreases in the provision for loan losses and operating
expenses which offset the loss of revenues attributable to the Bank's credit
card portfolio, which was sold on September 30, 1998. Although the credit card
program was historically a significant source of earnings for the Bank,
management believes that the Bank will be able to maintain profitability by
relying on its core deposit franchise as a significant source of low-cost funds,
and investing those funds in assets that, although offering lower yields than
credit cards, involve less credit risk and overhead costs. Nevertheless,
implementation of this strategy is a gradual process and the Bank's core
earnings for the current quarter have been adversely affected because the
immediate loss of earnings from the credit card program has not yet been fully
offset by corresponding reductions in operating expenses.
Net Interest Income. Net interest income, before the provision for loan losses,
increased $23.5 million (or 48.4%) in the 1999 quarter compared to the 1998
quarter. The Bank would have recorded additional interest income of $0.7 million
for the 1999 quarter if non-accrual assets and restructured loans had been
current in accordance with their original terms. Interest income of $0.1 million
was actually recorded on non-accrual assets and restructured loans during the
current quarter. 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,
----------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- ------------------------------------------
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) $ 5,171,243 $ 107,298 8.30 % $ 2,834,634 $ 75,219 10.61 %
Mortgage-backed securities 1,522,659 22,494 5.91 2,075,536 29,690 5.72
Federal funds sold and securities
purchased under agreements to resell 30,747 380 4.94 65,473 947 5.79
Trading securities 64,927 1,106 6.81 19,737 466 9.44
Investment securities 45,492 618 5.43 40,653 570 5.61
Other interest-earning assets 184,658 2,641 5.72 212,457 3,178 5.98
--------------- ------------- --------------- -------------
Total 7,019,726 134,537 7.67 5,248,490 110,070 8.39
------------- ----------- ------------- ---------
Noninterest-earning assets:
Cash 243,378 230,752
Real estate held for investment or sale 56,697 84,571
Property and equipment, net 295,309 294,514
Goodwill and other intangible assets, net 28,947 24,036
Other assets 259,222 760,170
--------------- ---------------
Total assets $ 7,903,279 $ 6,642,533
=============== ===============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,153,901 2,895 1.00 $ 1,036,376 4,774 1.84
Savings deposits 1,034,203 5,248 2.03 1,034,345 7,474 2.89
Time deposits 1,522,435 17,908 4.71 1,608,399 21,585 5.37
Money market deposits 1,093,696 9,097 3.33 1,005,095 9,793 3.90
--------------- ----------- --------------- -----------
Total deposits 4,804,235 35,148 2.93 4,684,215 43,626 3.73
Borrowings 1,947,958 27,412 5.63 1,128,723 17,980 6.37
--------------- ------------- --------------- -------------
Total liabilities 6,752,193 62,560 3.71 5,812,938 61,606 4.24
------------- ----------- ------------- ---------
Noninterest-bearing items:
Noninterest-bearing deposits 469,243 283,348
Other liabilities 98,042 65,240
Minority interest 144,000 144,000
Stockholders' equity 439,801 337,007
--------------- ---------------
Total liabilities and stockholders'
equity $ 7,903,279 $ 6,642,533
=============== ===============
Net interest income $ 71,977 $ 48,464
============= =============
Net interest spread (2) 3.96 % 4.15 %
=========== =========
Net yield on interest-earning assets (3) 4.10 % 3.69 %
=========== =========
Interest-earning assets to interest-
bearing liabilities 103.96 % 90.29 %
=========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
(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, 1999
Compared to
Three Months Ended June 30, 1998
Increase (Decrease)
Due to Change in (1)
-------------------------------------------------------
Total
Volume Rate Change
---------------- --------------- ---------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 129,331 $ (97,252) $ 32,079
Mortgage-backed securities (13,411) 6,215 (7,196)
Federal funds sold and securities
purchased under agreements to resell (444) (123) (567)
Trading securities 1,496 (856) 640
Investment securities 153 (105) 48
Other interest-earning assets (403) (134) (537)
---------------- --------------- ---------------
Total interest income 116,722 (92,255) 24,467
---------------- --------------- ---------------
Interest expense:
Deposit accounts 7,093 (15,571) (8,478)
Borrowings 22,531 (13,099) 9,432
---------------- --------------- ---------------
Total interest expense 29,624 (28,670) 954
---------------- --------------- ---------------
Increase in net interest income $ 87,098 $ (63,585) $ 23,513
================ =============== ===============
- -----------------------------------------------------------------------------------------------------
(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 1999 quarter increased $24.5 million (or 22.2%) from the
level in the 1998 quarter as a result of higher average balances of loans
receivable, which was offset by lower average yields on loans receivable. Higher
average balances of real estate loans, consumer loans and commercial loans more
than offset the elimination of $1.1 billion in average credit card loans
resulting from the sale of the credit card portfolio.
The Bank's net interest spread decreased slightly to 4.0% in the 1999 quarter
from 4.2% in the 1998 quarter. The decrease in the net interest spread primarily
reflected the decline in the yield on loans resulting from the elimination of
higher yielding credit card loans. Partially offsetting this decline was an
increase in the average balances of earning assets which were funded with
proceeds received from the sale of the credit card portfolio and Federal Home
Loan Bank advances. Average interest-earning assets as a percentage of average
interest bearing liabilities increased to 104.0% for the 1999 quarter compared
to 90.3% for the 1998 quarter.
Interest income on loans, the largest category of interest-earning assets,
increased by $32.1 million (or 42.6%) from the 1998 quarter primarily because of
higher average balances. The Bank did not securitize and sell any receivables in
the three months ended June 30, 1999, which contributed to the higher average
balances. Lower average yields earned on the loan portfolio (due to the effect
of the sale of the credit card portfolio) partially offset the positive effect
of the higher average balances.
Higher average balances of the Bank's single-family residential loans, which
increased $2.4 billion (or 214.2%), resulted in a $40.0 million (or 195.3%)
increase in interest income from such loans. Lower average yields on
single-family residential loans partially offset the effects of the higher
average balances. Average balances of automobile loans, commercial loans, real
estate construction loans and home equity loans increased $653.9 million, $139.1
million, $138.6 million and $58.9 million, respectively, and contributed to a
$17.8 million, $2.2 million, $2.5 million and $0.6 million increase in interest
income from such loans, respectively. Lower average yields on those loans
partially offset the effects of the higher average balances.
The average yield on the loan portfolio in the 1999 quarter decreased 231 basis
points (from 10.61% to 8.30%) from the average yield in the 1998 quarter. The
decline in the average yield for the 1999 quarter resulted from the sale of the
credit card portfolio on September 30, 1998.
Interest income on mortgage-backed securities decreased $7.2 million (or 24.2%)
primarily because of lower average balances. The effect of the $522.9 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.72% to 5.91%.
Interest expense on deposits decreased $8.5 million (or 19.4%) during the 1999
quarter due to decreased average rates. The 80 basis point reduction in the
average rate on deposits (from 3.73% to 2.93%) resulted from a shift in the
deposit mix from certificates of deposits to lower yielding demand deposits
coupled with market conditions during fiscal year 1998, which led the Bank to
reduce the rates it pays on deposits.
The decrease in interest expense on deposits was more than offset by an increase
in interest expense on borrowings. Higher average balances of Federal Home Loan
Bank advances ($963.0 million) contributed to the $9.4 million (or 52.5%)
increase in interest expense on borrowings. This amount was partially offset by
a 74 basis point reduction in the average rate on borrowings (from 6.37% to
5.63%).
<PAGE>
Provision for Loan Losses. The Bank's provision for loan losses decreased to
$5.7 million in the 1999 quarter from $28.3 million in the 1998 quarter. The
$22.6 million decrease was primarily due to the elimination of provisions for
losses on credit card loans resulting from the sale of the credit card
portfolio. See "Financial Condition - Asset Quality - Allowances for Losses."
Other Income. Other (non-interest) income decreased to $36.6 million in the 1999
quarter from $87.3 million in the 1998 quarter. The $50.7 million (or 58.0%)
decrease was primarily attributable to a decrease in servicing and
securitization income. Also contributing to the decrease in other income was the
elimination of credit card fees. Partially offsetting these decreases were
increases in deposit servicing fees and gain on real estate held for investment
or sale.
Servicing and securitization income decreased $42.9 million (or 81.3%) during
the 1999 quarter primarily as a result of decreased securitization activity and
the elimination of credit card loan servicing fees. The Bank did not securitize
and sell any loan receivables during the 1999 quarter. During the 1998 quarter,
the Bank securitized and sold $542.0 million, $153.6 million, $77.5 million and
$85.7 million of credit card, automobile, home equity and mortgage loan
receivables, respectively, and recognized gains of $8.9 million, $5.5 million,
$4.3 million and $4.5 million, respectively, on these transactions. In addition,
credit card loan servicing fees totaling $11.3 million for the 1998 quarter were
eliminated as a result of the September 30, 1998 sale of the credit card
portfolio.
The $3.2 million increase in gain (loss) on real estate held for investment or
sale was primarily attributable to a decrease of $3.5 million in the provision
for losses on such assets. See "Financial Condition - Asset Quality - Allowances
for Losses."
Deposit servicing fees increased $4.6 million (or 34.1%) during the 1999 quarter
primarily due to fees generated from the expansion of the Bank's branch and ATM
network.
Operating Expenses. Operating expenses for the 1999 quarter decreased $42.2
million (or 33.7%) from the level in the 1998 quarter. Primarily as a result of
the sale of the Bank's credit card operations, marketing expenses ($19.7
million), loan expenses ($6.6 million) and data processing expenses ($7.0
million) decreased during the 1999 quarter. Salaries and employee benefits also
decreased $5.6 million (or 11.0%) as a result of the sale. Additions of staff to
the Bank's consumer lending department and branch operations partially offset
the decrease of salaries and employee benefits resulting from the sale.
<PAGE>
NINE MONTHS ENDED JUNE 30, 1999 (the "1999 period") COMPARED TO NINE MONTHS
ENDED JUNE 30, 1998 (the "1998 period")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$2.9 million and an operating loss of $6.0 million in the 1999 period compared
to a loss before depreciation and amortization of $6.5 million and an operating
loss of $15.0 million in the 1998 period. The decrease in the operating loss was
largely attributable to improved results from income-producing properties,
higher earnings in unconsolidated entities, and lower interest expense.
Income after direct operating expenses from hotels increased $2,640,000 (13.7%)
in the 1999 period over the level achieved in the 1998 period. $1,030,000 (5.9%)
of this increase reflected improved results from ten hotels owned throughout
both periods and $1,610,000 reflected results from two acquisition properties.
The increase in total revenue of $6,020,000(11.5%) exceeded the increase of
$3,380,000(10.2%) in direct operating expenses. For the ten hotels owned
throughout both periods, the increase in total revenue was $2,453,000(5.1%). The
revenue increase was attributable to improved market conditions which permitted
the Real Estate Trust to raise average room rates without adversely affecting
occupancy levels at a majority of the hotels.
Income after direct operating expenses from office and industrial properties
increased $866,000(7.6%) in the 1999 period compared to such income in the 1998
period. The increase was caused by higher gross income of $1,115,000(6.6%).
Expenses for the current period were $248,000(4.5%) above last year.
Other income decreased $1,280,000(37.0%) during the 1999 period due to a lower
level of interest earnings.
Land parcels and other expense decreased $616,000(50.5%) during the 1999 period,
largely due to the collection of a multi-year real estate tax refund at one land
parcel, and the elimination of carrying costs of a property on which the Real
Estate Trust had terminated its ground lease.
Interest expense decreased $2,561,000(7.9%) in the 1999 period primarily because
of decreases in interest costs on senior secured debt and mortgage interest. The
average balance of the Real Estate Trust's outstanding borrowings increased to
$441.3 million for the 1999 period from $429.3 million for the 1998 period. The
increase in average borrowings occurred as a result of mortgage loan
refinancings and the issuance of $200.0 million of senior secured notes due 2008
and the retirement of $175.0 million of senior secured notes due 2002 during the
1998 period. The weighted average cost of borrowings was 9.27% in the 1999
period compared to 10.37% in the 1998 period. Average borrowings and average
cost of borrowings exclude loans made on properties under development, which
totaled $19.6 million as of June 30, 1999. Interest on these loans is
capitalized as long as the properties remain under development.
Capitalized interest increased $555,000(444.0%) during the 1999 period due to
the higher level of development activity in the current period.
Amortization of debt expense decreased $227,000(50.6%) in the 1999 period,
primarily due to the lower costs experienced in the refinancing of senior
secured debt.
Depreciation increased $481,000(5.7%)in the 1999 period as a result of new
assets placed in service and the addition of two new hotels.
<PAGE>
Advisory, management and leasing fees paid to related parties increased $510,000
(7.9%)in the 1999 period from their expense level in the 1998 period. The
monthly advisory fee in the 1999 period was $337,000 compared to $317,000 in the
prior period, which resulted in an aggregate increase of $176,000(6.2%).
Management and leasing fees increased $334,000(9.2%) in the current period,
reflecting both higher hotel sales and office rents on which fees are based.
General and administrative expense decreased $79,000(9.6%) in the 1999 period,
principally as a result of lower accounting and other administrative expense.
Equity in earnings of unconsolidated entities reflected earnings of $4,409,000
for the 1999 period, an increase of $3,370,000 over the earnings recorded for
the 1998 period. The lower earnings in the 1998 period were attributable to
nonrecurring charges for losses on sales of interest rate protection agreements,
losses on early extinguishment of debt and the cumulative effect of change in
accounting method.
BANKING
Overview. The Bank recorded operating income of $77.0 million for the 1999
period, compared to operating income of $24.3 million for the 1998 period. The
increase in income for the 1999 period was primarily the result of a gain of
$31.6 million recognized on the sale of one of the Bank's REO properties which
was partially offset by the effects of the sale of the Bank's credit card
portfolio on September 30, 1998. Although the credit card program was
historically a significant source of earnings for the Bank, management believes
that the Bank will be able to maintain profitability by relying on its core
deposit franchise as a significant source of low-cost funds, and investing those
funds in assets that, although offering lower yields than credit cards, involve
less credit risk and overhead costs. Nevertheless, implementation of this
strategy is a gradual process and the Bank's core earnings for the current
period have been adversely affected because the immediate loss of earnings from
the credit card program has not yet been fully offset by corresponding
reductions in operating expenses. Decreases in credit card interest income
($102.8 million), credit card fees ($37.6 million) and servicing and
securitization income ($194.5 million) during the 1999 period were offset by
increases in single-family loan interest income ($102.5 million) and gain on
real estate held for investment or sale ($40.7 million) and decreases in the
provision for loan losses ($63.9 million) and operating expenses ($118.6
million).
Net Interest Income. Net interest income, before the provision for loan losses,
increased $48.0 million (or 32.3%) in the 1999 period. The Bank would have
recorded additional interest income of $2.1 million for the 1999 period if
non-accrual assets and restructured loans had been current in accordance with
their original terms. Interest income of $0.2 million was actually recorded on
non-accrual assets and restructured loans during the 1999 period. 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,
-----------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- -------------------------------------------
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) $ 4,396,181 $ 277,874 8.43 % $ 2,668,701 $ 223,530 11.17 %
Mortgage-backed securities 1,715,788 76,173 5.92 1,932,249 81,891 5.65
Federal funds sold and securities
purchased under agreements to resell 58,047 2,162 4.97 163,136 6,897 5.64
Trading securities 52,460 2,708 6.88 26,478 1,576 7.94
Investment securities 44,498 1,847 5.53 35,822 1,522 5.67
Other interest-earning assets 202,961 8,449 5.55 186,465 8,569 6.13
--------------- -------------- --------------- -------------
Total 6,469,935 369,213 7.61 5,012,851 323,985 8.62
-------------- ------------ ------------- ---------
Noninterest-earning assets:
Cash 241,140 215,111
Real estate held for investment or sale 62,285 88,651
Property and equipment, net 289,543 284,247
Goodwill and other intangible assets, net 29,708 20,797
Other assets 251,610 615,467
--------------- ---------------
Total assets $ 7,344,221 $ 6,237,124
=============== ===============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,112,023 9,039 1.08 $ 982,952 15,633 2.12
Savings deposits 1,026,164 16,345 2.12 1,014,075 23,789 3.13
Time deposits 1,501,349 54,888 4.87 1,708,625 69,537 5.43
Money market deposits 1,072,806 26,995 3.36 986,452 28,957 3.91
--------------- ----------- --------------- -----------
Total deposits 4,712,342 107,267 3.04 4,692,104 137,916 3.92
Borrowings 1,506,837 64,992 5.75 720,512 37,162 6.88
--------------- -------------- --------------- -------------
Total liabilities 6,219,179 172,259 3.69 5,412,616 175,078 4.31
-------------- ------------ ------------- ---------
Noninterest-bearing items:
Noninterest-bearing deposits 465,236 255,379
Other liabilities 83,173 87,859
Minority interest 144,000 144,000
Stockholders' equity 432,633 337,270
--------------- ---------------
Total liabilities and stockholders'
equity $ 7,344,221 $ 6,237,124
=============== ===============
Net interest income $ 196,954 $ 148,907
============== =============
Net interest spread (2) 3.92 % 4.31 %
============ =========
Net yield on interest-earning assets (3) 4.06 % 3.97 %
============ =========
Interest-earning assets to interest-
bearing liabilities 104.03 % 92.61 %
============ =========
- ------------------------------------------------------------------------------------------------------------------------------------
(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, 1999
Compared to
Nine Months Ended June 30, 1998
Increase (Decrease)
Due to Change in (1)
-------------------------------------------------------
Total
Volume Rate Change
---------------- ---------------- ---------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 145,465 $ (91,121) $ 54,344
Mortgage-backed securities (11,322) 5,604 (5,718)
Federal funds sold and securities
purchased under agreements to resell (3,998) (737) (4,735)
Trading securities 1,491 (359) 1,132
Investment securities 386 (61) 325
Other interest-earning assets 987 (1,107) (120)
---------------- ---------------- ---------------
Total interest income 133,009 (87,781) 45,228
---------------- ---------------- ---------------
Interest expense:
Deposit accounts 979 (31,628) (30,649)
Borrowings 38,343 (10,513) 27,830
---------------- ---------------- ---------------
Total interest expense 39,322 (42,141) (2,819)
---------------- ---------------- ---------------
Increase in net interest income $ 93,687 $ (45,640) $ 48,047
================ ================ ===============
- -----------------------------------------------------------------------------------------------------
(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 1999 period increased $45.2 million (or 14.0%) from the
level in the 1998 period as a result of higher average balances of loans
receivable, which was offset by lower average yields on loans receivable. Higher
average balances of real estate loans, consumer loans and commercial loans more
than offset the elimination of $1.1 billion in average credit card loans.
The Bank's net yield on interest-earning assets increased slightly to 4.06% in
the 1999 period from 3.97% in the 1998 period. The increase in the net yield
reflected an increase in the average balances of earning assets which were
funded with proceeds received from the sale of the credit card portfolio and
related operations on September 30, 1998. Partially offsetting this increase was
the decline in the yield on loans resulting from the elimination of higher
yielding credit card loans. Average interest-earning assets as a percentage of
average interest bearing liabilities increased to 104.0% for the 1999 period
compared to 92.6% for the 1998 period.
Interest income on loans, the largest category of interest-earning assets,
increased by $54.3 million (or 24.3%) from the 1998 period primarily because of
higher average balances. The Bank did not securitize and sell any receivables in
the 1999 period, which contributed to the higher average balances. Lower average
yields earned on the loan portfolio (due to the effect of the sale of the credit
card portfolio) partially offset the positive effect of the higher average
balances.
Higher average balances of the Bank's single-family residential loans, which
increased $2.0 billion (or 196.1%), resulted in a $102.5 million (or 179.0%)
increase in interest income from such loans. Lower average yields on
single-family residential loans partially offset the effects of the higher
average balances. Average balances of automobile loans, home equity loans,
commercial loans and real estate construction loans increased $412.6 million,
$77.9 million, $111.7 million and $100.1 million, respectively, and contributed
to a $36.8 million, $3.5 million, $5.5 million and $5.5 million increase in
interest income from such loans, respectively. Lower average yields on those
loans partially offset the effects of the higher average balances.
The average yield on the loan portfolio in the 1999 period decreased 274 basis
points (to 8.43% from 11.17%) from the average yield in the 1998 period. The
decline in the average yield for the current period resulted from the sale of
the credit card portfolio on September 30, 1998. During the 1998 period, average
credit card loans totaled $1.1 billion with an average yield of 12.86%.
Interest income on mortgage-backed securities decreased $5.7 million (or 7.0%)
primarily because of lower average balances. The effect of the $216.5 million
decrease in average balances more than offset an increase in the average
interest rates on these securities from 5.65% to 5.92%.
Interest expense on deposits decreased $30.6 million (or 22.2%) during the
current period due to decreased average rates. The 88 basis point reduction in
the average rate on deposits (from 3.92% to 3.04%) resulted from a shift in the
deposit mix from certificates of deposits to lower yielding demand deposits
coupled with market conditions during fiscal year 1998, which led the Bank to
reduce the rates it pays on deposits.
The decrease in interest expense on deposits was partially offset by an increase
in interest expense on borrowings. Higher average balances of Federal Home Loan
Bank advances ($620.7 million) and repurchase agreement transactions ($137.6
million) primarily resulted in a $27.8 million (or 74.9%) increase in interest
expense on borrowings. This amount was partially offset by a 113 basis point
reduction in the average rate on borrowings (to 5.75% from 6.88%).
<PAGE>
Provision for Loan Losses. The Bank's provision for loan losses decreased to
$16.1 million in the 1999 period from $80.0 million in the 1998 period. The
$63.9 million decrease was primarily due to the elimination of provisions for
losses on credit card loans resulting from the sale of the credit card
portfolio. See "Financial Condition - Asset Quality - Allowances for Losses."
Other Income. Other (non-interest) income decreased to $133.8 million in the
1999 period from $311.7 million in the 1998 period. The $177.9 million (or
57.1%) decrease was primarily attributable to a decrease in servicing and
securitization income. Also contributing to the decrease in other income was the
elimination of credit card fees. Partially offsetting these decreases were
increases in deposit servicing fees and gain on real estate held for investment
or sale.
Servicing and securitization income decreased $194.5 million (or 89.2%) during
the 1999 period primarily as a result of decreased securitization activity and
the elimination of credit card loan servicing fees. The Bank did not securitize
and sell any loan receivables during the 1999 period. During the 1998 period,
the Bank securitized and sold $1.0 billion, $534.7 million, $258.9 million and
$85.7 million of credit card, automobile, home equity, and mortgage loan
receivables, respectively, and recognized gains of $15.3 million, $23.1 million,
$9.4 million and $4.5 million, respectively, on these transactions. In addition,
credit card loan servicing fees amounting to $102.3 million and unrealized gains
on credit card interest-only strips receivable of $11.5 million for the 1998
period were eliminated as a result of the September 30, 1998 sale of the Bank's
credit card portfolio.
The $40.7 million increase in gain (loss) on real estate held for investment or
sale was primarily attributable to the $31.6 million gain on sale of one of the
communities located in Loudoun County, Virginia and, to a lesser extent, a
decrease of $9.6 million in the provision for losses on such assets. See
"Financial Condition - Asset Quality - Allowances for Losses."
Deposit servicing fees increased $12.6 million (or 33.7%) during the 1999 period
primarily due to fees generated from the expansion of the Bank's branch and ATM
network.
Operating Expenses. Operating expenses for the 1999 period decreased $118.7
million (or 33.3%) from the level in the 1998 period. Primarily as a result of
the sale of the Bank's credit card operations, marketing expenses ($54.6
million), loan expenses ($19.3 million) and data processing expenses ($20.1
million) decreased in the 1999 period. Salaries and employee benefits also
decreased $15.1 million (or 10.6%) as a result of the sale. Additions of staff
to the Bank's consumer lending department and branch operations partially offset
the decrease of salaries and employee benefits resulting from the sale.
