<PAGE>
Registration No. 333-70753
Rule 424(b)(3)
Supplement Dated May 18, 1999 to
Prospectus Dated April 15, 1999
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
MARCH 31, 1999
----------------------------
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Statements:
(a) Consolidated Balance Sheets at March 31, 1999 and
September 30, 1998
(b) Consolidated Statements of Operations for the three-month and
six-month periods ended March 31, 1999 and 1998
(c) Consolidated Statements of Comprehensive Income and Changes in
Shareholders' Deficit for the three-month and
six-month periods ended March 31, 1999 and 1998
(d) Consolidated Statements of Cash Flows for the six-month periods
ended March 31, 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 March 31, 1999 compared to three months
ended March 31, 1998
Six months ended March 31, 1999 compared to Six months
ended March 31, 1998
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
March 31 September 30
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(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 169,968 $ 165,805
Office and industrial 111,004 110,257
Other 3,902 3,889
-------------- --------------
284,874 279,951
Accumulated depreciation (101,853) (96,072)
-------------- --------------
183,021 183,879
Land parcels 40,300 40,110
Construction in progress 25,653 8,694
Cash and cash equivalents 15,320 13,950
Other assets 73,009 76,799
-------------- --------------
Total real estate assets 337,303 323,432
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and other deposits 313,022 836,456
Federal funds sold and securities purchased under agreements to resell 38,000 380,000
Loans held for sale 159,697 56,287
Loans held for securitization and sale -- 125,000
Trading securities 8,256 11,319
Investment securities (market value $44,614 and $44,528, respectively) 44,392 43,999
Mortgage-backed securities (market value $1,588,843 and $2,014,819, respectively) 1,600,096 2,025,817
Loans receivable (net of allowance for losses of $58,414 and $60,157, respectively) 4,830,818 2,533,957
Federal Home Loan Bank stock 50,180 49,036
Real estate held for investment or sale (net of allowance for losses of $87,006
and $153,766, respectively) 57,789 69,025
Property and equipment, net 292,306 285,916
Goodwill and other intangible assets, net 29,221 30,879
Interest only strips, net 10,404 13,508
Other assets 335,537 259,950
-------------- --------------
Total banking assets 7,769,718 6,721,149
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TOTAL ASSETS $ 8,107,021 $ 7,044,581
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LIABILITIES
Real Estate
Mortgage notes payable $ 203,597 $ 198,874
Notes payable - secured 200,000 200,000
Notes payable - unsecured 45,443 50,335
Deferred gains - real estate 112,883 112,883
Accrued dividends payable - preferred shares of beneficial interest 32,758 34,049
Other liabilities and accrued expenses 40,879 39,895
-------------- --------------
Total real estate liabilities 635,560 636,036
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 5,245,202 4,888,230
Borrowings 514,587 492,184
Federal Home Loan Bank advances 1,000,070 352,027
Other liabilities 180,414 159,195
Capital notes -- subordinated 250,000 250,000
-------------- --------------
Total banking liabilities 7,190,273 6,141,636
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 72,228 72,242
Minority interest -- other 218,306 218,306
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,116,367 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 (67,615) (81,936)
Net unrealized holding gains 16 44
-------------- --------------
32,502 18,209
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (9,346) (23,639)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 8,107,021 $ 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 Six Months
Ended March 31 Ended March 31
-------------------------------- -----------------------------
(In thousands, except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 17,713 $ 15,672 $ 35,775 $ 30,878
Office and industrial properties 5,989 5,704 11,930 11,222
Other 820 791 1,507 1,816
---------------- -------------- -------------- --------------
Total income 24,522 22,167 49,212 43,916
- ------------------------------------------------------------------------------------------------------------------------------
Expenses Direct operating expenses:
Hotels 11,821 10,619 23,419 20,841
Office and industrial properties 1,922 1,900 3,792 3,811
Land parcels and other (141) 389 247 788
Interest expense 9,927 10,902 20,121 21,016
Captalized interest (154) (37) (375) (69)
Amortization of debt expense 66 152 164 292
Depreciation 2,905 2,830 5,781 5,489
Advisory, management and leasing fees - related parties 2,245 2,089 4,505 4,132
General and administrative 182 222 487 606
---------------- -------------- -------------- --------------
Total expenses 28,773 29,066 58,141 56,906
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Equity in earnings of unconsolidated entities 1,626 1,357 2,773 18
Loss on sale of property -- -- (1) --
- ------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $ (2,625) $ (5,542) $ (6,157) $ (12,972)
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BANKING
Interest income
Loans $ 94,633 $ 73,816 $ 170,576 $ 148,311
Mortgage-backed securities 24,791 25,594 53,679 52,201
Trading securities 1,033 638 1,602 1,110
Investment securities 614 550 1,229 952
Other 2,903 5,709 7,590 11,341
---------------- -------------- -------------- --------------
Total interest income 123,974 106,307 234,676 213,915
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Interest expense
Deposit accounts 34,891 45,511 72,119 94,290
Borrowings 22,706 9,669 37,580 19,182
---------------- -------------- -------------- --------------
Total interest expense 57,597 55,180 109,699 113,472
---------------- -------------- -------------- --------------
Net interest income 66,377 51,127 124,977 100,443
Provision for loan losses (6,616) (16,612) (10,389) (51,674)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 59,761 34,515 114,588 48,769
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Other income
Servicing and securitization income 7,070 65,618 13,582 165,196
Credit card fees -- 9,372 -- 23,130
Deposit servicing fees 15,815 11,992 31,710 23,749
Gain on sales of trading securities, net 2,663 435 3,328 992
Gain (loss) on real estate held for investment or sale, net 32,422 (192) 32,373 (5,106)
Gain on sales of loans, net 3,751 626 3,995 1,302
Other 6,224 8,436 12,177 15,180
---------------- -------------- -------------- --------------
Total other income 67,945 96,287 97,165 224,443
- ------------------------------------------------------------------------------------------------------------------------------
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 Six Months
Ended March 31 Ended March 31
-------------------------------- -----------------------------
(In thousands, except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 42,422 $ 47,927 $ 83,218 $ 92,772
Loan 3,021 9,300 6,352 19,062
Property and equipment 6,409 7,069 12,632 13,690
Marketing 2,937 20,423 5,871 40,738
Data processing 4,052 10,931 8,377 21,480
Depreciation and amortization 8,263 8,330 16,307 16,219
Deposit insurance premiums 1,096 1,125 2,166 2,591
Amortization of goodwill and other intangible assets 769 903 1,620 1,701
Other 9,066 12,088 18,222 22,820
---------------- -------------- -------------- --------------
Total operating expenses 78,035 118,096 154,765 231,073
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BANKING OPERATING INCOME $ 49,671 $ 12,706 $ 56,988 $ 42,139
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TOTAL COMPANY
Operating income $ 47,046 $ 7,164 $ 50,831 $ 29,167
Income tax provision 15,946 915 15,952 6,496
---------------- -------------- -------------- --------------
Income before extraordinary item and minority interest 31,100 6,249 34,879 22,671
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (9,335) -- (9,601)
---------------- -------------- -------------- --------------
Income before minority interest 31,100 (3,086) 34,879 13,070
Minority interest held by affiliates (5,239) (740) (5,194) (3,711)
Minority interest -- other (6,327) (6,327) (12,656) (12,656)
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TOTAL COMPANY NET INCOME (LOSS) $ 19,534 $ (10,153) $ 17,029 $ (3,297)
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NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 18,180 $ (11,507) $ 14,321 $ (6,005)
NET INCOME (LOSS) PER COMMON SHARE
Income before extraordinary item and minority interest $ 6.17 $ 1.01 $ 6.67 $ 4.14
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (1.93) -- (1.99)
---------------- -------------- -------------- --------------
Income before minority interest 6.17 (0.92) 6.67 2.15
Minority interest held by affiliates (1.09) (0.15) (1.08) (0.77)
Minority interest -- other (1.31) (1.31) (2.62) (2.62)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 3.77 $ (2.38) $ 2.97 $ (1.24)
- ------------------------------------------------------------------------------------------------------------------------------
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 Six Months
Ended March 31 Ended March 31
-------------------------------- -----------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME
Net income (loss) $ 19,534 $ (10,153) $ 17,029 $ (3,297)
Other comprehensive income:
Net unrealized holding gains (losses) 7 121 (28) 420
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 19,541 $ (10,032) $ 17,001 $ (2,877)
- ------------------------------------------------------------------------------------------------------------------------------
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 (85,795) (137,140) (81,936) (142,642)
Net income (loss) 19,534 (10,153) 17,029 (3,297)
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable ($2.62, $2.62, $5.25 and $5.25 per
share, respectively) (1,354) (1,354) (2,708) (2,708)
---------------- -------------- -------------- --------------
End of period (67,615) (148,647) (67,615) (148,647)
---------------- -------------- -------------- --------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period 9 (97) 44 (396)
Net unrealized holding gains (losses) 7 121 (28) 420
---------------- -------------- -------------- --------------
End of period 16 24 16 24
---------------- -------------- -------------- --------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848) (41,848)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT $ (9,346) $ (90,370) $ (9,346) $ (90,370)
- ------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
For the Six Months
Ended March 31
-----------------------------
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (3,745) $ (18,142)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 5,781 5,489
Early extiguishment of debt, net of taxes -- 9,601
(Increase) decrease in accounts receivable and accrued income 588 (1,385)
Increase in deferred tax asset (2,504) (4,502)
Increase (decrease) in accounts payable and accrued expenses 1,517 (9,266)
Decrease in tax sharing receivable 6,610 2,670
Amortization of debt expense 643 292
Equity in earnings of unconsolidated entities (2,773) (18)
Other 20,412 2,579
-------------- --------------
26,529 (12,682)
-------------- --------------
Banking
Net income 20,774 14,845
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of premiums, discounts and net deferred loan fees 4,370 5,315
Depreciation and amortization 16,307 16,219
Amortization of goodwill and other intangible assets -- 1,708
Provision for loan losses 10,389 51,674
Capitalized interest on real estate under development (1,642) (994)
Proceeds from sales of trading securities 401,681 238,047
Net fundings of loans held for sale and/or securitization (520,011) (275,059)
Proceeds from sales of loans held for sale and/or securitization 22,993 1,113,785
Gain on sales of real estate held for sale (31,267) (1,158)
Provision for losses on real estate held for investment or sale -- 6,086
Gain on sales of trading securities, net (3,328) (992)
(Increase) decrease in interest-only strips 3,104 (41,771)
Decrease in servicing assets 1,679 7,532
(Increase) decrease in goodwill and other intangible assets 1,665 (23,870)
Increase in other assets (70,572) (196,305)
Increase (decrease) in other liabilities 7,745 (17,983)
Minority interest held by affiliates 5,194 3,711
Minority interest - other 4,875 4,875
Decrease in tax sharing payable (6,610) (2,670)
Other (7,401) 5,946
-------------- --------------
(140,055) 908,941
-------------- --------------
Net cash provided by (used in) operating activities (113,526) 896,259
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (21,986) (6,621)
Property acquisitions -- (26,184)
Equity investment in unconsolidated entities 1,500 935
Other 1 --
-------------- --------------
(20,485) (31,870)
-------------- --------------
Banking
Net proceeds from redemption of Federal Home Loan Bank stock 19,043 2,504
Net proceeds from sales of real estate 29,114 9,643
Net fundings of loans receivable (654,952) (1,234,696)
Principal collected on mortgage-backed securities 424,086 533,091
Purchases of Federal Home Loan Bank stock (20,187) --
Purchases of investment securities (394) (34,009)
Purchases of loans receivable (1,496,079) (670,830)
Purchases of property and equipment (22,953) (32,668)
Disbursements for real estate held for investment or sale (5,456) (6,134)
Other (7,616) (1,345)
-------------- --------------
(1,735,394) (1,434,444)
-------------- --------------
Net cash used in investing activities (1,755,879) (1,466,314)
- ------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
For the Six Months
Ended March 31
-----------------------------
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 9,838 $ 55,779
Principal curtailments and repayments of mortgages (5,115) (30,310)
Proceeds from issuance of secured notes -- 214,100
Repayments of secured notes -- (175,000)
Proceeds from sales of unsecured notes 1,833 4,898
Repayments of unsecured notes (6,725) (3,428)
Costs of obtaining financings (505) (6,502)
Loan prepayment fees -- (10,055)
Dividends paid - preferred shares of beneficial interest (4,000) (3,600)
-------------- --------------
(4,674) 45,882
-------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 21,580,112 12,129,400
Customer withdrawals of deposits and payments for maturing certificates of deposit (21,223,140) (12,011,488)
Net increase in securities sold under repurchase agreements 25,675 200,280
Advances from the Federal Home Loan Bank 1,578,325 258,255
Repayments of advances from the Federal Home Loan Bank (930,282) (357,674)
Proceeds from other borrowings 12,356,831 6,279,389
Repayments of other borrowings (12,360,105) (6,278,729)
Cash dividends paid on preferred stock (4,875) (4,875)
Cash dividends paid on common stock (26,000) (6,500)
Other 13,474 6
-------------- --------------
1,010,015 208,064
-------------- --------------
Net cash provided by financing activities 1,005,341 253,946
- ------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (864,064) (316,109)
Cash and cash equivalents at beginning of period 1,230,406 670,139
-------------- --------------
Cash and cash equivalents at end of period $ 366,342 $ 354,030
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 100,903 $ 143,537
Income taxes paid (refunded) 94,504 5,088
Shares of Saul Centers, Inc. common stock 1,652 3,231
Limited partnership units of Saul Holdings Limited Partnership 2,980 --
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 1,652 1,439
Distributions from Saul Holdings Limited Partnership 2,980 2,727
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 3,194 2,130
Loans held for sale exchanged for trading securities 397,064 241,825
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) 984,930
Loans made in connection with the sale of real estate 29,260 3,974
Loans receivable transferred to real estate acquired in settlement of loans 889 2,278
Loans receivable exchanged for mortgage-backed securities held to maturity 1,792 607,829
- ------------------------------------------------------------------------------------------------------------------------------
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:
March 31, September 30,
(In thousands) 1999 1998
---------- -------------
Single-family residential $ 156,231 $ 49,502
Home improvement and related
loans 3,466 6,785
---------- ----------
$ 159,697 $ 56,287
========== ==========
<PAGE>
LOANS HELD FOR SECURITIZATION AND SALE:
At September 30, 1998, loans held for securitization and sale totaled $125,000
and was composed of automobile loans. At March 31, 1999, there were no loans
held for securitization and sale.
LOANS RECEIVABLE:
March 31, September 30,
(In thousands) 1999 1998
---------------- ----------------
Single-family residential $ 3,271,833 $ 1,772,784
Home equity 211,889 135,122
Real estate construction and
ground 331,669 209,247
Commercial real estate and
multifamily 75,694 75,877
Commercial 373,365 279,416
Automobile 741,977 232,826
Home improvement and related
loans 88,457 60,570
Overdraft lines of credit and
other consumer 31,130 33,484
---------------- ----------------
5,126,014 2,799,326
Less:
Undisbursed portion of loans 254,669 207,921
Net deferred loan origination
costs (17,887) (2,709)
Allowance for loan losses 58,414 60,157
---------------- ----------------
295,196 265,369
---------------- ----------------
Total $ 4,830,818 $ 2,533,957
================ ================
<PAGE>
REAL ESTATE HELD FOR INVESTMENT OR SALE:
The Bank's real estate held for investment is carried at the lower of aggregate
cost or net realizable value. The Bank's real estate acquired in settlement of
loans 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:
March 31, September 30,
(In thousands) 1999 1998
---------------- ----------------
Real estate held for investment $ 3,819 $ 3,819
Real estate held for sale 140,976 218,972
---------------- ----------------
Subtotal 144,795 222,791
---------------- ----------------
Less:
Allowance for losses on real
estate held for investment 202 202
Allowance for losses on real
estate held for sale 86,804 153,564
---------------- ----------------
Subtotal 87,006 153,766
---------------- ----------------
Total real estate held for
investment or sale $ 57,789 $ 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 March 31, 1999, the Bank's assets accounted for approximately
96% of the Trust's consolidated assets. The Trust recorded net income of $17.0
million for the six-month period ended March 31, 1999 compared to a net loss of
$3.3 million for the six-month period ended March 31, 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 and its subsidiaries, including Chevy Chase and
Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real Estate
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the Bank and its subsidiaries
is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at
March 31, 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
six-month periods of fiscal 1999 and 1998 experienced average occupancy rates of
63.9% and 63.3%, respectively, and average room rates of $82.14 and $76.35
respectively. Six of these hotels registered improved occupancies and eight
registered higher average room rates in the current period. Overall, the hotel
portfolio experienced an average occupancy rate of 63.0% and an average room
rate of $83.85 during the six-month period ended March 31, 1999. In December
1997, the Real Estate Trust purchased a 308-room Holiday Inn hotel located in
Arlington, Virginia, near the Ronald Reagan Washington National Airport and the
Real Estate Trust's Howard Johnsons hotel. In August 1998, the Real Estate Trust
opened its newly-constructed 95-room Marriott TownePlace Suites hotel located
near Washington Dulles Airport.
The Real Estate Trust's office and industrial portfolio was 98% leased at March
31, 1999, compared to leasing rates of 100% and 99% at September 30, 1998 and at
March 31, 1998, respectively. At March 31, 1999, the office and industrial
portfolio had a total gross leasable area of 1.3 million square feet, of which
161,000(12.7%) and 179,000(14.1%), are subject to leases whose terms expire in
the balance of fiscal 1999 and in fiscal 2000, respectively.
<PAGE>
BANKING
General. The Bank recorded operating income of $49.7 million during the quarter
ended March 31, 1999, compared to operating income of $12.7 million in the prior
corresponding quarter. The increase in income for the current quarter was
primarily the result of a gain of $31.6 million recognized on the sale of one of
the Bank's REO properties. The Loudoun County, Virginia property was a community
in the pre-development stage consisting of 2,000 acres of land. Also
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 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 $58.5 million (or 89.2%) 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 March 31, 1999. During the quarter ended March 31, 1998, the
Bank securitized and sold $123.5 million, $151.0 million and $19.7 million of
credit card, automobile and home equity loan receivables, respectively, and
recognized gains of $1.8 million, $8.6 million and $1.0 million, respectively,
on these transactions. In addition, credit card loan servicing fees totaling
$31.1 million for the quarter ended March 31, 1998 were eliminated as a result
of the September 30, 1998 sale of the credit card portfolio.
At March 31, 1999, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 6.89%, 6.89%, 9.90% and 15.71%,
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 March 31, 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 $300 per share.
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)
March 31, December 31, September 30,
1999 1998 1998
------------------ ---------------- ----------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 6,145 $ 7,498 $ 8,106
Consumer 5,327 7,262 4,501
------------------ ---------------- ----------------
Total non-accrual loans (1) 11,472 14,760 12,607
------------------ ---------------- ----------------
Real estate owned 140,977 214,719 218,972
Allowance for losses on real estate owned (86,804) (153,564) (153,564)
------------------ ---------------- ----------------
Real estate owned, net 54,173 61,155 65,408
------------------ ---------------- ----------------
Total non-performing assets $ 65,645 $ 75,915 $ 78,015
================== ================ ================
Troubled debt restructurings $ 11,764 $ 11,770 $ 11,800
================== ================ ================
Allowance for losses on loans $ 58,414 $ 60,157 $ 60,157
Allowance for losses on real estate held for investment 202 202 202
Allowance for losses on real estate owned 86,804 153,564 153,564
------------------ ---------------- ----------------
Total allowances for losses $ 145,420 $ 213,923 $ 213,923
================== ================ ================
Ratios:
Non-performing assets, net to total assets (2) 0.09% 0.21% 0.26%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 267.75% 220.74% 204.18%
Allowance for losses on consumer loans to
non-accrual consumer loans (1) 609.65% 469.86% 758.08%
Allowance for losses on loans to non-accrual loans (1) 509.19% 407.57% 477.17%
Allowance for losses on loans to total loans receivable (3) 1.16% 1.40% 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 $65.6 million, after valuation allowances on REO
of $86.8 million, at March 31, 1999, compared to $75.9 million, after valuation
allowances on REO of $153.6 million, at December 31, 1998. In addition to the
valuation allowances on REO, the Bank maintained $58.4 million of valuation on
allowances on its loan portfolio at March 31, 1999. The $10.3 million decrease
in non-performing assets for the current quarter was attributable to net
decreases in REO and non-accrual loans of $7.0 million and $3.3 million,
respectively. See "Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $11.5 million at March
31, 1999, as compared to $14.8 million at December 31, 1998. At March 31, 1999,
non-accrual loans consisted of $6.2 million of real estate loans and $5.3
million of consumer loans compared to non-accrual real estate loans of $7.5
million and non-accrual consumer loans of $7.3 million at December 31, 1998. The
$3.3 million decrease in non-accrual consumer loans was attributable to
decreased delinquencies in the Bank's sub-prime automobile loan portfolio which
reflects steps management has taken designed to reduce losses in this portfolio,
including expansion of collection efforts and adjustments to underwriting
criteria.
REO. At March 31, 1999, the Bank's REO totaled $54.2 million, after valuation
allowances on such assets of $86.8 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 Gross Charge Valuation Valuation Valuation of
(Dollars in thousands) of Properties Balance -Offs Allowances Allowances Allowances Total
------------- ------------- ------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Communities 4 $156,721 $ 32,509 $124,212 $ 77,627 $ 46,585 86.0%
Residential ground 3 6,358 493 5,865 3,179 2,686 5.0%
Commercial ground 3 17,714 7,645 10,069 5,800 4,269 7.9%
Single-family
residential properties 8 930 99 831 - 831 1.5%
Unallocated valuation
allowance - - - - 198 (198) (0.4%)
------------- ------------- ------------- ----------- ------------- -------------- ------------
Total REO 18 $181,723 $ 40,746 $140,977 $ 86,804 $ 54,173 100.0%
============= ============= ============= =========== ============= ============== ============
</TABLE>
During the three months ended March 31, 1999, REO decreased $7.0 million, which
was primarily attributable to the sale of one community in the predevelopment
stage, consisting of approximately 2,000 acres in Loudoun County, Virginia. Also
contributing to the decline were additional sales in the Communities and other
properties, partially offset by additional capitalized costs.
<PAGE>
During the three months ended March 31, 1999, the Bank received revenues of
$37.3 million from the sale of the pre-development stage community, and $6.6
million from dispositions of 83 residential lots or units in the Communities
($4.2 million), approximately 4.2 acres of commercial land in one of the
Communities ($0.4 million) and various single-family residential properties
($2.0 million).
At March 31, 1999, the Bank had an executed contract to sell one residential
ground property at its approximate book value of $0.9 million.
Delinquent Loans. At March 31, 1999, delinquent loans totaled $30.0 million (or
0.6% of loans) compared to $35.4 million (or 0.8% of loans) at December 31,
1998. The following table sets forth information regarding the Bank's delinquent
loans at March 31, 1999.
Principal Balance
------------------------------
Non- Total as a
Mortgage Mortgage Percentage
(Dollars in thousands) Loans Loans Total of Loans (1)
-------- -------- ---------- ------
Loans delinquent for:
30-59 days.......... $ 3,794 $ 19,834 $ 23,628 0.5%
60-89 days.......... 1,975 4,349 6,324 0.1%
-------- -------- ---------- ------
Total................ $ 5,769 $ 24,183 $ 29,952 0.6%
======== ======== ========== ======
(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 decreased from $7.4 million at December 31, 1998 to
$5.8 million at March 31, 1999.
Non-mortgage loans delinquent 30-89 days decreased to $24.2 million at March 31,
1999 from $28.0 million at December 31, 1998, primarily as a result of decreased
delinquencies in the sub-prime segment of the automobile portfolio.
Troubled Debt Restructurings. At March 31, 1999 and December 31, 1998, loans
accounted for as troubled debt restructurings totaled $11.8 million, and
included one commercial permanent loan with a principal balance of $11.7 million
and one commercial collateralized loan with a principal balance of $0.1 million.
The Bank had commitments to lend $0.1 million of additional funds on loans that
have been restructured.
Real Estate Held for Investment. At March 31, 1999 and December 31, 1998, real
estate held for investment consisted of two properties with an aggregate book
value of $3.6 million, net of valuation allowances of $0.2 million.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and the allowance for
losses on real estate held for investment or sale. These tables reflect
charge-offs taken against assets during the periods indicated and may include
charge-offs taken against assets which the Bank disposed of during such periods.
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of Loans
(Dollars in thousands)
Six Months Ended Three Months
March 31, Ended
------------------------------------- March 31,
1999 1998 1999
--------------- ------------------- -------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 60,157 $ 105,679 $ 60,157
--------------- ------------------- -------------------------
Provision for loan losses 10,389 51,674 6,616
--------------- ------------------- -------------------------
Charge-offs:
Single-family residential and home equity (316) (570) (108)
Credit card - (52,016) -
Consumer (12,576) (7,364) (8,609)
--------------- ------------------- -------------------------
Total charge-offs (12,892) (59,950) (8,717)
--------------- ------------------- -------------------------
Recoveries:
Single-family residential 33 18 4
Credit card - 5,998 -
Consumer 727 579 354
--------------- ------------------- -------------------------
Total recoveries 760 6,595 358
--------------- ------------------- -------------------------
Charge-offs, net of recoveries (12,132) (53,355) (8,359)
--------------- ------------------- -------------------------
Balance at end of period $ 58,414 $ 103,998 $ 58,414
=============== =================== =========================
Provision for loan losses to average loans (1) (2) (3) 0.51% 3.83% 0.58%
Net loan charge-offs to average loans (1) (2) (3) 0.60% 3.96% 0.73%
Ending allowance for losses on loans to total
loans (2) (3) 1.16% 3.84% 1.16%
(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)
March 31, December 31, September 30,
1999 1998 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 $ 1,769 68.2 % $ 1,822 68.7 % $ 1,822 65.7 %
Home equity 631 4.2 676 5.0 676 4.9
Commercial real estate
and multifamily 10,830 1.5 10,828 1.8 10,828 2.7
Real estate construction
and ground 3,222 4.0 3,225 3.4 3,225 3.9
Commercial 3,623 5.0 3,623 5.6 3,623 6.3
Automobile 27,400 14.7 29,044 12.4 29,044 12.9
Home improvement and
related loans 3,403 1.8 3,403 2.3 3,403 2.4
Overdraft lines of credit
and other consumer 1,674 0.6 1,674 0.8 1,674 1.2
Unallocated 5,862 - 5,862 - 5,862 -
-------------- ------------- --------------
Total $ 58,414 100.0 $ 60,157 100.0 $ 60,157 100.0
============== ============= ==============
</TABLE>
<PAGE>
<TABLE>
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowance for Losses
Six Months Ended Three Months
March 31, Ended
------------------------------------------ March 31,
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 153,564 140,738 153,564
----------------- ------------------- ---------------------
Total 153,766 140,936 153,766
----------------- ------------------- ---------------------
Provision for real estate losses:
Real estate held for investment - 3 -
Real estate held for sale - 6,083 -
----------------- ------------------- ---------------------
Total - 6,086 -
----------------- ------------------- ---------------------
Charge-offs:
Real estate held for sale:
Communities (66,760) (66,760)
Commercial ground - (2,371) -
----------------- ------------------- ---------------------
Total charge-offs on real estate
held for investment or sale (66,760) (2,371) (66,760)
----------------- ------------------- ---------------------
Balance at end of period:
Real estate held for investment 202 201 202
Real estate held for sale 86,804 144,450 86,804
----------------- ------------------- ---------------------
Total $ 87,006 $ 144,651 $ 87,006
================= =================== =====================
Components of Allowance for Losses
March 31, December 31, September 30,
1999 1998 1998
----------------- ------------------- ---------------------
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202
----------------- ------------------- ---------------------
Allowance for losses on real estate held for sale:
Communities 77,627 144,641 144,641
Residential ground 3,179 3,123 3,123
Commercial ground 5,800 5,800 5,800
----------------- ------------------- ---------------------
Total ground 86,606 153,564 153,564
----------------- ------------------- ---------------------
Unallocated 198 - -
----------------- ------------------- ---------------------
Total allowance for losses on real
estate held for investment or sale $ 87,006 $ 153,766 $ 153,766
================= =================== =====================
</TABLE>
<PAGE>
At March 31, 1999 and December 31, 1998, the Bank's total valuation allowances
for losses on loans and real estate held for investment or sale was $145.4
million and $213.9 million, respectively. The $68.5 million decrease was
primarily attributable to a charge-off of $65.8 million upon the sale of the
pre-development stage community.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $103.5 million at March 31, 1999, which
constituted 70.3% of total non-performing real estate assets, before valuation
allowances. During the three months ended March 31, 1999, the Bank recorded net
charge-offs of $66.9 million on these assets. The allowance for losses on real
estate held for sale at March 31, 1999 is in addition to approximately $40.7
million of cumulative charge-offs previously taken against assets remaining in
the Bank's portfolio at March 31, 1999.
At March 31, 1999, the combined allowance for losses on consumer loans
(automobile, home improvement and related loans, overdraft lines of credit and
other consumer loans) decreased to $32.5 million from $34.1 million at December
31, 1998. The ratios of the allowance for losses on consumer loans to
non-performing consumer loans and to outstanding consumer loans were 609.7% and
3.8%, respectively, at March 31, 1999 compared to 469.9% and 5.2%, respectively,
at December 31, 1998.
Asset and Liability Management. The following table presents the interest rate
sensitivity of the Bank's interest-earning assets and interest-bearing
liabilities at March 31, 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 March 31, 1999
Real estate loans:
Adjustable-rate $ 636,024 $ 763,291 $ 74,468 $ 213 $ - $ 1,473,996
Fixed-rate 89,791 79,175 291,841 246,081 1,336,261 2,043,149
Home equity credit lines
and second mortgages 229,279 2,210 7,827 6,405 26,249 271,970
Commercial 158,538 8,551 28,441 20,926 34,737 251,193
Consumer and other 166,137 136,177 356,894 170,186 19,530 848,924
Loans held for sale 159,697 - - - - 159,697
Mortgage-backed securities 554,513 225,274 526,331 76,166 217,812 1,600,096
Trading securities 8,256 - - - - 8,256
Other investments 205,390 - 44,392 - - 249,782
------------- -------------- --------------- --------------- -------------- --------------
Total interest-earning assets 2,207,625 1,214,678 1,330,194 519,977 1,634,589 6,907,063
Total non-interest earning assets - - - - 862,655 862,655
------------- -------------- --------------- --------------- -------------- --------------
Total assets $ 2,207,625 $ 1,214,678 $ 1,330,194 $ 519,977 $ 2,497,244 $ 7,769,718
============= ============== =============== =============== ============== ==============
Deposits:
Fixed maturity deposits $ 952,004 $ 300,822 $ 172,177 $ 58,870 $ - $ 1,483,873
NOW, statement and passbook
accounts 1,661,224 44,930 149,646 101,853 217,061 2,174,714
Money market deposit accounts 1,100,516 - - - - 1,100,516
Borrowings:
Capital notes - subordinated - - - - 250,000 250,000
Other 716,795 191 7,868 715,792 74,011 1,514,657
------------- -------------- --------------- --------------- -------------- --------------
Total interest-bearing liabilities 4,430,539 345,943 329,691 876,515 541,072 6,523,760
Total non-interest bearing
liabilities - - - - 810,513 810,513
Stockholders' equity - - - - 435,445 435,445
------------- -------------- --------------- --------------- -------------- --------------
Total liabilities & stockholders'
equity $ 4,430,539 $ 345,943 $ 329,691 $ 876,515 $ 1,787,030 $ 7,769,718
============= ============== =============== =============== ============== ==============
Gap $ (2,222,914) $ 868,735 $ 1,000,503 $ (356,538) $ 1,093,517
Cumulative gap $ (2,222,914) $ (1,354,179) $ (353,676) $ (710,214) $ 383,303
Adjustment for interest rate caps (1)$ 100,000 $ - $ - $ - $ -
Adjusted cumulative gap $ (2,122,914) $ (1,354,179) $ (353,676) $ (710,214) $ 383,303
Adjusted cumulative gap as a
percentage of total assets (27.3)% (17.4)% (4.6)% (9.1)% 4.9 %
(1) At March 31, 1999, the Bank had $200,000 notional amount of interest rate
caps. The adjustment reflects the average notional amount outstanding until the
cap expires June 30, 1999.
</TABLE>
<PAGE>
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, adjusted for the effect of
the Bank's interest rate caps, as a percentage of total assets, was a negative
17.4% at March 31, 1999 compared to a negative 28.0% at December 31, 1998. The
improvement in the Bank's one-year gap during the quarter ended March 31, 1999
reflected the Bank's 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 March 31, 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 March 31, 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 $ 463,193
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding gains (2) (21)
-------------
607,172
Adjustments for tangible and core capital:
Intangible assets (59,874)
Non-allowable minority interest in
REIT Subsidiary (1) (10,872)
Non-includable subsidiaries (3) (3,915)
-------------
Total tangible capital 532,511 6.89% $ 116,009 1.50% $ 416,502 5.39%
------------- ========== ============= ========== ============ ===========
Total core capital (4) 532,511 6.89% $ 309,358 4.00% $ 223,153 2.89%
------------- ========== ============= ========== ============ ===========
Tier 1 risk-based capital (4) 532,511 9.90% $ 218,140 4.00% $ 314,371 5.90%
------------- ========== ============= ========== ============ ===========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 51,294
-------------
Total supplementary capital 301,294
-------------
Total available capital 833,805
Equity investments (3) (6,531)
-------------
Total risk-based capital (4) $ 827,274 15.71% $ 436,279 8.00% $ 390,995 7.71%
============= ========== ============= ========== ============ ===========
(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. In May 1999, the Bank received from the OTS an extension of the
holding periods for certain of its REO properties through May 14, 2000. The
following table sets forth the Bank's REO at March 31, 1999, after valuation
allowances of $86.8 million, by the fiscal year in which the property was
acquired through foreclosure.
Fiscal Year (In thousands)
1990 (1) (2)........... $ 14,997
1991 (2)............... 32,276
1992 (2)............... 110
1993 .................. -
1994 .................. -
1995 .................. 5,959
1996 .................. -
1997 .................. -
1998 .................. 644
1999 .................. 187
-----------
Total REO......... $ 54,173
===========
- -----------------------
(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 $40.9 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 dividends 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, as well as the Bank's board resolution
adopted in connection with the release of its written agreement with the OTS,
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the Bank. In the first six months of fiscal 1999,
the Bank made a tax sharing payment of $6.6 million and dividend payments of
$20.8 million to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating losses
while the Bank has reported net income. It is anticipated that the Trust's
consolidation of the Bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the Bank would otherwise owe. If, in any future year, the
Bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the Bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated federal income
tax returns or (ii) the amount of 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 March 31, 1999, the Trust has purchased either in the open market or
through dividend reinvestment approximately 2.2 million shares of common stock
of Saul Centers (representing 17.0% of such company's outstanding common stock).
As of March 31, 1999, the market value of this unpledged stock was approximately
$32.2 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 March 31, 1999, there were no borrowings under this facility and
unrestricted availability on that date was $7.8 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for 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 March 31, 1999, there were no borrowings
under the facility and unrestricted availability was $3.3 million.
The maturity schedule for the Real Estate Trust's outstanding debt at March 31,
1999 for the balance of fiscal 1999 and subsequent years is set forth in the
following table:
<PAGE>
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- -------------------------------------------------------------------
1999 (1) $ 4,872 $ --- $ 6,230 $ 11,102
2000 14,195 --- 8,893 23,088
2001 16,453 --- 5,951 22,404
2002 14,117 --- 6,266 20,383
2003 14,982 --- 9,149 24,131
Thereafter 138,978 200,000 8,954 347,932
- -------------------------------------------------------------------
Total $203,597 $200,000 $ 45,443 $449,040
===================================================================
(1) April 1, 1999 - September 30, 1999
Of the $203.6 million of mortgage debt outstanding at March 31, 1999, $167.2
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"), 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 provides for quarterly cash distributions to the partners out of net
cash flow. During the six-month period ended March 31, 1999, the Real Estate
Trust received total cash distributions of $3.0 million from Saul Holdings.
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 3 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
two-year and one-year periods, respectively. The loan covered all costs except
for the land, fees to related parties, taxes and insurance.
On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near the Ronald Reagan Washington National
Airport and the Real Estate Trust's Howard Johnson Hotel. The purchase price was
$25.8 million. Also on December 10, 1997, the Real Estate Trust refinanced five
other hotels in its portfolio. Funds for the two transactions were provided by a
lender in the amount of $52.2 million. The new loans have a 15-year term, a
fixed interest rate of 7.57%, and amortization based on a 25-year schedule.
<PAGE>
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 2 acre site owned by the Trust in Avenel Business
Park in Gaithersburg, Maryland. Opening is scheduled for
July 1, 1999.
TownePlace Suites by Marriott containing 91 units located
on part of a 9 acre site owned by the Real Estate Trust in
the Arvida Park of Commerce in Boca Raton, Florida. Opening is
scheduled for August 1, 1999.
SpringHill Suites by Marriott containing 146 units located on
part of a 9 acre site owned by the Real Estate Trust in the
Arvida Park of Commerce in Boca Raton, Florida. Opening
is scheduled for August 1, 1999.
TownePlace Suites by Marriott containing 95 units located on
a 3 acre site owned by the Real Estate Trust in Ft. Lauderdale
Commerce Center, Ft. Lauderdale, Florida. Opening is scheduled
for September 4, 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 $6.6 million with bank financing of
$6.5 million for a five-year term and a two-year extension option. Leases for
approximately 76% of the space have been signed.
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 will be converted into a Holiday Inn
Crown Plaza, while the present 279-room Howard Johnsons will be 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 will be funded by the
Real Estate Trust in part from its internal resources and in part from its lines
of credit.
The Real Estate Trust believes that capital improvement costs for its
income-producing properties will be in range of $6.5 to $8.0 million per year
for the next several fiscal years.
<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
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. At present,
only one area of property management, apartments, has software which requires
replacement to meet Year 2000 compliance, and that replacement is scheduled to
be completed in May 1999. The Real Estate Trust had 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
2000 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 the The Year 2000 Information and Readiness
Disclosure Act) of Year 2000 statements of 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 know major direct
exposure. The Real State 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 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 March 31, 1999
was 4.0%. The Bank's average liquidity ratio for the quarter ended March 31,
1999 was 8.6%, compared to 14.3% for the quarter ended December 31, 1998.
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 Notes 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 $91.9 million and
$12.8 million, respectively, at March 31, 1999, and $98.2 million and $12.2
million, respectively, at December 31, 1998, 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
$8.3 million and $9.6 million at March 31, 1999 and December 31, 1998,
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 March 31, 1999, recourse to the Bank under these arrangements was $10.3
million, consisting of restricted cash accounts of $5.4 million and
overcollateralization of receivables of $4.9 million.
There were no material commitments for capital expenditures at March 31, 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.
YEAR 2000 ISSUES
As part of its Year 2000 program, the Bank charged $2.4 million and $2.3
million, respectively to expense during the six months ended March 31, 1999 and
the year ended September 30, 1998 and expects that an additional $4.3 million
and $1.2 million will be charged to expense during the remainder of fiscal 1999
and fiscal 2000, respectively. The Bank also expects to invest an additional
$5.4 million in equipment purchases, which will be amortized to expense over the
estimated useful lives of the equipment. 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 MARCH 31, 1999 (the "1999 quarter") COMPARED
TO THREE MONTHS ENDED MARCH 31, 1998 (the "1998 quarter")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$346,000 and an operating loss of $2.6 million in the 1999 quarter compared to a
loss before depreciation and amortization of $2.6 million and an operating loss
of $5.5 million in the 1998 quarter. The decrease in the operating loss was
largely attributable to improved results from income-producing properties.
Income after direct operating expenses from hotel properties increased $839,000
(16.6%) in the 1999 quarter over the level achieved in the 1998 quarter.
$466,000 (10.3%) of this increase reflected improved results from the ten hotels
owned throughout both quarters and $373,000 (6.3%) reflected results from
acquisition properties. The increase in total revenue of $2,041,000 (13.0%)
exceeded the increase of $1,202,000 (11.3%) in direct operating expenses. For
the ten hotels owned throughout both periods, the increase in total revenue was
$1,241,000 (8.8%) and the increase in direct operating expenses was $775,000
(8.1%). The revenue increase was attributable to improved market conditions,
which permitted the Real Estate Trust to raise average room rates at eight
properties and average occupancy levels at six properties.
Income after direct operating expenses from office and industrial properties
increased $263,000 (6.9%) in the 1999 quarter compared to such income in the
1998 quarter. This increase reflected higher base rents in the current period.
Gross income in the 1999 quarter was $285,000 (5.0%) above its level in the 1998
quarter. Expenses increased by $22,000 (1.2%).
Other income increased $29,000 (3.7%) during the 1999 quarter due to higher
percentage income recorded on purchase leaseback investments.
Land parcels and other expense decreased $530,000 (136.2%) during the 1999
quarter due to the collection of a multi-year property tax refund at one land
parcel.
Interest expense decreased $975,000 (8.9%) in the 1999 quarter, primarily
because of lower bank borrowing expense ($452,000), lower senior secured debt
expense ($211,000) and lower mortgage interest ($257,000). The average balance
of the Real Estate Trust's outstanding borrowings increased to $440.5 million
for the 1999 quarter from $436.1 million for the 1998 quarter. The increase in
average borrowings was the result of mortgage loan refinancings and new issue of
$200.0 million of senior secured notes due 2008 and the retirement of $175.0
million of senior secured notes due 2002 during the 1998 quarter. The weighted
average cost of borrowings was 9.30% in the 1999 quarter compared to 10.31% in
the 1998 quarter.
Capitalized interest increased $117,000 (316.2%) during the 1999 quarter due to
the higher level of development activity in the current period.
Amortization of debt expense decreased $86,000 (56.6%) in the 1999 quarter,
primarily due to the lower costs experienced in the renewal of senior secured
debt.
<PAGE>
Depreciation increased $75,000 (2.7%) in the 1999 quarter as a result of new
assets placed in service and the addition of two new hotels.
Advisory, management and leasing fees paid to related parties increased $156,000
(7.5%) 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 $58,000. Management
fees increased $98,000 (8.6%) in the current quarter, reflecting both higher
hotel sales and office rents on which the fees are based.
General and administrative expense decreased $40,000 (17.8%) in the 1999
quarter, principally as a result of lower legal and accounting expense.
Equity on earnings of unconsolidated entities reflected earnings of $1,626,000
in the 1999 quarter, an increase of $269,000 (19.8%) over the amount recorded in
the 1998 quarter. The improvement was due in part to increased period-to-period
earnings and a charge to earnings in the 1998 quarter which was caused by a
change in accounting method.
BANKING
Overview. The Bank recorded operating income of $49.7 million for the 1999
quarter compared to operating income of $12.7 million for the 1998 quarter. The
increase in income for the current quarter was primarily the result of a gain of
$31.6 million recognized on the sale of one of the Bank's REO properties. Also
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 partially 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.
<PAGE>
Net Interest Income. Net interest income, before the provision for loan losses,
increased $15.3 million (or 29.8%) 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 March 31,
-----------------------------------------------------------------------------------
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) $ 4,540,011 $ 94,633 8.34 % $ 2,596,989 $ 73,816 11.37 %
Mortgage-backed securities 1,698,616 24,791 5.84 1,828,866 25,594 5.60
Federal funds sold and securities
purchased under agreements to resell 50,176 601 4.79 210,012 2,923 5.57
Trading securities 62,245 1,033 6.64 32,099 638 7.95
Investment securities 44,003 614 5.58 39,007 550 5.64
Other interest-earning assets 169,838 2,302 5.42 178,346 2,786 6.25
--------------- -------------- --------------- --------------
Total 6,564,889 123,974 7.55 4,885,319 106,307 8.70
-------------- ---------- -------------- ---------
Noninterest-earning assets:
Cash 244,734 208,306
Real estate held for investment or sale 63,305 87,370
Property and equipment, net 289,668 283,320
Goodwill and other intangible assets, net 29,701 24,494
Other assets 274,303 604,205
--------------- ---------------
Total assets $ 7,466,600 $ 6,093,014
=============== ===============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,120,073 2,947 1.05 $ 982,949 5,073 2.06
Savings deposits 1,027,580 5,377 2.09 1,015,191 7,785 3.07
Time deposits 1,468,742 17,582 4.79 1,725,884 23,177 5.37
Money market deposits 1,090,268 8,985 3.30 983,261 9,476 3.85
--------------- ------------ --------------- -----------
Total deposits 4,706,663 34,891 2.97 4,707,285 45,511 3.87
Borrowings 1,623,698 22,706 5.59 525,081 9,669 7.37
--------------- -------------- --------------- --------------
Total liabilities 6,330,361 57,597 3.64 5,232,366 55,180 4.22
-------------- ---------- -------------- ---------
Noninterest-bearing items:
Noninterest-bearing deposits 490,799 251,207
Other liabilities 80,648 118,116
Minority interest 144,000 144,000
Stockholders' equity 420,792 347,325
--------------- ---------------
Total liabilities and stockholders'
equity $ 7,466,600 $ 6,093,014
=============== ===============
Net interest income $ 66,377 $ 51,127
============== ==============
Net interest spread (2) 3.91 % 4.48 %
========== =========
Net yield on interest-earning assets (3) 4.04 % 4.18 %
========== =========
Interest-earning assets to interest-bearing
liabilities 103.70 % 93.37 %
========== =========
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on
non-accruing loans has been included only to the extent reflected in the
Consolidated Statements of Operations; however, the loan balance is
included in the average amount outstanding until transferred to real
estate acquired in settlement of loans.
(2) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Three Months Ended March 31, 1999
Compared to
Three Months Ended March 31, 1998
Increase (Decrease)
Due to Change in (1)
----------------------------------------
Total
Volume Rate Change
----------- ----------- ----------
Interest income:
Loans (2) $ 130,795 $ (109,978) $ 20,817
Mortgage-backed securities (5,982) 5,179 (803)
Federal funds sold and securities
purchased under agreements to
resell (1,961) (361) (2,322)
Trading securities 1,052 (657) 395
Investment securities 102 (38) 64
Other interest-earning assets (128) (356) (484)
----------- ----------- ----------
Total interest income 123,878 (106,211) 17,667
----------- ----------- ----------
Interest expense:
Deposit accounts (6) (10,614) (10,620)
Borrowings 28,446 (15,409) 13,037
----------- ----------- ----------
Total interest expense 28,440 (26,023) 2,417
----------- ----------- ----------
Increase in net interest income $ 95,438 $ (80,188) $ 15,250
=========== =========== ==========
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
<PAGE>
Interest income in the 1999 quarter increased $17.7 million (or 16.6%) 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 $1.0 billion in average credit card loans
resulting from the sale of the credit card portfolio.
The Bank's net yield on interest-earning assets decreased slightly to 4.04% in
the 1999 quarter from 4.18% in the 1998 quarter. The decrease in the net yield
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
related operations on September 30, 1998. Average interest-earning assets as a
percentage of average interest bearing liabilities increased to 103.70% for the
1999 quarter compared to 93.37% for the 1998 quarter.
Interest income on loans, the largest category of interest-earning assets,
increased by $20.8 million (or 28.2%) from the 1998 quarter primarily because of
higher average balances. The Bank did not securitize and sell any receivables in
the three months ended March 31, 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 $2.2 billion (or 213.1%), resulted in a $37.1 million (or 197.4%)
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 and
real estate construction loans increased $416.9 million, $122.5 million and
$104.4 million, respectively, and contributed to a $10.3 million, $1.9 million
and $1.8 million increase in interest income from such loans, respectively.
Lower average yields on these loans partially offset the effects of the higher
average balances. Average balances of home equity loans increased $76.6 million,
which, when coupled with an increase in its average yield, resulted in an $1.5
million (or 58.2%) increase in interest income from such loans.
The average yield on the loan portfolio in the 1999 quarter decreased 303 basis
points (from 11.37% to 8.34%) from the average yield in the 1998 quarter. The
decline in the net 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 $0.8 million (or 3.1%)
primarily because of lower average balances. The effect of the lower average
balances of $130.2 million was partially offset by an increase in the average
interest rates on these securities from 5.60% to 5.84%.
Interest expense on deposits decreased $10.6 million (or 23.3%) during the 1999
quarter due to decreased average rates. The 90 basis point reduction in the
average rate on deposits (from 3.87% to 2.97%) 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 to the Bank's
reducing the rates it pays on deposits.
<PAGE>
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 ($698.6 million) and repurchase agreement transactions ($367.1
million) primarily resulted in a $13.0 million (or 134.8%) increase in interest
expense on borrowings. This amount was partially offset by a 178 basis point
reduction in the average rate on borrowings (to 5.59% from 7.37%).
Provision for Loan Losses. The Bank's provision for loan losses decreased to
$6.6 million in the 1999 quarter from $16.6 million in the 1998 quarter. The
$10.0 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
on September 30, 1998. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other (non-interest) income decreased to $67.9 million in the 1999
quarter from $96.3 million in the 1998 quarter. The $28.4 million (or 29.4%)
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 $58.5 million (or 89.2%) 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 $123.5 million, $151.0 million and $19.7 million
of credit card, automobile and home equity loan receivables, respectively, and
recognized gains of $1.8 million, $8.6 million and $1.0 million, respectively,
on these transactions. In addition, credit card loan servicing fees totaling
$31.1 million for the 1998 quarter were eliminated as a result of the September
30, 1998 sale of the credit card portfolio.
The $32.6 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 $0.8 million in the provision for losses on such assets. See
"Financial Condition - Asset Quality - Allowances for Losses."
Deposit servicing fees increased $3.8 million (or 31.9%) during the 1999 quarter
primarily due to increased fees recognized for servicing deposit accounts and
fees generated through the Bank's ATM network.
Operating Expenses. Operating expenses for the 1999 quarter decreased $40.1
million (or 33.9%) from the level in the 1998 quarter. The sale of the Bank's
credit card operations was primarily responsible for decreases in marketing
expenses ($17.5 million), loan expenses ($6.3 million) and data processing
expenses ($6.9 million) during the 1999 quarter. Salaries and employee benefits
decreased $5.5 million (or 11.5%) also 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.
<PAGE>
SIX MONTHS ENDED MARCH 31, 1999 (the "1999 period") COMPARED TO
SIX MONTHS ENDED MARCH 31, 1998 (the "1998 period")
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$212,000 and an operating loss of $6.2 million in the 1999 period compared to a
loss before depreciation and amortization of $7.2 million and an operating loss
of $13.0 million in the 1998 period. The decrease in the operating loss was
largely attributable to improved results from income-producing properties.
Income after direct operating expenses from hotels increased $2,319,000 (23.1%)
in the 1999 period over the level achieved in the 1998 period. $1,074,000
(11.3%) of this increase reflected improved results from ten hotels owned
throughout both periods and $1,245,000 reflected results from two acquisition
properties. The increase in total revenue of $4,897,000 (15.9%) exceeded the
increase of $2,578,000 (12.4%) in direct operating expenses. For the ten hotels
owned throught both periods, the increase in total revenue was $1,913,000
(6.6%). The revenue increase was attributable to improved market conditions
which permitted the Real Estate Trust to raise average room rates and occupancy
levels.
Income after direct operating expenses from office and industrial properties
increased $727,000 (9.8%) in the 1999 period compared to such income in the 1998
period. The increase was caused by higher gross income of $708,000 (6.3%) due to
an increase in the amount of rent received. Expenses for the current period were
$19,000 (0.5%) below last year, largely due to a refund of real estate taxes at
one property.
Other income decreased $309,000 (17.0%) during the 1999 period due to a lower
level of interest earnings.
Land parcels and other expense decreased $541,000 (68.7%) during the 1999
period, largely due to the collection of a multi-year property 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 decreases $895,000 (4.3%) in the 1999 period, primarily because
of decreases in bank borrowing expense ($419,000), interest costs on senior
secured debt ($414,000), and lower mortgage interest ($70,000). Average balances
of the Real Estate Trust's outstanding borrowings increased to $444.0 million
for the 1999 period from $421.1 million for the 1998 period. The increase in
average borrowings occurred as a result of mortgage loan refinancings and new
issue of $200.0 million of senior secured notes due 2008 and the retirement of
$175.0 million of senior secured notes due 2002 during the 1998 period. The
weighted average cost of borrowings was 9.29% in the 1999 period compared to
10.24% in the 1998 period.
Capitalized interest increased $306,000 (443.5%) during the 1999 period due to
the higher level of development activity in the current period.
Amortization of debt expense decreased $128,000 (43.8%) in the 1999 period,
primarily due to the lower costs experienced in the renewal of senior secured
debt.
Depreciation increased $292,000 (5.3%) in the 1999 period as a result of new
assets placed in service and the additions of two new hotels.
<PAGE>
Advisory, management and leasing fees paid to related parties increased $373,000
(9.0%) 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 $117,000. Management
and leasing fees increased $256,000 (11.5%) in the current period, reflecting
both higher hotel sales and office rents on which fees are based.
General and administrative expense decreased $119,000 (19.6%) in the 1999
period, principally as a result of lower legal and accounting expense.
Equity in earnings of unconsolidated entities reflected earnings of $2,773,000
for the 1999 period and earnings of $18,000 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 and losses on early
extinguishment of debt.
BANKING
Overview. The Bank recorded operating income of $57.0 million for the 1999
period compared to operating income of $42.1 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
($70.8 million), credit card fees ($23.1 million) and servicing and
securitization income ($151.6 million) during the 1999 period were partially
offset by increases in single-family loan interest income ($62.4 million) and
gain on real estate held for investment or sale ($37.5 million) and decreases in
the provision for loan losses ($41.3 million) and operating expenses ($76.2
million).
Net Interest Income. Net interest income, before the provision for loan losses,
increased $24.5 million (or 24.4%) in the 1999 period. The Bank would have
recorded additional interest income of $1.4 million for the 1999 period if
non-accrual assets and restructured loans had been current in accordance with
their original terms. Interest income of $0.1 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)
Six Months Ended March 31,
--------------------------------------------------------------------------------------
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) $ 4,008,650 $ 170,576 8.51 % $ 2,585,733 $ 148,311 11.47 %
Mortgage-backed securities 1,812,352 53,679 5.92 1,860,605 52,201 5.61
Federal funds sold and securities
purchased under agreements to resell 71,697 1,782 4.97 211,968 5,950 5.61
Trading securities 46,226 1,602 6.93 29,848 1,110 7.44
Investment securities 44,001 1,229 5.59 33,406 952 5.70
Other interest-earning assets 212,114 5,808 5.48 173,470 5,391 6.22
--------------- -------------- ---------------- --------------
Total 6,195,040 234,676 7.58 4,895,030 213,915 8.74
-------------- ---------- -------------- ----------
Noninterest-earning assets:
Cash 237,986 207,290
Real estate held for investment or sale 65,087 90,693
Property and equipment, net 286,660 279,114
Goodwill and other intangible assets, net 30,089 19,178
Other assets 247,794 543,113
--------------- ----------------
Total assets $ 7,062,656 $ 6,034,418
=============== ================
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,089,050 6,144 1.13 $ 956,239 10,901 2.28
Savings deposits 1,022,143 11,097 2.17 1,003,942 16,315 3.25
Time deposits 1,490,806 36,980 4.96 1,758,738 47,952 5.45
Money market deposits 1,062,361 17,898 3.37 977,130 19,122 3.91
--------------- ------------ ---------------- ------------
Total deposits 4,664,360 72,119 3.09 4,696,049 94,290 4.02
Borrowings 1,286,277 37,580 5.84 516,406 19,182 7.43
--------------- -------------- ---------------- --------------
Total liabilities 5,950,637 109,699 3.69 5,212,455 113,472 4.35
-------------- ---------- -------------- ----------
Noninterest-bearing items:
Noninterest-bearing deposits 463,233 241,395
Other liabilities 75,737 99,168
Minority interest 144,000 144,000
Stockholders' equity 429,049 337,400
--------------- ----------------
Total liabilities and stockholders'
equity $ 7,062,656 $ 6,034,418
=============== ================
Net interest income $ 124,977 $ 100,443
============== ==============
Net interest spread (2) 3.89 % 4.39 %
========== ==========
Net yield on interest-earning assets (3) 4.04 % 4.11 %
========== ==========
Interest-earning assets to interest-bearing
liabilities 104.11 % 93.91 %
========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on
non-accruing loans has been included only to the extent reflected in the
Consolidated Statements of Operations; however, the loan balance is
included in the average amount outstanding until transferred to real
estate acquired in settlement of loans.
(2) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Six Months Ended March 31, 1999
Compared to
Six Months Ended March 31, 1998
Increase (Decrease)
Due to Change in (1)
----------------------------------------
Total
Volume Rate Change
----------- ---------- -----------
Interest income:
Loans (2) $ 119,107 $ (96,842) $ 22,265
Mortgage-backed securities (3,213) 4,691 1,478
Federal funds sold and securities
purchased under agreements to
resell (3,555) (613) (4,168)
Trading securities 708 (216) 492
Investment securities 330 (53) 277
Other interest-earning assets 1,945 (1,528) 417
----------- ---------- -----------
Total interest income 115,322 (94,561) 20,761
----------- ---------- -----------
Interest expense:
Deposit accounts (628) (21,543) (22,171)
Borrowings 30,449 (12,051) 18,398
----------- ---------- -----------
Total interest expense 29,821 (33,594) (3,773)
----------- ---------- -----------
Increase in net interest income $ 85,501 $ (60,967) $ 24,534
=========== ========== ===========
- -----------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate
has been allocated in proportion to the absolute value of the change
due to volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
<PAGE>
Interest income in the 1999 period increased $20.8 million (or 9.7%) 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 decreased slightly to 4.04% in
the 1999 period from 4.11% in the 1998 period. The decrease in the net yield
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
related operations on September 30, 1998. Average interest-earning assets as a
percentage of average interest bearing liabilities increased to 104.1% for the
1999 period compared to 93.9% for the 1998 period.
Interest income on loans, the largest category of interest-earning assets,
increased by $22.3 million (or 15.0%) 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 $1.8 billion (or 185.9%), resulted in a $62.4 million (or 169.9%)
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 $292.0 million,
$87.4 million, $97.6 million and $80.8 million, respectively, and contributed to
a $19.0 million, $2.9 million, $3.3 million and $3.0 million increase in
interest income from such loans, respectively. Lower average yields on these
loans partially offset the effects of the higher average balances.
The average yield on the loan portfolio in the 1999 period decreased 296 basis
points (to 8.51% from 11.47%) from the average yield in the 1998 period. The
decline in the net 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 13.46%.
Interest income on mortgage-backed securities increased $1.5 million (or 2.8%)
primarily because of higher average yields. The effect of the $48.3 million
decrease in average balances was more than offset by an increase in the average
interest rates on these securities from 5.61% to 5.92%.
Interest expense on deposits decreased $22.2 million (or 23.5%) during the
current period due to decreased average rates and balances. The 93 basis point
reduction in the average rate on deposits (from 4.02% to 3.09%) 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 to
the Bank's reducing the rates it pays on deposits.
<PAGE>
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 ($449.5 million) and repurchase agreement transactions ($282.2
million) primarily resulted in a $18.4 million (or 95.9%) increase in interest
expense on borrowings. This amount was partially offset by a 159 basis point
reduction in the average rate on borrowings (to 5.84% from 7.43%).
Provision for Loan Losses. The Bank's provision for loan losses decreased to
$10.4 million in the 1999 period from $51.7 million in the 1998 period. The
$41.3 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
on September 30, 1998. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other (non-interest) income decreased to $97.2 million in the 1999
period from $224.4 million in the 1998 period. The $127.2 million (or 56.7%)
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 $151.6 million (or 91.8%) 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 $458.5 million, $381.1 million and $181.4 million
of credit card, automobile and home equity loan receivables, respectively, and
recognized gains of $6.3 million, $17.6 million and $5.1 million, respectively,
on these transactions. In addition, credit card loan servicing fees amounting to
$91.0 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 $37.5 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 $6.1 million in the provision for losses on such assets. See
"Financial Condition - Asset Quality - Allowances for Losses."
Deposit servicing fees increased $8.0 million (or 33.5%) during the 1999 period
primarily due to increased fees recognized for servicing deposit accounts and
fees generated through the Bank's ATM network.
Operating Expenses. Operating expenses for the 1999 period decreased $76.3
million (or 33.0%) from the level in the 1998 period. The sale of the Bank's
credit card operations was primarily responsible for decreases in marketing
expenses ($34.9 million), loan expenses ($12.7 million) and data processing
expenses ($13.1 million) in the 1999 period. Salaries and employee benefits
decreased $9.6 million (or 10.3%) also 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.
