<PAGE>
Registration No. 333-70753
Rule 424(b)(3)
Supplement Dated February 14, 2000 to
Prospectus Dated January 28, 2000
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
DECEMBER 31, 1999
----------------------------
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Statements (Unaudited):
(a) Consolidated Balance Sheets at December 31, 1999 and
September 30, 1999
(b) Consolidated Statements of Operations for the three-month
periods ended December 31, 1999 and 1998
(c) Consolidated Statements of Comprehensive Income and Changes in
Shareholders' Deficit for the three-month
periods ended December 31, 1999 and 1998
(d) Consolidated Statements of Cash Flows for the three-month
periods ended December 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 December 31, 1999 compared to
three months ended December 31, 1998
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
December 31 September 30
-----------------------------
(In thousands) 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 206,566 $ 197,075
Office and industrial 139,208 111,183
Other 3,947 3,923
-------------- --------------
349,721 312,181
Accumulated depreciation (115,061) (104,774)
-------------- --------------
234,660 207,407
Land parcels 41,281 39,448
Construction in progress 17,053 20,498
Cash and cash equivalents 7,033 17,857
Other assets 86,568 79,861
-------------- --------------
Total real estate assets 386,595 365,071
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and other deposits 569,107 396,146
Federal funds sold and securities purchased under agreements to resell 150,000 194,000
Loans held for sale 196,059 116,797
Investment securities (market value $45,191 and $44,434, respectively) 45,456 44,400
Trading securities 5,925 6,955
Mortgage-backed securities (market value $1,215,998 and $1,285,442, respectively) 1,243,712 1,311,370
Loans and leases receivable (net of allowance for losses of $58,139 for both periods) 6,833,317 6,312,073
Federal Home Loan Bank stock 98,636 87,183
Real estate held for investment or sale (net of allowance for losses of $84,130
and $84,607, respectively 48,554 52,369
Property and equipment, net 301,910 304,533
Goodwill and other intangible assets, net 27,184 27,902
Interest only strips, net 6,542 7,626
Servicing assets, net -- 30,479
Other assets 269,536 254,936
-------------- --------------
Total banking assets 9,795,938 9,146,769
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,182,533 $ 9,511,840
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable $ 251,830 $ 213,447
Notes payable - secured 224,700 216,000
Notes payable - unsecured 45,948 46,122
Deferred gains - real estate 112,834 112,834
Accrued dividends payable - preferred shares of beneficial interest 31,821 32,967
Other liabilities and accrued expenses 32,278 42,268
-------------- --------------
Total real estate liabilities 699,411 663,638
- ------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 6,227,700 5,763,486
Borrowings 629,979 631,144
Federal Home Loan Bank advances 1,971,671 1,743,188
Other liabilities 117,262 174,466
Capital notes -- subordinated 250,000 250,000
-------------- --------------
Total banking liabilities 9,196,612 8,562,284
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 76,203 73,236
Minority interest -- other 218,307 218,307
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 10,190,533 9,517,465
- ------------------------------------------------------------------------------------------------------------------------------
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 (66,256) (63,884)
Net unrealized holding loss 3 6
-------------- --------------
33,848 36,223
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (8,000) (5,625)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 10,182,533 $ 9,511,840
- ------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
For the Three Months
Ended December 31
-----------------------------
(In thousands, except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE
Income
Hotels $ 20,721 $ 18,062
Office and industrial properties 7,023 5,941
Other 690 687
-------------- --------------
Total income 28,434 24,690
- ------------------------------------------------------------------------------------------------------------------------------
Expenses Direct operating expenses:
Hotels 13,590 11,598
Office and industrial properties 1,993 1,870
Land parcels and other 303 388
Interest expense 10,936 10,194
Capitalized interest (225) (221)
Amortization of debt expense 156 98
Depreciation 3,454 2,876
Advisory, management and leasing fees - related parties 2,477 2,260
General and administrative 1,913 305
-------------- --------------
Total expenses 34,597 29,368
- ------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities 2,103 1,147
Gain (loss) on sale of property -- (1)
- ------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $ (4,060) $ (3,532)
- ------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans and leases $ 139,504 $ 75,943
Mortgage-backed securities 19,969 28,888
Trading securities 383 569
Investment securities 642 615
Other 8,253 4,687
-------------- --------------
Total interest income 168,751 110,702
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 45,761 37,228
Borrowings 41,613 14,874
-------------- --------------
Total interest expense 87,374 52,102
-------------- --------------
Net interest income 81,377 58,600
Provision for loan and lease losses (10,988) (3,773)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 70,389 54,827
- ------------------------------------------------------------------------------------------------------------------------------
Other income
Servicing and securitization income 5,823 6,512
Deposit servicing fees 20,894 15,895
Gain on sales of trading securities, net 278 665
Loss on real estate held for investment or sale, net (116) (49)
Gain (loss) on sales of loans, net (912) 244
Other 6,203 5,953
-------------- --------------
Total other income 32,170 29,220
- ------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
For the Three Months
Ended December 31
-----------------------------
(In thousands, except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 46,902 $ 40,796
Loan 1,074 3,331
Property and equipment 6,935 6,223
Marketing 2,183 2,934
Data processing 6,091 4,325
Depreciation and amortization 7,996 8,044
Deposit insurance premiums 1,173 1,070
Amortization of goodwill and other intangible assets 716 851
Other 12,731 9,156
-------------- --------------
Total operating expenses 85,801 76,730
- ------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME $ 16,758 $ 7,317
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Operating income $ 12,698 $ 3,785
Income tax provision 3,617 6
-------------- --------------
Income before minority interest 9,081 3,779
Minority interest held by affiliates (1,073) 45
Minority interest -- other (6,329) (6,329)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME (LOSS) $ 1,679 $ (2,505)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 325 $ (3,859)
NET INCOME (LOSS) PER COMMON SHARE
Income before minority interest $ 1.60 $ 0.50
Minority interest held by affiliates (0.22) 0.01
Minority interest -- other (1.31) (1.31)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.80)
- ------------------------------------------------------------------------------------------------------------------------------
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
Ended December 31
-----------------------------
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPREHENSIVE INCOME
Net income $ 1,679 $ (2,505)
Other comprehensive income:
Net unrealized holding gains (losses) (3) (35)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 1,676 $ (2,540)
- ------------------------------------------------------------------------------------------------------------------------------
CHANGES IN SHAREHOLDERS' DEFICIT
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516
-------------- --------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642
-------------- --------------
PAID-IN SURPLUS
Beginning and end of period 92,943 92,943
-------------- --------------
DEFICIT
Beginning of period (63,884) (81,936)
Net income 1,679 (2,505)
Minority interest in capital contribution (2,697) --
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (1,354) (1,354)
-------------- --------------
End of period (66,256) (85,795)
-------------- --------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period 6 44
Net unrealized holding gains (losses) (3) (35)
-------------- --------------
End of period 3 9
-------------- --------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT $ (8,000) $ (27,533)
- ------------------------------------------------------------------------------------------------------------------------------
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 Three Months
Ended December 31
-----------------------------
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss) $ (2,613) $ (2,326)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 3,453 2,876
Decrease in accounts receivable and accrued income 2,851 759
(Increase) decrease in deferred tax asset (1,448) 5,358
Decrease in accounts payable and accrued expenses (12,800) (8,157)
Amortization of debt expense 407 348
Equity in earnings of unconsolidated entities (2,103) (1,147)
Other 6,906 18,004
-------------- --------------
(5,347) 15,715
-------------- --------------
Banking
Net income (loss) 4,292 (179)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees (1,582) 3,576
Depreciation and amortization 7,996 8,044
Provision for loan and leases losses 10,988 3,773
Capitalized interest on real estate under development (908) (756)
Proceeds from sales of trading securities 107,527 120,886
Net fundings of loans held for sale and/or securitization (286,157) (185,506)
Proceeds from sales of loans held for sale and/or securitization 88,671 10,854
Gain on sales of real estate held for sale (339) (99)
Gain on sales of trading securities, net (278) (645)
Decrease in interest-only strips 1,084 2,158
(Increase) decrease in servicing assets (6,758) 3,341
Decrease in goodwill and other intangible assets 719 892
(Increase) decrease in other assets 13,856 (109,875)
Decrease in other liabilities (58,953) (13,465)
Minority interest held by affiliates 1,073 (45)
Minority interest - other 2,438 2,438
Other 18,516 (9,910)
-------------- --------------
(97,815) (164,518)
-------------- --------------
Net cash used in operating activities (103,162) (148,803)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (12,765) (8,255)
Property acquisitions (16,755) --
Equity investment in unconsolidated entities 1,632 1,500
Other 633 1
-------------- --------------
(27,255) (6,754)
-------------- --------------
Banking
Proceeds from maturities of investment securities 34,000 --
Net proceeds from redemption of Federal Home Loan Bank stock -- 18,370
Net proceeds from sales of real estate 4,979 6,757
Net fundings of loans and leases receivable (535,473) (473,183)
Principal collected on mortgage-backed securities 67,128 228,611
Purchases of Federal Home Loan Bank stock (11,453) (2,524)
Purchases of investment securities (35,052) --
Purchases of loans receivable (275) (978,848)
Purchases of property and equipment (5,569) (9,722)
Disbursements for real estate held for investment or sale (115) (2,483)
Other (541) 7
-------------- --------------
(482,371) (1,213,015)
-------------- --------------
Net cash used in investing activities (509,626) (1,219,769)
- ------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
==============================================================================================================================
For the Three Months
Ended December 31
-----------------------------
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 39,871 $ 3,705
Principal curtailments and repayments of mortgages (1,488) (2,697)
Proceeds from secured note financing 8,700 --
Proceeds from sales of unsecured notes 2,238 1,174
Repayments of unsecured notes (2,412) (3,222)
Costs of obtaining financings (329) (400)
Dividends paid - preferred shares of beneficial interest (2,500) --
-------------- --------------
44,080 (1,440)
-------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 8,909,535 10,547,746
Customer withdrawals of deposits and payments for maturing certificates of deposit (8,445,321) (10,255,001)
Net increase in securities sold under repurchase agreements 2,556 26,125
Advances from the Federal Home Loan Bank 230,000 485,270
Repayments of advances from the Federal Home Loan Bank (1,517) (202,337)
Net decrease in other borrowings (3,721) (18,369)
Cash dividends paid on preferred stock (2,438) (2,438)
Cash dividends paid on common stock (4,000) (21,000)
Other 1,751 5,275
-------------- --------------
686,845 565,271
-------------- --------------
Net cash provided by financing activities 730,925 563,831
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 118,137 (804,741)
Cash and cash equivalents at beginning of period 608,003 1,230,406
-------------- --------------
Cash and cash equivalents at end of period $ 726,140 $ 425,665
- ------------------------------------------------------------------------------------------------------------------------------
Components of cash and cash equivalents as presented in the consolidated balance
sheets:
Real Estate
Cash and cash equivalents $ 7,033 $ 21,471
Banking
Cash and other deposits 569,107 324,194
Federal funds sold and securities purchased under agreements to resell 150,000 80,000
-------------- --------------
Cash and cash equivalents at end of period $ 726,140 $ 425,665
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 95,072 $ 70,830
Income taxes paid (refunded) (18,696) 92,319
Shares of Saul Centers, Inc. common stock 905 816
Limited partnership units of Saul Holdings Limited Partnership -- 1,471
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 905 816
Distributions from Saul Holdings Limited Partnership 1,632 1,471
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 1,561 2,088
Loans held for sale exchanged for trading securities 107,318 119,618
Loans receivable transferred to (from) loans held for sale and/or securitization -- (125,000)
Loans made in connection with the sale of real estate 284 906
Loans receivable transferred to real estate acquired in settlement of loans 112 --
- ------------------------------------------------------------------------------------------------------------------------------
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,
1999. 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:
December September
31, 30,
1999 1999
----------- -----------
(In thousands)
Single-family residential $ 182,034 $ 112,434
Home improvement and related loans 14,025 4,363
----------- -----------
Total $ 196,059 $ 116,797
=========== ===========
LOANS AND LEASES RECEIVABLE:
Loans and leases receivable is composed of the following:
December September
31, 30,
1999 1999
------------ -----------
(In thousands)
Single-family residential $4,124,410 $3,986,212
Home equity 246,358 239,673
Real estate construction and ground 435,482 419,211
Commercial real estate and multifamily 58,076 60,607
Commercial 666,897 579,668
Automobile 904,118 717,712
Subprime automobile 529,727 480,533
Leasing 191,802 109,724
Home improvement and related loans 92,643 102,483
Overdraft lines of credit and other consumer 31,004 31,646
------------ -----------
7,280,517 6,727,469
------------ -----------
Less:
Undisbursed portion of loans 415,090 379,829
Unearned discounts and net deferred
loan origination costs (26,029) (22,572)
Allowance for loan losses 58,139 58,139
------------ -----------
447,200 415,396
------------ -----------
Total $6,833,317 $6,312,073
============ ===========
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:
December September
31, 30,
1999 1999
----------- -----------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
Real estate held for sale 128,865 133,157
----------- -----------
Subtotal 132,684 136,976
----------- -----------
Less:
Allowance for losses on real
estate held for investment 202 202
Allowance for losses on real
estate held for sale 83,928 84,405
----------- -----------
Subtotal 84,130 84,607
----------- -----------
Total real estate held for
investment or sale $ 48,554 $ 52,369
=========== ===========
<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 December 31, 1999, the Bank's assets accounted for
approximately 96% of the Trust's consolidated assets. The Trust recorded net
income of $1.7 million for the three-month period ended December 31, 1999,
compared to a net loss of $2.5 million for the three-month period ended December
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 Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real
Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The operations conducted by the Real Estate Trust are
designated as "Real Estate," while the business conducted by the Bank and its
subsidiaries is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at
December 31, 1999, which consisted primarily of hotels, office and industrial
projects, and land parcels, has increased from the number of properties at
September 30, 1999. As of October 1, 1999, the Real Estate Trust placed its
newly constructed office building, Dulles North Building Two in operation. This
building contains 59,886 square feet of leasable area and is 100% leased. On
October 25, 1999, the Real Estate Trust opened a newly constructed 95 unit
TownePlace Suites in Ft. Lauderdale, Florida. On December 13, 1999, the Real
Estate Trust acquired an office building located in McLean, Virginia known
as Tysons Park Place. The building contains 249,982 square feet of leasable area
and is 99% leased. The seller was Chevy Chase Bank.
Space in the Real Estate Trust's commercial property portfolio was 96% leased at
December 31, 1999, compared to leasing rates of 92% and 97% at September 30,
1999 and December 31, 1998, respectively. At December 31, 1999, the Real Estate
Trust's commercial property portfolio had a total gross leasable area of 1.6
million square feet, of which 140,000 square feet (8.7%) and 354,000 square feet
(22.0%) are subject to leases whose terms expire in the balance of fiscal 2000
and in fiscal 2001, respectively.
The twelve hotel properties owned by the Real Estate Trust throughout the first
fiscal quarters of 2000 and 1999 experienced average occupancy rates of 63.0%
and 62.1%, respectively, and average room rates of $86.17 and $83.35,
respectively. Seven of these hotels registered improved occupancy rates and ten
registered higher average room rates in the current period. Overall, the hotel
portfolio experienced an average occupancy rate of 62.6% and an average room
rate of $84.22 during the quarter ended December 31, 1999.
<PAGE>
BANKING
General. The Bank continued its pattern of growth during the current quarter
with total assets increasing to $9.8 billion, an increase of $648 million from
September 30, 1999. Total loans increased $601 million during the quarter,
funded primarily through increases in Federal Home Loan Bank advances and
brokered deposits. The Bank recorded operating income of $16.8 million during
the quarter ended December 31, 1999, compared to operating income of $7.3
million in the prior corresponding quarter. Increased interest income on
single-family and automobile loans was partially offset by a decrease in
interest income on mortgage-backed securities and increases in interest expense
on deposits and borrowings, provision for loan and lease losses and operating
expenses.
At December 31, 1999, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.74%, 5.74%, 8.09% and 12.48%,
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 December 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 $400 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)
December 31, September 30, December 31,
1999 1999 1998
----------------- -------------- ---------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 5,132 $ 4,756 $ 7,498
Commercial 85 269 -
Subprime automobile 9,257 6,640 6,067
Other consumer 2,937 1,607 1,195
----------------- -------------- ---------------
Total non-accrual loans (1) 17,411 13,272 14,760
----------------- -------------- ---------------
Real estate owned 128,865 133,157 214,719
Allowance for losses on real estate owned (83,928) (84,405) (153,564)
----------------- -------------- ---------------
Real estate owned, net 44,937 48,752 61,155
----------------- -------------- ---------------
Total non-performing assets $ 62,348 $ 62,024 $ 75,915
================= ============== ===============
Troubled debt restructurings $ 11,714 $ 11,714 $ 11,800
================= ============== ===============
Allowance for losses on loans and leases $ 58,139 $ 58,139 $ 60,157
Allowance for losses on real estate held for investment 202 202 202
Allowance for losses on real estate owned 83,928 84,405 153,564
----------------- -------------- ---------------
Total allowances for losses $ 142,269 $ 142,746 $ 213,923
================= ============== ===============
Ratios:
Non-performing assets, net to total assets (2) 0.04% 0.04% 0.21%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 334.88% 361.35% 220.74%
Allowance for losses on consumer loans and leases to
non-accrual consumer loans (1)(3) 297.93% 440.52% 469.86%
Allowance for losses on loans and leases
to non-accrual loans (1) 333.92% 438.06% 407.57%
Allowance for losses on loans and leases to total loans
and leases receivable (4) 0.82% 0.90% 1.40%
(1) Before deduction of allowances for losses.
(2) Non-performing assets, net are presented after all allowances for losses on
loans and leases and real estate held for investment or sale.
(3) Includes subprime automobile loans.
(4) Includes loans and leases receivable and loans held for sale and/or
securitization, before deduction of allowance for losses.
</TABLE>
<PAGE>
Non-performing assets totaled $62.3 million, after valuation allowances on REO
of $83.9 million, at December 31, 1999, compared to $62.0 million, after
valuation allowances on REO of $84.4 million, at September 30, 1999. In addition
to the valuation allowances on REO, the Bank maintained $58.1 million of
valuation allowances on its loan and lease portfolio at December 31, 1999. The
$0.3 million increase in non-performing assets for the current quarter was
attributable to a net decrease in REO of $3.8 million and an increase in
non-accrual loans of $4.1 million. See "Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $17.4 million at
December 31, 1999, as compared to $13.3 million at September 30, 1999. At
December 31, 1999, non-accrual loans consisted of $5.1 million of non-accrual
real estate loans and $12.3 million of non-accrual consumer and other loans
compared to non-accrual real estate loans of $4.8 million and non-accrual
consumer and other loans of $8.5 million at September 30, 1999. The increase in
non-accrual loans was primarily due to the aging of the bank's loan portfolio
following last year's growth.
REO. At December 31, 1999, the Bank's REO totaled $44.9 million, after valuation
allowances on such assets of $83.9 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 properties remain in two of the four Communities.
<TABLE>
Number Balance Before Balance After Percent
of Gross Charge- Valuation All Valuation Valuation of
Properties Balance Offs Allowances Allowances Allowances Total
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Communities 4 $ 147,281 $ 32,510 $ 114,771 $ 76,608 $ 38,163 84.9%
Residential ground 3 3,512 - 3,512 1,520 1,992 4.4%
Commercial ground 3 17,852 7,646 10,206 5,800 4,406 9.8%
Single-family
residential properties 5 442 66 376 - 376 0.9%
-----------------------------------------------------------------------------------------------------------
Total REO 15 $ 169,087 $ 40,222 $ 128,865 $ 83,928 $ 44,937 100.0%
============================================================================================================
</TABLE>
During the three months ended December 31, 1999, REO decreased $3.8 million,
which was primarily attributable to additional sales in the Communities and
other properties, partially offset by additional capitalized costs.
During the three months ended December 31, 1999, the Bank received revenues of
$3.9 million from dispositions of 73 residential lots or units in the
Communities ($2.6 million), approximately 5.0 acres of commercial land in two of
the Communities ($0.9 million) and various single-family residential properties
($0.4 million).
Delinquent Loans. At December 31, 1999, delinquent loans totaled $76.7 million,
or 1.1% of loans, compared to $53.7 million, or 0.8% of loans, at September 30,
1999. The following table sets forth information regarding the Bank's delinquent
loans at December 31, 1999.
<TABLE>
Principal Balance
(Dollars in Thousands)
-------------------------------------------------------------------------------------
Subprime Other Consumer Total as a
Real Estate Automobile Loans Percentage
Loans Loans Total of Loans (1)
------------------ -------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Loans delinquent for:
30-59 days $ 6,882 $ 47,386 $ 7,355 $ 61,623 0.9%
60-89 days 1,572 11,025 2,522 15,119 0.2%
------------------ -------------------- ----------------- ---------------- ----------------
Total $ 8,454 $ 58,411 $ 9,877 $ 76,742 1.1%
================== ==================== ================= ================ ================
</TABLE>
(1) Includes loans held for sale and/or securitization, before deduction of
valuation allowances, unearned premiums and discounts and deferred loan
origination fees (costs).
Real estate loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity loans. Total
delinquent real estate loans increased to $8.4 million at December 31, 1999,
from $7.5 million at September 30, 1999, as a result of growth in the mortgage
loan portfolio.
Total delinquent subprime automobile loans increased to $58.4 million at
December 31, 1999, from $41.0 million at September 30, 1999, primarily as a
result of growth in the subprime automobile portfolio coupled with seasonal
increase in delinquency rates at year end.
Other consumer loans delinquent 30-89 days increased to $9.9 million at December
31, 1999 from $5.2 million at September 30, 1999, as a result of growth in the
other consumer loan portfolio coupled with seasonal increase in delinquency
rates at year end.
Troubled Debt Restructurings. At December 31, 1999 and September 30, 1999, loans
accounted for as troubled debt restructurings totaled $11.7 million. The Bank
had commitments to lend $0.1 million of additional funds on loans and leases
that have been restructured.
Real Estate Held for Investment. At December 31, 1999 and September 30, 1999,
real estate held for investment consisted of two properties with an aggregate
book value of $3.6 million, net of valuation allowances of $0.2 million.
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 and Leases
(Dollars in thousands)
Three Months Ended Year Ended
December 31, September 30,
-----------------------------------
1999 1998 1999
--------------- -------------- ---------------------
<S> <C> <C> <C>
Balance at beginning of period $ 58,139 $ 60,157 $ 60,157
--------------- -------------- ---------------------
Provision for loan and lease losses 10,988 3,773 22,880
--------------- -------------- ---------------------
Charge-offs:
Single-family residential and home equity (206) (208) (617)
Subprime automobile (9,377) (2,970) (21,169)
Other consumer (1,942) (997) (4,988)
--------------- -------------- ---------------------
Total charge-offs (11,525) (4,175) (26,774)
--------------- -------------- ---------------------
Recoveries:
Single-family residential and home equity 66 29 85
Subprime automobile 267 155 744
Other consumer 204 218 1,047
--------------- -------------- ---------------------
Total recoveries 537 402 1,876
--------------- -------------- ---------------------
Charge-offs, net of recoveries (10,988) (3,773) (24,898)
--------------- -------------- ---------------------
Balance at end of period $ 58,139 $ 60,157 $ 58,139
=============== ============== =====================
Provision for loan losses to average loans and leases (1) (2) 0.66% 0.43% 0.48%
Net loan charge-offs to average loans and leases (1) (2) 0.66% 0.43% 0.52%
Ending allowance for losses on loans and leases to total
loans and leases (2) (3) 0.82% 1.40% 0.90%
(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 and Leases by Type
(Dollars in thousands)
December 31, September 30,
---------------------------------------------------------
1999 1998 1999
---------------------------- ---------------------------- ----------------------------
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 $ 3,187 61.0 % $ 1,822 68.7 % $ 3,187 63.4 %
Home equity 947 3.5 676 5.0 947 3.7
Commercial real estate and multifamily 9,484 0.8 10,828 1.8 11,355 0.9
Real estate construction and ground 3,561 3.6 3,225 3.4 1,697 3.5
Commercial 4,630 6.2 3,623 5.6 4,623 6.1
Automobile 3,334 15.5 3,034 6.5 3,334 12.8
Subprime automobile 28,782 7.5 26,010 5.9 28,782 7.4
Home improvement and related loans 3,523 1.5 3,403 2.3 3,523 1.7
Overdraft lines of credit and
other consumer 691 0.4 1,674 0.8 691 0.5
Unallocated -- -- 5,862 -- -- --
----------- ------------ -----------
Total $ 58,139 $ 60,157 $ 58,139
=========== ============ ===========
</TABLE>
<PAGE>
<TABLE>
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowance for Losses
Three Months Ended Year Ended
December 31, September 30,
--------------------------------------
1999 1998 1999
----------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 202 $ 202 $ 202
Real estate held for sale 84,405 153,564 153,564
----------------- ---------------- ----------------
Total 84,607 153,766 153,766
----------------- ---------------- ----------------
Charge-offs:
Real estate held for sale:
Residential ground (64) -- (1,703)
Communities -- -- (67,456)
Ground (413) -- --
----------------- ---------------- ----------------
Total (477) -- (69,159)
----------------- ---------------- ----------------
Balance at end of period:
Real estate held for investment 202 202 202
Real estate held for sale 83,928 153,564 84,405
----------------- ---------------- ----------------
Total $ 84,130 $ 153,766 $ 84,607
================= ================ ================
</TABLE>
<TABLE>
Components of Allowance for Losses
December 31, September 30,
--------------------------------------
1999 1998 1999
----------------- ---------------- ----------------
<S> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202
----------------- ---------------- ----------------
Allowance for losses on real estate held for sale:
Residential ground 1,520 3,122 1,520
Commercial ground 5,800 5,800 5,800
Ground 76,608 144,642 77,085
----------------- ---------------- ----------------
Total 83,928 153,564 84,405
----------------- ---------------- ----------------
Total allowance for losses on real
estate held for investment or sale $ 84,130 $ 153,766 $ 84,607
================= ================ ================
</TABLE>
<PAGE>
At December 31, 1999 and September 30, 1999, the Bank's total valuation
allowances for losses on loans and leases and real estate held for investment or
sale were $142.3 million and $142.7 million, respectively. Management reviews
the adequacy of the valuation allowances on loans and leases and real estate
using a variety of measures and tools including historical loss performance,
delinquent status, internal risk ratings, current economic conditions and
current underwriting policies and procedures. Using this analysis, management
determines a range of acceptable valuation allowances. Although the amount of
delinquent and non-accrual consumer loans increased during the current quarter,
the provision for loan losses approximated the amount of net charge-offs for the
quarter, reflecting management's determination that the overall level of the
allowance remained appropriate.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $101.1 million at December 31, 1999, which
constituted 75.5% of total non-performing real estate assets, before valuation
allowances. During the three months ended December 31, 1999, the Bank recorded
net charge-offs of $0.6 million on these assets. The allowance for losses on
real estate held for sale at December 31, 1999 is in addition to approximately
$40.2 million of cumulative charge-offs previously taken against assets
remaining in the Bank's portfolio at December 31, 1999.
At both December 31, 1999 and September 30, 1999, the combined allowance for
losses on consumer loans and leases, including automobile, subprime automobile,
home improvement and related loans, overdraft lines of credit and other consumer
loans was $36.3 million. The ratios of the allowance for losses on consumer
loans to non-performing consumer loans and to outstanding consumer loans were
297.9% and 2.2%, respectively, at December 31, 1999 compared to 440.5% and 2.5%,
respectively, at September 30, 1999. The ratios for charge-offs on consumer
loans to total outstanding consumer loans were 0.6% and 1.8% at December 31,
1999 and September 30, 1999, respectively.
Asset and Liability Management. The following table presents the interest rate
sensitivity of the Bank's interest-earning assets and interest-bearing
liabilities at December 31, 1999, which reflects management's estimate of
mortgage loan prepayments, amortization and provisions for loans with 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 and market experience.
Statement savings and passbook accounts with balances under $20,000 are
classified based upon management's assumed attrition rate of 17.5%, and those
with balances of $20,000 or more, as well as all NOW accounts, are assumed to be
subject to repricing within six months or less.
<PAGE>
<TABLE>
Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
------------- ------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999 Real estate loans:
Adjustable-rate $ 527,880 $ 228,965 $ 633,521 $ 473,867 $ 365,773 $ 2,230,006
Fixed-rate 127,742 111,064 379,909 301,903 1,246,192 2,166,810
Home equity credit lines and second
mortgages 119,519 24,485 70,087 39,947 67,000 321,038
Commercial 305,590 12,678 42,041 30,741 42,135 433,185
Consumer and other 369,781 298,047 755,440 292,134 25,015 1,740,417
Loans held for sale 196,059 -- -- -- -- 196,059
Loans held for securitization and sale -- -- -- -- -- --
Mortgage-backed securities 275,516 264,564 383,378 118,600 201,654 1,243,712
Trading securities 5,925 -- -- -- -- 5,925
Other investments 548,581 -- 45,456 -- -- 594,037
------------- ------------ ------------- ------------- ------------ ------------
Total interest-earning assets 2,476,593 939,803 2,309,832 1,257,192 1,947,769 8,931,189
Total non-interest earning assets -- -- -- -- 864,749 864,749
------------- ------------ ------------- ------------- ------------ ------------
Total assets $ 2,476,593 $ 939,803 $ 2,309,832 $ 1,257,192 $ 2,812,518 $ 9,795,938
============= ============ ============= ============= ============ ============
Deposits:
Fixed maturity deposits $ 1,193,262 $ 1,063,654 $ 174,099 $ 39,933 $ -- $ 2,470,948
NOW, statement and passbook accounts 1,718,232 42,314 140,932 95,922 204,421 2,201,821
Money market deposit accounts 1,094,383 -- -- -- -- 1,094,383
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 895,753 43,972 820,983 760,859 80,083 2,601,650
------------- ------------ ------------- ------------- ------------ ------------
Total interest-bearing liabilities 4,901,630 1,149,940 1,136,014 896,714 534,504 8,618,802
Total non-interest bearing liabilities -- -- -- -- 721,810 721,810
Stockholders' equity -- -- -- -- 455,326 455,326
------------- ------------ ------------- ------------- ------------ ------------
Total liabilities & stockholders' equity $ 4,901,630 $ 1,149,940 $ 1,136,014 $ 896,714 $ 1,711,640 $ 9,795,938
============= ============ ============= ============= ============ ============
Gap $ (2,425,037) $ (210,137) $ 1,173,818 $ 360,478 $ 1,413,265
Cumulative gap $ (2,425,037) $(2,635,174) $ (1,461,356) $ (1,100,878) $ 312,387
Adjusted cumulative gap as a percentage
of total assets (24.8)% (26.9)% (14.9)% (11.2)% 3.2 %
</TABLE>
<PAGE>
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, as a percentage of total
assets, was a negative 26.9% at December 31, 1999 compared to a negative 30.6%
at September 30, 1999. The improvement in the Bank's one-year gap during this
period reflects an increase in production of adjustable rate mortgage loans with
repricing terms of less than one-year coupled with an increase of fixed rate
mortgages and home improvement loans held for sale. The Bank continues to
consider a variety of strategies to manage its interest rate risk position.
Capital. At December 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 December 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 $ 480,730
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding gains (2) (6)
-------------
624,724
Adjustments for tangible and core capital:
Intangible assets (55,323)
Non-allowable minority interest in
REIT Subsidiary (1) (4,021)
Non-includable subsidiaries (3) (5,465)
-------------
Total tangible capital 559,915 5.74% $ 146,413 1.50% $ 413,502 4.24%
------------- ========== ============= ========== ============= ===========
Total core capital (4) 559,915 5.74% $ 390,435 4.00% $ 169,480 1.74%
------------- ========== ============= ========== ============= ===========
Tier 1 risk-based capital (4) 559,915 8.09% $ 276,985 4.00% $ 282,930 4.09%
------------- ========== ============= ========== ============= ===========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 51,018
-------------
Total supplementary capital 301,018
-------------
Total available capital 860,933
Equity investments (3) (5,570)
-------------
Total risk-based capital (4) $ 855,363 12.48% $ 553,970 8.00% $ 301,393 4.48%
============= ========== ============= ========== ============= ===========
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(3) Reflects an aggregate offset of $0.6 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
</TABLE>
<PAGE>
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. The following table sets forth the Bank's REO at December 31, 1999,
after valuation allowances of $83.9 million, by the fiscal year in which the
property was acquired through foreclosure.
Fiscal Year (In thousands)
------------ --------------
1990 (1) (2) $ 12,477
1991 (2) 25,691
1992 (2) 151
1993 -
1994 -
1995 6,243
1996 -
1997 -
1998 145
1999 128
2000 102
--------------
Total REO $ 44,937
==============
- -----------------------
(1) Includes REO with an aggregate net book value of $5.6 million, which the
Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $32.8 million, for which
the Bank received an extension of the holding periods through May 14, 2000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements include operating
expenses, debt service, debt principal repayment and capital expenditures.
During fiscal 1999 and 1998, the Real Estate Trust generated positive cash flow
from operating activities, including the receipt of dividends and tax sharing
payments from Chevy Chase Bank, and is expected to do so for the foreseeable
future. However, the Real Estate Trust's cash flow from operating activities has
historically been insufficient to pay principal and interest on its outstanding
debt securities and to fund capital expenditures. These shortfalls have
historically been funded through external sources including additional
borrowings and refinancings and proceeds from asset sales. Overall, the Real
Estate Trust's ability to generate positive cash flow from operating activities
and to meet its liquidity needs in the future, including debt service payments,
repayment of debt principal and capital expenditures, will continue to depend on
dividends and tax sharing payments from the bank.
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 sold to the public, the payment of interest on its
senior secured notes, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financings (including the sale of unsecured
notes), refinancings of maturing mortgage debt, asset sales and tax sharing
payments from the bank. See the Consolidated Statements of Cash Flows included
in the Consolidated Financial Statements in this report.
Liquidity. The Real Estate Trust's ability to meet its liquidity needs,
including debt service payments in the balance of fiscal 2000 and subsequent
years, will depend in significant part on its receipt of dividends from the bank
and tax sharing payments from the bank pursuant to the tax sharing agreement
among the Trust, the bank, and their subsidiaries. The availability and amount
of tax sharing payments and dividends in future periods is dependent upon, among
other things, the bank's operating performance and income, regulatory
restrictions on such payments, and in the case of tax sharing payments, the
continued consolidation of the bank and the bank's subsidiaries with the Trust
for federal income tax purposes.
The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods should enhance prospects for the Real
Estate Trust to receive tax sharing payments and dividends from the bank. In the
first quarter of fiscal 2000, the Bank made no tax sharing payments, but did
make a dividend payment of $3.2 million to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. It is anticipated that the Trust's
consolidation of the bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the bank would otherwise owe. If in any future year, the
bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated federal income
tax returns or (ii) the amount of 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.
Through December 31, 1999, the Trust has purchased either in the open market or
through dividend reinvestment 2,385,000 shares of common stock of Saul Centers
(representing 17.9% of such company's outstanding common stock). As of December
31, 1999, the market value of these shares was approximately $33.5 million. All
shares have been pledged as collateral with the Real Estate Trust's credit line
banks.
<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 or 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.
The Real Estate Trust is currently selling unsecured notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
unsecured notes. To the degree that the Real Estate Trust does not sell new
unsecured notes in an amount sufficient to finance completely the scheduled
repayment of outstanding unsecured notes as they mature, it will finance such
repayments from other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million 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. In September 1999, this facility was increased to
$50.0 million and its term was set at three years with provisions for extending
the term annually. The current maturity date is September 29, 2002. This
facility is secured by a portion of the Real Estate Trust's ownership in Saul
Holdings Partnership and Saul Centers. Interest is computed by reference to a
floating rate index. At December 31, 1999, the Real Estate Trust had outstanding
borrowings of $12.7 million and unrestricted availability of $15.3 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially 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
line of credit was increased to $20.0 million and was extended for an additional
year. The current maturity date for this line is July 31, 2001. Interest is
computed by reference to the floating rate index. At December 31, 1999, the Real
Estate Trust had outstanding borrowings of $12.0 million and unrestricted
availability of $2.8 million.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at December
31, 1999 for the balance of fiscal 2000 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
Notes Notes
Fiscal Year Mortgage Payable- Payable- Total
Notes Secured Unsecured
- ------------- ------------ ------------- ----------- -------------
2000 (1) $ 12,631 $ -- $6,493 $ 19,124
2001 33,245 12,000 6,046 51,291
2002 19,663 12,700 7,798 40,161
2003 18,091 -- 9,953 28,044
2004 7,496 -- 9,411 16,907
Thereafter 160,704 200,000 6,247 366,951
- ------------------------------------------------------------------
Total $251,830 $224,700 $45,948 $522,478
==================================================================
(1) January 1, 2000 - September 30, 2000
Of the $251.8 million of mortgage debt outstanding at December 31, 1999, $195.3
million was nonrecourse to the Real Estate Trust.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Limited Partnership ("Saul Holdings
Partnership"), the Real Estate Trust shares in cash distributions from
operations and from capital transactions involving the sale of properties. The
partnership agreement of Saul Holdings Partnership provides for quarterly cash
distributions to the partners out of net cash flow. During the three-month
period ended December 31, 1999, the Real Estate Trust received a cash
distribution of $1.6 million from Saul Holdings Partnership. During the period
April 1998 through July 1999, the Real Estate Trust reinvested its quarterly
distributions and obtained additional partnership units in Saul Holdings
Partnership. The majority of the Real Estate Trust's ownership interest in Saul
Holdings Partnership has been pledged as collateral with the Real Estate Trust's
lines of credit banks.
Development and Capital Expenditures. During the quarter ended June 30, 1998,
the Real Estate Trust commenced development of four new extended stay hotels:
TownePlace Suites by Marriott containing 91 units located on a 2 acre site owned
by the Trust in Avenel Business Park in Gaithersburg, Maryland. This hotel
opened for business on June 24, 1999.
TownePlace Suites by Marriott containing 91 units located on part of a 9 acre
site owned by the Real Estate Trust in the Arvida Park of Commerce in Boca
Raton, Florida. This hotel opened for business on June 28, 1999.
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. This hotel opened for business on July 9, 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. This hotel opened for business on October 25, 1999.
The costs for the four hotels aggregated $33 million and were largely 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 79,210 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, known as Dulles North Building
Two, 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 was
$7.3 million with bank financing of $6.5 million for a five-year term and a
two-year extension option. The project is 100% leased and became operational on
October 1, 1999.
During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia near
Reagan National Airport. The 308-room Crystal City Holiday Inn has been
converted into a Holiday Inn Crowne Plaza, while the 279-room Howard Johnson has
been converted into a Holiday Inn. Both hotels began operations under their new
designation during October 1999. 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 were 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,
has also been renovated. The incremental costs for the two conversions have been
funded by the Real Estate Trust in part from its internal resources and in part
from its lines of credit.
During the quarter ended June 30, 1999, the Real Estate Trust commenced the
development of an 11-story 229-room hotel on a site adjacent to its Tyson Corner
Holiday Inn in McLean, Virginia. The new hotel will be franchised as a Courtyard
by Marriott and will cost approximately $30.0 million. Financing of $25.0
million has been obtained for an initial period of three years with options for
two one-year extensions. Completion is projected for December 2000.
Also during the quarter ended June 30, 1999, the Real Estate Trust began
development of an 80,000 square foot single-story office/research and
development building located on a 6.5 acre site owned by the Real Estate Trust
in Dulles North Corporate Park, Sterling, Virginia. The development cost is $4.5
million, with estimated bank financing of $4.1 million for a three-year term.
The project is 100% leased to a single tenant and is projected to become
operational in March 2000.
On December 13, 1999, the Real Estate Trust purchased Tysons Park Place, an
office building owned by Chevy Chase Bank. The building is located in Tysons
Corner, McLean, Virginia and contains approximately 250,000 square feet of
leasable area, which was 99% leased as of December 31, 1999. The Bank occupies
approximately 45% of the building. The Real Estate Trust purchased the property
and an adjacent land parcel suitable for further development for $37.0 million.
The transaction was financed with the proceeds of a $32.0 million mortgage loan,
which has a 20-year term and a fixed interest rate of 8.21%.
On December 16, 1999, the Real Estate Trust purchased a 4.6 acre site located in
the Cascades Town Center in Sterling, Virginia for the purpose of constructing a
152 room Hampton Inn. The purchase price was $1,060,000 and the seller was Chevy
Chase Bank. Development costs for the hotel are projected to be $12.6 million.
The hotel will be financed with the proceeds of a $9.15 million mortgage loan,
which has a 3-year term, a floating interest rate and two one-year renewal
options.
The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in range the of $8.0 to $10.0 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 reviewed all its financial and accounting systems 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. The Real
Estate Trust has no information which would suggest that its financial systems
will not continue to function effectively.
Using the Building Owners and Manager Association's guidelines to identify
building systems and critical services that might be vulnerable to the Year 2000
software problem, the Real Estate Trust contacted the manufacturer, supplier, or
vendor supporting the system and requested information regarding Year 2000
compliance. The majority of the replies indicated that the systems or services
are Year 2000 compliant. The Real Estate Trust has no information which would
suggest that any system will not continue to function effectively. Except with
regard to internally developed software, all information regarding Year 2000
compliance is based on a republication (as defined in The Year 2000 Information
and Readiness Disclosure Act) of Year 2000 statements of disclosures made by
others.
The Trust's relatively smooth transition into the Year 2000 indicates that
remediation efforts were largely successful. The Trust has nonetheless planned
for the possibility that Year 2000 failures may yet be discovered. 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, but there is no known major direct exposure. The Real Estate
Trust's commercial leases contain provisions empowering it to take certain
actions to enforce its right to the timely payment of rent regardless of the
tenants'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 has
evaluated these areas and developed contingency plans as appropriate. The Real
Estate estimates that its incremental costs to meet year 2000 compliance was
less than $250,000.
<PAGE>
BANKING
Liquidity. The required liquidity level under OTS regulations at December 31,
1999 was 4.0%. The Bank's average liquidity ratio for the quarter ended December
31, 1999 was 14.7%, compared to 10.5% for the quarter ended September 30, 1999.
The Bank did not securitize and sell any loan receivables during the current
quarter. As part of its operating strategy, the Bank will continue to explore
opportunities to sell assets and to securitize and sell home equity, automobile
and home loan receivables to meet liquidity and other balance sheet objectives.
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 $60.7 million and
$11.1 million, respectively, at December 31, 1999, and $67.0 million and $12.3
million, respectively, at September 30, 1999, both of which are included in
other assets in the Consolidated Balance Sheets. In addition, the Bank owned
subordinated automobile receivables-backed securities with carrying values of
$5.9 million and $7.0 million at December 31, 1999 and September 30, 1999,
respectively, which were classified as trading securities in the Consolidated
Balance Sheets.
<PAGE>
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 December 31, 1999, recourse to the Bank under these arrangements was
$14.4 million, consisting of restricted cash accounts of $8.0 million and
overcollateralization of receivables of $6.4 million.
The Bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At December 31, 1999 and September
30, 1999 recourse to the Bank under this arrangement totaled $1.4 million and
$0.8 million, respectively.
There were no material commitments for capital expenditures at December 31,
1999. During fiscal 1999, the Bank leased 3.5 acres of land at 7501 Wisconsin
Avenue in Bethesda, Maryland, on which the Bank is developing an office building
to use as its new corporate headquarters. The project is expected to be
completed July 2001.
The Bank's liquidity requirements in fiscal 2000 and for years subsequent to
fiscal 2000 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
Many activities relating to the Bank's corporate-wide year 2000 program took
place during the weeks before January 1, 2000, the date change weekend, and the
weeks immediately thereafter. To manage these efforts, the Bank developed a
coordinated management strategy to facilitate detection and resolution of Year
2000 disruptions, and to ensure efficient communications with the Bank's
management, staff, customers, and third parties.
As a result of diligent monitoring, the Bank's internal systems were available
earlier than predicted. As testing proceeded over the transition period, very
few system problems were reported, and all of these problems were resolved with
little or no impact to the Bank and its customers.
The relatively smooth transition into the Year 2000 indicates that remediation
efforts were largely successful. The Bank has nonetheless planned for the
possibility that Year 2000 failures may yet be discovered. Monitoring and
reporting will continue throughout 2000 in compliance with FFIEC guidelines.
As part of the program, the Bank charged $0.4 million and $3.2 million,
respectively to expense during the 1999 quarter and the fiscal year ended
September 30, 1999, respectively.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1998
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$450,000 and an operating loss of $4.1 million in the three-month period ended
December 31, 1999 (the "2000 quarter") compared to a loss before depreciation
and amortization of $558,000 and an operating loss of $3.5 million in the
three-month period ended December 31, 1998 (the "1999 quarter"). The changes
reflect improved results in operations of hotels and office and industrial
properties, and in the Real Estate Trust's equity in earnings of unconsolidated
entities, partially reduced by higher interest expense and general and
administrative expense.
Income after direct operating expenses from hotels increased $667,000 (10.3%)
in the 2000 quarter over the level achieved in the 1999 quarter. Results from
the twelve hotels owned throughout both quarters, declined by $61,000, while
results from newly developed properties amounted to $728,000. The increase in
total revenue of $2,659,000 (14.7%) exceeded the increase of $1,992,000 (17.2%)
in direct operating expenses. For the twelve hotels owned throughout both
periods, the increase in total revenue was $1,018,000 (5.6 %) and the increase
in direct operating expenses was $1,079,000 (9.3%). The revenue increase was
attributable to improved market conditions which permitted the Real Estate Trust
to raise average room rates. The expense increase was largely attributable to
higher employee benefits.
Income after direct operating expenses from office and industrial properties
increased $959,000 (23.6%) in the 2000 quarter over the 1999 quarter. $311,000
of this increase reflected improved results from the seven office properties
owned throughout both quarters, and $648,000 reflected results from two new
properties. Gross income increased $1,082,000 (18.2%), while expenses increased
$123,000 (6.6%). For the seven office properties owned throughout both periods,
the increase in total revenue was $344,000 (5.8%) and the increase in direct
operating expenses was $33,000 (1.8%). The improvement was due to additional
space leased in the current period and higher turnover rents.
Interest expense increased $742,000 (7.3%) in the 2000 quarter because of higher
average borrowings. Average balances of the Real Estate Trust's outstanding
borrowings increased to $479.5 million for the 2000 quarter from $442.4 million
for the 1999 quarter. Average interest rates in the 2000 and 1999 quarters were
9.34% and, 9.48% respectively.
Capitalized interest increased $4,000 (1.8%) in the 2000 quarter due to the
difference in the level of development activity in the current period.
Amortization of debt expense increased $58,000 (59.2%) in the 2000 quarter,
primarily due to costs incurred in connection with obtaining additional mortgage
loans.
Depreciation increased $578,000 (20.1%) in the 2000 quarter, largely as a result
of new income-producing assets placed in service.
Advisory, management and leasing fees paid to related parties increased $217,000
(9.6%) in the 2000 quarter from their level in the 1999 quarter. The monthly
advisory fees were $349,000 in the 2000 quarter, compared to $337,000 in the
1999 quarter, an increase aggregating $35,000 (3.5%). Management and leasing
fees increased $182,000 (14.5%) in the current quarter, reflecting both higher
hotel sales and office rents on which the fees are based.
General and administrative expense increased $1,608,000 (528.0%) in the 2000
quarter, primarily due to a $1.2 million payment to terminate the Howard Johnson
franchise at one hotel and $390,000 in start-up expenses at three new hotels.
Equity in earnings of unconsolidated entities reflected earnings of $2,103,000
in the 2000 quarter as compared to earnings of $1,147,000 in the 1999 quarter,
an increase of $956,000 (83.3%).
<PAGE>
BANKING
Overview. The Bank recorded operating income of $16.8 million for the 2000
quarter compared to operating income of $7.3 million for the 1999 quarter.
Contributing to the increased income were increases in single-family loan
interest income which is partially offset by the decrease in interest income on
mortgage-backed securities and increases in interest expense on deposits and
borrowings, provision for loan and lease losses and operating expenses.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $22.8 million (or 38.9%) in the 1999 quarter compared to
the 1998 quarter. Included in interest income during the 1999 quarter was $0.1
million recorded on non-accrual assets and restructured loans. The Bank would
have recorded additional interest income of $0.8 million for the 1999 quarter if
non-accrual assets and restructured loans had been current in accordance with
their original terms. The Bank's net interest income in future periods will
continue to be adversely affected by the Bank's non-performing assets. See
"Financial Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)
Three Months Ended December 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) $ 6,646,181 $ 139,504 8.40 % $ 3,477,289 $ 75,943 8.74 %
Mortgage-backed securities 1,287,754 19,969 6.20 1,926,088 28,888 6.00
Federal funds sold and securities
purchased under agreements to resell 287,043 3,954 5.51 93,218 1,181 5.07
Trading securities 19,293 383 7.94 30,207 569 7.53
Investment securities 45,091 642 5.70 43,998 615 5.59
Other interest-earning assets 282,149 4,299 6.09 254,390 3,506 5.51
-------------- ------------ -------------- ------------
Total 8,567,511 168,751 7.88 5,825,190 110,702 7.60
------------ ----------- ------------ -----------
Noninterest-earning assets:
Cash 285,968 231,488
Real estate held for investment or sale 49,840 66,853
Property and equipment, net 305,303 283,652
Goodwill and other intangible assets, net 27,649 60,478
Other assets 220,632 221,304
-------------- --------------
Total assets $ 9,456,903 $ 6,688,965
============== ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,154,499 2,552 0.88 $ 1,058,278 3,197 1.21
Savings deposits 980,854 4,616 1.88 1,016,707 5,719 2.25
Time deposits 2,244,699 29,195 5.20 1,512,870 19,399 5.13
Money market deposits 1,120,316 9,398 3.36 1,034,453 8,913 3.45
-------------- ---------- -------------- ----------
Total deposits 5,500,368 45,761 3.33 4,622,308 37,228 3.22
Borrowings 2,803,934 41,613 5.94 948,856 14,874 6.27
-------------- ------------ -------------- ------------
Total liabilities 8,304,302 87,374 4.21 5,571,164 52,102 3.74
------------ ----------- ------------ -----------
Noninterest-bearing items:
Noninterest-bearing deposits 467,901 435,667
Other liabilities 92,556 70,826
Minority interest 144,000 144,000
Stockholders' equity 448,144 437,308
-------------- --------------
Total liabilities and stockholders' equity $ 9,456,903 $ 6,658,965
============== ==============
Net interest income $ 81,377 $ 58,600
============ ============
Net interest spread (2) 3.67 % 3.86 %
=========== ===========
Net yield on interest-earning assets (3) 3.80 % 4.02 %
=========== ===========
Interest-earning assets to interest-bearing
liabilities 103.17 % 104.56 %
=========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
<PAGE>
<TABLE>
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Three Months Ended December 31, 1999
Compared to
Three Months Ended December 31, 1998
Increase (Decrease)
Due to Change in (1)
-------------------------------------------------------
Total
Volume Rate Change
--------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 83,636 $ (20,075) $ 63,561
Mortgage-backed securities (15,104) 6,185 (8,919)
Federal funds sold and securities
purchased under agreements to resell 2,662 111 2,773
Trading securities (377) 191 (186)
Investment securities 15 12 27
Other interest-earning assets 404 389 793
--------------- ---------------- ----------------
Total interest income 71,236 (13,187) 58,049
--------------- ---------------- ----------------
Interest expense:
Deposit accounts 7,232 1,301 8,533
Borrowings 32,136 (5,397) 26,739
--------------- ---------------- ----------------
Total interest expense 39,368 (4,096) 35,272
--------------- ---------------- ----------------
Increase in net interest income $ 31,868 $ (9,091) $ 22,777
=============== ================ ================
- ---------------------------------------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to volume
and the change due to rate.
(2) Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
Interest income in the 1999 quarter increased $58.0 million (or 52.4%) from the
level in the 1998 quarter as a result of higher average balances of loans and
leases receivable, which was offset by lower average yields on loans and leases
receivable.
The Bank's net interest spread decreased to 3.80% in the 1999 quarter from 4.02%
in the 1998 quarter. The decrease in the net interest spread primarily reflected
the decline in the yield on loans resulting from lower yields in consumer loans.
Partially offsetting this decline was an increase in the average balances of
earning assets, which was funded primarily with higher cost Federal Home Loan
Bank advances and brokered deposits. Average interest-earning assets as a
percentage of average interest bearing liabilities decreased to 103.17% for the
1999 quarter compared to 104.56% for the 1998 quarter.
Interest income on loans, the largest category of interest-earning assets,
increased by $63.6 million from the 1998 quarter primarily because of higher
average balances. Higher average balances of the Bank's single-family
residential loans, which increased $1.8 billion (or 73.5%), resulted in a $30.7
million (or 71.1%) increase in interest income from such loans. Slightly 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 $1.0 billion, $215.7 million
and $123.7 million, respectively, and contributed to a $24.9 million, $3.9
million and $2.5 million increase in interest income from such loans,
respectively. Lower average yields on those loans partially offset the effects
of the higher average balances.
The average yield on the loan portfolio in the 1999 quarter decreased 34 basis
points (from 8.74% to 8.40%) from the average yield in the 1998 quarter.
Contributing to the lower net yield was a decrease in the yield on automobile
loans which resulted from management's decision to shift from higher yielding
subprime loans which have higher risks of default to lower yielding prime
automobile loans and leases with relatively lower risk of default. Average
subprime automobile loans as a percentage of total automobile loans and leases
declined to 34.6% during the 1999 quarter from 60.4% during the 1998 quarter.
Also contributing to the decreased average yield on the loan portfolio were
decreases in the average yield on home improvement loans (from 10.32% to 9.24%)
and commercial loans (from 8.13% to 7.63%). An increase in the average yield on
home equity loans (from 6.99% to 8.18%) resulting from increases in the index on
which the interest rates on such loans are based slightly offset the decreases
in the average yield on the loan portfolio.
Interest income on mortgage-backed securities decreased $8.9 million (or 30.9%)
primarily because of lower average balances. The effect of the $638 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 6.00% to 6.20%.
Interest expense on deposits increased $8.5 million (or 22.9%) during the 1999
quarter due to increased average rates and average balances. The 11 basis point
increase in the average rate on deposits (from 3.22% to 3.33%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal year 1999, the Bank began using brokered deposits as an alternative
funding source.
Interest expense on borrowings increased $26.7 million (or 179.8%) in the 1999
quarter over the 1998 quarter. Higher average balances on Federal Home Loan Bank
advances of $1.5 billion or 401.25% and to a lesser extent the increase in the
average rate on such borrowings (from 5.42% to 5.61%) resulted in an increase of
$21.8 million in interest expense. Also contributing to the increase in interest
expense on borrowings was an increase in the average balance of $305.9 million
and average yield (from 5.02% to 5.77%) in securities sold under repurchase
agreements.
Provision for Loan and Lease Losses. The Bank's provision for loan and lease
losses increased to $11.0 million in the 1999 quarter from $3.8 million in the
1998 quarter. The $7.2 million increase was primarily due to increased charge-
offs as a result of the aging of the Bank's loan portfolio following last
year's growth. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other non-interest income increased to $32.2 million in the 1999
quarter from $29.2 million in the 1998 quarter. The $3.0 million (or 10.1%)
increase was primarily attributable to an increase in deposit servicing fees.
Partially offsetting this increase was an increase in losses on sales of loans,
net and a decrease in servicing and securitization income.
Servicing and securitization income decreased $0.7 million (or 10.6%) during the
1999 quarter primarily as a result of decreased securitization balances. The
Bank has not securitized and sold any loan receivables since fiscal year 1998.
Deposit servicing fees increased $5.0 million (or 31.5%) during the 1999 quarter
primarily due to fees generated from the continued expansion of the Bank's
branch and ATM network.
Operating Expenses. Operating expenses for the 1999 quarter increased $9.1
million (or 11.8%) from the level in the 1998 quarter. Salaries and employee
benefits increased $6.1 million (or 15.0%) as a result of additions of staff to
the Bank's consumer lending department and branch operations. Also contributing
to increased operating expenses for the 1999 quarter was an increase in other
operating expenses of $3.6 million (or 39.0%). The 1998 quarter included a
reduction to other operating expenses related to services the Bank provided to
First USA following the sale of the credit card portfolio on September 30, 1998.
Partially offsetting the increase in operating expenses was a decrease in loan
expenses as a result of a $3.5 million recovery of prior valuation adjustments
recorded against the Bank's mortgage servicing assets.
