<PAGE>
Registration No. 333-70753
Rule 424(b)(3)
Supplement Dated August 14, 2000 to
Prospectus Dated January 28, 2000
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
JUNE 30, 2000
----------------------------
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Statements (Unaudited):
(a) Consolidated Balance Sheets at June 30, 2000 and
September 30, 1999
(b) Consolidated Statements of Operations for the three-month
and nine-month periods ended June 30, 2000 and 1999
(c) Consolidated Statements of Comprehensive Income and Changes
in Shareholders' Deficit for the three-month and nine-month
periods ended June 30, 2000 and 1999
(d) Consolidated Statements of Cash Flows for the nine-month
periods ended June 30, 2000 and 1999
(e) Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three months ended June 30, 2000 compared to three
months ended June 30, 1999
Nine months ended June 30, 2000 compared to six months
ended June 30, 1999
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
June 30 September 30
--------------------------------
(In thousands) 2000 1999
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<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 209,541 $ 197,075
Office and industrial 146,890 111,183
Other 3,981 3,923
--------------- ---------------
360,412 312,181
Accumulated depreciation (122,685) (104,774)
--------------- ---------------
237,727 207,407
Land parcels 41,564 39,448
Construction in progress 35,497 20,498
Cash and cash equivalents 8,598 17,857
Other assets 96,926 79,861
--------------- ---------------
Total real estate assets 420,312 365,071
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Banking
Cash and other deposits 287,969 396,146
Federal funds sold and securities purchased under agreements to resell 55,000 194,000
Loans held for sale 93,909 116,797
Loans held for securitization and sale 165,000 --
Investment securities (market value of $45,157 and $44,434, respectively) 45,462 44,400
Trading securities 4,134 6,955
Mortgage-backed securities (market value $1,091,826 and $1,285,442, respectively) 1,121,555 1,311,370
Loans and leases receivable (net of allowance for losses of $59,638 and $58,139, respectively) 7,875,926 6,312,073
Federal Home Loan Bank stock 103,545 87,183
Real estate held for investment or sale (net of allowance for losses of $80,264 and $84,607,
respectively) 52,700 52,369
Property and equipment, net 339,812 304,533
Goodwill and other intangible assets, net 25,873 27,902
Interest only strips, net 15,678 7,626
Other assets 342,078 285,415
--------------- ---------------
Total banking assets 10,528,641 9,146,769
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TOTAL ASSETS $ 10,948,953 $ 9,511,840
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LIABILITIES
Real Estate
Mortgage notes payable $ 276,357 $ 213,447
Notes payable - secured 223,200 216,000
Notes payable - unsecured 46,020 46,122
Deferred gains - real estate 112,834 112,834
Accrued dividends payable - preferred shares of beneficial interest 29,529 32,967
Other liabilities and accrued expenses 41,346 42,268
--------------- ---------------
Total real estate liabilities 729,286 663,638
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Banking
Deposit accounts 6,898,278 5,763,486
Borrowings 558,292 631,144
Federal Home Loan Bank advances 1,995,889 1,743,188
Other liabilities 219,719 174,466
Capital notes -- subordinated 250,000 250,000
--------------- ---------------
Total banking liabilities 9,922,178 8,562,284
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Commitments and contingencies
Minority interest held by affiliates 77,631 73,236
Minority interest -- other 218,307 218,307
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TOTAL LIABILITIES 10,947,402 9,517,465
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SHAREHOLDERS' EQUITY (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 (56,698) (63,884)
Net unrealized holding loss (4) 6
--------------- ---------------
43,399 36,223
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,551 (5,625)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 10,948,953 $ 9,511,840
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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 For the Nine Months
Ended June 30 Ended June 30
---------------------------------------------------------------------
(In thousands, except per share amounts) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 27,188 $ 22,585 $ 70,503 $ 58,360
Office and industrial (including rental income from banking
segment of $820, $51, $1,853 and $153, respectively) 9,140 6,134 24,880 18,064
Other 692 673 2,318 2,180
------------------- --------------- --------------- ---------------
Total income 37,020 29,392 97,701 78,604
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Expenses
Direct operating expenses:
Hotels 15,659 13,078 43,350 36,497
Office and industrial properties 2,450 1,951 6,869 5,743
Land parcels and other 341 358 975 605
Interest expense 11,903 9,830 34,454 29,951
Capitalized interest (326) (305) (793) (680)
Amortization of debt expense 173 58 491 222
Depreciation 3,588 3,120 11,086 8,901
Advisory, management and leasing fees - related parties 2,951 2,501 8,145 7,006
General and administrative 793 256 3,560 743
------------------- --------------- --------------- ---------------
Total expenses 37,532 30,847 108,137 88,988
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Equity in earnings of unconsolidated entities 1,734 1,636 5,712 4,409
Gain (loss) on sale of property 999 -- 999 (1)
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REAL ESTATE OPERATING INCOME (LOSS) $ 2,221 $ 181 $ (3,725) $ (5,976)
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BANKING
Interest income
Loans and leases $ 169,190 $ 107,298 $ 461,148 $ 277,874
Mortgage-backed securities 18,527 22,494 57,373 76,173
Trading securities 233 1,106 970 2,708
Investment securities 660 618 1,957 1,847
Other 4,316 3,021 18,517 10,611
------------------- --------------- --------------- ---------------
Total interest income 192,926 134,537 539,965 369,213
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Interest expense
Deposit accounts 58,637 35,148 155,674 107,267
Borrowings 45,605 27,412 128,108 64,992
------------------- --------------- --------------- ---------------
Total interest expense 104,242 62,560 283,782 172,259
------------------- --------------- --------------- ---------------
Net interest income 88,684 71,977 256,183 196,954
Provision for loan and lease losses (10,760) (5,727) (34,522) (16,116)
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Net interest income after provision for loan losses 77,924 66,250 221,661 180,838
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Other income
Servicing and securitization income 9,156 9,898 22,608 23,480
Deposit servicing fees 23,294 18,139 63,691 49,849
Gain (loss) on sales of trading securities, net (2,916) 1,928 (2,558) 5,256
Gain on real estate held for investment or sale, net 1,297 891 (189) 33,264
Gain on sales of loans, net 4,908 140 3,591 4,135
Other 7,729 5,616 19,035 17,793
------------------- --------------- --------------- ---------------
Total other income 43,468 36,612 106,178 133,777
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Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Three Months For the Nine Months
Ended June 30 Ended June 30
---------------------------------------------------------------------
(In thousands, except per share amounts) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 49,249 $ 44,835 $ 145,245 $ 128,053
Loan 5,668 3,053 8,497 9,405
Property and equipment (including rental expense paid to real
estate segment of $820, $51, $1,853 and $153, respectively) 8,072 6,405 23,380 19,037
Marketing 2,997 3,576 8,006 9,447
Data processing 5,762 4,568 18,290 12,945
Depreciation and amortization 8,106 8,519 24,085 24,826
Deposit insurance premiums 321 1,131 1,795 3,297
Amortization of goodwill and other intangible assets 642 745 2,028 2,365
Other 14,674 10,057 40,502 28,279
------------------- --------------- --------------- ---------------
Total operating expenses 95,491 82,889 271,828 237,654
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BANKING OPERATING INCOME $ 25,901 $ 19,973 $ 56,011 $ 76,961
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TOTAL COMPANY
Operating income $ 28,122 $ 20,154 $ 52,286 $ 70,985
Income tax provision 8,395 7,611 15,114 23,563
------------------- --------------- --------------- ---------------
Income before extraordinary item and minority interest 19,727 12,543 37,172 47,422
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (140) -- (140) --
------------------- --------------- --------------- ---------------
Income before minority interest 19,587 12,543 37,032 47,422
Minority interest held by affiliates (2,360) (1,291) (4,102) (6,485)
Minority interest -- other (6,329) (6,329) (18,985) (18,985)
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TOTAL COMPANY NET INCOME $ 10,898 $ 4,923 $ 13,945 $ 21,952
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NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 9,544 $ 3,569 $ 9,883 $ 17,890
NET INCOME PER COMMON SHARE
Income before extraordinary item and minority interest $ 3.81 $ 2.31 $ 6.86 $ 8.98
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (0.03) -- (0.03) --
------------------- --------------- --------------- ---------------
Income before minority interest 3.78 2.31 6.83 8.98
Minority interest held by affiliates (0.49) (0.26) (0.85) (1.34)
Minority interest -- other (1.31) (1.31) (3.93) (3.93)
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NET INCOME PER COMMON SHARE $ 1.98 $ 0.74 $ 2.05 $ 3.71
------------------------------------------------------------------------------------------------------------------------------------
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' Equity (Deficit)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Three Months For the Nine Months
Ended June 30 Ended June 30
---------------------------------------------------------------------
(Dollars in thousands) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME
Net income $ 10,898 $ 4,923 $ 13,945 $ 21,952
Other comprehensive income:
Net unrealized holding losses (1) (3) (10) (31)
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TOTAL COMPREHENSIVE INCOME $ 10,897 $ 4,920 $ 13,935 $ 21,921
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CHANGES IN SHAREHOLDERS' EQUITY (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 (66,242) (67,615) (63,884) (81,936)
Net income 10,898 4,923 13,945 21,952
Minority interest in capital contribution -- -- (2,697) --
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (1,354) (1,354) (4,062) (4,062)
------------------- --------------- --------------- ---------------
End of period (56,698) (64,046) (56,698) (64,046)
------------------- --------------- --------------- ---------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period (3) 16 6 44
Net unrealized holding losses (1) (3) (10) (31)
------------------- --------------- --------------- ---------------
End of period (4) 13 (4) 13
------------------- --------------- --------------- ---------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848) (41,848)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ 1,551 $ (5,780) $ 1,551 $ (5,780)
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Nine Months
Ended June 30
--------------------------------
(In thousands) 2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (2,461) $ (3,563)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 11,077 8,901
Early extinguishment of debt, net of taxes 140 --
Increase in accounts receivable and accrued income (3,642) (125)
Increase in deferred tax asset (1,498) (2,504)
Decrease in accounts payable and accrued expenses (5,982) (3,258)
Decrease in tax sharing receivable -- 6,610
Amortization of debt expense 1,205 941
Equity in earnings of unconsolidated entities (5,712) (4,409)
Other 12,685 22,790
--------------- ---------------
5,812 25,383
--------------- ---------------
Banking
Net income 16,406 25,938
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees (2,941) 1,703
Depreciation and amortization 24,085 24,826
Provision for loan and leases losses 34,522 16,116
Capitalized interest on real estate under development (2,771) (2,508)
Proceeds from sales of trading securities 222,165 709,071
Net fundings of loans held for sale and/or securitization (542,070) (808,908)
Proceeds from sales of loans held for sale and/or securitization 668,558 34,966
Gain on sales of real estate held for sale (724) (31,175)
Provision for losses on real estate held for investment or sale 350 --
(Gain) loss on sales of trading securities, net 2,558 (5,256)
(Increase) decrease in interest-only strips (8,052) 4,362
Increase in servicing assets (40,513) (1,012)
Decrease in goodwill and other intangible assets 2,036 2,413
Increase in other assets (24,874) (29,938)
Increase (decrease) in other liabilities 20,858 (15,736)
Minority interest held by affiliates 4,102 6,485
Minority interest - other 7,313 7,313
Decrease in tax sharing payable -- (6,610)
Other 63,282 (10,814)
--------------- ---------------
444,290 (78,764)
--------------- ---------------
Net cash provided by (used in) operating activities 450,102 (53,381)
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (39,469) (34,564)
Property sales 903 --
Property acquisitions (19,517) --
Equity investment in unconsolidated entities 4,895 1,500
Other (354) 2
--------------- ---------------
(53,542) (33,062)
--------------- ---------------
Banking
Proceeds from maturities of investment securities 44,000 --
Net proceeds from redemption of Federal Home Loan Bank stock 4,052 24,165
Net proceeds from sales of loans (40,903) --
Net proceeds from sales of real estate 12,067 32,347
Net fundings of loans and leases receivable (768,940) (1,024,186)
Principal collected on mortgage-backed securities 193,167 584,706
Purchases of Federal Home Loan Bank stock (20,414) (42,615)
Purchases of investment securities (45,048) (398)
Purchases of loans receivable (1,342,440) (1,814,575)
Purchases of property and equipment (75,192) (38,738)
Disbursements for real estate held for investment or sale (9,762) (6,879)
Other 15,920 (7,010)
--------------- ---------------
(2,033,493) (2,293,183)
--------------- ---------------
Net cash used in investing activities (2,087,035) (2,326,245)
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Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Nine Months
Ended June 30
--------------------------------
(In thousands) 2000 1999
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 92,440 $ 18,227
Principal curtailments and repayments of mortgages (29,530) (7,538)
Proceeds from secured note financing 24,200 --
Repayments of secured notes (17,000) --
Proceeds from sales of unsecured notes 7,265 4,162
Repayments of unsecured notes (7,367) (8,944)
Costs of obtaining financings (1,735) (587)
Dividends paid - preferred shares of beneficial interest (7,500) (4,000)
--------------- ---------------
60,773 1,320
--------------- ---------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 28,285,272 31,962,603
Customer withdrawals of deposits and payments for maturing certificates of deposit (27,150,480) (31,509,467)
Net increase (decrease) in securities sold under repurchase agreements (117,289) 3,200
Advances from the Federal Home Loan Bank 1,571,731 2,256,590
Repayments of advances from the Federal Home Loan Bank (1,319,030) (1,258,925)
Net increase (decrease) in other borrowings 44,436 (13,869)
Cash dividends paid on preferred stock (7,313) (7,313)
Cash dividends paid on common stock (12,000) (30,000)
Other 24,397 16,116
--------------- ---------------
1,319,724 1,418,935
--------------- ---------------
Net cash provided by financing activities 1,380,497 1,420,255
------------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (256,436) (959,371)
Cash and cash equivalents at beginning of period 608,003 1,230,406
--------------- ---------------
Cash and cash equivalents at end of period $ 351,567 $ 271,035
------------------------------------------------------------------------------------------------------------------------------------
Components of cash and cash equivalents as presented in the consolidated balance sheets:
Real Estate
Cash and cash equivalents $ 8,598 $ 7,591
Banking
Cash and other deposits 287,969 250,444
Federal funds sold and securities purchased under agreements to resell 55,000 13,000
--------------- ---------------
Cash and cash equivalents at end of period $ 351,567 $ 271,035
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 315,543 $ 205,801
Income taxes paid (refunded) (56,255) 94,595
Shares of Saul Centers, Inc. common stock 2,790 2,511
Limited partnership units of Saul Holdings Limited Partnership -- 4,530
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 2,790 2,511
Distributions from Saul Holdings Limited Partnership 4,895 4,530
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 4,242 4,928
Loans held for sale exchanged for trading securities 224,261 702,006
Loans receivable transferred to (from) loans held for sale and/or securitization 514,390 (125,000)
Loans made in connection with the sale of real estate 976 30,109
Loans receivable transferred to real estate acquired in settlement of loans 546 1,381
Loans receivable exchanged for mortgage-backed securities held-to-maturity 4,798 1,792
------------------------------------------------------------------------------------------------------------------------------------
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:
June 30, September 30,
2000 1999
----------- ------------
(In thousands)
Single-family residential $ 74,758 $ 112,434
Home improvement and
related loans 19,151 4,363
----------- -----------
Total $ 93,909 $ 116,797
=========== ===========
LOANS HELD FOR SECURITIZATION AND SALE:
At June 30, 2000, loans held for securitization and sale totaled $165,000 and
was composed of automobile loans. There were no loans held for securitization
and sale at September 30, 1999.
<PAGE>
LOANS AND LEASES RECEIVABLE:
Loans and leases receivable is composed of the following:
June 30, September 30,
2000 1999
------------ -----------
(In thousands)
Single-family residential $ 4,779,414 $ 3,986,212
Home equity 266,062 239,673
Real estate construction and ground 468,481 419,211
Commercial real estate and multifamily 50,425 60,607
Commercial 897,460 579,668
Automobile 797,207 717,712
Subprime automobile 588,197 480,533
Leasing 469,514 109,724
Home improvement and related loans 81,225 102,483
Overdraft lines of credit and other
consumer 30,784 31,646
------------ -----------
8,428,769 6,727,469
------------ -----------
Less:
Undisbursed portion of loans 530,520 379,829
Unearned discounts and net deferred
loan origination costs (37,315) (22,572)
Allowance for loan losses 59,638 58,139
------------ -----------
552,843 415,396
------------ -----------
Total $ 7,875,926 $ 6,312,073
============ ===========
<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:
June 30, September 30,
2000 1999
----------- -----------
(In thousands)
Real estate held for investment $ 2,713 $ 3,819
Real estate held for sale 130,251 133,157
----------- -----------
Subtotal 132,964 136,976
----------- -----------
Less:
Allowance for losses on real
estate held for investment 202 202
Allowance for losses on real
estate held for sale 80,062 84,405
----------- -----------
Subtotal 80,264 84,607
----------- -----------
Total real estate held for
investment or sale $ 52,700 $ 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 June 30, 2000, the Bank's assets accounted for approximately 96%
of the Trust's consolidated assets. The Trust recorded net income of $13.9
million for the nine-month period ended June 30, 2000 compared to net income of
$22.0 million for the nine-month period ended June 30, 1999.
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 June
30, 2000, 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, Dulles North Building Two became operational. 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 by Marriott 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 247,581 square feet of
leasable area and is over 99% leased. The seller was Chevy Chase. On March 1,
2000, Dulles North Building Five became operational. This building contains
80,391 square feet of leasable area and is 100% leased to a single tenant for a
10-year period.
The twelve hotel properties owned by the Real Estate Trust throughout the first
nine-month periods of fiscal 2000 and 1999 experienced average occupancy rates
of 70.1% and 67.5%, respectively, and average room rates of $90.50 and $86.06
respectively. Seven of these hotels registered improved occupancies and ten
registered higher average room rates in the current period. Including
non-comparable hotel properties, the hotel portfolio experienced an average
occupancy rate of 69.5% and an average room rate of $89.17 during the nine-month
period ended June 30, 2000.
The Real Estate Trust's office and industrial portfolio was 98% leased at June
30, 2000, compared to leasing rates of 92% and 97% at September 30, 1999 and at
June 30, 1999, respectively. At June 30, 2000, the office and industrial
portfolio had a total gross leasable area of 1.7 million square feet, of which
36,000 (2.1%)and 321,000 (19.0%) are subject to leases whose terms expire in the
balance of fiscal 2000 and in fiscal 2001, respectively.
<PAGE>
BANKING:
General. The Bank continued its pattern of growth during the current quarter
with total assets increasing to $10.5 billion, an increase of $394.9 million
from March 31, 2000. Total loans and leases increased $384.6 million during the
quarter, funded primarily through increases in brokered deposits and Federal
Home Loan Bank advances. The Bank recorded operating income of $25.9 million
during the quarter ended June 30, 2000, compared to operating income of $20.0
million in the corresponding quarter of the prior year. Increased loan and lease
interest income, gain on sales of loans and deposit service fees were partially
offset by increases in interest expense and operating expenses.
At June 30, 2000, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.46%, 5.46%, 7.27% and 11.10%,
respectively. The Bank's regulatory capital ratios exceeded the requirements
under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well-capitalized"
institutions under the prompt corrective action regulations issued pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
See "Capital."
During the quarter ended June 30, 2000, 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.
During the quarter ended June 30, 2000, the Bank declared and paid out of
retained earnings of the Bank a cash dividend on its Preferred Stock in the
amount of $0.8125 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)
June 30, March 31, September 30,
2000 2000 1999
------------------------- --------------------- ---------------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 4,743 $ 4,904 $ 4,756
Residential construction 70 70 --
Commercial 28 43 269
Subprime automobile 8,654 7,878 6,640
Other consumer 4,171 2,684 1,607
------------------------- --------------------- ---------------------
Total non-accrual loans (1) 17,666 15,579 13,272
------------------------- --------------------- ---------------------
Real estate owned 130,251 125,386 133,157
Allowance for losses on real estate owned (80,062) (83,349) (84,405)
------------------------- --------------------- ---------------------
Real estate owned, net 50,189 42,037 48,752
------------------------- --------------------- ---------------------
Total non-performing assets $ 67,855 $ 57,616 $ 62,024
========================= ===================== =====================
Troubled debt restructurings $ 11,714 $ 11,714 $ 11,714
========================= ===================== =====================
Allowance for losses on loans and leases $ 59,638 $ 58,139 $ 58,139
Allowance for losses on real estate held for investment 202 202 202
Allowance for losses on real estate owned 80,062 83,349 84,405
------------------------- --------------------- ---------------------
Total allowances for losses $ 139,902 $ 141,690 $ 142,746
========================= ===================== =====================
Ratios:
Non-performing assets, net to total assets (2)(3) 0.08% 0.00% 0.04%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 347.97% 344.65% 361.35%
Allowance for losses on consumer loans and leases to
non-accrual consumer loans (1)(4) 283.27% 343.97% 440.52%
Allowance for losses on loans and leases
to non-accrual loans (1) 339.57% 373.19% 438.06%
Allowance for losses on loans and leases to total loans
and leases receivable (5) 0.73% 0.74% 0.90%
(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) Total allowances for losses on loans and leases and real estate held for
investment or sale exceeded non-performing assets at March 31, 2000.
(4) Includes subprime automobile loans.
(5) 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 $67.9 million, after valuation allowances on REO
of $80.1 million, at June 30, 2000, compared to $59.6 million, after valuation
allowances on REO of $83.3 million, at March 31, 2000. In addition to the
valuation allowances on REO, the Bank maintained $60.0 million of valuation
allowances on its loan and lease portfolio at June 30, 2000. The $10.3 million
increase in non-performing assets for the current quarter was attributable to
increases in REO of $8.2 million and non-accrual loans of $2.1 million. See
"Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $17.7 million at June
30, 2000, as compared to $15.6 million at March 31, 2000. At June 30, 2000,
non-accrual loans consisted of $4.8 million of non-accrual real estate loans and
$12.8 million of non-accrual subprime automobile and other loans compared to
non-accrual real estate loans of $5.0 million and non-accrual subprime
automobile and other loans of $10.6 million at March 31, 2000. Market conditions
in certain geographic regions coupled with seasonal staffing problems
contributed to this increase. Management has recently increased its collections
staff in an effort to reduce delinquencies and losses in these areas.
REO. At June 30, 2000, the Bank's REO totaled $50.2 million, after valuation
allowances on such assets of $80.1 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
(Dollars in thousands) Properties Balance Offs Allowances Allowances Allowances Total
---------------------- ----------- --------------- ------------- ------------------ --------------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Communities 4 $ 152,329 $ 32,509 $ 119,820 $ 76,138 $ 43,682 87.1%
Residential ground 2 3,549 - 3,549 1,520 2,029 4.0%
Commercial ground 1 9,375 2,732 6,643 2,404 4,239 8.4%
Single-family
residential properties 2 282 43 239 - 239 0.5%
----------- --------------- ------------- ------------------ --------------- ------------------- -----------
Total REO 9 $ 165,535 $ 35,284 $ 130,251 $ 80,062 $ 50,189 100.0%
=========== =============== ============= ================== =============== =================== ===========
</TABLE>
During the three months ended June 30, 2000, REO increased $8.2 million, which
was primarily attributable to an increase in the Bank's investment purchases in
two of the communities and additional capitalized costs, partially offset by
additional sales in the communities and other properties. The Bank purchased
from certain investors their portion of the developments in two of the
communities. The Bank's investment in one of the communities increased from
80% to 90% and the other community 57% to 84% as a result of the purchases.
During the three months ended June 30, 2000, the Bank received revenues of $3.5
million from dispositions of 34 residential lots or units in the Communities
($1.8 million), approximately 6 acres of commercial land in two of the
Communities ($0.5 million), approximately 145 acres of commercial ground ($0.9
million) and various single-family residential properties ($0.3 million).
<PAGE>
Delinquent Loans. At June 30, 2000, delinquent loans totaled $82.4 million, or
1.0% of loans, compared to $61.9 million, or 0.8% of loans, at March 31, 2000.
The following table sets forth information regarding the Bank's delinquent loans
at June 30, 2000.
<TABLE>
Principal Balance
(Dollars in Thousands)
-------------------------------------------------------------------------------------
Subprime Total as a
Real Estate Automobile Other Percentage
Loans Loans Loans Total of Loans (1)
------------------ -------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days...... $ 5,143 $ 50,175 $ 10,260 $ 65,578 0.8%
60-89 days...... 1,686 12,062 3,057 16,805 0.2%
------------------ -------------------- ----------------- ---------------- ----------------
Total............ $ 6,829 $ 62,237 $ 13,317 $ 82,383 1.0%
================== ==================== ================= ================ ================
(1) Includes loans held for sale and/or securitization, before deduction of
valuation allowances, unearned premiums and discounts and deferred loan
origination fees (costs).
</TABLE>
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 $6.8 million at June 30, 2000, from
$6.1 million at March 31, 2000.
Total delinquent subprime automobile loans increased to $62.2 million at June
30, 2000, from $45.8 million at March 31, 2000. Other consumer loans delinquent
30-89 days increased to $13.3 million at June 30, 2000, from $9.9 million at
March 31, 2000. Market conditions in certain geographic regions coupled with
seasonal staffing problems contributed to this increase. Management has recently
increased its collections staff in an effort to reduce delinquencies and losses
in these areas.
Troubled Debt Restructurings. At June 30, 2000 and March 31, 2000, 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 that have been
restructured.
Real Estate Held for Investment. Real estate held for investment consisted of
two properties with an aggregate book value of $2.5 million and $3.6 million, at
June 30, 2000 and March 31, 2000, respectively, net of valuation allowances of
$0.2 million. The $1.1 million decrease from the balance at March 31, 2000 was
attributable to a sale in one of the properties.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and leases 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
Nine Months Ended Ended
June 30, June 30,
---------------------------------------------
2000 1999 2000
--------------------- --------------------- -----------------------
<S> <C> <C> <C>
Balance at beginning of period $ 58,139 $ 60,157 $ 58,139
--------------------- --------------------- -----------------------
Provision for loan and lease losses 34,522 16,116 10,760
--------------------- --------------------- -----------------------
Charge-offs:
Single-family residential and home equity (624) (424) (139)
Subprime automobile (27,880) (15,036) (7,870)
Other (7,271) (3,613) (2,614)
--------------------- --------------------- -----------------------
Total charge-offs (35,775) (19,073) (10,623)
--------------------- --------------------- -----------------------
Recoveries:
Single-family residential and home equity 76 37 8
Subprime automobile 1,555 558 939
Other 1,121 672 415
--------------------- --------------------- -----------------------
Total recoveries 2,752 1,267 1,362
--------------------- --------------------- -----------------------
Charge-offs, net of recoveries (33,023) (17,806) (9,261)
--------------------- --------------------- -----------------------
Balance at end of period $ 59,638 $ 58,467 $ 59,638
===================== ===================== =======================
Provision for loan losses to average loans and leases (1) (2) 0.63% 0.48% 0.53%
Net loan charge-offs to average loans and leases (1) (2) 0.60% 0.53% 0.46%
Ending allowance for losses on loans and leases to total
loans and leases (2) (3) 0.73% 1.02% 0.73%
(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)
June 30, September 30,
---------------------------------------------------------
2000 1999 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 $ 3,578 59.5 % $ 3,578 58.5 % $ 3,578 63.4 %
Home equity 556 3.3 556 3.3 556 3.7
Commercial real estate and multifamily 9,087 0.6 9,189 0.7 11,355 0.9
Real estate construction and ground 4,127 3.4 3,820 3.3 1,697 3.5
Commercial 5,960 6.8 4,666 6.3 4,623 6.1
Automobile 3,334 17.6 3,334 18.7 3,334 12.8
Subprime automobile 28,782 7.2 28,782 7.4 28,782 7.4
Home improvement and related loans 3,523 1.2 3,523 1.4 3,523 1.7
Overdraft lines of credit and
other consumer 691 0.4 691 0.4 691 0.5
----------- ----------- -----------
Total $ 59,638 $ 58,139 $ 58,139
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowance for Losses
Three Months
Nine Months Ended Ended
June 30, June 30,
-------------------------------
2000 1999 2000
-------------- -------------- ---------------
<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 83,349
-------------- -------------- ---------------
Total 84,607 153,766 83,551
-------------- -------------- ---------------
Provision for real estate losses:
Real estate held for sale 350 -- 350
-------------- -------------- ---------------
Total 350 -- 350
-------------- -------------- ---------------
Charge-offs:
Real estate held for sale:
Residential ground (64) -- --
Commercial ground (3,396) -- (3,285)
Communities (1,233) (67,530) (352)
------------ ------------ -------------
Total (4,693) (67,530) (3,637)
------------ ------------ -------------
Balance at end of period:
Real estate held for investment 202 202 202
Real estate held for sale 80,062 86,034 80,062
-------------- -------------- ---------------
Total $ 80,264 $ 86,236 $ 80,264
============== ============== ===============
Components of Allowance for Losses
June 30, March 31, September 30,
2000 2000 1999
------------------------------- ---------------
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 1,520 1,520
Commercial ground 2,404 5,689 5,800
Communities 76,138 76,140 77,085
-------------- -------------- ---------------
Total 80,062 83,349 84,405
-------------- -------------- ---------------
Total allowance for losses on real
estate held for investment or sale $ 80,264 $ 83,551 $ 84,607
============== ============== ===============
</TABLE>
<PAGE>
At June 30, 2000, the Bank's total valuation allowances for losses on loans and
leases and real estate held for investment or sale were $139.9 million, a slight
decrease from the $141.7 million at March 31, 2000. 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. Based on this analysis, the Bank
increased the allowance for loan and lease losses by $1.5 million during the
quarter ended June 30, 2000, while the allowance for real estate held for
investment or sale decreased by $3.6 million.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $97.3 million at June 30, 2000, which constituted
72% of total non-performing real estate assets, before valuation allowances.
During the three months ended June 30, 2000, the Bank recorded net charge-offs
of $3.8 million on these assets. The allowance for losses on real estate held
for sale at June 30, 2000 is in addition to approximately $35.3 million of
cumulative charge-offs previously taken against assets remaining in the Bank's
portfolio at June 30, 2000.
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 at June 30, 2000,
unchanged from the amount at March 31, 2000. The ratios of the allowance for
losses on consumer loans to non-performing consumer loans and to outstanding
consumer loans were 283.3% and 1.7%, respectively, at June 30, 2000 compared to
344.0% and 1.7%, respectively, at March 31, 2000.
Asset and Liability Management. The following table presents the interest rate
sensitivity of the Bank's interest-earning assets and interest-bearing
liabilities at June 30, 2000, which reflects management's estimate of mortgage
loan prepayments, amortization and provisions for loans and leases 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 June 30, 2000
Real estate loans:
Adjustable-rate $ 937,884 $ 236,819 $ 770,086 $ 619,888 $ 412,334 $ 2,977,011
Fixed-rate 113,170 91,451 332,076 286,753 1,272,893 2,096,343
Home equity credit lines and
second mortgages 249,428 10,957 36,307 24,107 25,378 346,177
Commercial 413,175 15,794 50,617 34,839 40,869 555,294
Consumer and other 449,526 328,843 935,201 233,309 13,860 1,960,739
Loans held for sale 93,909 -- -- -- -- 93,909
Loans held for securitization
and sale 165,000 -- -- -- -- 165,000
Mortgage-backed securities 363,876 278,991 202,658 71,676 204,354 1,121,555
Trading securities 4,134 -- -- -- -- 4,134
Other investments 231,877 -- 45,462 -- -- 277,339
---------------- ---------------- ----------------- ----------------- --------------- ---------------
Total interest-earning assets 3,021,979 962,855 2,372,407 1,270,572 1,969,688 9,597,501
Total non-interest earning
assets -- -- -- -- 931,140 931,140
---------------- ---------------- ----------------- ----------------- --------------- ---------------
Total assets $ 3,021,979 $ 962,855 $ 2,372,407 $ 1,270,572 $ 2,900,828 $ 10,528,641
================ ================ ================= ================= =============== ===============
Deposits:
Fixed maturity deposits $ 1,618,824 $ 785,812 $ 618,947 $ 52,083 $ -- $ 3,075,666
NOW, statement and
passbook accounts 1,690,702 43,554 145,060 98,732 210,409 2,188,457
Money market deposit
accounts 1,104,953 -- -- -- -- 1,104,953
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 804,619 90,426 1,322,251 283,431 53,454 2,554,181
---------------- ---------------- ----------------- ----------------- --------------- ---------------
Total interest-bearing
liabilities 5,219,098 919,792 2,086,258 434,246 513,863 9,173,257
Total non-interest bearing
liabilities -- -- -- -- 892,921 892,921
Stockholders' equity -- -- -- -- 462,463 462,463
---------------- ---------------- ----------------- ----------------- --------------- ---------------
Total liabilities &
stockholders' equity $ 5,219,098 $ 919,792 $ 2,086,258 $ 434,246 $ 1,869,247 $ 10,528,641
================ ================ ================= ================= =============== ===============
Gap $ (2,197,119) $ 43,063 $ 286,149 $ 836,326 $ 1,455,825
Cumulative gap $ (2,197,119) $ (2,154,056) $ (1,867,907) $ (1,031,581) $ 424,244
Adjusted cumulative gap as
a percentage of total assets (20.9)% (20.5)% (17.7)% (9.8)% 4.0 %
</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 20.5% at June 30, 2000 compared to a negative 21.6% at
March 31, 2000. The modest 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.
Capital. At June 30, 2000, the Bank was in compliance with all of its regulatory
capital requirements under FIRREA, and its capital ratios exceeded the ratios
established for "well-capitalized" institutions under OTS prompt corrective
action regulations.
The following table shows the Bank's regulatory capital levels at June 30, 2000
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 $ 486,264
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding gains (2) 2
------------
630,266
Adjustments for tangible and core capital:
Intangible assets (52,299)
Non-allowable minority interest in
REIT Subsidiary (1) (603)
Non-includable subsidiaries (3) (2,904)
Non-qualifying purchased/originated loan servicing (873)
------------
Total tangible capital 573,587 5.46% $ 157,451 1.50% $ 416,137 3.96%
------------ ========== ============= ========== ============= ===========
Total core capital (4) 573,587 5.46% $ 419,869 4.00% $ 153,719 1.46%
------------ ========== ============= ========== ============= ===========
Tier 1 risk-based capital (4) 573,587 7.27% $ 315,420 4.00% $ 258,168 3.27%
------------ ========== ============= ========== ============= ===========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 52,518
------------
Total supplementary capital 302,518
------------
Total available capital 876,105
Equity investments (3) (8,246)
------------
Total risk-based capital (4) $ 867,859 11.10% $ 630,840 8.00% $ 271,431 3.10%
============ ========== ============= ========== ============= ===========
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(3) Reflects an aggregate offset of $1.0 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
</TABLE>
<PAGE>
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. The following table sets forth the Bank's REO at June 30, 2000, after
valuation allowances of $80.1 million, by the fiscal year in which the property
was acquired through foreclosure.
Fiscal Year (In thousands)
------------ --------------------
1990 (1) (2) $ 16,608
1991 (2) 27,074
1992 -
1993 -
1994 -
1995 6,268
1996 -
1997 -
1998 -
1999 -
2000 239
--------------------
Total REO $ 50,189
====================
-----------------------
(1) Includes REO, with an aggregate net book value of $8.6 million, which the
Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $35.4 million, for which
the Bank received an extension of the holding periods through August 4, 2001.
<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, 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 and dividends 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 final quarter 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 nine months of fiscal 2000, the Bank made no tax sharing payments, but did
make dividend payments of $9.6 million to the Real Estate Trust.
<PAGE>
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 in 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 June 30, 2000, the Trust has purchased either in the open market or
through dividend reinvestment approximately 2,513,000 shares of common stock of
Saul Centers Inc. ("Saul Centers"), which represents 18.5% of such company's
outstanding common stock. As of June 30, 2000 the market value of these shares
was approximately $40.5 million. All shares have been pledged as collateral with
the Real Estate Trust's credit line banks.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Limited Partnership("Saul Holdings
Partnership"), the Real Estate Trust shares in cash distributions from
operations and from capital transactions involving the sale of properties. The
partnership agreement of Saul Holdings Partnership provides for quarterly cash
distributions to the partners out of net cash flow. During the nine-month period
ended June 30, 2000, the Real Estate Trust received total cash distributions of
$4.9 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 credit
line banks.
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.
<PAGE>
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. 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 June 30, 2000 the Real Estate Trust had outstanding
borrowings of $15.7 million and unrestricted availability of $16.4 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 and Saul Centers. 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 credit was increased to $20.0 million and was extended for an
additional year. The current maturity date for this line is July 31, 2002.
Interest is computed by reference to a floating rate index. At June 30, 2000 the
Real Estate Trust had outstanding borrowings of $7.5 million and unrestricted
availability of $9.4 million.
The maturity schedule for the Real Estate Trust's outstanding debt at June 30,
2000 for the remainder of fiscal 2000 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
-------------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
-------------------------------------------------------------------
2000 (1) $ 2,650 $ --- $1,538 $ 4,188
2001 34,642 --- 6,046 40,688
2002 21,075 23,200 7,847 52,122
2003 15,644 --- 11,013 26,657
2004 7,817 --- 9,616 17,433
Thereafter 194,529 200,000 9,960 404,489
-------------------------------------------------------------------
Total $276,357 $223,200 $ 46,020 $545,577
==================================================================
(1) July 1, 2000 - September 30, 2000
Of the $276.4 million of mortgage debt outstanding at June 30, 2000, $192.2
million was nonrecourse to the Real Estate Trust.
In April 2000, the Real Estate Trust completed the refinancing of one hotel and
four office/industrial properties. The new loans total $28.4 million, have a
15-year term, and require amortization based on a 20-year schedule. The new
loans replace floating rate loans and have fixed interest rates of 9.09% for the
hotel and 8.64% for the other properties. The Real Estate Trust received
approximately $8.9 million in new funds from the refinancing.
<PAGE>
In June 2000, the Real Estate Trust completed the refinancing of one
office/industrial property. The new loan was for $6.6 million at a fixed
interest rate of 8.47%, and it replaced a floating-rate construction loan with
an outstanding balance of $3.6 million.
The new loan has a 15-year term and requires amortization based on a 20-year
schedule.
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 Real Estate Trust in Avenel Business Park in Gaithersburg, Maryland. This
hotel opened for business on June 24, 1999.
TownePlace Suites by Marriott containing 91 units located on part of 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
with 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 was converted
into a Holiday Inn Crowne Plaza, while the 279-room Howard Johnsons was
converted into a Holiday Inn. Both hotels began operations under their new
designations 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
Johnsons hotel. A restaurant, which had been operated by an unaffiliated
company, was also renovated. The incremental costs for the two conversions were
funded by the Real Estate Trust in part from its internal resources and in part
from its bank lines.
<PAGE>
During the quarter ended June 30, 1999, the Real Estate Trust commenced the
development of an 11-story 229-room hotel on a site adjacent to its Tysons
Corner Holiday Inn in McLean, Virginia. The new hotel will be franchised as a
Courtyard by Marriott and will cost approximately $30.0 million. Financing of
$25.0 million has been obtained for an initial period of three years with
options for two one-year extensions. Opening is scheduled for December 2000.
Also during the quarter ended June 30, 1999, the Real Estate Trust began
development of an 80,391 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 of this
project, known as Dulles North Building Five, was $5.0 million, with financing
of $3.6 million for a three-year term. This loan was refinanced in June 2000 as
indicated above. The project is 100% leased to a single tenant and became
operational on March 1, 2000.
On December 13, 1999, the Real Estate Trust purchased Tysons Park Place, an
office building owned by Chevy Chase. The building is located in Tysons Corner,
McLean, Virginia and contains approximately 248,000 square feet of leasable
area, which was 99% leased as of December 31, 1999. Chevy Chase 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. Development costs for the hotel are projected to be $11.3 million.
The hotel is being 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. Opening is scheduled for November 2000.
During the quarter ended March 31, 2000, the Real Estate Trust began the
development of a 30,000 square foot office flex building located on a 2.2 acre
site in the Avenel Business Park in Gaithersburg, Maryland. The development cost
is projected to be $3.2 million, which the Real Estate Trust is financing with
its bank lines. Completion is expected in the summer of 2000. The project is
100% leased to a single tenant. In July 2000, the Real Estate Trust agreed to
sell its interest in this project to Saul Centers at a price of $4.2 million, as
determined by an independent appraisal.
Also, during the quarter ended March 31, 2000, the Real Estate Trust began the
development of a 53,000 square foot office flex building located on a 3.8 acre
site in Dulles North Corporate Park near other Real Estate Trust projects. The
new building will be known as Dulles North Building Six. Development costs are
projected to be $6.1 million and will be financed with the proceeds of a $5.2
million mortgage loan. Completion is expected in the summer of 2000. The project
is 100% leased to a single tenant.
On June 29, 2000, the Real Estate Trust purchased a 6.17 acre site in the
Loudoun Tech Center, a 246 acre business park located in Loudoun County,
Virginia, for $1,050,000. The site was purchased for the purpose of developing
an 81,000 square foot office flex building to be known as Loudoun Tech Phase I.
The cost of development is projected to be $8.4 million and will be financed by
a $7.4 million mortgage loan. Construction is expected to be completed in
November 2000 and the building is expected to be operational by November 2001.
<PAGE>
The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in the range of $8.5 to $10.0 million per
year for the next several years.
BANKING:
Liquidity. The required liquidity level under OTS regulations at June 30, 2000
was 4.0%. The Bank's average liquidity ratio for the quarter ended June 30, 2000
was 7.5%, compared to 10.0% for the quarter ended March 31, 2000.
The Bank securitized and sold $349.4 million of automobile receivables during
the three months ended June 30, 2000. At June 30, 2000, the Bank is considering
the securitization and sale of $165 million of outstanding automobile
receivables. As part of its operating strategy, the Bank continues to explore
opportunities to sell assets and to securitize and sell mortgage, 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 $49.1 million and
$10.7 million, respectively, at June 30, 2000, and $51.7 million and $11.9
million, respectively, at March 31, 2000, 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
$4.1 million and $5.0 million at June 30, 2000 and March 31, 2000, respectively,
which were classified as trading securities in the Consolidated Balance Sheets.
The Bank is also obligated under various recourse provisions related to the swap
of single family residential loans for mortgage-backed securities issued by the
Bank. At June 30, 2000, recourse to the Bank under these arrangements was $10.9
million, consisting of restricted cash accounts of $8.3 million and
overcollateralization of receivables of $2.6 million.
The Bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At June 30, 2000 and March 31,
2000 recourse to the Bank under this arrangement totaled $3.2 million and $2.0
million, respectively.
There were no material commitments for capital expenditures at June 30, 2000.
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.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 (the "2000 quarter") COMPARED TO
THREE MONTHS ENDED JUNE 30, 1999 (the "1999 quarter")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$6.0 million and operating income of $2.2 million in the 2000 quarter compared
to income before depreciation and amortization of $3.4 million and operating
income of $181,000 in the 1999 quarter. The increase in operating income was
largely attributable to improved results from income-producing properties.
Income after direct operating expenses from hotel properties increased
$2,021,000 (21.3%) in the 2000 quarter over the level achieved in the 1999
quarter. $1,287,000 (13.5%) of this increase reflected improved results from the
twelve hotels owned throughout both quarters, and $734,000 (7.7%) reflected
results from non-comparable properties. The increase in total revenue of
$4,603,000 (20.4%)exceeded the increase of $2,581,000 (19.7%) in direct
operating expenses. For the twelve hotels owned throughout both periods, the
increase in total revenue was $2,773,000 (12.3%) and the increase in direct
operating expenses was $1,486,000 (11.4%). The revenue increase was attributable
to improved market conditions, which permitted the Real Estate Trust to raise
average room rates at ten properties and average occupancy levels at seven
properties.
Income after direct operating expenses from office and industrial properties
increased $2,508,000 (60.0%) in the 2000 quarter compared to such income in the
1999 quarter. $357,000 (8.5%)of this increase reflected improved results from
the seven properties owned throughout both quarters and $2,151,000 (51.5%)
reflected results from non-comparable properties. The increase in total revenue
of $3,006,000 (49.0%) exceeded the increase of $498,000 (25.5%) in direct
operating expenses. For the seven properties owned throughout both periods, the
increase in total revenue was $445,000 (7.3%) and the increase in direct
operating expenses was $88,000 (4.5%).
Other income increased $19,000 (2.9%) during the 2000 quarter, largely due to
income received for granting a temporary easement at a land parcel.
Land parcels and other expense increased $29,000 (9.3%) during the 2000 quarter
due to higher property taxes.
Interest expense increased $2,073,000 (21.1%)in the 2000 quarter, primarily
because of higher mortgage interest and higher interest on bank borrowings. The
average balance of the Real Estate Trust's outstanding borrowings increased to
$528.1 million for the 2000 quarter from $436.0 million for the 1999 quarter.
The increase in average borrowings was the result of mortgage loan refinancings
and bank borrowings. The weighted average cost of borrowings was 9.32% in the
2000 quarter compared to 9.24% in the 1999 quarter.
Capitalized interest increased $21,000 (6.9%) during the 2000 quarter due to the
higher level of development activity in the current period.
Amortization of debt expense increased $115,000 (198.3%) in the 2000 quarter,
primarily due to costs experienced in adding new debt.
<PAGE>
Depreciation increased $468,000 (15.0%) in the 2000 quarter as a result of the
addition of seven new properties and new assets placed in service at existing
properties.
Advisory, management and leasing fees paid to related parties increased $450,000
(18.0%) in the 2000 quarter from their expense level in the 1999 quarter. The
monthly advisory fee in the 2000 quarter was $349,000 compared to $337,000 in
the 1999 quarter, which resulted in an aggregate increase of $35,000 (3.5%).
Management and leasing fees increased $415,000 (27.9%) in the current quarter,
reflecting both higher hotel sales and office rents on which the fees are based.
General and administrative expense increased $537,000 (210.1%) in the 2000
quarter, principally as a result of higher legal and accounting expense.
Equity on earnings of unconsolidated entities reflected earnings of $1,734,000
in the 2000 quarter, an increase of $98,000 (6.0%) over the amount recorded in
the 1999 quarter. The improvement was due to increased period-to-period earnings
of Saul Centers.
In April 2000, the Real Estate Trust received $1.3 million from Cobb County,
Georgia, in payment on the condemnation for road improvements of a 3.4 acre
piece of its Circle 75 land parcel. The gain on this transaction was $999,000.
<PAGE>
BANKING:
Overview. The Bank recorded operating income of $25.9 million for the 2000
quarter, compared to operating of $20.0 million for the 1999 quarter.
Contributing to the increased income were increases in interest income on loans
and leases, gain on sales of loans and deposit service fees which were partially
offset by increases in interest expense, provision for loan and lease losses and
operating expenses.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $16.7 million (or 23.2%) in the 2000 quarter over the
1999 quarter. Included in interest income during the 2000 quarter was $0.1
million recorded on non-accrual assets and restructured loans. The Bank would
have recorded additional interest income of $0.9 million for the 2000 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 June 30,
----------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ------------------------------------------
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) $ 8,067,801 $ 169,190 8.39 % $ 5,171,243 $ 107,298 8.30 %
Mortgage-backed securities 1,156,908 18,527 6.41 1,522,659 22,494 5.91
Federal funds sold and securities
purchased under agreements to resell 78,220 1,062 5.43 30,747 380 4.94
Trading securities 15,816 233 5.89 64,927 1,106 6.81
Investment securities 45,467 660 5.81 45,492 618 5.43
Other interest-earning assets 182,818 3,254 7.12 184,658 2,641 5.72
---------------- ------------- --------------- -------------
Total 9,547,030 192,926 8.08 7,019,726 134,537 7.67
------------- ------------ ------------- -----------
Noninterest-earning assets:
Cash 252,223 243,378
Real estate held for investment or sale 49,438 56,697
Property and equipment, net 324,275 295,309
Goodwill and other intangible assets, net 26,283 28,947
Other assets 269,910 259,222
---------------- ---------------
Total assets $ 10,469,159 $ 7,903,279
================ ===============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,248,192 2,720 0.87 $ 1,153,901 2,895 1.00
Savings deposits 934,119 4,313 1.85 1,034,203 5,248 2.03
Time deposits 2,881,435 41,576 5.77 1,522,435 17,908 4.71
Money market deposits 1,093,874 10,028 3.67 1,093,696 9,097 3.33
---------------- ----------- --------------- -----------
Total deposits 6,157,620 58,637 3.81 4,804,235 35,148 2.93
Borrowings 2,976,595 45,605 6.13 1,947,958 27,412 5.63
---------------- ------------- --------------- -------------
Total liabilities 9,134,215 104,242 4.56 6,752,193 62,560 3.71
------------- ------------ ------------- -----------
Noninterest-bearing items:
Noninterest-bearing deposits 549,181 469,243
Other liabilities 182,942 98,042
Minority interest 144,000 144,000
Stockholders' equity 458,821 439,801
---------------- ---------------
Total liabilities and stockholders'
equity $ 10,469,159 $ 7,903,279
================ ===============
Net interest income $ 88,684 $ 71,977
============= =============
Net interest spread (2) 3.52 % 3.96 %
============ ===========
Net yield on interest-earning assets (3) 3.72 % 4.10 %
============ ===========
Interest-earning assets to interest-bearing
liabilities 104.52 % 103.96 %
============ ===========
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
<PAGE>
<TABLE>
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Three Months Ended June 30, 2000
Compared to
Three Months Ended June 30, 1999
Increase (Decrease)
Due to Change in (1)
-------------------------------------------------------
Total
Volume Rate Change
---------------- --------------- ---------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 60,717 $ 1,175 $ 61,892
Mortgage-backed securities (14,194) 10,227 (3,967)
Federal funds sold and securities
purchased under agreements to resell 641 41 682
Trading securities (741) (132) (873)
Investment securities (2) 44 42
Other interest-earning assets (178) 791 613
---------------- --------------- ---------------
Total interest income 46,243 12,146 58,389
---------------- --------------- ---------------
Interest expense:
Deposit accounts 11,368 12,121 23,489
Borrowings 15,574 2,619 18,193
---------------- --------------- ---------------
Total interest expense 26,942 14,740 41,682
---------------- --------------- ---------------
Increase in net interest income $ 19,301 $ (2,594) $ 16,707
================ =============== ===============
-----------------------------------------------------------------------------------------------------
(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 2000 quarter increased $58.4 million (or 43.4%) from the
level in the 1999 quarter as a result of higher average balances and slightly
higher average yields on loans and leases receivable.
The Bank's net interest spread decreased to 3.52% in the 2000 quarter from 3.96%
in the 1999 quarter. The decrease in the net interest spread primarily reflected
an increase in the cost of deposits and Federal Home Loan Bank advances.
Partially offsetting the increase in deposit and borrowings cost was a slight
increase in the yield on loans and mortgage-backed securities. Average
interest-earning assets as a percentage of average interest bearing liabilities
increased slightly to 104.52% for the 2000 quarter compared to 103.96% for the
1999 quarter.
Interest income on loans, the largest category of interest-earning assets,
increased by $61.9 million from the 1999 quarter primarily because of higher
average balances. Higher average balances of the Bank's automobile loans, which
increased $1.3 billion (or 158.0%), resulted in a $30.0 million (or 105.2%)
increase in interest income from such loans. Average balances of single-family
residential loans, commercial loans and real estate construction loans increased
$1.2 billion, $252.6 million and $61.2 million, respectively, and contributed to
a $22.6 million, $5.8 million and $2.3 million increase in interest income from
such loans, respectively. Lower average yields on automobile loans partially
offset the effects of the higher average balances.
The average yield on the loan portfolio in the 2000 quarter increased 9 basis
points (from 8.30% to 8.39%) from the average yield in the 1999 quarter.
Contributing to the slightly higher net yield was an increase in the average
yield on home equity loans, residential construction loans and commercial loans.
Partially offsetting the increase 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 26.4% during the 2000 quarter from 41.9% during the 1999 quarter.
Interest income on mortgage-backed securities decreased $4.0 million (or 17.6%)
primarily because of lower average balances. The effect of the $365.8 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.91% to 6.41%.
Interest expense on deposits increased $23.5 million (or 66.8%) during the 2000
quarter due to increased average rates and average balances. The 88 basis point
increase in the average rate on deposits (from 2.93% to 3.81%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal year 2000, the Bank increased its use of brokered deposits as an
alternative funding source.
Interest expense on borrowings increased $18.2 million (or 66.4%) in the 2000
quarter over the 1999 quarter. A $715.8 million (or 56.1%) increase in average
balances on Federal Home Loan Bank advances and, to a lesser extent, an increase
in the average rate on such borrowings (from 5.23% to 5.70%) resulted in an
increase of $11.7 million in interest expense from such borrowings.
<PAGE>
Provision for Loan and Lease Losses. The Bank's provision for loan and lease
losses increased to $10.8 million in the 2000 quarter from $5.7 million in the
1999 quarter. The $5.1 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 $43.5 million in the 2000
quarter from $36.6 million in the 1999 quarter. The $6.9 million (or 20.0%)
increase was primarily attributable to an increase in deposit service fees and
gain on sales of loans. Deposit servicing fees increased $5.2 million (or 28.4%)
during the 2000 quarter primarily due to fees generated from the continued
expansion of the Bank's branch and ATM network. Partially offsetting the
increase was a loss on the sale of trading securities. The Bank recognized a
gain on sales of loans of $4.9 million during the current quarter compared to
$0.1 million in the prior corresponding quarter.
Operating Expenses. Operating expenses for the 2000 quarter increased $12.6
million (or 15.2%) from the level in the 1999 quarter. Salaries and employee
benefits increased $4.4 million (or 9.8%) 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 2000 quarter was an increase in other
operating expenses of $4.6 million (or 45.9%). The 1999 quarter included a
reduction in other operating expenses related to services the Bank provided to
First USA following the sale of the credit card portfolio on September 30, 1998.
<PAGE>
NINE MONTHS ENDED JUNE 30, 2000 (the "2000 period") COMPARED TO NINE MONTHS
ENDED JUNE 30, 1999 (the "1999 period").
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$7.9 million and an operating loss of $3.7 million in the 2000 period compared
to operating income before depreciation and amortization of $3.1 million and an
operating loss of $6.0 million in the 1999 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 $5,290,000 (24.2%)
in the 2000 period over the level achieved in the 1999 period. $2,123,000 (9.7%)
of this increase reflected improved results from twelve hotels owned throughout
both periods and $3,167,000 (14.5%) reflected results from non-comparable
properties. The increase in total revenue of $12,143,000 (20.8%) exceeded the
increase of $6,853,000 (18.8%) in direct operating expenses. For the twelve
hotels owned throughout both periods, the increase in total revenue was
$5,785,000 (9.9%) and the increase in direct operating expenses was $3,662,000
(10.0%). The revenue increase was attributable to improved market conditions
which permitted the Real Estate Trust to raise average room rates at ten
properties and an average occupancy levels at seven properties.
Income after direct operating expenses from office and industrial properties
increased $5,691,000 (46.2%) in the 2000 period compared to such income in the
1999 period. $908,000 (7.4%) of this increase reflected improved results from
the seven properties owned throughout both periods and $4,783,000 (38.8%)
reflected results from non-comparable properties. The increase in total revenue
of $6,816,000 (37.7%) exceeded the increase of $1,125,000 (19.6%) in direct
operating expenses. For the seven properties owned throughout both periods, the
increase in total revenue was $1,080,000 (6.0%) and the increase in direct
operating expenses was $172,000 (3.0%).
Other income increased $139,000 (6.4%) during the 2000 period due to higher
interest income.
Land parcels and other expense increased $416,000 (74.4%) during the 2000
period. Last year's number reflected a multi-year tax refund at one property.
Interest expense increased $4,503,000 (15.0%) in the 2000 period, primarily
because of higher mortgage interest and higher interest on bank borrowings.
Average balances of the Real Estate Trust's outstanding borrowings increased to
$509.3 million for the 2000 period from $441.3 million for the 1999 period. The
increase in average borrowings occurred as a result of mortgage loan
refinancings and higher bank borrowings. The weighted average cost of borrowings
was 9.33% in the 2000 period compared to 9.27% in the 1999 period.
Capitalized interest increased $113,000 (16.6%) during the 2000 period due to
the higher level of development activity in the current period.
Amortization of debt expense increased $269,000 (121.2%) in the 2000 period,
primarily due to costs experienced in adding new debt.
Depreciation increased $2,185,000 (24.5%) in the 2000 period as a result of the
additions of new properties and new assets placed in service at existing
properties.
<PAGE>
Advisory, management and leasing fees paid to related parties increased
$1,139,000 (16.3%) in the 2000 period from their expense level in the 1999
period. The monthly advisory fee in the 2000 period was $349,000 compared to
$337,000 in the prior period, which resulted in an aggregate increase of
$106,000 (3.5%). Management and leasing fees increased $1,033,000 (26.0%) in the
current period, reflecting both higher hotel sales and office rents on which the
fees are based.
General and administrative expense increased $2,817,000 (379.3%) in the 2000
period, principally as a result of a $1.2 million payment to terminate the
Howard Johnsons franchise at one hotel, start-up expenses for new hotels, higher
legal and accounting costs and the writeoff of abandoned development expenses.
Equity in earnings of unconsolidated entities reflected earnings of $5,712,000
for the 2000 period and earnings of $4,409,000 for the 1999 period, an increase
of $1,303,000 (29.6%). The improvement was due to increased period-to-period
earnings of Saul Centers.
In April 2000, the Real Estate Trust received $1.3 million from Cobb County,
Georgia, in payment on the condemnation for road improvements of a 3.4 acre
piece of its Circle 75 land parcel. The gain on this transaction was $999,000.
<PAGE>
BANKING:
Overview. The Bank recorded operating income of $56.0 million for the 2000
period, compared to operating income of $77.0 million for the 1999 period. The
decrease in income for the period was primarily attributable to a decrease in
other (non-interest) income resulting from the inclusion in last year's results
of a $31.6 million gain from the sale of one of the Bank's REO properties.
Operating (non-interest) expense also increased by $34.2 million. In addition,
an increase in provision for loan and lease losses of $18.4 million contributed
to the reduced income in the 2000 period. Partially offsetting the reduction of
income was an increase in net interest income of $59.2 million.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $59.2 million (or 30.1%) in the 2000 period over the
1999 period. Included in interest income during the 2000 period was $0.3 million
recorded on non-accrual assets and restructured loans. The Bank would have
recorded additional interest income of $2.4 million for the 2000 period if
non-accrual assets and restructured loans had been current in accordance with
their original terms. The Bank's net interest income in future periods will
continue to be adversely affected by the Bank's non-performing assets. See
"Financial Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)
Nine Months Ended June 30,
----------------------------------------------------------------------------------------
2000 1999
------------------------------------------- -------------------------------------------
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) $ 7,354,928 $ 461,148 8.36 % $ 4,396,181 $ 277,874 8.43 %
Mortgage-backed securities 1,221,771 57,373 6.26 1,715,788 76,173 5.92
Federal funds sold and securities
purchased under agreements to resell 170,404 7,173 5.61 58,047 2,162 4.97
Trading securities 20,259 970 6.38 52,460 2,708 6.88
Investment securities 45,339 1,957 5.76 44,498 1,847 5.53
Other interest-earning assets 231,864 11,344 6.52 202,961 8,449 5.55
--------------- ------------- --------------- -------------
Total 9,044,565 539,965 7.96 6,469,935 369,213 7.61
------------- ----------- ------------- -----------
Noninterest-earning assets:
Cash 278,395 241,140
Real estate held for investment or sale 49,297 62,285
Property and equipment, net 311,828 289,543
Goodwill and other intangible assets, net 26,960 29,708
Other assets 236,500 251,610
--------------- ---------------
Total assets $ 9,947,545 $ 7,344,221
=============== ===============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,203,496 7,901 0.88 $ 1,112,023 9,039 1.08
Savings deposits 953,705 13,310 1.86 1,026,164 16,345 2.12
Time deposits 2,572,590 105,747 5.48 1,501,349 54,888 4.87
Money market deposits 1,101,966 28,716 3.47 1,072,806 26,995 3.36
--------------- ----------- --------------- -----------
Total deposits 5,831,757 155,674 3.56 4,712,342 107,267 3.04
Borrowings 2,848,714 128,108 6.00 1,506,837 64,992 5.75
--------------- ------------- --------------- -------------
Total liabilities 8,680,471 283,782 4.36 6,219,179 172,259 3.69
------------- ----------- ------------- -----------
Noninterest-bearing items:
Noninterest-bearing deposits 505,232 465,236
Other liabilities 165,244 83,173
Minority interest 144,000 144,000
Stockholders' equity 452,598 432,633
--------------- ---------------
Total liabilities and stockholders'
equity $ 9,947,545 $ 7,344,221
=============== ===============
Net interest income $ 256,183 $ 196,954
============= =============
Net interest spread (2) 3.60 % 3.92 %
=========== ===========
Net yield on interest-earning assets (3) 3.78 % 4.06 %
=========== ===========
Interest-earning assets to interest-bearing
liabilities 104.19 % 104.03 %
=========== ===========
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
<PAGE>
<TABLE>
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Nine Months Ended June 30, 2000
Compared to
Nine Months Ended June 30, 1999
Increase (Decrease)
Due to Change in (1)
-------------------------------------------------------
Total
Volume Rate Change
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans (2) $ 187,120 $ (3,846) $ 183,274
Mortgage-backed securities (25,401) 6,601 (18,800)
Federal funds sold and securities
purchased under agreements to resell 4,698 313 5,011
Trading securities (1,554) (184) (1,738)
Investment securities 34 76 110
Other interest-earning assets 1,300 1,595 2,895
--------------- --------------- ----------------
Total interest income 166,197 4,555 170,752
--------------- --------------- ----------------
Interest expense:
Deposit accounts 28,142 20,265 48,407
Borrowings 60,178 2,938 63,116
--------------- --------------- ----------------
Total interest expense 88,320 23,203 111,523
--------------- --------------- ----------------
Increase in net interest income $ 77,877 $ (18,648) $ 59,229
=============== =============== ================
----------------------------------------------------------------------------------------------------
(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 2000 period increased $170.8 million (or 46.3%) from the
level in the 1999 period as a result of higher average balances of loans and
leases receivable, which was partially offset by lower average yields on loans
and leases receivable.
The Bank's net interest spread decreased to 3.60% in the 2000 period from 3.92%
in the 1999 period. The 32 basis point reduction in the net interest spread
primarily reflected the decline in the yield on loans resulting from lower
yields on 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
increased slightly to 104.19% for the 2000 period compared to 104.03% for the
1999 period.
Interest income on loans and leases, the largest category of interest-earning
assets, increased by $183.3 million from the 1999 period primarily because of
higher average balances. Higher average balances of the Bank's single-family
residential loans, which increased $1.4 billion (or 46.4%), resulted in a $74.1
million (or 46.4%) increase in interest income from such loans. Average balances
of automobile loans, commercial loans and real estate construction loans
increased $1.2 billion, $231.3 million and $93.1 million, respectively, and
contributed to a $83.3 million, $14.4 million and $7.4 million increase in
interest income from such loans, respectively. Lower average yields on
automobile loans partially offset the effects of the higher average balances.
The average yield on the loan portfolio in the 2000 period decreased 7 basis
points (from 8.43% to 8.36%) from the average yield in the 1999 period.
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 29.6% during the 2000 period from 48.5% during the 1999 period. Also
contributing to the decreased average yield on the loan portfolio was a decrease
in the average yield on home improvement loans (from 10.04% to 9.01%). An
increase in the average yield on home equity loans (from 7.12% to 8.48%)
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 $18.8 million (or 24.7%)
primarily because of lower average balances. The effect of the $494.0 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.92% to 6.26%.
Interest expense on deposits increased $48.4 million (or 45.1%) during the 2000
period due to increased average rates and average balances. The 52 basis point
increase in the average rate on deposits (from 3.04% to 3.56%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal year 2000, the Bank increased its use of brokered deposits as an
alternative funding source.
<PAGE>
Interest expense on borrowings increased $63.1 million (or 97.1%) in the 2000
period over the 1999 period. A $1.1 billion (or 136.7%) increase in average
balances on Federal Home Loan Bank advances and, to a lesser extent, the
increase in the average rate on such borrowings (from 5.21% to 5.65%) resulted
in an increase of $50.5 million in interest expense. Also contributing to the
increase in interest expense on borrowings was an increase in the average
balance of $177.5 million and average yield (from 4.85% to 5.93%) in securities
sold under repurchase agreements.
Provision for Loan and Lease Losses. The Bank's provision for loan and lease
losses increased to $34.5 million in the 2000 period from $16.1 million in the
1999 period. The $18.4 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 decreased to $106.2 million in the 2000
period from $133.8 million in the 1999 period. The $27.6 million (or 20.6%)
decrease was primarily attributable to a gain of $31.6 million included in the
1999 period resulting from the sale of one of the Bank's REO properties in the
pre-development stage. In addition, the Bank had losses on sales of trading
securities of $2.6 million during the 2000 period compared to gains of $5.2
million during the 1999 period. Partially offsetting this decrease was a $13.8
million (or 27.8%) increase in deposit service fees during the 2000 period
primarily due to fees generated from the continued expansion of the Bank's
branch and ATM network.
Operating Expenses. Operating expenses for the 2000 period increased $34.2
million (or 14.4%) from the level in the 1999 period. Salaries and employee
benefits increased $17.2 million (or 13.4%) 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 2000 period was an increase in other
operating expenses of $12.2 million (or 43.2%). The 1999 period 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 $6.3 million recovery of prior valuation adjustments
recorded against the Bank's mortgage servicing assets.
