<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the fiscal year ended September 30, 2000
TRANSITION REPORT PURSUANT FOR SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File number 1-7184
B. F. SAUL REAL ESTATE INVESTMENT TRUST
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(Exact name of registrant as specified in its charter)
Maryland 52-6053341
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 Connecticut Avenue, Chevy Chase, Maryland 20815
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 986-6000
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Securities registered pursuant to Section 12(b) of Act:
Title of each class Name of each exchange on which registered
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N/A N/A
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Securities registered pursuant to Section 12(g) of the Act:
N/A
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(Title of class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
requires to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. /x/
There were no Common Shares of Beneficial Interest held by non-affiliates of the
registrant as of December 15, 2000.
The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as
of December 15, 2000 was 4,826,910.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
Overview ..........................................................
Real Estate .......................................................
Banking ...........................................................
Federal Taxation ..................................................
ITEM 2. PROPERTIES ...................................................
Real Estate .......................................................
Banking ...........................................................
ITEM 3. LEGAL PROCEEDINGS ............................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..........
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS .................................
ITEM 6. SELECTED FINANCIAL DATA ......................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...............
Financial Condition ...............................................
Real Estate ..................................................
Banking ......................................................
Liquidity and Capital Resources ...................................
Real Estate ..................................................
Banking ......................................................
Results of Operations .............................................
Fiscal 2000 Compared to Fiscal 1999 ..........................
Real Estate .............................................
Banking .................................................
Fiscal 1999 Compared to Fiscal 1998 ..........................
Real Estate .............................................
Banking .................................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................
Management's Statement on Responsibility ..........................
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .........................
PART III
ITEM 10. TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST ................
Executive Officers of the Trust Who Are Not Directors ............
Committees of the Board of Trustees ..............................
ITEM 11. EXECUTIVE COMPENSATION .......................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT .......................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...............
Real Estate .............................................
Banking .................................................
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K .....................................
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
B.F. Saul Real Estate Investment Trust operates as a Maryland real estate
investment trust. The Trust began its operations in 1964 as an unincorporated
business trust organized under a Declaration of Trust governed by District of
Columbia law. The Trust terminated its status as a qualified real estate
investment trust for federal income tax purposes in 1978 and is now taxable as a
corporation. On October 24, 1988, the Trust amended its Declaration of Trust to
qualify the Trust as a statutory real estate investment trust under Maryland
law.
The principal business activities of the Trust are the ownership of 80% of the
outstanding common stock of Chevy Chase Bank, F.S.B., whose assets accounted for
96% of the Trust's consolidated assets as of September 30, 2000, and the
ownership and development of income-producing properties. By virtue of its
ownership of a majority of Chevy Chase, the Trust is a savings and loan holding
company and subject to regulation, examination and supervision by the Office of
Thrift Supervision, also known as "OTS." See "Banking - Holding Company
Regulation."
The Trust recorded net income of $22.4 million in the fiscal year ended
September 30, 2000, compared to a net income of $23.5 million in the fiscal year
ended September 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 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 Chevy Chase and its
subsidiaries is identified by "Banking."
Real Estate
The Real Estate Trust's long-term objectives are to increase cash
flow from operations and to maximize capital appreciation of its real estate.
The properties owned by the Real Estate Trust are located predominantly in the
mid-Atlantic and Southeastern regions of the United States and consist
principally of hotels, office projects, and undeveloped land parcels.
The Real Estate Trust has significant relationships with B.F. Saul Company and
two of its wholly owned subsidiaries, B.F. Saul Advisory Company, referred to in
this report as the "Advisor," and Franklin Property Company. Saul Company,
founded in 1892, specializes in real estate investment services including
acquisitions, financing, management and leasing, and insurance. Certain officers
and trustees of the Trust are also officers and/or directors of Saul Company,
the Advisor and Franklin Property Company. See "Item 13. Certain Relationships
and Related Transactions - Management Personnel."
The Advisor acts as the Real Estate Trust's investment advisor and manages the
day-to-day financial, accounting, legal and administrative affairs of the Real
Estate Trust. Franklin Property Company acts as leasing and management agent for
the income-producing properties owned by the Real Estate Trust, and plans and
oversees the development of new properties and the expansion and renovation of
existing properties.
<PAGE>
Banking
Chevy Chase Bank is a federally chartered and federally insured stock savings
bank which at September 30, 2000 was conducting business from 170 full-service
branch offices, including 38 grocery store banking centers, and 856 automated
teller machines in Maryland, Delaware, Virginia and the District of Columbia.
The bank has its home office in McLean, Virginia and its executive offices in
Chevy Chase, Maryland, both suburban communities of Washington, DC. The bank
also maintains one commercial loan production office located in Baltimore,
Maryland, eight mortgage loan production offices in the mid-Atlantic region,
seven of which are operated by a wholly owned mortgage banking subsidiary and
eight consumer loan production offices. At September 30, 2000, the bank had
total assets of $10.7 billion, total deposits of $7.0 billion. Based on total
assets at September 30, 2000, Chevy Chase is the largest bank headquartered in
the Washington, DC metropolitan area.
Chevy Chase is a consumer oriented, full service banking institution principally
engaged in the business of attracting deposits from the public and using such
deposits, together with borrowings and other funds, to make loans secured by
real estate, primarily residential mortgage loans, and consumer loans. The bank
also has an active commercial lending program. The bank's principal deposit and
lending markets are located in the Washington, DC metropolitan area. As a
complement to its basic deposit and lending activities, the bank provides a
number of related financial services to its customers, including securities
brokerage and insurance products offered through its subsidiaries. In addition,
the bank offers a variety of investment products and provides fiduciary services
to a primarily institutional customer base through its subsidiaries, ASB Capital
Management, Inc. and Chevy Chase Trust Company.
Since the sale of its credit card operations on September 30, 1998, the bank has
been concentrating its efforts on capitalizing on the bank's status as the
largest locally-headquartered bank in the Washington, DC and Baltimore
metropolitan areas and furthering its community banking objectives. Accordingly,
the bank continues to build its branch and alternative delivery systems, to
maintain and expand its mortgage banking operations, and continues to offer a
broad range of non-credit card consumer products, including home equity lines of
credit, home improvement loans and automobile loans and leases. In addition, the
bank continues to expand its business banking program, with an emphasis on
businesses operating in the Washington, DC metropolitan area. The bank also
continues to develop further the fee based services it provides to customers,
including securities brokerage, trust, asset management and insurance products
offered through its subsidiaries.
Effective November 9, 2000, Consumer Finance Corporation ("CFC"), a wholly owned
subsidiary of the bank engaged in indirect subprime automobile lending stopped
originating new loans. CFC continues to own its existing portfolio of loans and
will continue servicing and collecting those loans.
<PAGE>
Chevy Chase recorded operating income of $81.3 million for the year ended
September 30, 2000, compared to operating income of $96.0 million for the year
ended September 30, 1999. At September 30, 2000, the bank's tangible, core, tier
1 risk-based and total risk-based regulatory capital ratios were 5.48%, 5.48%,
7.21% and 11.01%. The bank's regulatory capital ratios exceeded the requirements
under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
also known as "FIRREA," as well as the standards established for "well
capitalized" institutions under the prompt corrective action regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991, also known as "FDICIA."
Chevy Chase is subject to comprehensive regulation, examination and supervision
by OTS and, to a lesser extent, by the Federal Deposit Insurance Corporation.
The bank's deposit accounts are fully insured up to $100,000 per insured
depositor by the Savings Association Insurance Fund, also known as SAIF, which
is administered by the FDIC.
REAL ESTATE
Real Estate Investments
The following tables set forth, at and for the periods indicated, certain
information regarding the properties in the Real Estate Trust's investment
portfolio at September 30, 2000.
<PAGE>
<TABLE>
HOTELS
Average Occupancy (2) Average Room Rate
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Year Ended September 30, Year Ended September 30,
Available ------------------------ ------------------------
Location Name Rooms(1) 2000 1999 1998 2000 1999 1998
-------------- -------------------------------------- ---------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COLORADO
Pueblo Pueblo Holiday Inn 193 63% 66% 74% $51.59 $48.80 $51.39
FLORIDA
Boca Raton Boca Raton SpringHill Suites (3) 146 60% NA NA $82.94 $64.35 NA
Boca Raton Boca Raton TownePlace Suites (4) 91 73% NA NA $75.57 $70.35 NA
Ft. Lauderdale Ft. Lauderdale TownePlace Suites (5) 95 64% NA NA $68.45 NA NA
MARYLAND
Gaithersburg Gaithersburg Holiday Inn 301 68% 65% 64% $80.28 $80.25 $75.75
Gaithersburg Gaithersburg TownePlace Suites (6) 91 75% NA NA $70.90 $73.25 NA
MICHIGAN
Auburn Hills Auburn Hills Holiday Inn Select 190 76% 78% 76% $117.67 $106.05 $99.78
NEW YORK
Rochester Rochester Airport Holiday Inn 280 65% 61% 69% $72.97 $76.47 $72.25
OHIO
Cincinnati Cincinnati Holiday Inn 273 63% 66% 64% $72.08 $70.59 $65.70
VIRGINIA
Arlington National Airport Crowne Plaza (7) 308 68% 60% 57% $107.49 $104.32 $102.38
Arlington National Airport Holiday Inn (8) 279 74% 58% 63% $89.12 $80.26 $76.10
Herndon Herndon Holiday Inn Express 115 79% 81% 75% $91.64 $84.49 $76.83
McLean Tysons Corner Holiday Inn 316 73% 72% 72% $112.71 $104.22 $99.15
Sterling Dulles Airport Hampton Inn 127 81% 82% 74% $91.62 $82.97 $82.17
Sterling Dulles Airport Holiday Inn 296 81% 77% 75% $99.74 $90.44 $85.10
Sterling Dulles Airport TownePlace Suites (9) 95 83% 74% NA $85.57 $78.08 $83.65
------- --- --- --- ------ ------ -------
Totals 3,196 71% 68% 68% $89.16 $85.45 $81.01
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(1) Available rooms as of September 30, 2000.
(2) Average occupancy is calculated by dividing the rooms occupied by the
rooms available.
(3) Opened July 9, 1999.
(4) Opened June 28, 1999.
(5) Opened October 25, 1999.
(6) Opened June 24, 1999.
(7) Acquired December 10, 1997 as a Holiday Inn. Converted to Crowne Plaza in
October 1999.
(8) Operated as a Howard Johnson in fiscal 1998 and 1999. Converted to Holiday
Inn in October 1999.
(9) Opened August 13, 1998.
</TABLE>
<PAGE>
<TABLE>
OFFICE AND INDUSTRIAL
Expiring Leases (1)
-------------------
Leasing Percentages Year Ending
Gross ------------------------- -------------------
September 30, September 30,
Leasable ------------------------- -------------------
Location Name Area (1) 2000 1999 1998 2001 2002
--------------- -------------------------- --------- ------------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FLORIDA
Fort Lauderdale Commerce Center - Phase II 61,149 90% 89% 100% 19,090 15,286
GEORGIA
Atlanta 900 Circle 75 Parkway 345,502 98% 99% 100% 4,249 81,870
Atlanta 1000 Circle 75 Parkway 89,412 98% 93% 100% 28,561 8,602
Atlanta 1100 Circle 75 Parkway 269,049 99% 77% 100% 75,209 39,562
LOUISIANA
Metairie Metairie Tower 91,391 100% 100% 100% 17,805 6,598
VIRGINIA
McLean 8201 Greensboro Drive 360,854 95% 93% 100% 10,419 15,276
McLean Tysons Park Place (2) 247,581 100% NA NA 56,716 15,571
Sterling Dulles North 59,886 99% 100% 100% -- 34,373
Sterling Dulles North Two (3) 79,210 100% NA NA -- --
Sterling Dulles North Five (4) 80,391 100% NA NA -- --
--------- ---- ----- ----- --------- ----------
Totals 1,684,425 98% 92% 100% 212,049 217,138
12.6% 12.9%
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(1) In square feet
(2) Acquired December 13, 1999.
(3) Operational October 1, 1999.
(4) Operational March 1, 2000.
</TABLE>
<PAGE>
<TABLE>
LAND PARCELS
Location Name Acres Zoning
---------------- -------------------------------- -------- -----------------------------
<S> <C> <C> <C>
FLORIDA
Boca Raton Arvida Park of Commerce 6.5 Mixed Use
Fort Lauderdale Commerce Center 11.3 Office & Warehouse
GEORGIA
Atlanta Circle 75 133.0 Office & Industrial
KANSAS
Overland Park Overland Park 161.9 Residential, Office & Retail
MARYLAND
Rockville Flagship Centre 7.7 Commercial
MICHIGAN
Auburn Hills Holiday Inn - Auburn Hills 3.3 Commercial
NEW YORK
Rochester Holiday Inn - Rochester Airport 2.9 Commercial
VIRGINIA
Sterling Church Road 39.9 Office & Industrial
Sterling Sterling Boulevard 32.8 Industrial
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Total 399.3
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</TABLE>
<PAGE>
OTHER REAL ESTATE INVESTMENTS
Location Name
--------------- ------------------------------
PURCHASE - LEASEBACK PROPERTIES (1)
APARTMENTS
Number
of Units
--------
LOUISIANA
Metairie Chateau Dijon 336
TENNESSEE
Knoxville Country Club 232
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Total 568
SHOPPING CENTERS
Gross
Leasable
Area (2)
--------
GEORGIA
Atlanta Old National 160,000
Warner Robbins Houston Mall 264,000
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Total 424,000
APARTMENT PROJECT
Number
of Units
TEXAS --------
Dallas San Simeon(3) 124
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(1) The Trust owns the ground under certain income-producing properties and
receives fixed ground rent, which is subject to periodic escalation, from
the owners of the improvements. In certain instances, the Real Estate Trust
also receives percentage rent based upon the income generated by the
properties.
(2) In square feet.
(3) This project is under contract to be sold in December 2000.
The investment portfolio consists principally of seasoned operating properties.
The Real Estate Trust expects to hold its properties as long-term investments
and has no maximum period for retention of any investment. It may acquire
additional income-producing properties, expand and improve its properties, or
sell such properties, as and when circumstances warrant. The Real Estate Trust
also may participate with other entities in property ownership, through joint
ventures or other types of co-ownership.
<PAGE>
Investment in Saul Holdings Limited Partnership
On August 26, 1993, the Real Estate Trust consummated a series of transactions
in which it transferred its 22 shopping center properties and one of its office
properties together with the debt associated with such properties, to a newly
organized limited partnership, Saul Holdings Limited Partnership, and one of two
newly organized subsidiary limited partnerships of Saul Holdings Partnership.
In exchange for the transferred properties, the Real Estate Trust received
securities representing a 21.5% limited partnership interest in Saul Holdings
Partnership. Entities under common control with the Trust received limited
partnership interests collectively representing a 5.5% partnership interest in
Saul Holdings Partnership in exchange for the transfer of property management
functions and certain other properties to Saul Holdings Partnership and its
subsidiaries. Saul Centers, Inc., a newly organized, publicly held real estate
investment trust, received a 73.0% general partnership interest in Saul Holdings
Partnership in exchange for the contribution of approximately $220.7 million to
Saul Holdings Partnership.
Affiliates of the Trust received certain cash distributions from Saul Holdings
Partnership and purchased 4.0% of the common stock of Saul Centers in a private
offering consummated concurrently with the initial public offering of such
common stock. Certain officers and trustees of the Trust are also officers
and/or directors of Saul Centers. See "Item 13. Certain Relationships and
Related Transactions - Management Personnel."
The Real Estate Trust and affiliates of the Trust own rights enabling them to
convert their limited partnership interests in Saul Holdings Partnership into
shares of Saul Centers common stock on the basis of one share of Saul Centers
common stock for each partnership unit provided that, subject to Saul Centers'
articles of incorporation and subsequent waiver issued in March 2001, they do
not own rights to the extent that they collectively would be treated as owning,
directly or indirectly, more than 29.9% of the value of the outstanding equity
securities of Saul Centers. The shares of Saul Centers' common stock are listed
on the New York Stock Exchange under trading symbol "BFS."
<PAGE>
Saul Centers operates as a real estate investment trust for federal income tax
purposes under Sections 856 through 860 of the Internal Revenue Code. Under the
Internal Revenue Code, REITs are subject to numerous organizational and
operational requirements. If Saul Centers continues to qualify as a REIT, it
generally will not be subject to federal income tax, provided it makes certain
distributions to its stockholders and meets certain organizational and other
requirements. Saul Centers has made and has announced that it intends to
continue to make regular quarterly dividend distributions to its stockholders.
Allocations and Distributions of Saul Holdings Partnership. The net income or
net loss of Saul Holdings Partnership for tax purposes generally will be
allocated to Saul Centers and the limited partners in accordance with their
percentage interests, subject to compliance with the applicable provisions of
the Internal Revenue Code and the regulations promulgated thereunder. Net cash
flow after reserves of Saul Holdings Partnership and after reimbursement of
specified expenses will be distributed quarterly to the partners in proportion
to their respective partnership interests.
Competition
As an owner of, or investor in, commercial real estate properties, the Real
Estate Trust is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use.
Management believes that success in such competition is dependent upon the
geographic location of the property, the performance of property managers, the
amount of new construction in the area and the maintenance and appearance of the
property. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities such as parking, and the ability to provide rent concessions
and additional tenant improvements without increasing rent. Management believes
that general economic circumstances and trends and new properties in the
vicinity of each of the Real Estate Trust's properties also will be competitive
factors.
Environmental Matters
The Real Estate Trust's properties are subject to various laws and regulations
relating to environmental and pollution controls. The Real Estate Trust requires
an environmental study to be performed with respect to a property that may be
subject to possible environmental hazards prior to its acquisition to ascertain
that there are no material environmental hazards associated with such property.
Although the effect upon the Real Estate Trust of the application of
environmental and pollution laws and regulations cannot be predicted with
certainty, management believes that their application either prospectively or
retrospectively will not have a material adverse effect on the Real Estate
Trust's property operations.
<PAGE>
BANKING
Regulation
Federal Home Loan Bank System. The bank is a member of the Federal Home Loan
Bank (the "FHLB") of Atlanta. The 12 FHLBs are administered by the Federal
Housing Finance Board, an independent agency within the executive branch of the
federal government. The FHLBs serve as a central credit facility for their
members. Their primary credit mission is to facilitate residential mortgage
lending and support community and economic development activity in rural and
urban communities. From time to time, the bank obtains advances from the FHLB of
Atlanta. At September 30, 2000, the bank had outstanding advances of $1.9
billion. See Note 22 to the Consolidated Financial Statements in this report and
"Deposits and Other Sources of Funds - Borrowings."
As a member of the FHLB of Atlanta, the bank is required to acquire and hold
shares of capital stock in that bank in an amount equal to the greater of:
o 1.0% of mortgage-related assets;
o 0.3% of total assets;
o $500; or
o 5.0% of outstanding advances.
The bank had an investment of $97.7 million in FHLB of Atlanta stock at
September 30, 2000. The bank earned dividends of $7.7 million and $4.0 million
during the years ended September 30, 2000 and 1999. The Gramm-Leach-Bliley Act
of 1999 (the "GLB Act"), parts of which took effect November 12, 1999, reformed
the FHLB system by, among other things, making membership in the FHLB voluntary
rather than mandatory for federal thrifts such as the bank, imposing specific
regulatory capital requirements on the FHLBs, and expanding access to FHLB
advances particularly for smaller banks and thrifts. Because membership is
required to obtain advances from the FHLB and the bank continues to rely on FHLB
advances as an important source of funds, the bank currently intends to remain a
member of the FHLB of Atlanta.
Liquidity Requirements. The bank is required to maintain a quarterly average
balance of liquid assets equal to 4.0% of its average daily balance of deposits,
plus borrowings payable in one year or less. Liquid assets include cash, federal
funds, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and commercial paper, securities of certain mutual funds,
certain mortgage-related securities, certain mortgage loans and U.S. Government,
state government and federal agency obligations. Failure to meet this
requirement could subject the bank to monetary penalties imposed by the OTS. At
September 30, 2000, the bank was in compliance with the liquidity requirement,
with a liquid assets ratio of 7.8%.
In December 2000, the President signed into law legislation which, among other
things, repeals the statutory liquidity requirements imposed on thrifts, such as
the bank.
Deposit Insurance Premiums. Under FDIC insurance regulations, the bank is
required to pay premiums to the SAIF for insurance of its deposit accounts. The
FDIC utilizes a risk-based premium system in which an institution pays premiums
for deposit insurance on its SAIF-insured deposits based on supervisory
evaluations and on the institution's capital category under the OTS's prompt
corrective action regulations. See "Prompt Corrective Action."
<PAGE>
Although the FDIC insures commercial banks as well as thrifts, the insurance
funds for commercial banks and thrifts have been segregated into the Bank
Insurance Fund (the "BIF") and the SAIF. The FDIC is required to
maintain the reserve levels of both the BIF and the SAIF at 1.25% of insured
deposits.
Beginning in 1997, commercial banks have been required to share in the payment
of interest due on Financing Corporation ("FICO") bonds used to provide
liquidity to the savings and loan industry in the 1980s. Effective January 2000,
the bank and other institutions with SAIF-assessable deposits are no longer
required to pay higher FICO assessments than comparable institutions with
BIF-assessable deposits. Annual FICO assessments added to deposit insurance
premiums equaled 2.10 basis points for SAIF and BIF members for the first
semi-annual period of 2000 and 2.04 basis points for SAIF and BIF members for
the second semi-annual period of 2000.
SAIF insurance may be terminated by the FDIC, after notice and a 30-day
corrective period, if the FDIC finds that a financial institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or condition
imposed by the FDIC. The 30-day period may be eliminated by the FDIC with the
approval of the OTS.
On August 9, 2000, the FDIC published for public comment an "Options Paper" for
reforming the federal deposit insurance system. The paper identifies options for
changing the ways in which deposit insurance coverage is priced, losses to the
deposit insurance funds are funded, and the amount of deposit insurance coverage
is set. The FDIC has not officially endorsed any of the options, although it
continues to support the merger of the BIF and SAIF into a single insurance
fund. Most of the reforms under consideration would require Congressional
approval. The FDIC intends to complete its review of the options and present
recommendations to the FDIC Board and eventually to Congress in 2001. Because it
is uncertain at this time whether, or in what form, any reform of the deposit
insurance system will be adopted, the bank is unable to assess the potential
effects on the bank.
Regulatory Capital. The bank is subject to:
o a minimum tangible capital requirement,
o a minimum core (or leverage) capital requirement, and
o a minimum risk-based capital requirement.
Each of these requirements generally must be no less stringent than the capital
standards for national banks. At September 30, 2000, the bank's tangible capital
ratio was 5.48%, its core (or leverage) ratio was 5.48%, and its total
risk-based capital ratio was 11.01%, compared to the minimum requirements of
1.50%, 4.00% and 8.00%.
The tangible capital requirement adopted by the OTS requires the bank to
maintain "tangible capital" in an amount not less than 1.5% of tangible assets.
"Tangible capital" is defined as core capital less investments in certain
subsidiaries and any intangible assets (including supervisory goodwill), plus
qualifying servicing assets valued at the amount that can be included in core
capital.
<PAGE>
Under the minimum leverage capital requirement, Chevy Chase must maintain a
ratio of "core capital" to tangible assets of not less than 4.0%. "Core capital"
generally includes common shareholders' equity, noncumulative perpetual
preferred stock and minority interests in consolidated subsidiaries, less
investments in certain subsidiaries and certain intangible assets.
Under OTS regulations, servicing assets and purchased credit card relationships
("PCCRs") can be included in core capital in an amount up to 100% of core
capital. PCCRs and non-mortgage servicing assets are subject to a sublimit of
25% of core capital. For these purposes, servicing assets and PCCRs are valued
at the lesser of 90% of fair market value or 100% of the current unamortized
book value. At September 30, 2000, the bank had qualifying servicing assets of
$74.9 million, which constituted 12.8% of core capital at that date, and had no
PCCRs. In December 2000, the President signed into law legislation which, among
other things, provides federal banking agencies the flexibility to permit
inclusion in core capital of up to 100 percent of the fair market value of
readily marketable purchased mortgage servicing rights.
The risk-based capital requirements imposed by the OTS vary the amount of
capital required for an asset based on the degree of credit risk associated with
that asset and include off-balance sheet assets in the asset base used to
compute the bank's risk-based capital ratio.
There are currently four categories of risk-weightings:
o 0% for cash and similar assets;
o 20% for qualifying mortgage-backed securities;
o 50% for qualifying residential permanent real estate loans; and
o 100% for other assets, including consumer loans, commercial real estate loans,
loans more than 90 days past due, and real estate acquired in settlement of
loans.
The bank generally must maintain risk-based capital equal to 8.0% of
risk-weighted assets, with at least half of that amount in the form of core
capital.
Capital also must be maintained against assets sold with recourse despite the
fact that the assets are accounted for as having been sold. Under the OTS's
capital requirements, the bank maintains dollar-for-dollar capital against
securitized assets up to the otherwise applicable capital requirement on the
underlying loans in an amount equal to the sum of:
o the amounts on deposit in spread accounts;
o the amount of any interest-only strips relating to the securitized assets; and
o certain other items representing recourse for regulatory capital purposes.
The OTS and the other federal bank regulatory agencies have proposed revisions
to their risk-based capital regulations to address the regulatory capital
treatment of certain residual interests in asset securitizations. Residual
interests include interest only strips receivable, spread accounts, cash
collateral accounts, over-collateralization of receivables, retained
subordinated interests and other similar forms of on-balance sheet assets that
function as credit enhancements. The most significant revisions, if adopted,
would:
<PAGE>
o require that risk-based capital be held in an amount equal to the amount of
residual interest that is retained on balance sheet following a
securitization;
o include residual interests with PCCRs and servicing assets in the 100% of core
capital limit; and
o include residual interests with PCCRs and non-mortgage servicing assets in
the 25% of core capital sublimit.
At September 30, 2000, the bank had $81.2 million in residual interests that,
under the proposal, would require a dollar-for-dollar reduction from Tier 1
capital. Of this amount, $53.0 million is currently subjected to a
dollar-for-dollar reduction from Tier 1 capital.
The bank may use supplementary capital to satisfy the risk-based capital
requirement to the extent of its core capital. Supplementary capital includes
cumulative perpetual preferred stock, qualifying non-perpetual preferred stock,
qualifying subordinated debt, nonwithdrawable accounts and pledged deposits, and
allowances for loan and lease losses up to a maximum of 1.25% of risk-weighted
assets. At September 30, 2000, the bank had $54.0 million in allowances for loan
and lease losses, all of which was includable as supplementary capital.
Subordinated debt may be included in supplementary capital with OTS approval
subject to a phase-out based on its remaining term to maturity. The phase-out
permits these instruments to be included in supplementary capital under one of
two options:
o at the beginning of each of the last five years prior to the maturity date of
the instrument, the bank must reduce the amount eligible to be included by 20%
of the original amount, or
o the bank can include only the aggregate amount of maturing capital instruments
that mature in any one year, during the seven years immediately prior to an
instrument's maturity, that does not exceed 20% of its capital.
The bank has selected the second option for its subordinated debentures due 2005
and must continue to use that option for its subordinated debentures due 2008
and any future issuances as long as the prior issuance remains outstanding. At
September 30, 2000, the bank had $250.0 million in maturing subordinated capital
instruments, all of which was includable as supplementary capital. Of that
amount, $150.0 million matures in 2005 and $100.0 million matures in 2008. See
"Deposits and Other Sources of Funds - Borrowings."
The OTS has indefinitely delayed implementation of an interest-rate risk
component of its risk-based capital regulation. Under that component, an
institution that would experience a change in "portfolio equity" in an amount in
excess of 2.0% of the institution's assets as a result of a 200 basis point
increase or decrease in the general level of interest rates would be required to
maintain additional amounts of risk-based capital based on the lowest interest
rate exposure at the end of the three previous quarters.
The OTS also considers concentration of credit risk and risks arising from
non-traditional activities, as well as a thrift's ability to manage these risks,
in evaluating whether the thrift should be subject to increased capital
requirements.
<PAGE>
All or a portion of the assets of each of the bank's subsidiaries are generally
consolidated with the assets of the bank for regulatory capital purposes unless
all of the bank's investments in, and extensions of credit to, such subsidiary
are deducted from capital. The bank's investments in, and loans to, subsidiaries
engaged in activities not permissible for a national bank, are, with certain
exceptions, deducted from capital under each of the three regulatory capital
requirements. Chevy Chase's real estate development subsidiaries are its only
subsidiaries engaged in activities not permissible for a national bank. At
September 30, 2000, the bank's investments in, and loans to, these
"non-includable subsidiaries" totaled approximately $1.6 million, of which $1.4
million constituted a deduction from tangible capital.
OTS capital regulations also require a 100% deduction from total capital of all
equity investments that are not permissible for national banks and the portion
of land loans and non-residential construction loans in excess of an 80%
loan-to-value ratio. The bank's equity investments at September 30, 2000
consisted of a property classified as real estate held for sale, which the bank
has agreed to treat as equity investments for regulatory capital purposes. At
September 30, 2000, the book value of this property was $6.5 million, which was
required to be deducted from total capital. The bank had no land loans or
non-residential construction loans with loan-to-value ratios greater than 80% at
September 30, 2000. The bank has $2.0 million of valuation allowances maintained
against its non-includable subsidiaries and equity investments, which, pursuant
to OTS guidelines, are available as a credit against the otherwise required
deductions from capital.
OTS capital regulations provide a five-year holding period for real estate
acquired in settlement of loans ("REO" or "real estate held for sale") to
qualify for an exception from treatment as an equity investment. The five year
period may be extended by the OTS. If an REO property is considered an equity
investment, its then-current book value is deducted from total capital.
Accordingly, if the bank is unable to dispose of any REO property prior to the
end of its applicable five-year holding period and is unable to obtain an
extension of that five-year holding period from the OTS, the bank could be
required to deduct the then-current book value of such REO property from
risk-based capital. In August 2000, the bank received from the OTS additional
extensions through August 4, 2001, of the holding periods for certain of its REO
properties acquired through foreclosure in fiscal years 1990, 1991 and 1995. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Financial Condition - Banking - Capital."
The bank's ability to maintain capital compliance depends on a number of
factors, including, for example, general economic conditions and the condition
of local markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Capital." The OTS
has the authority to require an institution to maintain capital at levels above
the minimum levels generally required, but has not done so for the bank.
In June 1999, the Basle Committee on Banking Supervision outlined proposed
revisions to its 1988 risk-based capital accord, which forms the basis for the
risk-based capital requirements of the OTS and the other U.S. federal financial
institution regulators. Key components of the proposed revisions include:
<PAGE>
o adding a fifth risk-weighting of 150 percent for loans to low-quality
companies;
o using rating agency assessments to determine risk-weightings for claims on
banks, commercial loans and securitization interests;
o liberalizing capital requirements for certain collateralized and guaranteed
loans;
o requiring a specific level of additional capital for banks with interest rates
"significantly above average;"
o establishing a methodology for requiring that capital be maintained against
operational risk; and
o authorizing regulators to impose explicit capital requirements on managed or
securitized assets.
Comments on the June 1999 release, as amended, were due March 31, 2000 and final
regulations are expected to be adopted in 2001. The bank is unable to predict
whether, or in what form, any final changes will be adopted by the Basle
Committee, or the extent to which any changes actually adopted will be reflected
in the capital requirements that apply to the bank.
Prompt Corrective Action. The OTS and the other federal banking agencies have
adopted regulations, which apply to every FDIC-insured commercial bank and
thrift institution a system of mandatory and discretionary supervisory actions,
which generally become more severe as the capital levels of an individual
institution decline. The regulations establish five capital categories for
purposes of determining an institution's treatment under these prompt corrective
action provisions.
An institution is categorized as "well capitalized" under the regulations if (i)
it has a leverage 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%, and (ii)
is not subject to any written agreement, order, capital directive or prompt
corrective action directive issued by the OTS to meet and maintain a specific
capital level.
An institution is considered "adequately capitalized" if its leverage ratio is
at least 4.0% (3.0% if rated in the highest supervisory category), its tier 1
risk-based capital ratio is at least 4.0% and its total risk-based capital ratio
is at least 8.0%.
An institution with a leverage ratio below 4.0% (3.0% if rated in the highest
supervisory category), a tier 1 risk-based capital ratio below 4.0% or a total
risk-based capital ratio below 8.0% is considered "undercapitalized." An
institution with a leverage ratio or tier 1 risk-based ratio under 3.0% or a
total risk-based ratio under 6.0% is considered "significantly
undercapitalized." Finally, an institution is considered "critically
undercapitalized," and subject to provisions mandating appointment of a
conservator or receiver, if its ratio of "tangible equity" to total assets is
2.0% or less. "Tangible equity" generally includes core capital plus cumulative
perpetual preferred stock.
<PAGE>
An institution's classification category could be downgraded if, after notice
and an opportunity for a hearing, the OTS determined that the institution is in
an unsafe or unsound condition or has received and has not corrected a less than
satisfactory examination rating for asset quality, management, earnings or
liquidity.
At September 30, 2000, the bank's leverage ratio of 5.48%, its tier 1 risk-based
ratio of 7.21%, and its total risk-based capital ratio of 11.01% exceeded the
minimum ratios established for "well capitalized" institutions.
Qualified Thrift Lender ("QTL") Test. The bank must meet a QTL test to avoid
imposition of certain restrictions. The QTL test requires the bank to maintain a
"thrift investment percentage" equal to a minimum of 65%. The numerator of the
percentage is the bank's "qualified thrift investments" and the denominator is
the bank's "portfolio assets." "Portfolio assets" is defined as total assets
minus
o the bank's premises and equipment used to conduct the bank's business,
o liquid assets up to 20 percent of total assets, and
o intangible assets, including goodwill.
The QTL test must be met on a monthly average basis in nine out of every 12
months.
The bank's "qualified thrift investments" consist of residential housing loans
(including home equity loans and manufactured housing loans), mortgage-backed
securities, FHLB and Federal National Mortgage Association stock, small business
loans, credit card loans and educational loans. Portions of other assets are
also includable, provided that the total of these assets does not exceed 20% of
portfolio assets. Assets in this category include consumer loans (other than
credit card and educational loans), 50% of residential housing loans originated
and sold within 90 days, investments in real estate-oriented service
corporations, 200% of mortgage loans for residences, churches, schools, nursing
homes and small businesses in low- or moderate-income areas where credit demand
exceeds supply. Intangible assets, including goodwill, are specifically excluded
from qualified thrift investments.
The bank had 85.1% of its assets invested in qualified thrift investments at
September 30, 2000, and met the QTL test in each of the previous 12 months.
An institution that fails to meet the QTL test is subject to significant
penalties. Immediately after an institution ceases to meet the QTL test, it may
not:
o make any new investment or engage directly or indirectly in any other new
activity unless the investment or activity would be permissible for a national
bank,
o establish any new branch office at any location at which a national bank
could not establish a branch office,
o obtain new advances from the FHLB, and
o pay dividends beyond the amounts permissible if it were a national bank.
<PAGE>
One year following an institution's failure to meet the test, the institution's
holding company parent must register and be subject to supervision as a bank
holding company. Three years after failure to meet the QTL test, an institution
may not retain any investments or engage in any activities that would be
impermissible for a national bank, and must repay any outstanding FHLB advances
as promptly as possible consistent with the safe and sound operation of the
institution. Failure to meet the QTL test also could limit the bank's ability to
establish and maintain branches outside of its home state of Virginia.
Because Chevy Chase is engaged in activities that are not currently permissible
for national banks, such as investing in subsidiaries that engage in real estate
development activities, failure to satisfy the QTL test would require Chevy
Chase to terminate these activities and divest itself of any prohibited assets
held at such time. Based on a review of the bank's current activities,
management of the bank believes that compliance with these restrictions would
not have a significant adverse effect on the bank. However, the Trust is engaged
in real estate ownership and development, which are activities that are
currently prohibited for bank holding companies. As a result, failure by Chevy
Chase to meet the QTL test, in the absence of a significant restructuring of the
Trust's operations, would, in effect, require the Trust to reduce its ownership
of Chevy Chase to a level at which it no longer would be deemed to control the
bank.
The bank has taken, and will continue to take, steps to meet the QTL test by
structuring its balance sheet to include the required percentage of qualified
thrift investments.
Dividends and Other Capital Distributions. OTS regulations limit the ability of
the bank to make "capital distributions." "Capital distributions" include
payment of dividends, stock repurchases, cash-out mergers, repurchases of
subordinated debt and other distributions charged against the capital accounts
of an institution. The regulations do not apply to interest or principal
payments on debt, including interest or principal payments on the bank's
outstanding subordinated debentures.
The bank must notify the OTS before making any capital distribution. In
addition, the bank must apply to the OTS to make any capital distribution
regardless of its size if the bank does not qualify for expedited treatment
under OTS regulations. If the bank qualifies for expedited treatment, an
application is required only if the total amount of all of the bank's capital
distributions for the year exceeds the sum of the bank's net income for the year
and its retained net income for the previous two years.
In considering a notice or application, the OTS will not permit a capital
distribution if:
o the bank would be undercapitalized following the distribution;
o the capital distribution raises safety and soundness concerns; or
o the capital distribution violates any statute, regulation, agreement with the
OTS, or condition imposed by the OTS.
The OTS has approved the payment of dividends on the bank's outstanding 13%
Noncumulative Perpetual Preferred Stock, Series A (the "13% Preferred Stock"),
provided that:
<PAGE>
o immediately after giving effect to the dividend payment, the bank's core and
risk-based regulatory capital ratios would not be less than 4.0% and 8.0%,
respectively;
o dividends are earned and payable in accordance with the OTS capital
distribution regulation; and
o the bank continues to make progress in the disposition and reduction of its
non-performing loans and real estate owned.
Dividends paid on the 10 3/8% Noncumulative Exchangeable Preferred Stock, Series
A, (the "REIT Preferred Stock") issued by Chevy Chase Preferred Capital
Corporation (the "REIT Subsidiary") are not considered "capital distributions"
provided the bank is classified as "well capitalized." However, if the bank were
not classified as "well capitalized," the entire amount of the REIT Subsidiary
preferred dividends would be treated as a capital distribution. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Banking - Capital."
In May 1988, in connection with the merger of a Virginia thrift into the bank,
Saul Company and the Trust entered into a capital maintenance agreement in which
they agreed not to cause the bank without prior written approval of the OTS to
pay dividends in any fiscal year in excess of 50% of the bank's net income for
that fiscal year, provided that any dividends permitted under such limitation
could be deferred and paid in a subsequent year.
The bank is subject to other limitations on its ability to pay dividends. The
indenture pursuant to which $150 million principal amount of the bank's 9 1/4%
Subordinated Debentures due 2005 was issued in 1993 provides that the bank may
not pay dividends on its capital stock unless, after giving effect to the
dividend, no event of a continuing default shall have occurred and the bank is
in compliance with its regulatory capital requirements. In addition, the amount
of the proposed dividend may not exceed the sum of:
o $15 million,
o 66 2/3% of the bank's consolidated net income (as defined) accrued on a
cumulative basis commencing on October 1, 1993, and
o the aggregate net cash proceeds received by the bank after October 1, 1993
from the sale of qualified capital stock or certain debt securities, minus the
aggregate amount of any restricted payments made by the bank.
Notwithstanding these restrictions on dividends, provided no event of default
has occurred or is continuing under the 1993 Indenture, the 1993 Indenture does
not restrict the payment of dividends on the 13% Preferred Stock or any
payment-in-kind preferred stock issued in lieu of cash dividends on the 13%
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which $100 million principal amount of the bank's 1996
Debentures was issued provides that the proposed dividend may not exceed the sum
of the restrictions discussed above for the 1993 Indenture and the aggregate
liquidation preference of the bank's 10 3/8% Noncumulative Preferred Stock,
Series B (the "Series B Preferred Stock"), if issued in exchange for the
outstanding REIT Preferred Stock. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
- Banking - Capital" and "Item 12. Security Ownership of Certain Beneficial
Owners and Management."
The payment of any dividends on the bank's common stock and preferred stock will
be determined by the bank's board of directors based on the bank's liquidity,
asset quality profile, capital adequacy and recent earnings history, as well as
economic conditions and other factors that the bank's board of directors
determines are relevant, including applicable government regulations and
policies. See "Deposits and Other Sources of Funds - Borrowings."
<PAGE>
Lending Limits. The bank generally is prohibited from lending to one borrower
and its related entities amounts in excess of 15% of unimpaired capital and
unimpaired surplus. The bank may lend an additional 10% for loans fully secured
by readily marketable collateral. The bank's regulatory lending limit was
approximately $133.4 million at September 30, 2000, and no group relationships
exceeded this limit at that date.
Safety and Soundness Standards. The federal financial institution regulators
have developed standards to evaluate the operations of depository institutions,
as well as standards relating to asset quality, earnings and compensation. The
operational standards cover internal controls and audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. An institution that fails to meet a standard that is
imposed through regulation may be required to submit a plan for corrective
action within 30 days. If a savings association fails to submit or implement an
acceptable plan, the OTS must order it to correct the deficiency, and may:
o restrict its rate of asset growth,
o prohibit asset growth entirely,
o require the institution to increase its ratio of tangible equity to assets,
o restrict the interest rate paid on deposits to the prevailing rates of
interest on deposits of comparable amounts and maturities, or
o require the institution to take any other action the OTS determines will
better carry out the purpose of prompt corrective action.
Imposition of these sanctions is within the discretion of the OTS in most cases,
but is mandatory if the savings institution commenced operations or experienced
a change in control during the 24 months preceding the institution's failure to
meet these standards, or underwent extraordinary growth during the preceding 18
months.
The asset quality standards require that the bank establish and maintain a
system to identify problem assets and prevent deterioration of those assets. The
earnings standards require that the bank establish and maintain a system to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves.
Regulatory Assessments. The OTS imposes five separate fees to fund its
operations:
o semi-annual assessments for all savings institutions;
o examination fees for certain affiliates of savings associations;
o application fees;
o securities filing fees; and
o publication fees.
Of these fees, the semi-annual assessments are the most significant, totaling
$1.37 million for the bank for the twelve-month period ending December 31, 2000.
The OTS formula for charging examination and supervisory assessments imposes a
surcharge on institutions with a supervisory rating of 3, 4 or 5. Surcharges are
also imposed on "complex institutions," which the OTS defines as any institution
with over $1 billion of off-balance sheet assets consisting of loans serviced
for others, trust assets and recourse obligations or direct credit substitutes.
The bank is treated as a "complex institution" for these purposes.
<PAGE>
Other Regulations and Legislation. Chevy Chase must obtain prior approval of the
OTS before merging with another institution or before acquiring insured deposits
through certain transactions. Also, as a SAIF-insured institution, the bank is
subject to limitations on its ability to buy or sell deposits from or to, or to
combine with, a BIF-insured institution. Despite these restrictions,
SAIF-insured thrifts may be acquired by banks or by bank holding companies under
certain circumstances.
The federal agencies regulating financial institutions possess broad enforcement
authority over the institutions they regulate, including the authority to impose
civil money penalties of up to $1 million per day for violations of laws and
regulations.
Federally chartered thrifts like Chevy Chase generally are permitted to operate
branches anywhere in the United States, provided that they meet the QTL test and
their regulatory capital requirements and have at least a satisfactory rating
under the Community Reinvestment Act ("CRA").
Amounts realized by the FDIC from the liquidation or other resolution of any
insured depository institution must be distributed to pay claims (other than
secured claims to the extent of any such security) in the following order of
priority:
o administrative expenses of the receiver,
o any deposit liability of the institution,
o any other general or senior liability of the institution (which is not an
obligation described below),
o any obligation subordinated to depositors or general creditors which is not a
stockholder obligation, and
o any obligation to stockholders arising as a result of their status as
stockholders.
The OTS and the other federal bank regulatory agencies have adopted changes to
the regulatory classification policies for retail credit, which will take effect
December 31, 2000, including:
o a revised charge-off policy for open-end credit at 180 days delinquency and
closed-end credit at 120 days delinquency;
o a charge-off policy for loans affected by bankruptcy, fraudulent activity,
and/or death of a borrower;
o a revised policy for treatment of partial payments;
o a revised re-aging policy for past due accounts; and
o a classification policy for delinquent residential mortgage and home equity
loans.
<PAGE>
Federal Reserve System
The Federal Reserve Board requires the bank to maintain reserves against its
transaction accounts and certain non-personal deposit accounts. Because reserves
generally must be maintained in cash or non-interest-bearing accounts, the
effect of the reserve requirement is to decrease the bank's earnings.
FRB regulations generally require that reserves be maintained against net
transaction accounts. From October 1 to November 30, 1999, the first $4.9
million of the bank's transaction accounts were subject to a 0% reserve
requirement. The next $41.6 million in net transaction accounts were subject to
a 3.0% reserve requirement and any net transaction accounts over $46.5 million
were subject to a 10.0% reserve requirement. Effective December 1, 1999, the FRB
increased the amount of transaction accounts subject to a 0% reserve requirement
from $4.9 million to $5.0 million. The FRB decreased the amount of transaction
accounts subject to the 3% reserve requirement to $44.3 million from $46.5
million. Amounts over $44.3 million are subject to the 10% reserve requirement.
The bank met its reserve requirements for each period during the year ended
September 30, 2000. The balances maintained to meet the reserve requirements
imposed by the FRB also may be used to satisfy liquidity requirements imposed by
the OTS.
Savings institutions may borrow from the FRB "discount window," although FRB
regulations require these institutions to exhaust all reasonable alternate
sources of funds, including FHLB sources, before borrowing from the FRB. FDICIA
imposes additional limitations on the ability of the FRB to lend to
undercapitalized institutions through the discount window.
Community Reinvestment Act
Under the CRA and the OTS's regulations, the bank has a continuing and
affirmative obligation to help meet the credit needs of its local communities,
including low- and moderate-income neighborhoods and low and moderate income
individuals and families, consistent with the safe and sound operation of the
institution. The OTS is required to assess the institution's record in
satisfying the intent of the CRA in connection with its examination of the bank.
In addition, the OTS is required to take into account the bank's record of
meeting the credit needs of its community in determining whether to grant
approval for certain types of applications.
<PAGE>
The bank is committed to fulfilling its CRA obligation by providing access to a
full range of credit-related products and services to all segments of its
community. Based on the last OTS examination covering the period from June 1997
through January 2000, the bank received a "satisfactory" CRA rating. The bank is
scheduled for its next CRA examination in the year 2002.
Under the CRA, the bank is tested in three areas:
o Lending - how well the bank meets the credit needs of low- and moderate-income
borrowers and neighborhoods in its defined assessment area(s);
o Service - the bank's ability to deliver reasonable and accessible financial
products and services; such as retail banking branches and ATMs and support
community development services such as financial literacy education and
homebuyers counseling; and
o Investment - the bank's ability to commit to innovative and qualified CRA
investments such as equity investments which support and promote affordable
housing and economic development in low and moderate income neighborhoods in
the bank's assessment area(s).
A recent example of a qualified CRA investment is the bank's $5 million
investment in the Mid Atlantic Affordable Housing Fund I in January 2000. This
investment in Low Income Housing Tax Credit allowed the bank to provide equity
financing to several multifamily housing projects located in Delaware, Northern
Virginia and the District of Columbia which provide rental housing for low- and
moderate-income seniors and families. Because the bank's investment qualified
for the low-income housing tax credit under federal tax laws, the bank will
receive tax benefits relating to this investment over the next 15 years.
Other Aspects of Federal Law
The bank is also subject to federal statutory provisions covering matters such
as security procedures, currency transactions reporting, insider and affiliated
party transactions, management interlocks, truth-in-lending, electronic funds
transfers, funds availability and equal credit opportunity.
The GLB Act imposed significant new consumer privacy obligations on the bank.
Under the Act, the bank must establish and disclose annually its privacy
policies, provide consumers the right to "opt out" of disclosures to
unaffiliated third parties, and abide by regulatory standards to protect the
security and confidentiality of consumer information. The Act also expressly
prohibits the bank from disclosing customer account numbers to any
non-affiliated party for marketing purposes. The Act's privacy provisions do not
preempt state laws that provide greater protections to consumers, and the
federal banking agencies together with the Securities and Exchange Commission
and the Federal Trade Commission adopted regulations implementing the Act's
privacy provisions, which require compliance by July 1, 2001.
The Act contained a variety of other provisions, including, for example,
provisions codifying existing practices regarding disclosure of ATM surcharges,
and, effective May 12, 2001, permitting thrift institutions to offer common
trust funds without registering those funds under the federal securities laws.
<PAGE>
Holding Company Regulation
The Trust and Saul Company, by virtue of their direct and indirect control of
the bank, and Chevy Chase Property Company, referred to in this report as
"CCPC," and CCPC's wholly owned subsidiary, Westminster Investing Corporation,
by virtue of Westminster's direct and indirect ownership of 24.9% of the common
shares of beneficial interest of the Trust, also known as the "Common Shares,"
are "savings and loan holding companies," referred to in this report as the
"Holding Companies," and are subject to regulation, examination and supervision
by OTS. The bank is prohibited from making or guaranteeing loans or advances to
or for the benefit of the Holding Companies or other affiliates engaged in
activities beyond those permissible for bank holding companies and from
investing in the securities of the Holding Companies or other affiliates.
Transactions between the bank and the Holding Companies must be on terms
substantially the same, or at least as favorable to the bank, as those that
would be available to non-affiliates.
The Holding Companies must obtain OTS approval before acquiring any federally
insured savings institution or any savings and loan holding company. The status
of the Holding Companies as "unitary thrift holding companies" and the
activities in which the Holding Companies may engage have been grandfathered
under the GLB Act. As grandfathered unitary thrift holding companies, the
Holding Companies are virtually unrestricted in the types of business activities
in which they may engage provided the bank continues to meet the QTL test. See
"Qualified Thrift Lender ("QTL") Test." The GLB Act prohibits the sale of
grandfathered unitary thrift holding companies such as the Holding Companies
(together with their thrift subsidiaries) or their thrift subsidiaries alone to
commercial companies. Corporate reorganizations are expressly permitted.
If the Holding Companies were to acquire one or more federally insured
institutions and operate them as separate subsidiaries rather than merging them
into the bank, the Holding Companies would become "multiple" savings and loan
holding companies. As multiple savings and loan holding companies, the Holding
Companies would be subject to limitations on the types of business activities in
which they would be permitted to engage, unless the additional thrifts were
troubled institutions acquired pursuant to certain emergency acquisition
provisions and all subsidiary thrifts met the QTL test. The Holding Companies
may acquire and operate additional savings institution subsidiaries outside of
Maryland and Virginia only if the laws of the target institution's state
specifically permit such acquisitions or if the acquisitions are made pursuant
to emergency acquisition provisions.
On October 23, 2000, the OTS proposed regulations that would subject a broad
range of thrift holding company transactions to a 30-day prior notice
requirement and could lead to imposition of formal regulatory capital
requirements on thrift holding companies. Specifically, the proposal would
require a Holding Company to provide the OTS with 30 days' written notice
before:
<PAGE>
o incurring debt that, when combined with all other debt transactions by the
Holding Company or any or its non-thrift subsidiaries during the previous 12
months, (i) would increase the Holding Company's consolidated non-thrift
liabilities by five percent or more, and (ii) would result in the Holding
Company's non-thrift liabilities constituting 50 percent or more of its
consolidated tangible capital;
o acquiring non-cash assets that, when combined with similar acquisitions during
the past 12 months, would exceed 15 percent of the Holding Company's
consolidated assets; and
o engaging in "any activity or transaction" that, when combined with "all other
transactions" during the past 12 months, would reduce the Holding Company's
consolidated tangible capital ratio by 10 percent or more. A Holding Company
with negative consolidated tangible capital under GAAP would be required to
file a notice for "any transaction," unless the OTS Regional Director informed
the Holding Company in writing that a notice is not required.
The Holding Companies could seek advance OTS approval for a schedule of
transactions over a specified period, not to exceed 12 months.
As part of the proposal, the OTS is also considering whether to adopt a rule
designed to codify its current practice for reviewing a holding company's
capital adequacy, on a case-by-case basis, and, when necessary, requiring
additional capital for a holding company.
Comments on the proposal, which has generated substantial controversy, are due
February 9, 2001. The proposal, if adopted in its current from, could adversely
effect the Holding Companies by subjecting a broad range of business
transactions to prior regulatory review. In addition, the proposal could permit
the OTS to impose GAAP-based regulatory capital requirements on the Holding
Companies which, because they are engaged in real estate activities, generally
have relatively low or potentially negative levels of "regulatory capital."
The Trust and the Saul Company entered into an agreement with OTS's predecessor,
the Federal Savings and Loan Insurance Corporation, to maintain the bank's
regulatory capital at the required levels, and, if necessary, to infuse
additional capital to enable the bank to meet those requirements. Since the
execution of this agreement, the OTS has changed its policy and no longer
requires such agreements from companies acquiring thrift institutions. In
addition, the regulatory capital requirements applicable to the bank have
changed significantly as a result of FIRREA. The OTS has stated that capital
maintenance agreements entered into prior to the modification of OTS policy and
the enactment of FIRREA were not affected by those changes. The Trust and the
Saul Company have not sought to modify the existing agreement. To the extent the
bank is unable to meet regulatory capital requirements in the future, the OTS
could seek to enforce the obligations of the Trust and the Saul Company under
the agreement.
If the bank were to become "undercapitalized" under the prompt corrective action
regulations, it would be required to file a capital restoration plan with the
OTS setting forth, among other things, the steps the bank would take to become
"adequately capitalized." The OTS could not accept the plan unless the Holding
Companies guaranteed in writing the bank's compliance with that plan. The
aggregate liability of the Holding Companies under such a commitment would be
limited to the lesser of:
<PAGE>
o an amount equal to 5.0% of the bank's total assets at the time the bank became
"undercapitalized," and
o the amount necessary to bring the bank into compliance with all applicable
capital standards as of the time the bank fails to comply with its capital
plan.
If the Holding Companies refused to provide the guarantee, the bank would be
subject to the more restrictive supervisory actions applicable to "significantly
undercapitalized" institutions. See "Prompt Corrective Action."
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133" ("SFAS 138"). This statement addresses a
limited number of issues causing implementation difficulties for numerous
entities required to apply SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 and SFAS 138 establish accounting
and reporting standards for derivative instruments and hedging activities. They
require that an entity recognize all derivatives as either assets or liabilities
in the statement of financial condition and measure those instruments at fair
value. Changes in the fair value of those instruments will be reported in
earnings or other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. The accounting for gains and
losses associated with changes in the fair value of the derivative and the
effect on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting
changes in the fair value of cash flows of the asset or liability hedged.
Effective October 1, 2000, the bank adopted SFAS 133. The bank believes that the
adoption of these statements will not have a material impact on the bank's
financial position or results of operations in future periods. On October 1,
2000, the bank recorded an after tax loss of $0.5 million in other comprehensive
income representing its transition adjustment from the adoption of SFAS 133 and
138.
SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 140") was issued in September 2000 and
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS 140 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Under SFAS 140, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS 140 is effective for transfers after March 31, 2001, and is effective for
disclosures about securitizations and collateral and for recognition and
reclassification of collateral for fiscal years ending after December 15, 2000.
The impact of SFAS 140 on the bank's financial condition and results of
operations has not yet been determined.
Market Area
The bank's principal deposit and lending markets are located in the Washington,
DC metropolitan area. Service industries and federal, state and local
governments employ a significant portion of the Washington, DC area labor force,
while a substantial number of the nation's 500 largest corporations have some
presence in the area. The Washington, DC area's seasonally unadjusted
unemployment rate is generally below the national rate and was 2.4% in September
2000, compared to the national rate of 3.8%.
<PAGE>
Chevy Chase historically has relied on retail deposits originated in its branch
network as its primary funding source. See "Deposits and Other Sources of
Funds." Chevy Chase's principal market for deposits consists of Montgomery and
Prince George's Counties in Maryland and Fairfax County in Virginia.
Approximately 24.4% of the bank's deposits at September 30, 2000 were obtained
from depositors residing outside of Maryland, Northern Virginia and the District
of Columbia. Chevy Chase had the largest market share of deposits in Montgomery
County, and ranked third in market share of deposits in Prince George's County
at June 30, 1999, according to the most recently published industry statistics.
The per capita income of each of Montgomery and Fairfax Counties ranks among the
highest of counties and equivalent jurisdictions nationally. These two counties
are also the Washington, DC area's largest suburban employment centers, with a
substantial portion of their labor force consisting of federal, state and local
government employees. Private employment is concentrated in services and retail
trade centers. The unemployment rate in Montgomery and Fairfax Counties in
September 2000 of 1.7% and 1.4%, was below the national rate of 3.8% and state
rates of 3.5% for Maryland and 2.4% for Virginia for the same month.
The bank historically has concentrated its lending activities in the Washington,
DC metropolitan area. See "Lending Activities."
Investment and Other Securities
The bank is required by OTS regulations to maintain a specific minimum amount of
liquid assets and short-term liquid assets invested in certain qualifying types
of investments. See "Regulation - Liquidity Requirements." To meet these
requirements, the bank maintains a portfolio of cash, federal funds and
mortgage-backed securities with final maturities of five years or less. The
balance of investments in excess of regulatory requirements reflects
management's objective of maintaining liquidity at a level sufficient to assure
adequate funds to meet expected and unexpected balance sheet fluctuations.
The bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. All investment securities and mortgage-backed
securities were classified as held-to-maturity at September 30, 2000 and 1999.
As part of its mortgage banking activities, the bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
2000 and 1999.
At September 30, 2000 and 1999, the bank held automobile receivables-backed
securities which were classified as trading securities. These securities were
created as part of two automobile loan securitizations and represent subordinate
classes of certificates retained by the bank.
<PAGE>
Lending Activities
Loan and Lease Portfolio Composition. At September 30, 2000, the bank's loan and
lease portfolio totaled $8.3 billion, which represented 77.8% of its total
assets. It should be noted that all references in this report to the bank's loan
portfolio refer to loans and leases, whether they are held for sale and/or
securitization or for investment, and exclude mortgage-backed securities. Loans
collateralized by single-family residences constituted 63.6% of the loan and
lease portfolio at that date.
The following table sets forth information concerning the bank's loan and lease
portfolio net of unfunded commitments for the periods indicated.
<PAGE>
<TABLE>
Loan and Lease Portfolio
(Dollars in Thousands)
September 30,
----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ ------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single family residential (1) $5,012,556 60.3% $4,098,523 63.4% $1,821,982 65.7% $ 849,955 33.2% $1,601,483 47.2%
Home equity (1) 274,355 3.3 239,673 3.7 135,122 4.9 94,088 3.7 32,052 0.9
Commercial real estate and
multifamily 39,230 0.5 57,051 0.9 74,164 2.7 53,551 2.1 78,866 2.3
Real estate construction and
ground 296,705 3.6 228,464 3.5 108,379 3.9 54,998 2.2 63,907 1.9
Commercial 596,384 7.2 394,142 6.1 174,076 6.3 98,346 3.9 57,023 1.7
Credit card (1) -- -- -- -- -- -- 1,077,149 42.3 1,118,271 33.0
Automobile (1) 1,357,367 16.3 827,436 12.8 121,372 4.4 113,241 4.4 239,006 7.2
Subprime automobile (1) 620,588 7.4 480,533 7.4 236,454 8.5 116,627 4.6 62,060 1.8
Home improvement and related
loans (1) 86,973 1.0 106,847 1.7 67,355 2.4 55,453 2.2 99,192 2.9
Overdraft lines of credit and
other consumer 31,608 0.4 31,645 0.5 33,484 1.2 36,029 1.4 37,954 1.1
----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
8,315,766 100.0% 6,464,314 100.0% 2,772,388 100.0% 2,549,437 100.0% 3,389,814 100.0%
----------- ====== ----------- ====== ----------- ====== ----------- ====== ----------- ======
Less:
Unearned premiums and discounts (4,558) (6,562) (2,163) 280 836
Net deferred loan origination
fees (costs) (34,833) (16,133) (850) (2,170) (13,958)
Allowance for loan and lease losses 54,018 58,139 60,157 105,679 95,523
----------- ----------- ----------- ----------- -----------
14,627 35,444 57,144 103,789 82,401
----------- ----------- ----------- ----------- -----------
Total loans and leases
receivable $8,301,139 $6,428,870 $2,715,244 $2,445,648 $3,307,413
=========== =========== =========== =========== ===========
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization, if any.
</TABLE>
<PAGE>
The bank adjusts the composition of its loan and lease portfolio in response to
a variety of factors, including regulatory requirements and asset and liability
management objectives. See "Regulation - Regulatory Capital," "- Qualified
Thrift Lender Test" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition - Banking -
Asset and Liability Management."
Contractual Principal Repayments of Loans and Leases. The following table shows
the scheduled contractual principal repayments of the bank's loans and leases at
September 30, 2000. The entire balance of loans held for sale and/or
securitization is shown in the year ending September 30, 2001, because such
loans are expected to be sold in less than one year.
<PAGE>
<TABLE>
Contractual Principal Repayments
(In thousands)
Principal
Balance Approximate Principal Repayments
Outstanding Due in Years Ending September 30,
at -------------------------------------------------------------------------------------
September 30, 2016 and
2000 (1) 2001 2002 2003 2004-2005 2006-2010 2011-2015 Thereafter
------------ ------------ --------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single family residential $ 4,896,439 $ 69,818 $ 78,039 $ 83,168 $ 179,563 $ 532,765 $ 721,301 $3,231,785
Home equity 274,355 1,917 683 583 2,159 19,956 13,147 235,910
Commercial real estate and
multifamily 39,230 14,474 15,629 9,127 -- -- -- --
Real estate construction and
ground 296,705 207,737 40,158 48,162 -- 648 -- --
Commercial 596,384 152,549 86,269 67,924 113,286 162,466 8,996 4,894
Automobile - Subprime 620,588 132,268 151,630 161,692 174,206 792 -- --
Automobile - Prime 1,287,367 244,113 266,520 405,900 370,834 -- -- --
Home improvement and related
loans 77,345 5,577 5,665 5,590 10,785 22,706 17,980 9,042
Overdraft lines of credit and
other consumer 31,608 5,242 5,107 5,632 13,597 1,974 56 --
Loans held for sale 125,745 125,745 -- -- -- -- -- --
Loans held for securitization
and sale 70,000 70,000 -- -- -- -- -- --
------------ ------------ --------- ---------- ------------ ----------- ----------- -----------
Total loans and leases
receivable (2) $ 8,315,766 $ 1,029,440 $649,700 $ 787,778 $ 864,430 $ 741,307 $ 761,480 $3,481,631
============ ============ ========= ========== ============ =========== =========== ===========
Fixed-rate loans and leases $ 4,634,817 $ 677,296 $546,235 $ 689,481 $ 690,774 $ 468,621 $ 427,716 $1,134,694
Adjustable-rate loans 3,485,204 156,399 103,465 98,297 173,656 272,686 333,764 2,346,937
Loans held for sale 125,745 125,745 -- -- -- -- -- --
Loans held for securitization
and sale 70,000 70,000 -- -- -- -- -- --
------------ ------------ --------- ---------- ------------ ----------- ----------- -----------
Total loans and leases
receivable (2) $ 8,315,766 $ 1,029,440 $649,700 $ 787,778 $ 864,430 $ 741,307 $ 761,480 $3,481,631
============ ============ ========= ========== ============ =========== =========== ===========
-----------------------------------------------------------------------------------------------------------------------------------
(1) Of the total amount of loans and leases outstanding at September 30, 2000,
which were due after one year, an aggregate principal balance of
approximately $4.0 billion had fixed interest rates and an aggregate
principal balance of approximately $3.3 billion had adjustable interest
rates.
(2) Before deduction of allowance for loan and lease losses, unearned premiums
and discounts and deferred loan origination fees (costs).
</TABLE>
<PAGE>
Actual payments may not reflect scheduled contractual principal repayments due
to the effect of loan refinancings, prepayments and enforcement of due-on-sale
clauses. Due-on-sale clauses give the bank the right to declare a "conventional
loan" -- one that is neither insured by the Federal Housing Administration nor
partially guaranteed by the Veterans' Administration -- immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. Although the bank's
single-family residential loans historically have had stated maturities of
generally 30 years, such loans normally have remained outstanding for
substantially shorter periods because of these factors. At September 30, 2000,
principal repayments of $833.7 million are contractually due within the next
year. Of this amount, $677.3 million is contractually due on fixed-rate loans
and $156.4 million is contractually due on adjustable-rate loans.
Origination, Purchase and Sale of Real Estate Loans. The bank has general
authority to make loans secured by real estate located throughout the United
States. The following table shows changes in the composition of the bank's real
estate loan portfolio and the net change in mortgage-backed securities.
<PAGE>
<TABLE>
Origination, Purchase and Sale of Real Estate Loans
(In thousands)
For the Year Ended September 30,
-------------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -------------------
<S> <C> <C> <C>
Real estate loan originations and purchases: (1)
Single family residential $ 1,666,639 $ 3,526,750 $ 2,814,171
Home equity 267,694 331,371 448,071
Commercial real estate and multifamily 4,602 28,416 21,184
Real estate construction and ground 259,537 289,228 126,295
------------------ ------------------ -------------------
Total originations and purchases 2,198,472 4,175,765 3,409,721
------------------ ------------------ -------------------
Principal repayments (507,558) (710,376) (348,676)
Sales (2) (383,824) (52,914) (423,078)
Loans transferred to real estate acquired
in settlement of loans (5,695) (1,909) (4,938)
------------------ ------------------ -------------------
(897,077) (765,199) (776,692)
------------------ ------------------ -------------------
Transfers to mortgage-backed securities (3) (302,260) (926,502) (1,545,974)
------------------ ------------------ -------------------
Increase in real estate loans $ 999,135 $ 2,484,064 $ 1,087,055
================== ================== ===================
(1) Excludes unfunded commitments.
(2) Includes securitization and sale of home equity receivables into new trusts
of $298.8 million for the year ended September 30, 1998. There were no
securitizations or sales of home equity receivables into new trusts during
the years ended September 30, 2000 and 1999.
(3) Represents real estate loans which were pooled and exchanged for
mortgage-backed securities.
</TABLE>
<PAGE>
Single-Family Residential Real Estate Lending. The bank originates a variety of
loans secured by single-family residences. At September 30, 2000, $5.3 billion,
or 63.6%, of the bank's loan and lease portfolio consisted of loans secured by
first or second mortgages on such properties, as compared to $4.3 billion, or
67.1%, at September 30, 1999. Of these amounts, $20.5 million and $20.7 million
consisted of FHA-insured or VA-guaranteed loans at September 30, 2000 and 1999.
Approximately 50.3% of the principal balance of the bank's single-family
residential real estate loans at September 30, 2000, were secured by properties
located in Maryland, Virginia or the District of Columbia.
The bank originates VA, FHA and a wide variety of conventional residential
mortgage loans through its wholly-owned mortgage banking subsidiary, B. F. Saul
Mortgage Company, and through Chevy Chase Mortgage, a division of the bank.
Chevy Chase currently offers fixed-rate loans with maturities of 10 to 40 years
and adjustable-rate residential mortgage loans, principally with maturities of
30 years.
The bank maintains a wholesale network of correspondents, including loan brokers
and financial institutions, in order to supplement its direct origination of
single-family residential mortgage loans. The bank determines the specific loan
products and rates under which the correspondents originate the loans, and
subjects the loans to the bank's underwriting criteria and review. During the
year ended September 30, 2000, approximately $1.2 billion of loans settled under
the correspondent program.
Interest rates on the majority of the bank's ARMs are adjusted based on changes
in yields on U.S. Treasury securities of varying maturities. The interest rate
adjustment provisions of the bank's ARMs contain limitations on the frequency
and maximum amount of interest rate adjustments, although such limitations are
not required by law. These limitations are determined by a variety of factors,
including mortgage loan competition in the bank's markets. The ARMs currently
offered by the bank are generally subject to a limitation on the annual increase
in the interest rate of 2.0% and a limitation on the increase in the interest
rate over the term of the loan ranging from 6.0% to 9.0%. At September 30, 2000,
58.4% of the bank's residential mortgage loans were comprised of ARMs.
Loan sales provide the bank with liquidity and additional funds for lending,
enabling the bank to increase the volume of loans originated and thereby
increase loan interest and fee income as well as gains on sales of loans. In
fiscal 2000, sales of mortgage loans originated or purchased for sale by the
bank totaled $383.8 million compared to $52.9 million during fiscal 1999. The
marketability of loans, loan participations and mortgage-backed securities
depends on purchasers' investment limitations, general market and competitive
conditions, mortgage loan demand and other factors.
The bank's conforming fixed-rate, single-family loans are originated on terms
which conform to Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association and Government National Mortgage Association guidelines in
order to facilitate the sale and/or securitization of those loans. In order to
manage its interest-rate exposure, the bank hedges its held for sale mortgage
loan pipeline by entering into whole loan and mortgage-backed security forward
sale commitments. Sales of residential mortgage loans are generally made without
recourse to the bank. At September 30, 2000, the bank had $116.5 million of
single-family residential loans held for sale to investors.
<PAGE>
From time to time, as part of its capital and liquidity management plans, the
bank may consider exchanging loans held in its portfolio for lower risk-weighted
mortgage-backed securities and retaining those securities in its portfolio
rather than selling them. The bank did not exchange any of its loans held in its
portfolio for mortgage-backed securities during fiscal year 2000. During fiscal
year 1999 the bank exchanged $1.8 million of single-family residential loans
held in its portfolio for mortgage-backed securities, which the bank retained
for its own portfolio.
When the bank sells a residential whole loan or loan participation and retains
servicing, or purchases mortgage servicing assets from third parties, it
collects and remits loan payments, inspects the properties, makes certain
insurance and tax payments on behalf of borrowers and otherwise services the
loans. The servicing fee, generally ranging from 0.25% to 0.50% of the
outstanding loan principal amount per annum, is recognized as income over the
life of the loans. The bank also typically derives income from temporary
investment for its own account of loan collections pending remittance to the
participation or whole loan purchaser. At September 30, 2000, the bank was
servicing residential permanent loans totaling $5.2 billion for other investors.
See "Loan Servicing."
Sales of Mortgage-Backed Securities. The bank originates and sells
mortgage-backed securities pursuant to its normal mortgage banking operations.
The securities are generally issued in the same month as they are sold. The
securities are formed from conforming mortgage loans originated for sale or from
conforming mortgage loans resulting from the borrower's election to convert from
an adjustable-rate loan to a fixed-rate loan. Mortgage-backed securities held
for sale in conjunction with mortgage banking activities are classified as
trading securities. During the years ended September 30, 2000 and 1999, the bank
originated and sold $302.3 million and $924.7 million, of mortgage-backed
securities and recognized gains of $1.5 million and $7.2 million. As a result of
the sale of trading securities in the month such securities are formed, the
Consolidated Statements of Cash Flows in this report reflect significant
proceeds from the sales of trading securities, even though there are no balances
of such securities at September 30, 2000.
Home Equity Lending. The bank's home equity credit line loans provide revolving
credit secured principally by a second mortgage on the borrower's home. Home
equity credit line loans bear interest at a variable rate that adjusts monthly
based on changes in the applicable interest rate index and generally are subject
to a maximum annual interest rate of between 18.0% and 24.0%. Generally, except
for any amortization of principal that may occur as a result of monthly
payments, there are no required payments of principal until maturity. In order
to promote its home equity credit line loan program, the bank currently offers
prospective borrowers a below-market interest rate for an introductory period
and settlement without closing costs.
The bank, at times, may make purchases of home equity credit line loans as a way
to supplement its direct origination of such loans. During fiscal 2000, the bank
made no such purchases.
<PAGE>
Securitization and sale of home equity receivables has been an important element
of the bank's strategies to enhance liquidity and to maintain compliance with
regulatory capital requirements. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
- Banking." The bank transferred $64.4 and $79.4 million of home equity credit
line receivables in existing trusts to investors and recognized gains of $2.3
and $2.9 million during the years ended September 30, 2000 and 1999. The bank
transferred $298.8 million of home equity receivables in fiscal 1998 to trusts
for securitization and sale to investors. A gain of $19.7 million was recognized
by the bank as a result of this transaction. The bank continues to service the
underlying accounts.
Commercial Real Estate and Real Estate Construction Lending. Commercial real
estate, real estate construction and ground loans are originated directly by the
bank. Aggregate balances of residential and commercial construction, ground and
commercial real estate and multifamily loans increased 17.7% in fiscal 2000 to
$335.9 million at September 30, 2000, from $285.5 million at September 30, 1999.
The bank provides financing, generally at market rates, to certain purchasers of
its real estate owned. Additionally, the bank finances the construction of
residential real estate, principally single-family detached homes and
townhouses, but generally only when a home is under contract for sale by the
builder to a consumer.
Commercial Lending. The bank makes loans to business entities for a variety of
purposes, including working capital, acquisitions of machinery and equipment or
other assets, and facilitating cash flows. The bank also provides acquisition,
construction and permanent financing of real estate used in the borrower's
business. A wide variety of products are offered, including revolving lines of
credit for working capital or seasonal needs; term loans for the financing of
fixed assets; letters of credit; cash management services; and other deposit and
investment products.
Business development efforts originated by the bank's Business Banking Group
have been concentrated in the major industry groups in the metropolitan
Washington, DC and Baltimore areas, as well as a broad base of businesses and
community service organizations. Commercial loans increased $202.3 million
during fiscal 2000 from $394.1 million at September 30, 1999 to $596.4 million
at September 30, 2000. During fiscal year 2000, the bank purchased commercial
loan participations to a greater extent than in previous years. At September 30,
2000, approximately one-third of the bank's $596.4 million of commercial loans
consisted of participations by the bank in commercial loans which were
originated by other financial institutions. The bank believes its balances of
commercial loans will increase as it continues to expand this aspect of its
business. In addition, management believes that the ability to offer a broader
variety of investment products and fiduciary services to institutional customers
through the bank's subsidiaries, ASB Capital Management, Inc. and Chevy Chase
Trust Company will continue to enhance the operations of the Business Banking
Group.
Federal laws and regulations limit the bank's commercial loan portfolio to 20%
of assets, with at least 10% consisting of small business loans. At September
30, 2000 the bank was in compliance with this limit.
<PAGE>
Consumer Lending. Chevy Chase currently offers a variety of consumer loans,
including automobile loans and leases, overdraft lines of credit, home
improvement loans and other unsecured loans for traditional consumer purchases
and needs. Following the sale of the credit card portfolio on September 30,
1998, the bank no longer offers its own credit card loans, but has an agreement
with the purchaser pursuant to which the bank provides credit cards issued by
the purchaser to the bank's local customers. The bank's portfolios of automobile
loans and automobile leases, home improvement and related loans and other
consumer loans totaled $2.0 billion, $87.0 million and $31.6 million,
at September 30, 2000, which accounted for a combined 25.1% of total loans at
that date. The largest areas of recent growth have been in automobile loans and
home improvement loans. During fiscal 2000, the bank purchased or originated
$1.5 billion and $117.2 million of automobile loans and home improvement loans.
Effective November 9, 2000, the bank stopped originating subprime automobile
loans. The bank will continue its collection efforts on the existing portfolio.
See Note 32 to the Consolidated Financial Statements in this report.
Federal and state lawmakers and regulators are considering, and in some cases
have adopted, a variety of additional requirements relating to subprime and
perceived abusive or "predatory" lending practices. Those requirements range
from increased reporting and capital requirements to prohibition of specific
lending practices. In light of the bank's decision to stop originating new
subprime automobile loans, management currently believes that any such new
regulatory requirements should not have a material adverse effect on the bank's
financial condition.
Federal laws and regulations limit the bank's secured and unsecured consumer
loans to 35% of its total assets. Home improvement, secured deposit account and
educational loans are not included in the 35% limit. At September 30, 2000, the
bank was in compliance with this limit.
Real Estate Loan Underwriting. In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security. The Board of Directors has
delegated credit approval authority to the Executive Loan Committee and certain
senior officers based on credit authorizations approved by the Board of
Directors. Generally, all construction and commercial real estate loans are
reviewed and approved by the Executive Loan Committee. Any significant loan not
conforming to the bank's approved policies must be approved by the Executive
Loan Committee or the Chief Executive Officer. All loans of $30 million or more
are presented to the Board of Directors for final approval.
The approval process for all types of real estate loans includes appraisals or
evaluations of the properties securing such loans and a review of the
applicant's financial statements and credit, payment and banking history,
financial statements of any guarantors, and tax returns of guarantors of
construction and commercial real estate loans.
<PAGE>
In an effort to minimize the increased risk of loss associated with construction
and development loans, Chevy Chase considers the reputation of the borrower and
the contractor, reviews pre-construction sale and leasing information, and
requires an independent inspecting engineer or architect to review the progress
of multifamily and commercial real estate projects. In addition, the bank
generally requires personal guarantees of developers for all development loans
and, if a general contractor is used by the developer, may require the posting
of a performance bond.
The bank generally lends on its residential mortgage loans up to 95% of the
appraised value of owner-occupied single-family homes. The bank generally also
lends up to 80% of the appraised value of the completed project to finance the
construction of such homes. The loan-to-value ratio generally applied by the
bank to commercial real estate loans and multifamily residential loans has been
80% of the appraised value of the completed project. In some circumstances, the
bank originates a first and second mortgage loan simultaneously where the total
loan value does not exceed 95% of the appraised value of the property.
Currently, the bank offers home equity credit line loans up to a 125% maximum
loan-to-value ratio. Loan-to-value ratios are determined at the time a loan is
originated. Consequently, subsequent declines in the value of a loan's
collateral could expose the bank to losses. The bank's ability to make loans
with a loan-to-value ratio above 90 percent without mortgage insurance is
limited to 100 percent of the bank's total risk-based capital.
OTS regulations require institutions to adopt internal real estate lending
policies, including loan-to-value limitations conforming to specific guidelines
established by the OTS. The bank's current lending policies conform to these
regulations.
On all loans secured by real estate, other than home improvement and related
loans and certain home equity credit line loans, Chevy Chase requires title
insurance policies protecting the priority of the bank's liens. The bank
requires fire and casualty insurance for permanent loans including home equity
credit line loans and fire, casualty and builders' risk insurance for
construction loans. The borrower selects the insurance carrier, subject to Chevy
Chase's approval. Generally, for any residential loan, including home equity
credit line loans in an amount exceeding 80% of the appraised value of the
security property, Chevy Chase currently requires mortgage insurance from an
independent mortgage insurance company. The majority of the bank's mortgage
insurance is placed with six carriers.
Substantially all fixed-rate mortgage loans originated by the bank contain a
due-on-sale clause providing that the bank may declare a loan immediately due
and payable in the event, among other things, that the borrower sells the
property securing the loan without the consent of the bank. The bank's ARMs
generally are assumable.
Commercial Loan Underwriting. All commercial loan requests are underwritten and
approved under authorities granted to specified committees and individuals as
outlined in the bank's credit policies. The scope and depth of the underwriting
for a particular request are generally dictated by the size of the proposed
transaction. All commercial loans greater than $100,000 are assigned a risk
rating at inception, based on a risk-rating system established in the bank's
credit policies.
<PAGE>
Consumer Loan and Lease Underwriting. Consumer loans and leases, which include
automobile loans and leases, home improvement and related loans and overdraft
lines of credit, are originated or purchased by the bank after a review in
accordance with established underwriting procedures.
The underwriting procedures are designed to provide a basis for assessing the
borrower's ability and willingness to repay the loan or lease. In conducting
this assessment, the bank considers the borrower's ratio of debt to income,
various credit scoring models and evaluates the borrower's credit history
through a review of a written credit report compiled by a recognized consumer
credit reporting bureau. The borrower's equity in the collateral and the terms
of the loan or lease are also considered. The bank's guidelines are intended
only to provide a basis for lending decisions, and exceptions to such guidelines
may, within certain limits, be made based upon the credit judgment of the bank's
lending officer. The bank periodically conducts audits to ensure compliance with
its established underwriting policies and procedures.
Prior to November 9, 2000, the bank also originated subprime automobile loans
through one of its operating subsidiaries. The underwriting guidelines for this
subsidiary apply to a category of lending in which loans may be made to
applicants who have experienced certain adverse credit events and therefore
would not necessarily meet all of the bank's guidelines for its traditional loan
program, but who meet certain other creditworthiness tests. Such loans may
experience higher rates of delinquencies, repossessions and losses, especially
under adverse economic conditions, compared with loans originated pursuant to
the bank's traditional lending program. Effective November 9, 2000, the bank
stopped the origination of subprime automobile loans. The bank will continue its
collection efforts on the existing portfolio. See Note 32 to the Financial
Statements.
Loan Servicing. In addition to interest earned on loans, the bank receives
income through servicing of loans and fees in connection with loan origination,
loan modification, late payments, changes of property ownership and
miscellaneous services related to its loans. Servicing income earned on
single-family residential mortgage loans owned by third parties and the bank's
securitization and servicing of credit card, home equity, automobile and home
loan receivables portfolios, had been a source of substantial earnings for the
bank in past years. Following the sale of its credit card portfolio and
operations on September 30, 1998, the bank has significantly curtailed its
securitization activities which, when combined with the elimination of credit
card servicing fees, has led to a substantial decrease in servicing and
securitization income. Income from these activities varies with the volume and
type of loans originated and sold.
<PAGE>
The following table sets forth certain information relating to the bank's
servicing income as of or for the years indicated.
As of or For the Year Ended September 30,
-----------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Residential.................. $ 5,229,971 $ 3,459,750 $ 4,003,946
Home equity.................. 249,785 195,296 421,432
Automobile................... 867,046 556,238 1,055,746
Home Improvement loans....... 81,847 111,831 200,033
------------- ------------- -------------
Total amount of loans
serviced for others (1)... $ 6,428,649 $ 4,323,115 $ 5,681,157
============= ============= =============
Servicing and securitization
income (2)................ $ 38,441 $ 31,670 $ 231,674
============= ============= =============
--------------------
(1) The bank's basis in its servicing assets and interest-only strips at
September 30, 2000, 1999 and 1998 was $91.8 million, $38.1 million and $40.7
million.
(2) In each of the years ended September 30, 2000, 1999 and 1998, servicing and
securitization income as a percentage of net interest income before provision
for loan and lease losses was 11.2%, 11.6% and 116.4%.
The bank earns fees in connection with the servicing of home equity loans, home
improvement loans, automobile loans and single-family residential mortgage
loans. The bank's level of servicing and securitization income varies based in
large part on the amount of the bank's securitization activities with respect to
these loan types. As the bank securitizes and sells assets, acquires servicing
assets either through purchase or origination, or sells mortgage loans and
retains the servicing rights on those loans, the level of servicing and
securitization income generally increases. During fiscal 2000, the bank
securitized and sold $739.2 million of loan receivables into trusts compared to
$81.1 million during fiscal 1999.
<PAGE>
The bank's investment in servicing assets -- which includes servicing assets,
interest-only strips, and the amortization of those assets -- are periodically
evaluated for impairment. Interest-only strips are evaluated quarterly based on
the discounted value of estimated future net cash flows to be generated by the
underlying loans. The difference between the book value of these assets and the
discounted value is recognized as an unrealized gain or loss in the period in
which the change occurs. Several estimates are used when determining the
discounted value, the most significant of which are the estimated rate of
repayment of the underlying loans and estimated credit losses. The bank
evaluates its servicing assets for impairment based on fair value. To measure
fair value of its servicing assets, the bank uses either quoted market prices or
discounted cash flow analyses using appropriate assumptions for servicing fee
income, servicing costs, prepayment rates and discount rates. If actual
prepayment or default rates significantly exceed the estimates used to calculate
the carrying values of the servicing assets, the actual amount of future cash
flow could be less than the expected amount and the value of the servicing
assets, as well as the bank's earnings, could be negatively impacted. No
assurance can be given that the bank's receivables will not experience
significant increases in prepayment or default rates or that the bank may not
have to write down the value of its servicing assets. Additionally, the bank
stratifies its capitalized servicing assets for purposes of evaluating
impairment by taking into consideration relevant risk characteristics, including
loan type, note rate and date of acquisition.
The bank prices its single-family mortgage loans to achieve a competitive yield.
Loan origination and commitment fees, and the related costs associated with
making the loans, are deferred. For fully amortizing loans originated for the
bank's portfolio, the net deferred fees are accreted to interest income over the
estimated life of the loans using the level-yield method. Fees deferred on
revolving credit lines or loans, which have no scheduled amortization,
originated for the bank's portfolio are accreted to income over the estimated
lives of the underlying loans using the straight-line method. Fees deferred on
loans originated and held for sale are not accreted to income but instead are
used in determining the gain or loss on the sale of the loans.
Delinquencies, Foreclosures and Allowances for Losses
Delinquencies and Foreclosures. When a borrower fails to make a required payment
on a mortgage loan, the loan is considered delinquent and, after expiration of
the applicable cure period, the borrower is charged a late fee. The bank follows
practices customary in the banking industry in attempting to cure delinquencies
and in pursuing remedies upon default. Generally, if the borrower does not cure
the delinquency within 90 days, the bank initiates foreclosure action. If the
loan is not reinstated, paid in full or refinanced, the security property is
sold. In some instances, the bank may be the purchaser. Thereafter, the acquired
property is listed in the bank's account for real estate acquired in settlement
of loans until it is sold. Deficiency judgments generally may be enforced
against borrowers in Maryland, Virginia and the District of Columbia, but may
not be available or may be subject to limitations in other jurisdictions in
which loans are originated by the bank.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Banking - Asset Quality -
Delinquent Loans" for a discussion of the bank's delinquent loan portfolio at
September 30, 2000.
<PAGE>
Allowances for Losses. It is the bank's policy to maintain adequate allowances
for estimated losses on loans and leases and real estate. Generally, the
allowances are based on, among other things, historical loan and lease loss
experience, evaluation of economic conditions in general and in various sectors
of the bank's customer base, and periodic reviews of loan and lease portfolio
quality by bank personnel. The bank's specific methods for establishing the
appropriate levels of allowances vary depending upon the assets involved.
Allowances for losses on loans and leases and real estate are based on current
events or facts that may ultimately lead to future losses. In addition to
reviews of individual portfolio segments, the bank regularly reviews its overall
loan and lease portfolio consisting of performing non-classified assets and,
based on that review, may establish additional allowances for losses. The bank's
actual losses may vary from management's current estimates. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Banking - Asset Quality - Allowances for
Losses."
The bank's allowance on its consumer loans and leases is based on a number of
factors, including historical charge-off and repayment experience. The bank's
reserve methodology is based on an analysis of the characteristics of the
portfolio and trends at any particular time. In this regard, the bank considers
various historical information relative to the origination date, borrower
profiles, delinquencies and other factors. In the case of automobile loans,
management also considers the value of the underlying collateral, which can be
adversely impacted by the time required to liquidate the collateral as well as
the age and type of the collateral, and geographic trends.
The bank's methods for determining the allowance on loans secured by real estate
vary depending on whether the loans are secured by residences or by other real
estate. For residential mortgage loans, management analyzes the allowance by
stratifying residential permanent loans on a state by state basis and on whether
the property is occupied by the owner. After the residential permanent portfolio
has been stratified by state, historical loss ratios, as adjusted for
predictable or quantifiable trends, if known, for the specific states are
applied to delinquent loans. Based on this analysis, a reserve component is
assigned to residential permanent loans. In the bank's experience, this approach
has resulted in timely recognition of necessary allowances, which has been
generally supported by the bank's favorable results on the ultimate disposition
of the underlying collateral.
The bank assesses the adequacy of its allowances on non-residential mortgage
loans, commercial loans, REO and real estate held for investment based primarily
on an ongoing evaluation of individual assets. This evaluation takes into
consideration a variety of factors, including cash flow analyses, independent
appraisals, internal risk ratings, market studies, economic trends and
management's knowledge of the market and experience with particular borrowers.
The bank obtains current appraisals when properties are classified as REO. The
bank periodically reviews appraisals and orders new appraisals as appropriate
based on a number of factors, including the date of the previous appraisal,
changes in market conditions and regulatory requirements.
In addition to the allowances described above, allowances are provided for
individual loans where the ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the collateral or
guarantees, if applicable.
<PAGE>
REO is carried at the lower of cost or fair value, less selling costs. To date,
sales of REO, non-residential mortgage loans, commercial loans and loans
classified as investments in real estate have resulted in no material additional
aggregate loss to the bank above the amounts already reserved. However, these
results do not necessarily assure that the bank will not suffer losses in the
future beyond its level of allowances.
The bank's review of its various asset portfolios takes place within its Asset
Review and Asset Classification Committees, which meet on a quarterly basis. The
Asset Classification Committee reviews risk performance trends within the bank's
loan and REO portfolios and economic trends and conditions which might impact
those portfolios. This Committee also reviews the status of individual
criticized and classified asset from $500,000 up to $5,000,000. The Asset
Classification Committee concludes with a presentation on the allowance for loan
and lease losses. The Asset Review, which meets in conjunction with the Asset
Classification Committee, reviews the status of individual criticized and
classified assets of $5,000,000 and greater.
The Federal Financial Institution Examination Council, which is composed of the
OTS and the other federal banking agencies, has issued guidelines regarding the
appropriate levels of general valuation allowances that should be maintained by
insured institutions. The bank believes that its levels of general valuation
allowances at September 30, 2000 comply with the guidelines. In September 2000,
the FFIEC issued a proposed policy statement providing additional guidance on
the design and implementation of loan loss allowance methodologies and
supporting documentation practices. The bank is reviewing its existing
procedures in light of the proposed policy statement.
The bank's assets are subject to review and classification by the OTS upon
examination. Based on such examinations, the bank could be required to establish
additional valuation allowances or incur additional charge-offs.
Deposits and Other Sources of Funds
General. Deposits are the primary source of the bank's funds for use in lending
and for other general business purposes. In addition to deposits, Chevy Chase
receives funds from loan repayments and loan sales. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
influenced by general interest rates and money-market conditions. Borrowings may
be used to compensate for reductions in normal sources of funds, such as deposit
inflows at less than projected levels or deposit outflows, or to support the
bank's operating or investing activities, or planned growth. In recent periods,
the bank has relied to a significantly greater degree on borrowed funds --
particularly FHLB advances -- and brokered deposits to fund its planned asset
growth. Those sources of funding generally are more volatile and expensive than
traditional core deposits.
Deposits. Chevy Chase currently offers a variety of deposit accounts with a
range of interest rates and maturities designed to attract both long-term and
short-term deposits. Deposit programs include Super Money Fund, Super Statement
Savings, Super NOW, Insured Money Fund, Checking, Simple Statement Savings,
Young Savers, Certificate, and special programs for Individual Retirement and
Keogh self-employed retirement accounts.
<PAGE>
Chevy Chase attracts deposits through its branch network and advertisements, and
offers depositors access to their accounts through 856 ATMs, including 335 ATMs
located in grocery stores. These ATMs significantly enhance the bank's position
as a leading provider of convenient ATM service in its primary market area. The
bank is a member of the "STAR"(R) ATM network which offers nationwide access,
and the "PLUS"(R) ATM network, which offers worldwide access. In addition, the
bank has a partnership agreement with a regional grocery store to potentially
provide in-store banking centers at up to 163 Maryland, Virginia, Delaware and
Washington DC area stores. As of September 30, 2000, the bank has opened 38
in-store banking centers as part of this agreement.
Chevy Chase accepted brokered deposits in fiscal 2000 and 1999 as a way to
diversify the bank's funding sources and provide additional funding for planned
growth. The bank had $1.4 billion and $584.2 million of brokered deposits at
September 30, 2000 and 1999. Under FDIC regulations, the bank can accept
brokered deposits as long as it meets the capital standards established for well
capitalized institutions or, with FDIC approval, adequately-capitalized
institutions, under the prompt corrective action regulations. Brokered deposits
typically have higher interest rates and are more volatile than traditional
retail deposits. However, during fiscal years 2000 and 1999, management
determined that they represented a viable alternative source of funds for the
bank, particularly in light of the bank's need to fund its planned rate of
growth. The bank will continue to explore using brokered deposits as a source of
funds in the future.
The bank obtains deposits primarily from customers residing in Montgomery and
Prince George's Counties in Maryland and Northern Virginia. Approximately 47.4%
of the bank's deposits at September 30, 2000 were obtained from depositors
residing outside of Maryland, with approximately 17.2% of the bank's deposits
being obtained from depositors residing in Northern Virginia.
The following table shows the amounts of Chevy Chase's deposits by type of
account at the dates indicated.
<PAGE>
<TABLE>
Deposit Analysis
(Dollars in thousands)
September 30,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
----------------------------- ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts $1,849,203 26.3% $1,606,169 27.9% $1,329,839 27.2% $1,120,375 22.9% $1,007,902 24.2%
Money market deposit
accounts 1,156,829 16.4 1,125,405 19.5 1,019,569 20.9 983,016 20.1 1,002,688 24.1
Statement savings accounts 779,344 11.1 888,212 15.4 913,467 18.7 907,141 18.5 881,285 21.2
Jumbo certificate accounts 636,750 9.0 486,245 8.4 358,913 7.3 358,737 7.3 125,847 3.0
Brokered certificate
accounts 1,306,419 18.6 532,588 9.3 -- -- 315,142 6.4 -- --
Other certificate accounts 1,195,999 17.0 1,016,118 17.6 1,168,746 23.9 1,130,274 23.2 1,077,828 25.9
Other deposit accounts 113,245 1.6 108,749 1.9 97,696 2.0 79,071 1.6 68,487 1.6
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total deposits $7,037,789 100.0% $5,763,486 100.0% $4,888,230 100.0% $4,893,756 100.0% $4,164,037 100.0%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
Average Cost of Deposits
Year Ended September 30,
-------------------------------------------------
2000 1999 1998
----- ----- -----
Demand and NOW accounts 0.88% 1.04% 1.99%
Money market accounts 3.55% 3.36% 3.90%
Statement savings and
other deposit accounts 1.86% 2.07% 3.02%
Certificate accounts 5.69% 4.88% 5.41%
Total deposit accounts 3.71% 3.04% 3.84%
===== ===== =====
<PAGE>
The range of deposit account products offered by the bank through its extensive
branch and ATM network allows the bank to be competitive in obtaining funds from
its local retail deposit market. At the same time, however, as customers have
become increasingly responsive to changes in interest rates, the bank has
experienced some fluctuations in deposit flows. Chevy Chase's ability to attract
and maintain deposits and its cost of funds will continue to be significantly
affected by market conditions and its pricing strategy.
The following table sets forth Chevy Chase's deposit flows during the periods
indicated.
Deposit Flows
Year Ended September 30,
-----------------------------------------
(In thousands)
2000 1999 1998
------------- ------------- -------------
Deposits to accounts............... $ 38,470,514 $ 40,084,375 $ 24,799,407
Withdrawals from
accounts........................ (37,418,474) (39,355,464) (24,984,251)
------------- ------------- -------------
Net cash to (from)
accounts........................ 1,052,040 728,911 (184,844)
Interest credited to
accounts........................ 222,263 146,345 179,318
------------- ------------- -------------
Net increase (decrease) in deposit
balances........................ $ 1,274,303 $ 875,256 $ (5,526)
============= ============= =============
Deposit growth may be moderated by the bank from time to time either to take
advantage of lower cost funding alternatives or in response to more modest
expectations for loan and other asset growth.
The following table sets forth, by weighted average interest rates, the types
and amounts of deposits as of September 30, 2000 which will mature during the
fiscal years indicated.
<PAGE>
<TABLE>
Weighted Average Interest Rates of Deposits
As of September 30, 2000
(Dollars in thousands)
Demand, NOW
and Money Market Statement Passbook and Other Certificate
Deposit Accounts Savings Accounts Core Accounts Accounts Total
-------------------- ------------------ ------------------ -------------------- --------------------
Maturing
During Weighted Weighted Weighted Weighted Weighted
Year Ending Average Average Average Average Average
September 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------- ---------- --------- -------- --------- -------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2001 $3,006,032 1.91 % $779,344 1.90 % $113,245 1.66 % $2,388,385 6.08 % $6,287,006 3.49 %
2002 -- -- -- -- -- -- 582,576 6.77 582,576 6.77
2003 -- -- -- -- -- -- 124,716 6.69 124,716 6.69
2004 -- -- -- -- -- -- 11,079 4.77 11,079 4.77
2005 -- -- -- -- -- -- 32,412 6.02 32,412 6.02
---------- -------- -------- ---------- ---------
Total $3,006,032 1.91 % $779,344 1.90 % $113,245 1.66 % $3,139,168 6.23 % $7,037,789 3.83 %
========== ======== ======== ========== =========
</TABLE>
<PAGE>
The following table summarizes maturities of certificate accounts in amounts of
$100,000 or greater as of September 30, 2000.
Year Ending September 30, Amount Weighted Average Rate
------------------------- -------------- ---------------------
(Dollars in thousands)
2001..................... $ 563,178 6.27%
2002..................... 34,976 6.79%
2003..................... 9,716 6.52%
2004..................... 1,207 4.63%
2005..................... 5,322 6.05%
-------------- -------
Total................. $ 614,399 6.30%
============== =======
The following table represents the amounts of deposits by various interest rate
categories as of September 30, 2000 maturing during the fiscal years indicated.
<PAGE>
<TABLE>
Maturities of Deposits by Interest Rates
As of September 30, 2000
(In thousands)
Accounts Maturing During Year Ending September 30,
----------------------------------------------------------------------------------------------------------
Interest Rate 2001 2002 2003 2004 2005 Total
----------------------- -------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits (0%) $ 555,747 $ -- $ -- $ -- $ -- $ 555,747
0.01% to 1.99% 2,160,691 -- -- -- -- 2,160,691
2.00% to 2.99% 166,928 -- -- -- -- 166,928
3.00% to 3.99% 563,540 -- -- -- -- 563,540
4.00% to 4.99% 506,097 14,627 967 8,629 338 530,658
5.00% to 5.99% 572,950 22,511 23,539 678 7,618 627,296
6.00% to 7.99% 1,761,053 545,438 100,210 1,772 24,456 2,432,929
-------------- ------------- ------------- ------------- ------------- --------------
Total $ 6,287,006 $ 582,576 $ 124,716 $ 11,079 $ 32,412 $ 7,037,789
============== ============= ============= ============= ============= ==============
</TABLE>
<PAGE>
Borrowings. The FHLB system functions as a central reserve bank providing credit
for member institutions. As a member of the FHLB of Atlanta, Chevy Chase is
required to own capital stock in the FHLB of Atlanta and is authorized to apply
for advances on the security of such stock and certain of its mortgages and
other assets, principally securities which are obligations of, or guaranteed by,
the United States or its agencies, provided certain standards related to
creditworthiness have been met.
Under the credit policies of the FHLB of Atlanta, credit may be extended to
creditworthy institutions based upon their financial condition, and the adequacy
of collateral pledged to secure the extension of credit. Such extensions of
credit may be obtained pursuant to several different credit programs, each of
which has its own rate and range of maturities. Advances from the FHLB of
Atlanta must be secured by certain types of collateral with a value, as
determined by the FHLB of Atlanta, at least equal to 100% of the borrower's
outstanding advances. The bank had outstanding FHLB advances of $1.9 billion at
September 30, 2000.
From time to time the bank enters into repurchase agreements, which are treated
as financings. The bank sells securities, which are usually mortgage-backed
securities, to a dealer and agrees to buy back the same securities at a
specified time which is generally within seven to 90 days. The bank pays a
stated interest rate for the use of the funds for the specified time period to
the dealer. The obligation to repurchase the securities sold is reflected as a
liability and the securities underlying the agreements are included in assets in
the Consolidated Balance Sheets in this report. These arrangements are, in
effect, borrowings by the bank secured by the securities sold. The bank had
outstanding repurchase agreements of $369.6 million at September 30, 2000.
The following table sets forth a summary of the repurchase agreements of the
bank as of the dates and for the years indicated.
September 30,
-----------------------------------
2000 1999
---------------- -----------------
(Dollars in thousands)
Securities sold under repurchase agreements:
Balance at year-end......................... $ 369,628 $ 526,571
Average amount outstanding during
the year................................. 490,333 371,660
Maximum amount outstanding at any
month-end................................ 647,779 526,571
Weighted average interest rate during
the year................................. 6.27% 5.22%
Weighted average interest rate
on year-end balances..................... 6.74% 5.78%
On November 23, 1993, the bank sold $150 million principal amount of its 9 1/4%
Subordinated Debentures due 2005. Interest on the 1993 Debentures is payable
semiannually on December 1 and June 1 of each year. The OTS approved the
inclusion of the principal amount of the 1993 Debentures in the bank's
supplementary capital for regulatory capital purposes. Since December 1, 1998,
the 1993 Debentures have been redeemable, in whole or in part, at any time at
the option of the bank.
<PAGE>
On December 3, 1996, the bank sold $100 million principal amount of its 9 1/4%
Subordinated Debentures due 2008. Interest on the 1996 Debentures is payable
semiannually on December 1 and June 1 of each year. The OTS approved the
inclusion of the principal amount of the 1996 Debentures in the bank's
supplementary capital for regulatory capital purposes. On or after December 1,
2001, the 1996 Debentures will be redeemable, in whole or in part, at any time
at the option of the bank.
Under the OTS capital regulations, redemption of the 1993 Debentures or the 1996
Debentures prior to their stated maturity requires prior approval of the OTS
unless the debentures are redeemed with the proceeds of, or replaced by, a like
amount of "a similar or higher quality" capital instrument.
Subsidiaries
OTS regulations generally permit the bank to make investments in service
corporation subsidiaries in an amount not to exceed 3.0% of the bank's assets,
provided that any investment in excess of 2.0% of assets serves primarily
community, inner city or community development purposes. These regulations also
permit the bank to make "conforming loans" to such subsidiaries and joint
ventures in an amount not to exceed 50% of the bank's regulatory capital. At
September 30, 2000, 2.0% and 3.0% of the bank's assets was equal to $214.2
million and $321.2 million, and the bank had $7.7 million invested in its
service corporation subsidiaries, $5.0 million of which was in the form of
conforming loans.
The bank may establish operating subsidiaries to engage in any activities in
which the bank may engage directly. There are no regulatory limits on the amount
the bank can invest in operating subsidiaries. The bank is required to provide
30 days advance notice to the OTS and to the FDIC before establishing a new
subsidiary or conducting a new activity in an existing subsidiary. The bank
engages in a variety of other activities through its subsidiaries, including
those described below.
Real Estate Development Activities. Manor Investment Company was engaged in
certain real estate development activities commenced prior to the enactment of
FIRREA and continues to manage the remaining property it holds. As a result of
the stringent capital requirements that FIRREA applies to investments in
subsidiaries, such as Manor, that engage in activities impermissible for
national banks, Manor has not entered, and does not intend to enter, into any
new real estate development arrangements. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Financial
Condition - Banking - Asset Quality."
Securities Brokerage Services. Chevy Chase Securities, Inc., is a wholly owned
subsidiary of Chevy Chase Financial Services Corporation ("CCFS"), a wholly
owned direct subsidiary of Chevy Chase. Chevy Chase Securities is a licensed
broker-dealer, which sells securities on a retail basis to the general public,
including customers and depositors of the bank.
Insurance Services. Chevy Chase Insurance Agency, Inc., a wholly owned
subsidiary of CCFS, is a licensed insurance broker offering a variety of
"personal line" property and casualty and life insurance programs to the general
public, including customers and depositors of the bank. The Company's primary
programs consist of home owner and automobile insurance in the property and
casualty sector and mortgage and credit life and disability insurance in the
life insurance sector.
<PAGE>
Special Purpose Subsidiaries. At September 30, 2000, Chevy Chase Real
Estate Corporation, a wholly owned subsidiary of Chevy Chase, held 100% of the
common stock of 23 subsidiaries, 10 of which are active, a majority of which
were formed for the sole purpose of acquiring title to various real estate
projects pursuant to foreclosure or deed-in-lieu of foreclosure. The bank's
investment in the subsidiaries was $91.7 million at September 30, 2000. The
bank's investment in CCRC is not subject to the 3.0% service corporation
investment limit discussed above.
Operating Subsidiaries. Chevy Chase engages in significant mortgage lending
activities through B. F. Saul Mortgage Company. See "Lending Activities."
Consumer Finance Corporation was formed as an operating subsidiary in December
1994 to engage in subprime automobile lending. Effective November 9, 2000, the
bank stopped the origination of subprime automobile loans. The bank will
continue its collection efforts on the existing portfolio. See Note 32 to the
Consolidated Financial Statements in this report. Chevy Chase Preferred Capital
Corporation was formed in August 1996 as an operating subsidiary to invest in
real estate loans, and mortgage-backed securities and related assets, and to
serve as the vehicle for raising additional Tier 1 capital for the bank.
On November 12, 1997, a newly formed operating subsidiary of the bank acquired
ASB Capital Management, Inc. through which the bank offers investment,
management and fiduciary services to primarily institutional customers. As a
result of an internal reorganization that took effect on October 1, 2000, ASB
Capital Management, Inc.'s trust activities will be conducted through Chevy
Chase Trust Company, a separate wholly owned operating subsidiary of the bank.
Employees
The bank and its subsidiaries had 3,234 full-time and 460 part-time employees at
September 30, 2000. The bank provides its employees with a comprehensive range
of employee benefit programs, including group health benefits, life insurance,
disability insurance, paid sick leave, certain free deposit services and certain
loan discounts. See "Item 11. Executive Compensation" for a discussion of
certain compensation programs available to the bank's executive officers. None
of the bank's employees is represented by a collective bargaining agent. The
bank believes that its employee relations are good.
Competition
Chevy Chase encounters strong competition both in attracting deposits and making
real estate and other loans in its markets. The bank's most direct competition
for deposits has come from other thrifts, commercial banks and credit unions, as
well as from money market funds and corporate and government securities. In
addition to offering competitive interest rates, Chevy Chase offers a variety of
services, convenient ATM locations and convenient office locations and hours to
attract deposits. Competition for real estate and other loans comes principally
from other thrifts, banks, mortgage banking companies, insurance companies and
other institutional lenders. Chevy Chase competes for loans through interest
rates, loan fees and the variety and quality of services provided to borrowers
and brokers.
The bank's major competition comes from local depository institutions and, as a
result of deregulation of the financial services industry and changing market
demands over recent years, regional, national and international financial
institutions and other providers of financial services. The GLB Act amended
federal law to permit broader affiliations among commercial banks, securities
firms, insurance companies, and other financial services providers.
<PAGE>
The bank estimates that it competes principally with approximately thirteen
depository institutions in its deposit-taking activities in the Washington, DC
metropolitan area. The bank also competes with such institutions in the
origination of single-family residential mortgage loans and home equity credit
line loans. According to the most recently published industry statistics, Chevy
Chase had the largest market share, with approximately 22% of deposits in
Montgomery County, Maryland, and ranked third in market share, with
approximately 10% of deposits, in Prince George's County, Maryland at June 30,
1999. Based on publicly available information, Chevy Chase estimates that, in
the Washington, DC metropolitan area, it maintains the leading market share of
single-family residential mortgage and home equity credit line loans.
FEDERAL TAXATION
The Trust terminated its status as a real estate investment trust for federal
income tax purposes in 1978 and is now taxable as a corporation. The Trust and
its subsidiaries join in the filing of a consolidated federal income tax return
using the accrual method of accounting on the basis of a fiscal year ending
September 30.
Since June 28, 1990 the bank and its subsidiaries have joined in the
consolidated federal income tax returns filed by the Trust on a fiscal year
basis. Each member of an affiliated group of corporations which files
consolidated income tax returns is liable for the group's federal income tax
liability. Prior to June 28, 1990, the bank and its subsidiaries filed a
consolidated federal income tax return on a calendar-year basis.
Savings institutions such as the bank generally are taxed in the same manner as
other corporations. There are, however, several special rules that apply
principally to savings institutions and, in some cases, other financial
institutions. Certain significant aspects of the federal income taxation of the
bank are discussed below.
The Internal Revenue Service has notified the Trust that its consolidated
federal tax returns for the fiscal years ended September 30, 1996 and 1995 have
been selected for review.
Bad Debt Reserve. For taxable years beginning before December 31, 1995, savings
institutions that satisfied certain requirements were permitted to establish
reserves for bad debts and to deduct each year reasonable additions to those
reserves in lieu of taking a deduction for bad debts actually sustained during
the taxable year. To qualify for this treatment, at least 60% of a savings
institution's assets had to be "qualifying assets," including cash, certain U.S.
and state government securities, and loans secured by interests in residential
real property.
In establishing its reserves from calendar year 1988 through fiscal year 1996,
the bank calculated its bad debt deduction for tax purposes using the experience
method. The experience method was based on the institution's actual loan loss
experience over a prescribed period. For the year ended September 30, 1996,
accumulated reserves were approximately $111.8 million.
<PAGE>
Provisions that repealed the thrift bad debt provisions of the Internal Revenue
Code were included in the Small Business Act of 1996 and took effect for tax
years beginning after December 31, 1995. As a result, for its fiscal year 2000
and fiscal year 1999, the bank is no longer able to use the "reserve method" for
computing its bad debt deduction and can deduct only those bad debts actually
incurred during the respective taxable years. The bad debt provisions of this
legislation also require thrifts to recapture and pay tax on bad debt reserves
accumulated since 1987 over a six year period, beginning with a thrift's taxable
year starting after December 31, 1995 or, if the thrift meets a loan origination
test, beginning up to two years later. The bank's accumulated reserves since
1987 which are subject to recapture under this rule are $101.3 million.
Of this amount, $16.9 million was recaptured in fiscal year 2000 and 1999,
and $84.4 million remains subject to recapture over the remainder of the six
year recovery period. The tax liability related to the recapture of the bad debt
reserves accumulated since 1987 has been reflected in the bank's financial
statements as of September 30, 2000 and 1999.
Consolidated Tax Returns; Tax Sharing Payments. Generally, the operations of the
Trust have generated significant net operating losses. The bank's taxable income
generally has been sufficient to fully utilize the current year tax loss of the
Trust. Under the terms of a tax sharing agreement dated June 28, 1990, as
amended, the bank is obligated to make payments to the Trust based on its
taxable income, as explained more fully below.
The Tax Sharing Agreement generally provides that each member of the Trust's
affiliated group is required to pay the Trust an amount equal to 100% of the tax
liability that the member would have been required to pay to the IRS if the
member had filed on a separate return basis. These amounts generally must be
paid even if the affiliated group has no tax liability or the group's tax
liability is less than the sum of such amounts. Under the Tax Sharing Agreement,
the Trust, in turn, is obligated to pay to the applicable tax authorities the
overall tax liability, if any, of the group. In addition, to the extent the net
operating losses or tax credits of a particular member reduce the overall tax
liability of the group, the Trust is required to reimburse such member on a
dollar-for-dollar basis, thereby compensating the member for the group's use of
its net operating losses or tax credits. Under the tax sharing agreement, the
bank and its subsidiaries are treated as a single member of the Trust's
affiliated group.
The bank made tax sharing payments of $6.6 million in fiscal 2000. At September
30, 2000, the amount of tax sharing payments due to the Trust from the bank was
$3.5 million. It is expected that the bank will have taxable income in future
years and additional operating losses of the Trust will be utilized to reduce
the overall tax liability of the group which would otherwise arise from such
taxable income of the bank or from the taxable income of other members of the
Trust's affiliated group.
In general, if the bank has net operating losses or unused tax credits in any
taxable year, under the tax sharing agreement the Trust is obligated to
reimburse the bank in an amount generally equal to (1) the tax benefit to the
group of using such tax losses or unused tax credits in the group's consolidated
federal income tax return for such year, plus (2) to the extent such losses or
credits are not used by the group in such year, the amount of the tax refunds
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 but not in
excess of the net amount paid by the bank to the Trust pursuant to the tax
sharing agreement. There is no assurance that the Trust would be able to fulfill
this obligation. If the Trust did not make the reimbursement, the OTS could
attempt to characterize such nonpayment as an unsecured extension of credit by
the bank to the Trust which, as described above under "Holding Company
Regulation," is prohibited under current law. The tax sharing agreement itself
does not provide for any remedies upon a breach by any party of its obligations
under the agreement.
<PAGE>
The bank, as a member of an affiliated group of corporations filing consolidated
income tax returns, is liable under the Internal Revenue Code for the group's
tax liability. Although the bank would be entitled to reimbursement under the
tax sharing agreement for income tax paid with respect to the income of other
members of the affiliated group, there can be no assurance that the Trust or
other members would be able to fulfill this obligation.
State Taxation
Maryland law does not allow the filing of consolidated income tax returns, and
thus the Trust and its subsidiaries, which includes the bank and its
subsidiaries, that are subject to Maryland income tax, are required to file
separately in Maryland. The Trust and its subsidiaries are also subject to
income taxes in other states, some of which allow or require combined or
consolidated filings.
<PAGE>
ITEM 2. PROPERTIES
Real Estate
A list of the investment properties of the Real Estate Trust is set forth under
"Item 2. Business - Real- Estate - Real Estate Investments."
The Trust conducts its principal business from its executive offices at 8401
Connecticut Avenue, Chevy Chase, Maryland. The Trust sells its unsecured notes
due one year to ten years from date of issue from a sales office located at 7200
Wisconsin Avenue, Suite 903, Bethesda, Maryland. Saul Company leases both
office facilities on behalf of the Trust.
Banking
At September 30, 2000, the bank conducted its business from its home office at
7926 Jones Branch Drive, McLean, Virginia and its executive offices at 8401
Connecticut Avenue, Chevy Chase, Maryland; its operations centers at 6151 and
6200 Chevy Chase Drive, Laurel, Maryland; its office facilities at 7700 and 7735
Old Georgetown Road, Bethesda, Maryland, and 1101 Pennsylvania Avenue, NW,
Washington, DC; and 170 full-service offices located in Maryland, Virginia,
Delaware and the District of Columbia. On that date, the bank owned the building
and land for 31 of its branch offices and leased its remaining 139 branch
offices. Chevy Chase leases the office facilities at 8401 Connecticut Avenue,
6200 Chevy Chase Drive, 7735 Old Georgetown Road, 1101 Pennsylvania Avenue, NW
and the land at 7700 Old Georgetown Road. Chevy Chase owns the building at 7700
Old Georgetown Road. In addition, the bank leases office space in which its
subsidiaries are housed. The office facility leases have various terms expiring
from fiscal 2001 to 2019 and the ground leases have terms expiring from fiscal
2029 to 2080. The bank also owns the building and land at 5202 President's
Court, Frederick, Maryland. In connection with the sale of the credit card
portfolio and related operations on September 30, 1998, the bank entered into a
lease agreement with the purchaser for this facility. See Note 19 to the
Consolidated Financial Statements in this report for lease expense and
commitments.
The following table sets forth the location of the bank's 170 full-service
branch offices at September 30, 2000.
1 Catoctin Circle 8201 Greensboro Drive
Leesburg, VA 20176 McLean, VA 22102
1100 W. Broad Street 234 Maple Avenue East
Falls Church, VA 22046 McLean, VA 22180
3941 Pickett Road 8436 Old Keene Mill Road
Fairfax, VA 22031 Springfield, VA 22152
1439 Chain Bridge Road 75 West Lee Highway
McLean, VA 22101 Warrenton, VA 20186
8120 Sudley Road 6367 Seven Corners Center
Manassas, VA 20109 Falls Church, VA 22044
1100 S. Hayes Street 13344-A Franklin Farms Road
Arlington, VA 22202 Herndon, VA 20171
<PAGE>
2932 Chain Bridge Road 20970 Southbank Street
Oakton, VA 22124 Potomac Falls, VA 20165
1201 Elden Street 21800 Towncenter Plaza
Herndon, VA 20170 Sterling, VA 20164
5613 Stone Road 7030 Little River Turnpike
Centreville, VA 20120 Annandale, VA 22003
44151 Ashburn Shopping Plaza 3095 Nutley Street
Ashburn, VA 20147 Fairfax, VA 22031
3690-A King Street 4700 Lee Highway
Alexandria, VA 22302 Arlington, VA 22207
6609 Springfield Mall 5851 Crossroads Center Way
Springfield, VA 22150 Falls Church, VA 22041
500 South Washington Street 6800 Richmond Highway
Alexandria, VA 22314 Alexandria, VA 22306
10100 Dumfries Road 7935 L Tysons Corner Center
Manassas, VA 22110 McLean, VA 22102
5870 Kingstowne Boulevard 11874 Spectrum Center
Alexandria, VA 22310 Reston, VA 20190
3499 S. Jefferson Street 5230-A Port Royal Road
Baileys Crossroads, VA 22041 Springfield, VA 22151
3046 Gatehouse Plaza 8628 Richmond Highway
Falls Church, VA 22042 Alexandria, VA 22309
1621 B Crystal Square Arcade 46160 Potomac Run Plaza
Arlington, VA 22202 Sterling, VA 20164
1100 Wilson Boulevard 5740 Union Mills Road
Arlington, VA 22209 Clifton, VA 20124
4229 Merchant Plaza 21100 Dulles Town Circle
Woodbridge, VA 22192 Dulles, VA 20166
14125 St. Germain Drive 7575 Newlinton Hall Road
Centreville, VA 20121 Gainesville, VA 20155
3532 Columbia Pike 12445 Hedges Run Drive
Arlington, VA 22204 Lakeridge, VA 22192
11200 Main Street 9863 Georgetown Pike
Fairfax, VA 22030 Great Falls, VA 22066
13043 Lee Jackson Memorial Highway 2251 John Milton Drive
Fairfax, VA 22033 Herndon, VA 20171
2079 Daniel Stuart Square 7137 Columbia Pike
Woodbridge, VA 22191 Annandale, VA 22003
<PAGE>
2901-11 South Glebe Road 8110 Fletcher Avenue
Arlington, VA 22206 McLean, VA 22101
7501 Huntsman Boulevard 3501 Plank Road
Springfield, VA 22153 Fredericksburg, VA 22407
1230 West Broad Street 6011 Burke Center Parkway
Falls Church, VA 22047 Burke, VA 22015
10346 Courthouse Road 8025 Sudley Road
Spotsylvania, VA 22553 Manassas, VA 22110
3480 South Jefferson Street 1228 Elden Street
Falls Church, VA 22041 Herndon, VA 22070
26001 Ridge Road 8315 Georgia Avenue
Damascus, MD 20872 Silver Spring, MD 20910
17831 Georgia Avenue 4701 Sangamore Road
Olney, MD 20832 Bethesda, MD 20816
11261 New Hampshire Avenue 2185 Brightseat Road
Silver Spring, MD 20904 Landover, MD 20785
101 Halpine Road 6200 Annapolis Road
Rockville, MD 20852 Landover Hills, MD 20784
6107 Greenbelt Road 33 West Franklin Street
Berwyn Heights, MD 20740 Hagerstown, MD 21740
4 Bureau Drive 6400 Belcrest Road
Gaithersburg, MD 20878 Hyattsville, MD 20782
19610 Club House Road 8740 Arliss Street
Gaithersburg, MD 20886 Silver Spring, MD 20901
812 Muddy Branch Road 2409 Wooton Parkway
Gaithersburg, MD 20878 Rockville, MD 20850
10211 River Road 8845 Branch Avenue
Potomac, MD 20854 Clinton, MD 20735
14113 Baltimore Avenue 1181 University Boulevard
Laurel, MD 20707 Langley Park, MD 20783
7290-A Cradlerock Way 19801 Century Boulevard
Columbia, MD 21045 Germantown, MD 20874
1151 Maryland Route 3 North 1009 West Patrick Street
Gambrills, MD 21054 Frederick, MD 21701
12228 Viers Mill Road 7937 Ritchie Highway
Silver Spring, MD 20906 Glen Burnie, MD 21061
317 Kentlands Boulevard 19781-83 Frederick Road
Gaithersburg, MD 20878 Germantown, MD 20876
<PAGE>
215 N. Washington Street 16827 Crabbs Branch Way
Rockville, MD 20850 Rockville, MD 20855
1336 Crain Highway South 2321-E Forest Drive
Mitchellville, MD 20716 Annapolis, MD 21401
573 Governor Ritchie Highway 15460 Annapolis Road
Severna Park, MD 21146 Bowie, MD 20715
4745 Dorsey Hall Drive 20000 Goshen Road
Ellicott City, MD 21042 Gaithersburg, MD 20879
1130 Smallwood Drive 12097 Rockville Pike
Waldorf, MD 20603 Rockville, MD 20852
10800 Baltimore Avenue 10159 New Hampshire Avenue
Beltsville, MD 20705 Hillandale, MD 20903
1040 Largo Center Drive 6264 Central Avenue
Largo, MD 20785 Seat Pleasant, MD 20743
6335 Marlboro Pike 7700 Old Georgetown Road
District Heights, MD 20747 Bethesda, MD 20814
7530 Annapolis Road 18104 Town Center Drive
Lanham, MD 20784 Olney, MD 20832
11241 Georgia Avenue 6197 Oxon Hill Road
Wheaton, MD 20902 Oxon Hill, MD 20745
13484 New Hampshire Avenue 10821 Connecticut Avenue
Silver Spring, MD 20904 Kensington, MD 20895
7101 Democracy Boulevard 18006 Mateny Road
Bethesda, MD 20817 Germantown, MD 20874
4825 Cordell Avenue 7406 Baltimore Avenue
Bethesda, MD 20814 College Park, MD 20740
7515 Greenbelt Road 980 E. Swan Creek Road
Greenbelt, MD 20770 Fort Washington, MD 20744
15777 Columbia Pike 3828 International Drive
Burtonsville, MD 20866 Silver Spring, MD 20906
509 N. Frederick Avenue 3400 Crain Highway
Gaithersburg, MD 20877 Bowie, MD 20716
5823 Eastern Avenue 2315 Randolph Road
Chillum, MD 20782 Silver Spring, MD 20906
3355 Corridor Market Place 6020 Marshalee Drive
Laurel, MD 20724 Elkridge, MD 21075
10400 Old Georgetown Road 135 East Baltimore Street
Bethesda, MD 20814 Baltimore, MD 21202
<PAGE>
115 University Boulevard West 2801 University Boulevard West
Silver Spring, MD 20901 Kensington, MD 20895
9707 Old Georgetown Road 4624 Edmondson Avenue
Bethesda, MD 20814 Baltimore, MD 21229
7941 Tuckerman Lane 6000 Greenbelt Road
Potomac, MD 20854 Greenbelt, MD 20704
Stamp Student Union 9730 Groffs Mill Drive
College Park, MD 20742 Owings Mills, MD 21117
5400 Corporate Drive 6340 York Road
Frederick, MD 21703 Towson, MD 21212
20944 Frederick Road 4622 Wilkens Avenue
Germantown, MD 20876 Baltimore, MD 21229
3601 St. Barnabas Road 11301 Rockville Pike
Silver Hill, MD 20746 Kensington, MD 20895
18331 Leaman Farm Road 7500 Old Georgetown Road
Germantown, MD 20876 Bethesda, MD 20814
1734 York Road 5370 Westbard Avenue
Lutherville, MD 21093 Bethesda, MD 20816
11399 York Road 7340 Westlake Terrace
Cockeysville, MD 21030 Bethesda, MD 20817
751 South Salisbury Boulevard 1327 Lamberton Drive
Salisbury, MD 21801 Silver Spring, MD 20902
5700 Southeast Crain Highway 2215 Bel Pre Road
Upper Marlboro, MD 20772 Wheaton, MD 20906
5476 Wisconsin Avenue 8401 Connecticut Avenue
Chevy Chase, MD 20815 Chevy Chase, MD 20815
8100 Loch Raven Boulevard 5424 Western Avenue
Towson, MD 21286 Chevy Chase, MD 20815
842 Muddy Branch Road 13641 Connecticut Avenue
Gaithersburg, MD 20878 Wheaton, MD 20906
4455 Connecticut Avenue, NW 229 Kentlands Boulevard
Washington, DC 20008 Gaithersburg, MD 20878
2831 Alabama Avenue, SE 4000 Wisconsin Avenue, NW
Washington, DC 20020 Washington, DC 20016
1800 M Street, NW 1717 Pennsylvania Avenue, NW
Washington, DC 20036 Washington, DC 20006
1545 Wisconsin Avenue, NW 925 15th Street, NW
Washington, DC 20007 Washington, DC 20005
<PAGE>
4860 Massachusetts Avenue, NW 1299 Pennsylvania Avenue, NW
Washington, DC 20016 Washington, DC 20005
210 Michigan Avenue, NE 5714 Connecticut Avenue, NW
Washington, DC 20017 Washington, DC 20015
22 Lighthouse Plaza 1850 K Street, NW
Rehoboth Beach, DE 19971 Washington, DC 20006
At September 30, 2000, the net book value of the bank's office facilities,
including leasehold improvements, was $53.3 million, net of accumulated
depreciation of $77.9 million. See Note 18 to the Consolidated Financial
Statements in this report.
As of October 2000, the bank had received OTS approval to open four additional
full-service branch offices. The branches, three in Virginia and one in
Maryland, are scheduled to open during fiscal 2001.
During fiscal 1998, the bank entered into an agreement to lease approximately
3.5 acres of land located at 7501 Wisconsin Avenue, Bethesda, Maryland, on which
the bank is developing an office building to use as its new corporate
headquarters. At September 30, 2000, the bank had invested $90.0 million related
to this facility.
The bank owns additional assets, including furniture and data processing
equipment. At September 30, 2000, these other assets had a book value of $219.2
million, net of accumulated depreciation of $118.1 million. The bank also has
operating leases, primarily for certain data processing equipment and software.
Such leases have month-to-month or year-to-year terms.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Trust is involved in certain litigation,
including litigation arising out of the collection of loans, the enforcement or
defense of the priority of its security interests, the continued development and
marketing of certain of its real estate properties, and certain employment
claims. In the opinion of management, litigation which is currently pending will
not have a material adverse impact on the financial condition or future
operations of the Trust.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There currently is no established public trading market for Common Shares. At
December 6, 2000, there were nine corporate or individual holders of record of
Common Shares. All holders of Common Shares at such date were affiliated with
the Trust. The Trust did not pay any cash dividends on its Common Shares during
the past two fiscal years. See "Item 12. Security Ownership of Certain
Beneficial Owners and Management."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Trust herein have been derived from the
Consolidated Financial Statements of the Trust. The data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
included elsewhere in this report.
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
==================================================================================================================================
Year Ended September 30
-------------------------------------------------------------------
(In thousands, except per share amounts and other data) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Real Estate:
Revenues $ 132,858 $ 106,025 $ 98,592 $ 84,569 $ 76,839
Operating expenses 145,484 121,676 118,636 108,601 104,321
Equity in earnings of partnership investments 7,711 5,360 1,918 4,150 3,374
Gain (loss) on sales of property 994 -- (331) 895 (68)
-------------------------------------------------------------------
Real estate operating loss (3,921) (10,291) (18,457) (18,987) (24,176)
-------------------------------------------------------------------
Banking:
Interest income 736,659 519,493 437,404 454,352 388,196
Interest expense 394,400 245,507 238,410 239,815 188,836
-------------------------------------------------------------------
Net interest income 342,259 273,986 198,994 214,537 199,360
Provision for loan losses (49,930) (22,880) (150,829) (125,115) (115,740)
-------------------------------------------------------------------
Net interest income after provision for loan and lease losses 292,329 251,106 48,165 89,422 83,620
-------------------------------------------------------------------
Other income:
Servicing and securitization income 38,441 31,670 231,674 303,216 284,964
Credit card fees -- -- 53,881 57,381 30,765
Deposit servicing fees 88,253 69,570 51,997 41,893 29,900
Gain on sales of trading securities, net 1,490 7,243 982 1,203 1,158
Net unrealized gains (losses) on trading securities -- 1,192 (1,258) -- --
Gain (loss) on real estate held for investment or sale, net (1,523) 34,049 (16,539) (18,688) (24,413)
Gain on sales of assets 1,486 3,779 290,434 1,527 1,732
Other 26,112 22,693 29,089 22,573 19,713
-------------------------------------------------------------------
Total other income 154,259 170,196 640,260 409,105 343,819
-------------------------------------------------------------------
Operating expenses 365,316 325,322 504,018 418,346 381,328
-------------------------------------------------------------------
Banking operating income 81,272 95,980 184,407 80,181 46,111
-------------------------------------------------------------------
Total Company:
Operating income 77,351 85,689 165,950 61,194 21,935
Provision for income taxes 23,217 29,302 42,869 12,810 8,301
-------------------------------------------------------------------
Income before extraordinary item and minority interest 54,134 56,387 123,081 48,384 13,634
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (166) -- (9,601) -- --
-------------------------------------------------------------------
Income before minority interest 53,968 56,387 113,480 48,384 13,634
Minority interest held by affiliates (6,298) (7,604) (22,043) (6,848) (3,962)
Minority interest -- other (25,313) (25,313) (25,313) (22,676) (9,750)
-------------------------------------------------------------------
Total company net income (loss) $ 22,357 $ 23,470 $ 66,124 $ 18,860 $ (78)
===================================================================
Net income (loss) available to common shareholders $ 16,939 $ 18,052 $ 60,706 $ 13,442 $ (5,498)
Net income (loss) per common share:
Income before extraordinary item and minority interest $ 10.08 $ 10.56 $ 24.38 $ 8.90 $ 1.70
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (0.03) -- (1.99) -- --
-------------------------------------------------------------------
Income before minority interest 10.05 10.56 22.39 8.90 1.70
Minority interest held by affiliates (1.30) (1.58) (4.57) (1.42) (0.82)
Minority interest -- other (5.24) (5.24) (5.24) (4.70) (2.02)
-------------------------------------------------------------------
Total company net income (loss) $ 3.51 $ 3.74 $ 12.58 $ 2.78 $ (1.14)
===================================================================
----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
(Continued)
==================================================================================================================================
Year Ended September 30
-------------------------------------------------------------------
(In thousands, except per share amounts and other data) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Real estate assets $ 430,864 $ 365,071 $ 323,432 $ 300,573 $ 294,503
Income-producing properties, net 238,249 207,407 183,879 156,535 156,115
Land parcels 39,716 39,448 40,110 42,160 41,580
Banking assets 10,684,994 9,146,769 6,721,149 6,057,413 5,693,074
Total company assets 11,115,858 9,511,840 7,044,581 6,357,986 5,987,577
Liabilities:
Real estate liabilities 738,367 663,638 636,036 590,910 578,092
Mortgage notes payable 307,214 213,447 198,874 180,204 173,345
Notes payable - secured 200,000 216,000 200,000 175,000 177,500
Notes payable - unsecured 47,463 46,122 50,335 46,633 42,367
Banking liabilities 10,071,545 8,562,284 6,141,636 5,582,167 5,388,444
Minority interest held by affiliates 79,028 73,236 72,242 51,388 46,065
Minority interest - other 218,307 218,307 218,306 218,306 74,307
Total company liabilities 11,107,247 9,517,465 7,068,220 6,442,771 6,086,908
Shareholders' equity (deficit) 8,611 (5,625) (23,639) (84,785) (99,331)
----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA:
Net cash flows provided by (used in) operating activities:
Real estate $ 24,980 $ 30,388 $ 14,738 $ 6,911 $ 9,782
Banking 887,985 (10,534) 2,211,589 2,368,287 1,747,887
-------------------------------------------------------------------
Total Company 912,965 19,854 2,226,327 2,375,198 1,757,669
-------------------------------------------------------------------
Net cash flows provided by (used in) investing activities:
Real estate (88,665) (44,237) (45,115) (11,664) (4,907)
Banking (2,475,266) (2,995,105) (2,202,225) (2,276,165) (2,567,763)
-------------------------------------------------------------------
Total Company (2,563,931) (3,039,342) (2,247,340) (2,287,829) (2,572,670)
-------------------------------------------------------------------
Net cash flows provided by (used in) financing activities:
Real estate 63,957 17,756 26,079 7,485 (6,714)
Banking 1,425,368 2,379,329 555,201 293,344 727,019
-------------------------------------------------------------------
Total Company 1,489,325 2,397,085 581,280 300,829 720,305
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (161,641) (622,403) 560,267 388,198 (94,696)
----------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Hotels:
Number of hotels 16 15 12 10 9
Number of guest rooms 3,196 3,103 2,772 2,370 2,261
Average occupancy 71% 68% 68% 70% 68%
Average room rate $89.16 $85.46 $81.01 $72.21 $68.79
Office properties:
Number of properties 10 7 7 8 8
Leasable area (square feet) 1,684,425 1,277,243 1,270,087 1,308,000 1,308,000
Leasing percentages 98% 92% 100% 99% 93%
Land parcels:
Number of parcels 9 10 10 10 9
Total acreage 399 417 434 439 446
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
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 Real Estate Trust's investment portfolio at September 30, 2000 consisted
primarily of hotels, office projects, and land parcels. See "Business - Real
Estate - Real Estate Investments." During fiscal 2000, the Real Estate Trust
added a 95-unit TownePlace Suites to its hotel portfolio, which at year-end
included 16 properties containing 3,196 available rooms. Also during fiscal
2000, the Real Estate Trust acquired a 248,000 square foot multi-storied
building and developed two single-story buildings containing 160,000 square feet
of gross leasable area.
Overall, the hotel portfolio experienced an average occupancy rate of 71% and an
average room rate of $89.16 during fiscal 2000, compared to an average occupancy
of 68% and an average room rate of $85.45 during the prior year. For the twelve
hotels owned throughout both periods, the average occupancies were 72% and 68%,
and the average rates were $91.12 and $85.65. REVPAR (revenue per available
room) for the twelve hotels was $65.16 for fiscal 2000, an 11.4% increase over
REVPAR for fiscal 1999 of $58.47.
Office space in the Real Estate Trust's office property portfolio was 98% leased
at September 30, 2000, compared to a leasing rate of 92% at September 30, 1999.
At September 30, 2000, the Real Estate Trust's office property portfolio
consisted of 10 properties and had a total gross leasable area of 1,684,000
square feet, of which 212,000 square feet (12.6%) and 217,000 square feet
(12.9%) are subject to leases expiring in fiscal 2001 and fiscal 2002.
<PAGE>
Banking
General. The bank continued its pattern of growth during fiscal 2000 with total
assets increasing to $10.7 billion, an increase of $1.6 billion from fiscal
1999. Total loans and leases increased $1.8 billion during fiscal 2000, funded
primarily through increases in deposits, including brokered deposits, and
Federal Home Loan bank advances. The bank recorded operating income of $81.3
million during fiscal 2000, compared to operating income of $96.0 million during
fiscal 1999. Fiscal 1999 results include the impact of a $31.6 million pre-tax
gain on the sale of an REO property. The decrease in income for fiscal 2000 was
attributable to a $15.9 million decrease in other (non-interest) income, largely
resulting from the gain on the sale of the REO property during 1999, an increase
in operating (non-interest) expenses of $40.0 million in fiscal 2000 and an
increase in the provision for loan and lease losses of $27.1 million. Partially
offsetting the reduction of income were increases in net interest income of
$68.3 million and deposit service fees of $18.9 million. See "Results of
Operations."
Gain (loss) on real estate held for investment or sale decreased during fiscal
year 2000 to a loss of $1.5 million from a gain of $34.0 million during fiscal
1999. The $35.6 million decrease was primarily attributable to a $31.6 million
gain on sale of one of the communities in Loudoun County, Virginia which took
place in fiscal 1999.
Servicing and securitization income increased $6.8 million, or 21.4%, during
fiscal 2000 primarily as a result of increased securitization activity. During
fiscal 2000, the bank securitized and sold $674.8 million of automobile loan
receivables and recognized a gain of $4.6 million. The bank did not securitize
and sell any loan receivables into new trusts during fiscal 1999. See Notes 1, 2
and 10 to the Consolidated Financial Statements in this report. See "Liquidity
and Capital Resources - Banking." The bank recognized a net unrealized gain of
$2.6 million during fiscal 2000 on its interest-only strips receivables. The
bank did not recognize any net unrealized gains or losses on interest-only
strips receivables during fiscal 1999. In addition, amortization of
interest-only strips receivable related to prior gains on sales of loans totaled
$7.3 million during fiscal 2000 compared to $8.7 million during fiscal 1999.
Real estate owned, net of valuation allowances, decreased from $48.8 million at
September 30, 1999 to $48.5 million at September 30, 2000. This reduction was
primarily due to sales in the Communities and other properties offset by an
increase in the bank's ownership interest in two of the communities. See "Asset
Quality - REO."
At September 30, 2000, the bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.48%, 5.48%, 7.21% and 11.01%. The
bank's capital ratios exceeded regulatory requirements as well as the standards
established for well-capitalized institutions under OTS prompt corrective action
regulations. See "Capital."
During fiscal 2000, the bank declared and paid, out of the retained earnings of
the bank, cash dividends on its Common Stock in the aggregate amount of $1,600
per share. Subsequent to September 30, 2000, the bank declared and paid, out of
the retained earnings of the bank, cash dividends on its Common Stock in the
amount of $400 per share.
<PAGE>
The bank's assets are subject to review and classification by the OTS upon
examination. The OTS concluded its most recent examination of the bank in
February 2000.
Asset Quality. Non-Performing Assets. The bank's level of non-performing assets
increased during fiscal 2000. The following table sets forth information
concerning the bank's non-performing assets at the dates indicated. The figures
shown are after charge-offs and, in the case of real estate acquired in
settlement of loans, after all valuation allowances.
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)
September 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 5,171 $ 4,756 $ 8,106 $ 9,617 $ 8,200
Real estate and construction and ground 70 -- -- -- --
----------- ------------ ------------- ------------ ------------
Total non-accrual real estate loans 5,241 4,756 8,106 9,617 8,200
Credit card (1) (2) -- -- -- -- 25,350
Commercial -- 269 -- -- --
Subprime automobile 12,026 6,640 3,563 3,154 382
Other consumer 5,399 1,607 938 1,072 857
----------- ------------ ------------- ------------ ------------
Total non-accrual loans (3) 22,666 13,272 12,607 13,843 34,789
----------- ------------ ------------- ------------ ------------
Real estate acquired in settlement of loans 129,213 133,157 218,972 231,407 246,380
Allowance for losses on real estate acquired in settlement
of loans (80,752) (84,405) (153,564) (140,738) (126,519)
----------- ------------ ------------- ------------ ------------
Real estate acquired in settlement of loans, net 48,461 48,752 65,408 90,669 119,861
----------- ------------ ------------- ------------ ------------
Total non-performing assets 71,127 62,024 78,015 104,512 154,650
Accruing loans past due 90 days -- -- -- 25,700 --
----------- ------------ ------------- ------------ ------------
Total non-performing assets and accruing loans past due
90 days $ 71,127 $ 62,024 $ 78,015 $ 130,212 $ 154,650
=========== ============ ============= ============ ============
Troubled debt restructurings $ -- $ 11,714 $ 11,800 $ 11,861 $ 13,618
=========== ============ ============= ============ ============
Allowance for losses on loans and leases $ 54,018 $ 58,139 $ 60,157 $ 105,679 $ 95,523
Allowance for losses on real estate held for investment 202 202 202 198 191
Allowance for losses on real estate acquired in settlement
of loans 80,752 84,405 153,564 140,738 126,519
----------- ------------ ------------- ------------ ------------
Total allowances for losses $ 134,972 $ 142,746 $ 213,923 $ 246,615 $ 222,233
=========== ============ ============= ============ ============
Interest income recorded
Non-accrual assets $ 4 $ 17 $ 38 $ 441 $ 770
=========== ============ ============= ============ ============
Restructured loans $ 340 $ 229 $ 367 $ 265 $ 507
=========== ============ ============= ============ ============
Interest income that would have been recorded had the
loans been current in accordance with their original terms
Non-accrual assets $ 2,434 $ 1,769 $ 1,081 $ 5,692 $ 7,364
=========== ============ ============= ============ ============
Restructured loans $ 1,323 $ 1,261 $ 1,244 $ 1,244 $ 1,693
=========== ============ ============= ============ ============
------------------------------------------------------------------------------------------------------------------------------------
(1) The bank sold its credit card portfolio and related operations on
September 30, 1998.
(2) Effective June 30, 1997, the bank stopped placing credit card loans on
non-accrual status.
(3) Before deduction of allowances for losses.
</TABLE>
<PAGE>
<TABLE>
Non-Performing Assets (Continued)
September 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ratios:
Non-performing assets and accruing credit card loans past
due 90 days, net to total assets (1) 0.16% 0.04% 0.26% 0.40% 1.04%
Allowance for losses on real estate loans to non-accrual
real estate loans (2) 205.76% 361.35% 204.18% 99.81% 134.44%
Allowance for losses on consumer loans to
non-accrual consumer and other loans (2)(3) 208.49% 440.52% 758.08% 148.37% 370.86%
Allowance for losses on loans and leases to non-accrual
loans (2) 238.32% 438.06% 477.17% 763.41% 274.58%
Allowance for losses on loans and leases to total loans
and leases receivable (4) 0.65% 0.90% 2.17% 4.14% 2.81%
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-performing assets is presented after all allowances for losses on loans
and leases and real estate held for investment or sale.
(2) Before deduction of allowances for losses.
(3) Includes subprime automobile loans.
(4) Includes loans and leases receivable and loans held for sale and/or
securitization, before deduction of allowance for losses.
</TABLE>
<PAGE>
Non-performing assets include non-accrual loans, non-accrual real estate held
for investment, and REO, acquired either through foreclosure or deed-in-lieu of
foreclosure, or pursuant to in-substance foreclosure. Non-accrual loans consist
of loans contractually past due 90 days or more or with respect to which other
factors indicate that full payment of principal and interest is unlikely.
Non-performing assets totaled $71.1 million, after valuation allowances on REO
of $80.8 million, at September 30, 2000, compared to $62.0 million, after
valuation allowances on REO of $84.4 million, at September 30, 1999. The bank
also maintained valuation allowances of $54.0 million and $58.1 million on its
loan and lease portfolio at September 30, 2000 and 1999. The $9.1 million
increase in non-performing assets reflected an increase in non-accrual loans of
$9.4 million which was partially offset by a net decrease in REO of $0.3
million.
Non-accrual Loans. The bank's non-accrual loans totaled $22.7 million at
September 30, 2000, compared to $13.3 million at September 30, 1999 primarily
due to increased delinquencies of subprime automobile loans. At September 30,
2000, non-accrual loans consisted of $5.2 million of non-accrual real estate
loans and $17.4 million of non-accrual consumer and other loans compared to
non-accrual real estate loans of $4.8 million and non-accrual consumer and other
loans of $8.5 million at September 30, 1999.
REO. At September 30, 2000, the bank's REO totaled $48.5 million, after
valuation allowances on such assets of $80.8 million as set forth in the
following table:
<TABLE>
Balance Balance
Number of Before After Percent
Properties Gross Charge- Valuation Valuation Valuation of
Balance Offs Allowances Allowances Allowances Total
------------ ---------- ---------- ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Communities (1) 4 $146,345 $32,509 $113,836 $75,602 $38,234 78.9%
Residential ground 2 3,549 - 3,549 1,520 2,029 4.2%
Commercial Permanent 1 3,137 - 3,137 - 3,137 6.4%
Commercial ground 2 10,960 2,732 8,228 3,630 4,598 9.5%
Single-family
residential properties 3 463 - 463 - 463 1.0%
------------ ---------- ---------- ------------- -------------- ------------- ----------
Total REO 12 $164,454 $35,241 $129,213 $80,752 $48,461 100.0%
============ ========== ========== ============= ============== ============= ==========
1) Consisting of four planned unit developments acquired by the bank pursuant to deeds in lieu of foreclosure.
</TABLE>
During fiscal 2000, REO decreased $0.3 million, which was primarily attributable
to sales in the Communities and other properties, partially offset by an
increase in the bank's investment percentage in two of the communities,
foreclosure of one commercial property and additional capitalized costs.
<PAGE>
During fiscal 2000, the bank received revenues of $20.8 million resulting from
dispositions of 431 residential lots or units in the Communities ($13.5
million), approximately 29.2 acres of commercial land in the Communities ($4.6
million) and various single-family residential properties ($2.7 million). The
bank purchased from investors their interests in two of the communities for $9.3
million. The bank's ownership interest in one of the communities increased from
80% to 90% and in the other community from 57% to 84% as a result of the
purchases.
The bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in a manner which will best preserve the value of
the bank's assets. The bank's ability to achieve this objective will depend on a
number of factors, some of which are beyond its control, such as the general
economic conditions in the Washington, DC metropolitan area.
The principal component of REO consists of the four Communities, all of which
are under active development. At September 30, 2000, two of the active
Communities had 907 remaining residential lots, of which 801 lots, or 88.3%,
were under contract and pending settlement. The four active Communities had
approximately 177 remaining acres of land designated for commercial use, of
which 28.95 acres, or 16.3%, were under contract and pending settlement. In
addition, at September 30, 2000, the bank was engaged in discussions with
potential purchasers regarding the sale of additional residential units and
retail land.
The following chart provides historical sales information regarding the four
remaining Communities:
<TABLE>
Residential Lots Commercial Ground (Acres)
---------------- -------------------------
Under Under
Property Location Total Sold Contract Total Sold Contract
--------------------------------- ------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loudoun County, VA 5,051 4,182 789 175.00 42.00 --
Loudoun County, VA 2,042 2,042 -- 24.10 10.00 --
Montgomery County, MD 1,805 1,777 12 71.15 66.55 4.60
Loudoun County, VA 4,352 4,352 -- 116.02 90.30 24.35
------------- ------------- ------------- ------------- ------------- -----------
Total 13,250 12,353 801 386.27 208.85 28.95
============= ============= ============= ============= ============= ===========
</TABLE>
The bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
During fiscal 2000, the bank capitalized interest in the amount of $3.8 million
relating to its four active Communities.
The bank will continue to monitor closely its major non-performing and potential
problem assets in light of current and anticipated market conditions. The bank's
asset workout group focuses its efforts in resolving these problem assets as
expeditiously as possible.
<PAGE>
Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. At
September 30, 2000 and 1999, none of the bank's assets were deemed by management
to be potential problem assets.
Subsequent to September 30, 2000, the bank established the Watch List Committee.
The Watch List Committee meets quarterly and reviews all relationships in
Commercial Lending which are rated as vulnerable, criticized or classified with
commitments of $1.0 million and greater. This Committee reviews the current
status of each relationship, recent changes, performance against the correction
action plan presented at the prior meeting, and the current action plan to deal
with the relationship. On November 21, 2000, at its first meeting the Committee
reviewed loans on the Watch List with commitments of $37.4 million at September
30, 2000.
Delinquent Loans. At September 30, 2000, delinquent loans totaled $89.4 million,
or 1.1% of loans, compared to $53.7 million, or 0.8% of loans, at September 30,
1999. The following table sets forth information regarding the bank's delinquent
loans at September 30, 2000.
<TABLE>
Principal Balance
(Dollars in Thousands)
------------------------------------------------------------------------
Subprime Other Total as a
Real Estate Automobile Consumer Loans Percentage
Loans Loans Total of Loans (1)
--------------- ---------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days...... $ 5,843 $ 54,686 $ 10,112 $70,641 0.9%
60-89 days...... 1,368 13,390 3,954 18,712 0.2%
--------------- ---------------- --------------- ------------- --------------
Total............ $ 7,211 $ 68,076 $ 14,066 $89,353 1.1%
=============== ================ =============== ============= ==============
--------------------------
(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 decreased to $7.2 million at September 30, 2000,
from $7.5 million at September 30, 1999.
Total delinquent subprime automobile loans increased to $68.1 million at
September 30, 2000, from $41.0 million at September 30, 1999 as a result of
market conditions in certain geographic regions. Effective November 9, 2000, the
bank stopped the origination of subprime automobile loans. The bank will
continue its collection efforts on the existing loan portfolio. See Note 32 to
the Consolidated Financial Statements in this report.
<PAGE>
Other consumer loans delinquent 30-89 days increased to $14.1 million at
September 30, 2000 from $5.2 million at September 30, 1999, largely as a result
of portfolio growth.
Troubled Debt Restructurings. A troubled debt restructuring occurs when the bank
agrees to modify significant terms of a loan in favor of a borrower experiencing
financial difficulties. The bank had no troubled debt restructurings at
September 30, 2000 compared to one commercial permanent loan with a principal
balance of $11.7 million at September 30, 1999. During fiscal 2000, the bank
foreclosed on the property securing this $11.7 million loan.
Real Estate Held for Investment. At September 30, 2000, real estate held for
investment consisted of one property with book value of $1.1 million, net of
valuation allowances of $0.2 million. At September 30, 1999, real estate held
for investment consisted of two properties with an aggregate book value of $3.6
million, net of valuation allowances of $0.2 million. During fiscal 2000, one of
the properties with an aggregate book value of $2.5 million was foreclosed upon
by an REO subsidiary of the bank.
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 years indicated and may
include charge-offs taken against assets which the bank disposed of during such
years.
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of Loans and Leases
(Dollars in thousands)
Year Ended September 30,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 58,139 $ 60,157 $ 105,679 $ 95,523 $ 60,496
------------ ------------ -------------- ------------- -------------
Provision for loan and lease losses 49,930 22,880 150,829 125,115 115,740
------------ ------------ -------------- ------------- -------------
Increase due to acquisition of loans -- -- -- 118 --
------------ ------------ -------------- ------------- -------------
Reduction due to sale of credit card portfolio -- -- (87,609) -- --
------------ ------------ -------------- ------------- -------------
Charge-offs:
Single family residential and home equity (807) (617) (1,629) (1,014) (867)
Commercial real estate and multifamily (7,120) -- -- -- --
Credit card -- -- (108,289) (115,835) (84,805)
Subprime automobile (40,110) (21,169) (7,298) (3,309) (680)
Other (10,847) (4,988) (5,436) (6,348) (5,695)
------------ ------------ -------------- ------------- -------------
Total charge-offs (58,884) (26,774) (122,652) (126,506) (92,047)
------------ ------------ -------------- ------------- -------------
Recoveries (1):
Single family residential and home equity 78 85 49 34 32
Credit card -- -- 12,732 10,365 10,720
Subprime automobile 3,074 744 297 104 24
Other 1,681 1,047 832 926 558
------------ ------------ -------------- ------------- -------------
Total recoveries 4,833 1,876 13,910 11,429 11,334
------------ ------------ -------------- ------------- -------------
Charge-offs, net of recoveries (54,051) (24,898) (108,742) (115,077) (80,713)
------------ ------------ -------------- ------------- -------------
Balance at end of year $ 54,018 $ 58,139 $ 60,157 $ 105,679 $ 95,523
============ ============ ============== ============= =============
Provision for loan and lease losses to average
loans and leases (2) 0.66% 0.48% 5.43% 3.50% 3.94%
Net loan and lease charge-offs to average loans
and leases (2) 0.71% 0.52% 3.92% 3.22% 2.75%
Ending allowance for losses on loans and leases to
total loans and leases (2) (3) 0.65% 0.90% 2.17% 4.15% 2.81%
(1) Includes proceeds received from the sale of
charged-off loans.
(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)
September 30,
------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------- -------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- -------- --------- ------- --------- -------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of year
allocated to:
Single family residential $ 2,686 60.3 % $ 3,187 63.4 % $ 1,822 65.7 % $ 661 33.2 % $ 925 47.2 %
Home equity 448 3.3 947 3.7 676 4.9 683 3.7 446 0.9
Commercial real estate
and multifamily 893 0.5 10,580 0.9 10,828 2.7 7,705 2.1 8,398 2.3
Real estate construction
and ground 4,757 3.6 2,472 3.5 3,225 3.9 550 2.2 1,255 1.9
Commercial 6,904 7.2 4,623 6.1 3,623 6.3 364 3.9 223 1.7
Credit card -- -- -- -- -- -- 89,446 42.3 79,681 33.0
Automobile 7,534 16.3 3,334 12.8 3,034 4.4 340 4.4 2,665 7.2
Subprime automobile 28,782 7.4 28,782 7.4 26,010 8.5 2,740 4.6 1,300 1.8
Home improvement and
related loans 1,523 1.0 3,523 1.7 3,403 2.4 2,415 2.2 229 2.9
Overdraft lines of credit
and other consumer 491 0.4 691 0.5 1,674 1.2 775 1.4 401 1.1
Unallocated -- -- -- -- 5,862 -- -- -- -- --
--------- --------- --------- ---------- ---------
Total $ 54,018 $ 58,139 $ 60,157 $ 105,679 $ 95,523
========= ========= ========= ========== =========
</TABLE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Year Ended September 30,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year:
Real estate held for investment $ 202 $ 202 $ 198 $ 191 $ 193
Real estate held for sale 84,405 153,564 140,738 126,519 135,043
----------- ------------ ------------ ------------- -------------
Total 84,607 153,766 140,936 126,710 135,236
----------- ------------ ------------ ------------- -------------
Provision for real estate losses:
Real estate held for investment -- -- 4 7 (2)
Real estate held for sale 1,400 -- 18,856 19,616 26,343
----------- ------------ ------------ ------------- -------------
Total 1,400 -- 18,860 19,623 26,341
----------- ------------ ------------ ------------- -------------
Charge-offs:
Real estate held for sale:
Residential ground (64) (1,703) -- -- --
Real estate construction -- -- -- -- --
Communities (1,592) (67,456) -- -- --
Commercial Ground (3,397) -- -- -- --
Ground -- -- (6,030) (5,397) (34,867)
----------- ------------ ------------ ------------- -------------
Total (5,053) (69,159) (6,030) (5,397) (34,867)
----------- ------------ ------------ ------------- -------------
Total charge-offs on real estate
held for investment or sale (5,053) (69,159) (6,030) (5,397) (34,867)
----------- ------------ ------------ ------------- -------------
Balance at end of year:
Real estate held for investment 202 202 202 198 191
Real estate held for sale 80,752 84,405 153,564 140,738 126,519
----------- ------------ ------------ ------------- -------------
Total $ 80,954 $ 84,607 $ 153,766 $ 140,936 $ 126,710
=========== ============ ============ ============= =============
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
September 30,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202 $ 198 $ 191
----------- ------------ ------------ ------------- -------------
Allowance for losses on real estate held
for sale:
Single family residential and home equity -- -- -- -- 120
Residential ground 1,520 1,520 3,123 1,040 5,944
Commercial ground 3,631 5,800 5,800 6,793 5,894
Communities 75,601 77,085 144,641 132,905 114,561
----------- ------------ ------------ ------------- -------------
Total 80,752 84,405 153,564 140,738 126,519
----------- ------------ ------------ ------------- -------------
Total allowance for losses on real
estate held for investment or sale $ 80,954 $ 84,607 $ 153,766 $ 140,936 $ 126,710
=========== ============ ============ ============= =============
</TABLE>
<PAGE>
The bank maintains valuation allowances for estimated losses on loans and leases
and real estate. The bank's total valuation allowances for losses on loans and
leases and real estate held for investment or sale decreased to $135.0 million
at September 30, 2000, from $142.7 million at September 30, 1999. The $7.7
million decrease was primarily attributable to the charge-off of the allowance
against one commercial permanent loan which was foreclosed on during fiscal
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, current economic conditions,
internal risk ratings and current underwriting policies and procedures. Using
this analysis, management determines a range of acceptable valuation allowances.
Although the amount of delinquent and non-accrual consumer loans increased
during fiscal 2000, management believes that the overall level of the allowance
remained appropriate.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $89.7 million at September 30, 2000, which
constituted 66.7% of total non-performing real estate assets before valuation
allowances. This amount represented a $12.1 million decrease from the September
30, 1999 level of $101.8 million, or 73.8% of total non-performing real estate
assets before valuation allowances at that date. The decrease reflected the
charge-off of the allowance against one commercial permanent loan which was
foreclosed upon during fiscal 2000.
When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change,
it may be necessary to provide additional valuation allowances based on new
information. The allowance for losses on real estate held for sale at September
30, 2000 is in addition to approximately $35.2 million of cumulative charge-offs
previously taken against assets remaining in the bank's portfolio at September
30, 2000.
The bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans, including the Communities. As a result of such
updated appraisals, the bank could be required to increase its valuation
allowances. The bank may also increase its allowances for losses after
considering local market conditions, including the bank's efforts to sell
individual properties or portions of properties. In addition to ongoing sales of
lots, management periodically receives and reviews offers to purchase various
parcels of these Communities. If information is deemed credible and can be
supported with market comparables, additional allowances for losses may be
provided.
<PAGE>
In accordance with bank regulatory requirements, the bank performs ongoing real
estate evaluations for all REO as a basis for substantiating the carrying values
in accordance with accounting principles generally accepted in the United
States. As indicated, as of September 30, 2000, the bank's REO consisted
primarily of residential communities under active development. While the overall
strategy of the bank is the expedient sale of the real estate assets, on an
ongoing basis the bank is actively funding, managing and overseeing substantive
land development activities in the Communities. As a part of its development
activities, the bank maintains and updates real estate project evaluations in
accordance with regulatory requirements which include analyses of lot and
acreage sales, status and budgets for development activities and consideration
of project market trends. These real estate evaluations are reviewed
periodically as part of management's review and evaluation of the carrying
values of REO. Following a review of the real estate assets and the related
carrying values, management reports its actions to the bank's board of
directors.
The allowance for losses on consumer loans and leases, including automobile,
home improvement, overdraft lines of credit and other consumer loans, increased
to $38.3 million at September 30, 2000 from $36.3 million at September 30, 1999.
Net charge-offs of subprime automobile loans for fiscal 2000 were $37.0 million,
compared to $20.4 million for fiscal 1999 primarily due to adverse trends in
delinquencies. Effective November 9, 2000, the bank stopped the origination of
subprime automobile loans. See Note 32 to the Consolidated Financial Statements
in this report.
Asset and Liability Management. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mix, volume and maturity to stabilize the net
interest spread is referred to as asset and liability management. The objective
of asset and liability management is to maximize the net interest yield within
the constraints imposed by prudent lending and investing practices, liquidity
needs and capital planning.
The bank's assets and liabilities are inherently sensitive to changes in
interest rates. These movements can result in variations to the overall level of
income and market value of equity. Based on the characteristics of a specific
asset or liability (including maturity, repricing frequency and interest rate
caps) a change in interest rates can significantly affect the contribution to
net income and market value for the instrument. If, in the aggregate, the bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the bank is termed "asset sensitive" and will tend to experience
increased income and market value during periods of rising interest rates and
declining income and market value during periods of falling interest rates.
Conversely, if the bank's liabilities mature or reprice more quickly or to a
greater extent than its assets, the bank is termed "liability sensitive" and
will tend to experience decreased income and market value during periods of
rising interest rates and increased income and market value during periods of
falling interest rates.
The bank pursues an asset-liability management strategy designed both to control
risk from changes in market interest rates and to maximize interest income in
its loan and lease portfolio. To achieve this strategy, the bank emphasizes the
origination and retention of a mix of both adjustable-rate and fixed-rate loan
products.
<PAGE>
As interest rates rose throughout fiscal year 2000, the bank originated more
adjustable rate loan products than those with fixed interest rates. At September
30, 2000, adjustable-rate loans accounted for 42.0% of total loans and leases
compared to 35.2% at September 30, 1999. This increase was primarily due to
increased originations of adjustable rate mortgages which reprice monthly and
are tied to an index based on one year average CMT for the previous twelve
months. The bank continuously monitors its sensitivity to changes in market
interest rates and attempts to minimize the impact of interest-rate changes on
net income. The bank's policy is generally to sell, or have the ability to sell,
some portion of its long-term fixed-rate mortgages in order to reduce its
exposure to market interest rate fluctuations typically associated with
long-term fixed-rate lending.
A traditional measure of interest-rate risk within the banking industry is the
interest sensitivity "gap," which is the sum of all interest-earning assets
minus all interest-bearing liabilities subject to repricing within the same
period. Gap analysis is a tool used by management to evaluate interest-rate risk
which results from the difference between repricing and maturity characteristics
of the bank's assets and those of the liabilities that fund them. By analyzing
these differences, management can attempt to estimate how changes in interest
rates affect the bank's future net interest income.
The bank views control over interest rate sensitivity as a key element in its
financial planning process and monitors interest rate sensitivity through its
forecasting system. The bank manages interest rate exposure and will narrow or
widen its gap depending on its perception of interest rate movements and the
composition of its balance sheet. For the reasons discussed above, the bank
might take action to narrow its gap if it believes that market interest rates
will experience a significant prolonged increase, and might widen its gap if it
believes that market interest rates will decline or remain relatively stable.
A number of asset and liability management strategies are available to the bank
in structuring its balance sheet. These include selling or retaining certain
portions of the bank's current residential mortgage loan production; altering
the bank's pricing on certain deposit products to emphasize or de-emphasize
particular maturity categories; altering the type and maturity of securities
acquired for the bank's investment portfolio when replacing securities following
normal portfolio maturation and turnover; lengthening or shortening the maturity
or repricing terms for any current period asset securitizations; and altering
the maturity or interest rate reset profile of borrowed funds, if any, including
funds borrowed from the FHLB of Atlanta.
The following table presents the interest rate sensitivity of the bank's
interest-earning assets and interest-bearing liabilities at September 30, 2000,
which reflects management's estimate of mortgage loan prepayments and
amortization and provisions for adjustable interest rates. Adjustable and
floating rate loans are included in the period in which their interest rates are
next scheduled to adjust, and prepayment rates are assumed for the bank's loans
based on recent actual experience. Statement savings and passbook accounts with
balances under $20,000 are classified based upon management's assumed attrition
rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW
accounts, are assumed to be subject to repricing within six months or less.
<PAGE>
<TABLE>
Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
------------- -------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000
Real estate loans:
Adjustable-rate $ 1,140,071 $ 265,141 $ 763,022 $ 571,074 $ 400,954 $ 3,140,262
Fixed-rate 125,715 103,364 375,268 334,695 1,115,296 2,054,338
Home equity credit lines and second
mortgages 241,506 13,255 42,699 29,807 30,654 357,921
Commercial 453,621 19,023 60,211 40,597 20,998 594,450
Consumer and other 421,943 317,341 1,102,782 155,018 14,994 2,012,078
Loans held for sale 126,108 -- -- -- -- 126,108
Loans held for securitization and sale 70,000 -- -- -- -- 70,000
Mortgage-backed securities 408,861 175,567 195,123 76,282 190,976 1,046,809
Trading securities 3,380 -- -- -- -- 3,380
Other investments 226,782 -- 45,648 -- -- 272,430
------------- -------------- -------------- ------------- ------------ ------------
Total interest-earning assets 3,217,987 893,691 2,584,753 1,207,473 1,773,872 9,677,776
Total non-interest earning assets -- -- -- -- 1,007,218 1,007,218
------------- -------------- -------------- ------------- ------------ ------------
Total assets $ 3,217,987 $ 893,691 $ 2,584,753 $ 1,207,473 $ 2,781,090 $10,684,994
============= ============== ============== ============= ============ ============
Deposits:
Fixed maturity deposits $ 1,531,989 $ 839,942 $ 715,683 $ 51,555 $ -- $ 3,139,169
NOW, statement and passbook accounts 1,697,462 42,438 141,346 96,204 205,021 2,182,471
Money market deposit accounts 1,156,829 -- -- -- -- 1,156,829
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 738,172 129,703 1,381,547 184,745 53,153 2,487,320
------------- -------------- -------------- ------------- ------------ ------------
Total interest-bearing liabilities 5,124,452 1,012,083 2,238,576 332,504 508,174 9,215,789
Total non-interest bearing liabilities -- -- -- -- 976,798 976,798
Stockholders' equity -- -- -- -- 492,407 492,407
------------- -------------- -------------- ------------- ------------ ------------
Total liabilities & stockholders' equity $ 5,124,452 $ 1,012,083 $ 2,238,576 $ 332,504 $ 1,977,379 $10,684,994
============= ============== ============== ============= ============ ============
Gap $ (1,906,465) $ (118,392) $ 346,177 $ 874,969 $ 1,265,698
Cumulative gap $ (1,906,465) $ (2,024,857) $ (1,678,680) $ (803,711) $ 461,987
Adjusted cumulative gap as a percentage
of total assets (17.8)% (19.0)% (15.7)% (7.5)% 4.3 %
</TABLE>
<PAGE>
The bank's one-year gap as a percentage of total assets was negative 19.0% at
September 30, 2000, compared to negative 30.6% at September 30, 1999. The
improvement in the bank's one-year gap was attributable primarily to an increase
in the origination during fiscal year 2000 of adjustable rate mortgages with
repricing terms of less than one year. The increase in assets with repricing
characteristics of one-year or less was partially offset by an increase in fixed
maturity deposits of one-year or less. The bank continues to consider a variety
of strategies to manage its interest rate risk position.
In addition to gap measurements, the bank measures and manages interest-rate
risk with the extensive use of computer simulation. This simulation includes
calculations of Market Value of Portfolio Equity and Net Interest Margin as
promulgated by the OTS's Thrift Bulletin 13a. Under this regulation,
institutions are required to establish limits on the sensitivity of their net
interest income and net portfolio value ("NPV") to parallel changes in interest
rates. Such changes in interest rates are defined as instantaneous and sustained
movements of interest rates in 100 basis point increments. In addition, the bank
is required to calculate its ratio of NPV to the present value of total assets
("NPV Ratio") for each interest rate shock scenario. The following table shows
the estimated impact of parallel shifts in interest rates at September 30, 2000,
calculated in a manner consistent with the requirements of TB 13a.
<TABLE>
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------
Changes in Change in
(Basis Points) Net Interest Net Portfolio
Change in Income(1) Value(2) NPV
Interest Rates Ratio
-------------------------------- -------------------------------------
Percent Amount Percent Amount
------------------- ------------- --------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
+ 200 -3.17% (10,302) -10.89% (83,863) 6.15%
+ 100 -1.72% (5,608) -3.48% (26,812) 6.54%
- 100 4.03% 13,109 16.58% 127,724 7.60%
- 200 0.24% 788 15.57% 119,887 7.44%
-------------------------------------------------------------------------------------------------------------------
(1) Represents the difference between net interest income for 12 months in a
stable interest rate environment and the various interest rate scenarios.
(2) Represents the difference between net portfolio value (NPV) of the bank's
equity in a stable interest rate environment and the NPV in the various rate
scenarios. The OTS defines NPV as the present value of expected net cash flows
from existing assets minus the present value of expected net cash flows from
existing liabilities plus the present value of expected net cashflows from
existing off-balance sheet contracts.
</TABLE>
<PAGE>
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain limitations are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable-rate
mortgage loans, generally have features which restrict changes in their interest
rates on a short-term basis and over the life of the asset. In the event of a
change in interest rates, loan prepayments and early deposit withdrawal levels
could deviate significantly from those assumed in making the calculations set
forth above. Additionally, credit risk may increase if an interest rate increase
adversely affects the ability of many borrowers to service their debt.
Inflation. The impact of inflation on the bank is different from the impact on
an industrial company because substantially all of the assets and liabilities of
the bank are monetary in nature. The most direct impact of an extended period of
inflation would be to increase interest rates and to place upward pressure on
the operating expenses of the bank. However, the actual effect of inflation on
the net interest income of the bank would depend on the extent to which the bank
was able to maintain a spread between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities, which would depend
to a significant extent on its asset-liability sensitivity. The effect of
inflation on the bank's results of operations for the past three fiscal years
has been minimal.
Deferred Taxes. At September 30, 2000, the bank recorded a net deferred tax
liability of $70.0 million, which generally represents the cumulative excess of
the bank's actual income tax liability over its income tax expense for financial
reporting purposes. A valuation allowance has been established to reduce the net
deferred tax asset for net operating loss carryforwards related to state taxes.
The state net operating loss carryforwards generated in prior years related
primarily to costs associated with the support of the bank's retail activities,
most significantly the credit card operations. These costs are being reduced due
to the sale of the credit card operations and the continued reorganization of
the bank's cost structure. As a result, the bank is expected to generate future
taxable income at the state level sufficient to utilize the net operating loss
carryforwards prior to their expiration which begins in 2010. However,
management established a valuation allowance to reduce the deferred tax asset
associated with these state net operating loss carryforwards to an amount whose
realization is considered more likely than not. See Note 35 to the Consolidated
Financial Statements in this report.
Capital. At September 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 September 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
SEPTEMBER 30, 2000
------------------------------------------------------------------------------------
MINIMUM EXCESS
(Dollars in thousands) ACTUAL CAPITAL REQUIREMENT CAPITAL
----------------------------------------- -------------------------- -------------------------- ------------------------
As a % As a % of As a %
Amount of Assets Amount Assets Amount of Assets
------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $ 492,406
Minority interest in REIT
Subsidiary(1) 144,000
------------
Adjusted capital 636,406
Adjustments for tangible and core capital:
Intangible assets
(50,797)
Non-includable subsidiaries(2) (1,424)
Non-qualifying
purchased/originated loan servicing (188)
------------
Total tangible capital 583,997 5.48% $ 159,840 1.50% $ 424,157 3.98%
------------ ========== ========== ============ ========== ==========
Total core capital(3) 583,997 5.48% $ 426,239 4.00% $ 157,758 1.48%
------------ ========== ========== ============ ========== ==========
Tier 1 risk-based capital(3) 583,997 7.21% $ 324,089 4.00% $ 259,908 3.21%
------------ ========== ========== ============ ========== ==========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and
lease losses 54,018
------------
Total supplementary capital 304,018
------------
Total available capital 888,015
Equity investments(2) (6,463)
------------
Total risk-based capital(3) $ 881,552 11.01% $ 648,178 8.00% $ 233,374 3.01%
============ ========== ========== ============ ========== ==========
(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) Reflects an aggregate offset of $2.0 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.
(3) 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>
Under the OTS prompt corrective action regulations, an institution is
categorized as well capitalized if it has a leverage or core capital ratio of at
least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total
risk-based capital ratio of at least 10.0% and is not subject to any written
agreement, order, capital directive or prompt corrective action directive to
meet and maintain a specific capital level. At September 30, 2000, the bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 5.48%,
7.21% and 11.01%, which exceeded the ratios established for well capitalized
institutions. The OTS has the discretion to reclassify an institution from one
category to the next lower category, for example from well capitalized to
adequately capitalized, if, after notice and an opportunity for a hearing, the
OTS determines that the institution is in an unsafe or unsound condition or has
received and has not corrected a less than satisfactory examination rating for
asset quality, management, earnings or liquidity.
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. Accordingly, if the bank is unable to dispose of any REO property,
whether through bulk sales or otherwise, prior to the end of its applicable
five-year holding period and is unable to obtain an extension of such five-year
holding period from the OTS, the bank could be required to deduct the
then-current book value of such REO property from total risk-based capital. In
August 2000, the bank received from the OTS an extension of the holding periods
for certain of its REO properties through August 4, 2001. The following table
sets forth the bank's REO at September 30, 2000, after valuation allowances of
$80.8 million, by the fiscal year in which the property was acquired through
foreclosure.
Fiscal Year (In thousands)
-----------
----------------
1990 $ 14,696(1)(2)
1991 23,538(2)
1992 -
1993 -
1994 -
1995 5,041(2)
1996 -
1997 -
1998 -
1999 -
2000 5,186
----------------
Total REO $ 48,461
================
-------------------------------------------------------------------------------
(1) Includes REO with an aggregate net book value of $6.5 million, which the
bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $36.8 million, for which
the bank received an extension of the holding periods through August 4, 2001.
<PAGE>
Failure to obtain the REO extensions discussed above could adversely affect the
bank's regulatory capital ratios. The bank's ability to maintain or increase its
capital levels in future periods also will be subject to general economic
conditions, particularly in the bank's local markets. Adverse general economic
conditions or a downturn in local real estate markets could require further
additions to the bank's allowances for losses and further charge-offs. Any such
developments would adversely affect the bank's earnings and thus its regulatory
capital levels. The bank has historically relied on preferred stock and
subordinated debt as significant components of its regulatory capital. Those
instruments require significant fixed payments to holders, which increase the
bank's expenses and make it more difficult for the bank to generate additional
core capital through retained earnings.
The OTS has proposed amendments to its capital rules that would increase the
amount of capital the bank would be required to maintain against certain of its
residual interests. See "Item 1. Business - Banking - Regulation - Regulatory
Capital."
LIQUIDITY AND CAPITAL RESOURCES
General. The Real Estate Trust's primary cash requirements include operating
expenses, debt service, debt principal repayment and capital expenditures.
During fiscal 2000, 1999 and 1998, the Real Estate Trust generated positive cash
flow from operating activities, including the receipt of dividends and tax
sharing payments from the bank, and is expected to do so for the foreseeable
future. However, the Real Estate Trust's cash flow from operating activities has
historically been insufficient to pay principal and interest on its outstanding
debt securities and to fund capital expenditures. These shortfalls have
historically been funded through external sources including additional
borrowings and refinancings and proceeds from asset sales. Overall, the Real
Estate Trust's ability to generate positive cash flow from operating activities
and to meet its liquidity needs in the future, including debt service payments,
repayment of debt principal and capital expenditures, will continue to depend on
dividends from the bank.
The bank's primary cash requirements include its commitment to fund maturing
savings certificates and deposit withdrawals, fund existing and continued loan
commitments, repay borrowings and meet operating expenses. The bank's primary
sources of liquidity historically have consisted of:
o principal and interest payments on loans and
mortgage-backed securities;
o savings deposits;
o sales of loans held for sale and trading securities;
o securitizations; and
o borrowed funds.
Management believes that these liquidity sources are adequate to fund the bank's
liquidity needs without the need to sell any securities classified as "held to
maturity."
<PAGE>
Real Estate
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 dividends and
tax sharing payments from the bank. See the Consolidated Statements of Cash
Flows included in the Consolidated Financial Statements in this report.
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 2001 and subsequent years, will depend in significant
part on its receipt of dividends from the bank. The availability and amount of
dividends in future periods is dependent upon, among other things, the bank's
operating performance and income and regulatory restrictions on such payments.
See also the discussion of potential limitations on the payment of dividends by
the bank contained in "Item 2. Business - Banking - Regulation - Dividends and
Other Capital Distributions."
The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods, as well as the bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the bank. See "Banking - Regulation - Regulatory
Capital." During fiscal 2000, the bank made tax sharing payments totalling $6.6
million and dividend payments totalling $12.8 million to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. The Trust's consolidation of the bank's
operations into the Trust's federal income tax return has resulted in the use of
the Trust's net operating losses to reduce the federal income taxes the bank
would otherwise have owed. 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 (1) the tax benefit to the group using such tax losses or unused tax
credits in the group's consolidated federal income tax returns or (2) 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 September 30, 2000, the Real Estate Trust has purchased either in the
open market or through dividend reinvestment approximately 2,577,000 shares of
common stock of Saul Centers representing 18.8% of such company's outstanding
common stock. As of September 30, 2000, the market value of these shares was
approximately $41.1 million. Substantially all of these shares have been pledged
as collateral with the Real Estate Trust's two revolving credit lenders.
<PAGE>
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in 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.
See "Business - Real Estate - Investment in Saul Holdings Limited Partnership."
In fiscal 2000, the Real Estate Trust received total cash distributions $6.5
million from Saul Holdings Partnership. During the period of April 1998 through
July 1999, the Real Estate Trust reinvested its quarterly distributions and
obtained additional partnership units in Saul Holdings Partnership.
Substantially all of the Real Estate Trust's ownership interest in Saul Holdings
Partnership has been pledged as collateral with the Real Estate Trust's two
revolving credit lenders.
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 $175.0 million aggregate principal amount of
11 5/8% Senior Secured Notes issued in 1994 ( the "1994 Notes"), including a
prepayment premium of $10.0 million and debt issuance costs of approximately
$5.9 million, the Real Estate Trust realized approximately $9.1 million in new
funds. In addition, the Real Estate Trust received about $13.2 million in cash
which had been held as additional collateral by the indenture agent under the
1994 Notes. The 1998 Notes are secured by a first priority perfected security
interest in 8,000 shares, or 80%, of the issued and outstanding common stock of
the bank, which constitute all of the bank common stock held by the Real Estate
Trust. The 1998 Notes are nonrecourse obligations of the Real Estate Trust.
The Real Estate Trust is currently selling unsecured notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
unsecured notes. To the degree that the Real Estate Trust does not sell new
unsecured notes in an amount sufficient to finance completely the scheduled
repayment of outstanding unsecured notes as they mature, it will finance such
repayments from other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million revolving
credit line with an unrelated bank. This facility was for an initial two-year
period subject to extension for one or more additional one-year terms. In fiscal
1997, the facility was increased to $20.0 million and was renewed for an
additional two-year period. In September, 1999, this facility was increased to
$50.0 million and its term was set at three years with provisions for extending
the term annually. The current maturity date for this line 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 September 30, 2000, the Real Estate Trust had no
outstanding borrowings under the facility and unrestricted availability was
$31.8 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, the line of credit was
increased to $10.0 million and was extended for a year. During fiscal 1998, the
line of credit was increased to $20.0 million and was extended for an additional
year. The current maturity date for this line is July 31, 2002. Interest is
computed by reference to a floating rate index. At September 30, 2000, the Real
Estate Trust had no outstanding borrowings and unrestricted availability was
$19.1 million.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 2000 for fiscal years commencing October 1, 2000 is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
--------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable -- Payable --
Year Notes Secured Unsecured Total
------------- --------- ----------- ----------- --------------
2001 $ 29,507 $ -- $ 6,046 $ 35,553
2002 26,314 -- 7,872 34,186
2003 20,044 -- 11,551 31,595
2004 8,435 -- 9,646 18,081
2005 10,076 -- 7,755 17,831
Thereafter 212,838 200,000 4,593 417,431
--------- ----------- ----------- --------------
Total $307,214 $200,000 $ 47,463 $ 554,677
--------------------------------------------------------------
Of the $307.2 million of mortgage notes outstanding at September 30, 2000,
$268.1 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.
In June 2000, the Real Estate Trust completed the refinancing of one office
property. The new loan was for $6.6 million at a fixed interest rate of 8.47%
and replaces 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.
In August 2000, the Real Estate Trust completed an additional $25.0 million
financing with a lender on four hotel and two office properties, resulting in an
outstanding balance of $116.6 million on the combined loans. The blended
interest rate on these loans is 8.12% and the maturity is March 2006.
Also in August 2000, the Real Estate Trust completed the refinancing of one
hotel property. The new loan was for $4.9 million at a fixed interest rate of
8.79%, and replaces a floating-rate construction loan with an outstanding
balance of $5.7 million. The new loan has a 10-year term and requires
amortization based on a 20-year schedule.
<PAGE>
Development and Capital Expenditures
During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels, three of which opened for business
prior to fiscal 2000. The fourth hotel, TownePlace Suites by Marriott containing
95 units located on a 3 acre site owned by the Real Estate Trust in the Fort
Lauderdale Commerce Center, Fort Lauderdale, Florida, opened for business on
October 25, 1999.
The costs for the four hotels aggregated $32 million and were largely funded by
the proceeds of a three-year 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 the Dulles
North Corporate Park, Sterling, Virginia. This project, known as Dulles North
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 an
option for a two-year extension. The project is 100% leased and became
operational October 1, 1999.
<PAGE>
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 Holiday Inn was converted into a Crowne
Plaza, while the 279-room Howard Johnson 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 Johnson 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.
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. This hotel opened for business on
December 15, 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 Five, was $5.3 million, with construction
financing of $3.6 million for a three-year term. This property was refinanced in
June 2000 as indicated above. The project is 100% leased to a single tenant and
become 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
Cascades Town Center in Sterling, Virginia, for the purpose of constructing a
152-room Hampton Inn. The purchase price was $1.1 million 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. This hotel opened for business on November 27, 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
was $3.2 million, which the Real Estate Trust financed with its bank lines. 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. The sale was completed in
October 2000.
<PAGE>
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 Dulles North Six. Development costs are projected to
be $6.1 million and will be financed with the proceeds of a $5.2 million
construction loan, which has a three-year term, a floating interest rate, and
two one-year renewal options. The project is 100% leased to a single tenant and
became operational on October 1, 2000.
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 $1.1 million. 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 construction loan, which has a five-year term, a floating
interest rate and one two-year renewal options. Construction was largely
completed in November 2000 and the building is expected to be operational by
November 2001.
During the quarter ended September 30, 2000, the Real Estate Trust began the
development of a 100,000 square foot office/flex building located on an 8.3 acre
site in Dulles North Corporate Park near other Real Estate Trust projects. The
new building will be known as Dulles North Four. Development costs are projected
to be $10.8 million and will be financed with the proceeds of a $9.5 million
construction loan, which has a three-year term, a floating interest rate and two
one-year renewal options. Construction is expected to be completed in March 2001
and the building is expected to be operational by March 2002.
The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in the range of $9.0 to $11.0 million per
year for the next several years.
Subsequent Event
On November 15, 2000, the Real Estate Trust purchased a 19.1 acre land parcel in
Laurel, Maryland, which contained a 105,000 square foot office/warehouse
building. The purchase price was $12.3 million and was financed from the Real
Estate Trust's bank lines. The entire building has been leased to Chevy Chase
under a long-term agreement.
<PAGE>
Banking
The standard measure of liquidity in the savings industry is the ratio of cash
and short-term U.S. Government and other specified securities to net
withdrawable accounts and borrowings payable in one year or less.
The OTS has established a minimum liquidity requirement, which may vary from
time to time depending upon economic conditions and deposit flows. The required
liquidity level under OTS regulations in effect at September 30, 2000 was 4.0%.
The bank's liquidity ratio for the quarter ended September 30, 2000 was 7.8%,
compared to 10.5% for the quarter ended September 30, 1999. The bank met the
liquidity level requirements for each quarter of fiscal 2000. See "Item 1.
Business - Banking - Regulation - Liquidity Requirements."
The bank's primary sources of funds historically have consisted of:
o principal and interest payments on loans and mortgage-backed securities;
o savings deposits;
o sales of loans and trading securities;
o securitizations and sales of loans; and
o borrowed funds including funds borrowed from the FHLB of Atlanta.
The bank's holdings of readily marketable securities constitute another
important source of liquidity. At September 30, 2000, the bank's portfolio
included mortgage loans, U.S. Government securities and mortgage-backed
securities with outstanding principal balances of $4.2 billion, $45.0 million
and $1.0 billion. The estimated borrowing capacity against these assets that are
available to be pledged to the FHLB of Atlanta and various securities dealers
totaled $4.2 billion at September 30, 2000, after market-value and other
adjustments.
In addition, Chevy Chase from time to time accesses the capital markets as an
additional means of funding its operations and managing its capital ratios and
asset growth. Specifically, the bank has securitized financial assets, including
credit card, home equity, home loan and automobile loan receivables, as well as
single-family residential loans, because such securitizations provide the bank
with a source of financing at competitive rates and assist the bank in
maintaining compliance with regulatory capital requirements. Additionally, the
securitizations have permitted the bank to limit the credit risk associated with
these assets while continuing to earn servicing fees and other income associated
with the securitized assets.
Since 1988, the bank has securitized approximately $13.6 billion of credit card,
home equity, automobile and home loan receivables. These transactions depend on
sophisticated back-office systems to service complex securitization structures
and on personnel with the experience to design, install and manage those
systems. At September 30, 2000, the bank continues to service $146.7 million,
$867.0 million and $82.1 million of securitized home equity, automobile and home
loan receivables. Chevy Chase derives fee-based income from servicing these
securitized portfolios. However, such fee-based income has been adversely
affected in prior periods by increases in delinquencies and charge-offs related
to the receivables placed in these securitized pools. Following the sale of its
credit card portfolio and related operations on September 30, 1998, the bank has
decreased its reliance on these transactions as a means of funding its
operations and managing its capital ratio and growth.
<PAGE>
The bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust which holds the receivables and issues the
asset-backed certificates and ultimately the risk of repayment is transferred to
the holders of those certificates. The bank retains risk with respect to the
assets transferred to the trust only to the extent that it retains recourse
based on the performance of the assets or holds certificates issued by the
trust, such as a seller certificate. In its securitizations, the bank typically
retains a limited amount of recourse through one or more means, most often
through the establishment of spread accounts. Occasionally other structures,
such as overcollateralization of receivables or subordinated asset-backed
certificates, are used. Spread accounts are funded by initial deposits, if
required, and by amounts generated by the securitized assets over and above the
amount required to pay interest, defaults and other charges and fees on the
investors' interests in the securitization transaction. Because amounts on
deposit in the spread accounts are at risk depending upon performance of the
securitized receivables, those amounts represent recourse to the bank.
Pursuant to OTS's low level recourse rule, which sets capital requirements for
assets sold with recourse at the lower of the applicable capital requirement or
the amount of recourse retained, the bank maintains dollar-for-dollar capital
against the securitized assets in the amount of the recourse retained up to the
otherwise applicable capital requirement. Even if defaults on outstanding
receivables significantly exceed projected and historical levels so that a pay
out event is triggered, the immediate consequence is that investors will begin
receiving payments of principal from the securitized assets earlier than
originally scheduled. Even if payments are insufficient to repay investors in
full, the bank's assets are not exposed to risk of loss beyond the relevant
amount of recourse retained, including amounts outstanding in the spread
accounts and the amount of any overcollateralization of receivables or
subordinated interest, which, as noted above, constitute a dollar-for-dollar
capital requirement for the bank. The bank also retains risk through the bank's
interest in any seller certificate. Seller certificates share collections on the
securitized assets on an unsubordinated basis with the investor certificates,
unless and to the extent recourse is retained through an express subordination,
and are on-balance sheet assets against which the bank must maintain capital.
The OTS has proposed amendments to its capital rules that would increase the
amount of capital the bank would be required to maintain against certain of its
residual interests. See "Item 1. Business - Banking - Regulation - Regulatory
Capital."
The proceeds from the securitization and sale of home equity, automobile and
home loan receivables can be a significant source of liquidity for the bank. The
bank securitized and sold $674.8 million of automobile loan receivables during
fiscal 2000. The bank did not securitize and sell any loan receivables into new
trusts during fiscal 1999. At September 30, 2000, the bank had $70.0 million of
automobile loan receivables held for securitization and sale.
In connection with the sale of the bank's credit card portfolio and related
operations on September 30, 1998, the bank transferred all of its rights,
interests, liabilities and obligations, including recourse obligations, relating
to its credit card securitizations to the purchaser.
As part of its operating strategy, the bank continues to explore opportunities
to sell assets and to securitize and sell home equity, automobile and home loan
receivables to meet liquidity and other balance sheet objectives.
<PAGE>
The bank uses its liquidity primarily to meet its commitments to fund maturing
savings certificates and deposit withdrawals, fund existing and continuing loan
commitments, repay borrowings and meet operating expenses. During fiscal 2000,
the bank used the cash provided by operating, investing and financing activities
primarily to meet its commitments to fund maturing savings certificates and
deposit withdrawals of $37.2 billion, repay borrowings, fund existing and
continuing loan commitments, including real estate held for investment or sale,
of $2.6 billion, purchase investments and loans of $1.6 billion and meet
operating expenses, before depreciation and amortization, of $330.2 million.
These commitments were funded primarily through proceeds from customer deposits
and sales of certificates of deposit of $38.5 billion, proceeds, net of
repayments, from borrowings of $113.0 million, proceeds from sales of loans,
trading securities and real estate of $702.7 million, and principal and interest
collected on investments, loans, and securities of $1.7 billion.
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 $42.1 million and
$18.9 million, at September 30, 2000, and $67.0 million and $12.3 million, at
September 30, 1999. In addition, the bank owned subordinated automobile
receivables-backed securities with carrying values of $3.4 million and $7.0
million at September 30, 2000 and 1999, which were classified as trading
securities in the Consolidated Balance Sheets in this report.
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 September 30, 2000, recourse to the bank under these arrangements was
$10.8 million, consisting of restricted cash accounts amounting to $8.3 million
and overcollateralization of receivables of $2.5 million.
The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At September 30, 2000, recourse to
the bank under this arrangement totaled $3.4 million.
<PAGE>
The bank's commitments to extend credit at September 30, 2000 are set forth in
the following table.
(In thousands)
-----------------
Commitments to originate loans.................. $ 165,362
-----------------
Loans in process (collateralized loans):
Home equity................................... 538,243
Real estate construction and ground........... 210,756
Commercial real estate and multifamily........ 687
Commercial.................................... 179,035
-----------------
Subtotal 928,721
-----------------
Loans in process (unsecured loans):
Overdraft lines............................... 111,322
Commercial................................... 239,727
-----------------
Subtotal 351,049
-----------------
Total commitments to extend credit.............. $ 1,445,132
=================
Based on historical experience, the bank expects to fund substantially less than
the total amount of its outstanding overdraft line and home equity credit line
commitments, which together accounted for 45.0% of commitments to extend credit
at September 30, 2000.
At September 30, 2000, repayments of borrowed money scheduled to occur during
the next 12 months were $971.7 million. Certificates of deposit maturing during
the next 12 months amounted to $2.4 billion, including $1.3 billion of brokered
deposits. The bank expects that a significant portion of these maturing
certificates of deposit will remain with the bank. In the event that deposit
withdrawals are greater than anticipated, particularly among the more volatile
brokered deposits, the bank may have to increase deposit interest rates or rely
on alternative and potentially higher cost sources of funds in order to meet its
liquidity needs.
There were no material commitments for capital expenditures at September 30,
2000. During fiscal 1998, 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. Construction on this project began in
April 1999 and is expected to be completed in the summer of 2001.
The bank's liquidity requirements in years subsequent to fiscal 2000 will
continue to be affected both by the asset size of the bank, the growth of which
may be constrained by capital requirements, and the composition of the asset
portfolio. Management believes that the bank's primary sources of funds,
described above, will be sufficient to meet the bank's foreseeable 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
The Real Estate Trust's ability to generate revenues from property ownership and
development is significantly influenced by a number of factors, including
national and local economic conditions, the level of mortgage interest rates,
governmental actions, such as changes in real estate tax rates, and the type,
location, size and stage of development of the Real Estate Trust's properties.
Debt service payments and most of the operating expenses associated with
income-producing properties are not decreased by reductions in occupancy or
rental income. Therefore, the ability of the Real Estate Trust to produce net
income in any year from its income-producing properties is highly dependent on
the Real Estate Trust's ability to maintain or increase the properties' levels
of gross income. The relative illiquidity of real estate investments tends to
limit the ability of the Real Estate Trust to vary its portfolio promptly in
response to changes in economic, demographic, social, financial and investment
conditions.
The bank's operating results historically have depended primarily on its "net
interest spread," which is the difference between the rates of interest earned
on its loans and securities investments and the rates of interest paid on its
deposits and borrowings. In the last three fiscal years, non-interest income
from securitizations of credit card and home equity credit line receivables and
income from gains on sales of credit card accounts, loans and mortgage-backed
securities have had a significant effect on net income. In addition to interest
paid on its interest-bearing liabilities, the bank's principal expenses are
operating expenses.
Fiscal 2000 Compared to Fiscal 1999
Real Estate
The Real Estate Trust recorded income before depreciation and amortization of
debt expense of $11.0 million and an operating loss of $3.9 million for fiscal
2000, compared to a loss before depreciation and amortization of debt expense of
$2.5 million and an operating loss of $10.3 million for fiscal 1999. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office properties, and increased equity in the earnings
of unconsolidated entities, partially reduced by increased net interest expense
and general and administrative expense.
Income after direct operating expenses from hotels increased $7,070,000, or
24.5%, in fiscal 2000 over the level achieved in fiscal 1999. $3,351,000 of this
increase reflected improved results from twelve hotels owned throughout both
periods, and $3,719,000 reflected results from four newly constructed
properties. The increase in total revenue of $16,467,000, or 20.9%, exceeded the
increase of $9,397,000 or 18.8%, in direct operating expenses. Room sales for
fiscal 2000 increased $14,143,000, or 23.7%, over fiscal 1999, while food and
beverage sales increased $1,579,000, or 10.3%, over the prior year. For the
twelve hotels owned throughout both periods, the increase in total revenue was
$8,934,000, or 11.4%, and the increase in direct operating expense was
$5,582,000, or 11.3%. The revenue increase was attributable to market conditions
which permitted the Real Estate Trust to raise average room rates without
adversely affecting occupancy levels at a majority of the hotels.
<PAGE>
Income after direct operating expenses from office properties increased
$8,488,000, or 52.3%, in fiscal 2000 compared to such income in fiscal 1999.
Gross income increased $10,052,000, or 41.4%, in fiscal 2000, while expenses
increased $1,564,000, or 19.4%. For the seven office properties owned throughout
both periods, the increase in total revenue was $1,744,000 or 7.2%, and the
increase in direct operating expenses was $170,000 or 2.1%. The improvement was
largely due to the acquisition of one new building and the development of two
new properties.
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, increased by $313,000, or 11.1%, in
fiscal 2000 primarily due to higher interest earnings.
Land parcels and other expense increased $429,000, or 48.8%, in fiscal 2000
largely as the result of a real estate tax refund at one property in the prior
year.
Interest expense increased $6,248,000, or 15.5%, in fiscal 2000, primarily
because of increases in average outstanding borrowings. The average balance of
outstanding borrowings increased to $513.9 million for fiscal 2000 from $444.9
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and new construction loans. The average
cost of borrowings was 9.35% in fiscal 2000 and 9.26%, in fiscal 1999.
Capitalized interest increased $214,000, or 22.3%, during fiscal 2000 due to the
higher level of development activity in the current year.
Amortization of debt expense increased $355,000, or 118.7%, due to new
financings completed during the past two years.
Depreciation increased $1,801,000, or 14.4%, in fiscal 2000 as a result of new
tenant improvements, capital replacements, and the additions of new
income-producing properties.
Advisory, management and leasing fees paid to related parties increased
$1,582,000, or 16.8%, in fiscal 2000. The advisory fee in fiscal 2000 was
$349,000 per month compared to $337,000 per month for fiscal 1999, which
resulted in an aggregate increase of $142,000, or 3.5%. Management and leasing
fees were higher by $1,440,000, or 26.7%, in fiscal 2000 as a result of
increased gross income on which fees are based.
General and administrative expense increased $2,646,000, or 227.8%, in fiscal
2000, principally as a result of a $1.2 million payment to terminate the Howard
Johnson franchise at one hotel, higher legal and accounting costs, start-up
expenses for new hotels, and the writeoff of abandoned development expenses.
Equity in earnings of unconsolidated entities reflected earnings of $7,711,000
in fiscal 2000 and earnings of $5,360,000 in fiscal 1999, an increase of
$2,351,000, or 43.9%. 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 $994,000.
<PAGE>
Banking
Overview. The bank recorded operating income of $81.3 million for fiscal 2000,
compared to operating income of $96.0 million for fiscal 1999. 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.
Contributing to the decrease in net income were increases in operating
(non-interest) expense of $40.0 million and in the provision for loan and lease
losses of $27.1 million. Partially offsetting the reduction of income were
increases in net interest income of $68.3 million and deposit service fees of
$18.7 million. The bank's net income in future periods will continue to be
affected by increased operating expenses associated with expansion of the bank's
branch network and other areas of business and reliance on relatively higher
cost sources of funding to support continued growth.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $68.3 million (or 24.9%) in fiscal 2000 over fiscal
1999. Included in interest income during fiscal 2000 was $0.3 million recorded
on non-accrual assets and restructured loans. The bank would have recorded
additional interest income of $3.4 million in fiscal 2000 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 - Banking
-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)
Year Ended September 30,
-------------------------------------------------------------------------------------------
2000 1999 1998
September 30, ------------------------------ ------------------------------ -----------------------------
2000 Average Yield/ Average Yield/ Average Yield/
Yield/Rate Balances Interest Rate Balances Interest Rate Balances Interest Rate
--------------- ---------- --------- --------- ---------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning
assets:
Loans and leases
receivable, net (1) 8.60 % $7,590,197 $635,246 8.37% $4,791,302 $402,263 8.40% $2,776,091 $299,701 10.80%
Mortgage-backed
securities 6.54 1,187,094 74,614 6.29 1,631,711 96,589 5.92 1,990,123 113,441 5.70
Federal funds sold
and securities
purchased under
agreements to resell 6.60 141,814 8,105 5.72 58,234 2,953 5.07 140,004 7,892 5.64
Trading securities 9.43 18,964 1,288 6.79 50,759 3,553 7.00 25,159 2,005 7.97
Investment securities 5.98 45,386 2,643 5.82 44,473 2,466 5.54 37,866 2,138 5.65
Other interest-
earning assets 6.87 220,134 14,763 6.71 204,548 11,669 5.70 196,646 12,362 6.29
---------- ------- ---------- -------- ---------- --------
Total 8.32 9,203,589 736,659 8.00 6,781,027 519,493 7.66 5,165,889 437,539 8.47
------------- ------- ------- -------- ------ -------- ------
Non-interest earning
assets:
Cash 273,878 234,320 217,929
Real estate held for
investment or sale 49,685 60,346 86,348
Property and
equipment, net 321,705 292,322 288,351
Goodwill and
other intangible
assets, net 26,635 23,741 10,192
Other assets 249,503 252,316 609,168
----------- ---------- ----------
Total assets $10,124,995 $7,644,072 $6,377,877
=========== ========== ==========
Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
Deposit accounts:
Demand deposits 0.61 $ 1,212,789 10,644 0.88 $1,121,970 11,648 1.04 $ 998,256 19,877 1.99
Savings deposits 1.87 942,985 17,531 1.86 1,023,744 21,218 2.07 1,017,755 30,727 3.02
Time deposits 6.23 2,721,138 154,737 5.69 1,578,571 77,084 4.88 1,663,772 89,958 5.41
Money market deposits 3.98 1,107,338 39,351 3.55 1,084,273 36,395 3.36 994,590 38,756 3.90
---------- ------- ---------- -------- --------- --------
Total deposits 3.83 5,984,250 222,263 3.71 4,808,558 146,345 3.04 4,674,373 179,318 3.84
Borrowings 6.23 2,843,834 172,137 6.05 1,718,721 99,162 5.77 888,473 59,092 6.65
---------- ------- ---------- -------- --------- --------
Total liabilities 4.50 8,828,084 394,400 4.47 6,527,279 245,507 3.76 5,562,846 238,410 4.29
------------- ------- ------- -------- ------ -------- -------
Non interest-
bearing items:
Non-interest bearing
deposits 523,882 457,832 266,711
Other liabilities 172,334 78,322 79,655
Minority interest 144,000 144,000 144,000
Stockholders' equity 456,695 436,639 365,558
---------- ---------- ---------
Total liabilities
and stockholders'
equity $10,124,995 $7,644,072 $6,418,770
=========== ========== ==========
Net interest income $342,259 $273,986 $199,129
======== ======== ========
Net interest spread (2) 3.53% 3.90% 4.18%
======= ====== =======
Net yield on interest-
earning assets (3) 3.72% 4.04% 3.85%
======= ====== =======
Interest-earning assets
to interest-bearing
liabilities 104.25% 103.89% 92.86%
======= ======= =======
(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. Includes $3,847, $4,196, and ($3,078) of amortized loan
fees, premiums and discounts in interest income for the years ended
September 30, 2000, 1999 and 1998.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals 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
(In thousands)
Year Ended September 30, 2000 Year Ended September 30, 1999
Compared to Compared to
Year Ended September 30, 1999 Year Ended September 30, 1998
Increase (Decrease) Increase (Decrease)
Due to Change in (1) Due to Change in (1)
---------------------------------- ----------------------------------
Total Total
Volume Rate Change Volume Rate Change
---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases (2) $ 234,425 $ (1,442) $232,983 $ 180,545 $ (77,983) $ 102,562
Mortgage-backed securities (27,697) 5,722 (21,975) (21,089) 4,237 (16,852)
Federal funds sold and securities
purchased under agreements to resell 4,730 422 5,152 (4,210) (729) (4,939)
Trading securities (2,161) (104) (2,265) 1,819 (271) 1,548
Investment securities 51 126 177 370 (42) 328
Other interest-earning assets 930 2,164 3,094 488 (1,181) (693)
---------- --------- --------- ---------- ---------- ----------
Total interest income 210,278 6,888 217,166 157,923 (75,969) 81,954
---------- --------- --------- ---------- ---------- ----------
Interest expense:
Deposit accounts 39,927 35,991 75,918 5,064 (38,037) (32,973)
Borrowings 67,939 5,036 72,975 48,797 (8,727) 40,070
---------- --------- --------- ---------- ---------- ----------
Total interest expense 107,866 41,027 148,893 53,861 (46,764) 7,097
---------- --------- --------- ---------- ---------- ----------
Increase (decrease) in net interest income $ 102,412 $(34,139) $ 68,273 $ 104,062 $ (29,205) $ 74,857
========== ========= ========= ========== ========== ==========
---------------------------------------------------------------------------------------------------------------------------------
(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 fiscal 2000 increased $217.2 million (or 41.8%) from the
level in fiscal 1999 as a result of higher average balances of loans and leases
receivable, which was slightly offset by lower average yields on loans and
leases receivable.
The bank's net interest spread decreased to 3.53% in fiscal 2000 from 3.90% in
fiscal 1999. The 37 basis point reduction in the net interest spread primarily
reflected a shift in the mix of consumer loans to lower yielding prime
automobile loans from higher yielding subprime automobile 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 104.25% in fiscal
2000 compared to 103.89% in fiscal 1999.
Interest income on loans and leases, the largest category of interest-earning
assets, increased by $233.0 million from fiscal 1999 primarily because of higher
average balances. Higher average balances of the bank's single-family
residential loans, which increased $1.3 billion (or 40.9%), resulted in a $95.3
million (or 42.0%) increase in interest income from such loans. Average balances
of automobile loans, commercial loans and real estate construction loans
increased $1.1 billion, $223.4 million and $88.4 million, and contributed to a
$103.1 million, $19.6 million and $9.8 million increase in interest income from
such loans. Lower average yields on automobile loans partially offset the
effects of the higher average balances.
The average yield on the loan portfolio in fiscal 2000 decreased 3 basis points
(from 8.40% to 8.37%) from the average yield in fiscal 1999. 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 29.2% during fiscal
2000 from 44.1% during fiscal 1999. Effective November 9, 2000, the bank stopped
the originations of subprime automobile loans. The bank will continue servicing
and collecting the existing portfolio of those loans. See Note 32. Also
contributing to the decreased average yield on the loan portfolio was a decrease
in the average yield on home improvement loans (from 10.05% to 9.11%). An
increase in the average yield on home equity loans (from 7.22% to 8.68%)
resulting from increases in the index on which the interest rates on such loans
are based offset the decreases in the average yield on the loan portfolio.
Interest income on mortgage-backed securities decreased $22.0 million (or 22.8%)
primarily because of lower average balances. The effect of the $444.6 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.92% to 6.29%.
Interest expense on deposits increased $75.9 million (or 51.9%) during fiscal
2000 due to increased average rates and average balances. The 67 basis point
increase in the average rate on deposits (from 3.04% to 3.71%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal 2000, the bank increased its use of brokered deposits as an alternative
funding source.
<PAGE>
Interest expense on borrowings increased $73.0 million (or 73.6%) in fiscal 2000
over fiscal 1999. A $967.0 million (or 96.9%) 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 5.29% to 5.69%) resulted in an increase of
$58.9 million in interest expense. Also contributing to the increase in interest
expense on borrowings was an increase in the average balance of $120.2 million
and average yield (from 5.07% to 6.08%) in securities sold under repurchase
agreements.
Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses increased to $49.9 million in fiscal 2000 from $22.9 million in fiscal
1999. The $27.1 million increase was primarily due to increased delinquencies in
subprime automobile loans and increased charge-offs as a result of the
maturation of the bank's loan portfolio. See "Financial Condition - Banking -
Asset Quality - Allowances for Losses."
Other Income. Other non-interest income decreased to $154.3 million in fiscal
2000 from $170.2 million in fiscal 1999. The $15.9 million (or 9.4%) decrease
was primarily attributable to a gain of $31.6 million included in fiscal 1999
resulting from the sale of one of the bank's REO properties. In addition, the
bank had gains on sales of trading securities of $1.5 million during fiscal 2000
compared to gains of $7.2 million during fiscal 1999. Partially offsetting this
decrease was a $18.7 million (or 26.9%) 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 fiscal 2000 increased $40.0 million
(or 12.3%) from the level in fiscal 1999. Salaries and employee benefits
increased $18.1 million (or 10.3%) as a result of additions of staff to the
bank's consumer lending department and branch operations. Also contributing to
increased operating expenses for fiscal 2000 was an increase in other operating
expenses of $14.1 million (or 36.1%). The increase is partially related to
increased other operating expenses associated with the expansion of the branch
network. Also contributing to the increase in other operating expenses was a
fiscal 1999 reduction to other operating expenses of $6.5 million related to
services the bank provided to First USA following the sale of the credit card
portfolio on September 30, 1998. In addition, property and equipment increased
$5.3 million primarily due to increased rent expense associated with the
addition of new deposit branches during fiscal 2000.
<PAGE>
Fiscal 1999 Compared to Fiscal 1998
Real Estate
The Real Estate Trust recorded income before depreciation and amortization of
debt expense of $2.5 Million and an operating loss of $10.3 million for fiscal
1999, compared to a loss before depreciation and amortization of debt expense of
$6.9 million and an operating loss of $18.5 million for fiscal 1998. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office and industrial properties, increased income from
the consolidated entities, and lower net interest expense.
Income after direct operating expenses from hotels increased $2,967,000, or
11.5%, in fiscal 1999 over the level achieved in fiscal 1998. $987,000 of this
increase reflected improved results from ten hotels owned throughout both
periods, and $1,980,000 reflected results from five acquisition or newly
constructed properties. The increase in total revenue of $7,490,000 or 10.5%,
exceeded the increase of $4,523,000, or 9.9%, in direct operating expenses. Room
sales for fiscal 1999 increased $6,684,000, or 12.6%, over fiscal 1998, while
food and beverage sales increased $714,000 or 4.9%, over the prior year. For the
ten hotels owned throughout both period, the increase in total revenue was
$2,886,000, or 4.5%, and the increase in direct operating expense was
$1,899,000, or 4.6%. The revenue increase was attributable to market conditions
which permitted the Real Estate Trust to raise average room rates without
adversely affecting occupancy levels at a majority of the hotels.
Income after direct operating expenses from office and industrial properties
increased $966,000, of 6.3%, in fiscal 1999 compared to such income in fiscal
1998. Gross income increased $1,406,000, or 6.1%, in fiscal 1999, while expenses
increased $440,000, or 5.8%. The improvement was the direct result of higher
rents received during the year and the historically high level of occupancy in
all the Trust's properties.
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, declined by $1,463,000, or 34.1%, in
fiscal 1999 primarily due to lower cash balances on which interest was earned.
Land parcels and other expense decreased $726,000, or 45.2%, in fiscal 1999 as
the result of the transfer of some portions of land parcels to development.
<PAGE>
Interest expense decreased $2,406,000, or 5.6%, in fiscal 1999, primarily
because of decreases in interest costs on senior secured debt and unsecured
debt. The average balance of outstanding borrowings increased to $444.3 million
for fiscal 1999 from $433.2 million for the prior year. The change in average
borrowings occurred as a result of mortgage loan refinancings and unsecured note
sales. The average cost of borrowings was 9.26% in fiscal 1999 and 10.05%, in
fiscal 1998.
Capitalized interest increased $753,000, or 362.0%, during fiscal 1999 due to
the higher level of development activity in the current year.
Amortization of debt expense decreased $73,000, or 19.6%, primarily due to the
lower costs experienced in the refinancing of senior secured debt.
Depreciation increased $1,338,000, or 12.0%, in fiscal 1999 as a result of new
tenant improvements, capital replacements, and the additions of new
income-producing properties.
Advisory, management and leasing fees paid to related parties increased
$689,000, or 7.9%, in fiscal 1999. The advisory fee in fiscal 1999 was $337,000
per month compared to $317,000 per month for fiscal 1998, which resulted in an
aggregate increase of $235,000, or 6.2%. Management and leasing fees were higher
by $454,000, or 9.2%, in fiscal 1999 as a result of increased gross income on
which fees are based.
General and administrative expense increased $9,000, or 0.8%, in fiscal 1999, as
a result of higher administrative costs.
Equity in earnings if unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1999, the Real
Estate Trust recorded earnings of $5,360,000 from such investments compared to
earnings of 1,918,000 in the prior year. The improvement of $3,442,000 largely
reflected a positive change in rental operations between the two years and a
reduction in earnings in fiscal 1998 due to the sales of interest rate
protection agreements and the write-off of unamortized costs in excess of sales
proceeds received and the write-off of unamortized loan costs when a period of
the loan portfolio was refinanced.
There was no gain or loss on sale of property in fiscal 1999. The loss on sale
of property in fiscal 1998 reflected the termination of the Real Estate
Trust's lease on a property located in Oxon Hill, Maryland.
<PAGE>
Banking
Overview. The bank recorded operating income of $96.0 million for fiscal 1999,
compared to operating income of $184.4 million for fiscal 1998. Fiscal 1998
results include the impact of the sale of the bank's credit card portfolio and
related operations on September 30, 1998. The decrease in income for fiscal 1999
was primarily attributable to a $470.1 million decrease in other (non-interest)
income resulting primarily from the $288.3 million gain on sale of the bank's
credit card portfolio and related operations on September 30, 1998. The
elimination of credit card interest income of $102.8 million and credit card
fees of $53.9 million during fiscal 1999 were offset by corresponding reductions
in operating expenses of $178.7 million and provision for loan and lease losses
of $127.9 million. The bank also recognized a gain of $31.6 million from the
sale of one of its REO properties during fiscal 1999.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $75.0 million, or 37.7%, during fiscal 1999. Included in
interest income during fiscal year 1999 was $0.2 million recorded on non-accrual
asset and restructured loans. The bank would have recorded an additional $2.8
million in interest income in fiscal 1999 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 - Banking - Asset Quality
- Non-Performing Assets."
Interest income in fiscal 1999 increased $82.1 million, or 18.8%, from the level
in fiscal 1998 as a result of higher average balances of loans and leases
receivable, which was offset by lower average yields on loan and lease
receivables. Higher average balances of real estate loans, automobile loans and
leases and commercial loans more than offset the elimination of $1.0 billion in
average credit card loans.
The bank's net yield on interest-earning assets increased to 4.04% in fiscal
1999 from 3.85% in fiscal 1998. The increase in the net yield primarily
reflected an increase in the average balances of earning assets which were
funded with proceeds received from the sale of the credit card portfolio and
related operations as well as advances from the Federal Home Loan bank.
Partially offsetting this increase was the decline in the yield on loans
resulting from the elimination of higher yielding credit card loans. Average
interest-earning assets as a percentage of average interest-bearing liabilities
increased to 103.9% in fiscal 1999 from 92.9% in fiscal 1998.
Interest income on loans and leases, the largest category of interest-earning
assets, increased by $102.7 million, or 34.3%, from fiscal 1998 primarily
because of higher average balances. The bank did not securitize and sell any
receivables into new trusts during fiscal 1999, which contributed to the higher
average balances. Lower average yields earned on the loan and lease portfolio
due to the effect of the sale of the credit card portfolio partially offset the
positive effect of the higher average balances.
<PAGE>
Higher average balances of the bank's single-family residential loans, which
increased $2.1 billion, or 191.7%, resulted in a $144.2 million, or 173.8%,
increase in income from such loans. Lower average yields on single-family
residential loans partially offset the effects of the higher average balances.
Average balances of automobile loans and leases, commercial loans and real
estate construction loans increased $527.7 million, $135.2 million and $103.6
million and contributed to a $60.2 million, $8.9 million and $7.6 million
increase in interest income from such loans. Lower average yields on those loans
partially offset the effects of the higher average balances.
The average yield on the loan and lease portfolio in fiscal 1999 decreased 239
basis points, to 8.40% from 10.79%, from the average yield in fiscal 1998. The
decline in the average yield in fiscal 1999 resulted from the sale of the credit
card portfolio on September 30, 1998. During fiscal 1998, average credit card
loans totaled $1.0 billion with an average yield of 12.86%.
Interest income on mortgage-backed securities decreased $16.9 million, or 14.9%,
primarily because of lower average balances. The effect of the $358.4 million
decrease in average balances more than offset an increase in the average
interest rates on these securities from 5.70% to 5.92%.
Interest expense on deposits decreased $33.0 million, or 18.4%, during fiscal
1999 due to decreased average rates. The 80 basis point reduction in the average
rate on deposits, from 3.84% to 3.04%, resulted primarily from market conditions
during the last quarter of fiscal 1998, which led the bank to reduce the rates
it pays on deposits.
The decrease in interest expense on deposits was more than offset by an increase
in interest expense on borrowings. Higher average balances of Federal Home Loan
bank advances of $736.8 million and repurchase agreement transactions of $68.4
million primarily resulted in a $40.1 million, or 67.8%, increase in interest
expense on borrowings. This amount was partially offset by an 88 basis point
reduction in the average rate on borrowings, to 5.77% from 6.65%.
Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses decreased to $22.9 million in fiscal 1999 from $150.8 million in fiscal
1998. The $127.9 million decrease was primarily due to the elimination of
provisions for losses on credit card loans resulting from the sale of the credit
card portfolio. See "Financial Condition - Banking - Asset Quality - Allowances
for Losses."
Other Income. Other (non-interest) income decreased to $170.2 million in fiscal
1999 from $640.3 million in fiscal 1998. The $470.1 million, or 73.4%, decrease
was primarily attributable to the September 30, 1998 recognition of the gain on
sale of the credit card portfolio and the corresponding elimination of credit
card fees during fiscal 1999. Also contributing to the decrease in other income
was a decrease in servicing and securitization income. Partially offsetting
these decreases were increases in deposit servicing fees and gain on real estate
held for investment or sale.
<PAGE>
Servicing and securitization income decreased $200.0 million, or 86.3%, during
fiscal 1999 primarily as a result of decreased securitization activity and the
elimination of credit card loan servicing fees. The bank did not securitize and
sell any loan receivables into new trusts during fiscal 1999. During fiscal
1998, the bank securitized and sold $1.0 billion, $298.8 million, $534.7 million
and $45.9 million of credit card, home equity, automobile and home loan
receivables, and recognized gains of $81.6 million, $19.7 million, $23.1 million
and $3.4 million, on these transactions. In addition, credit card loan servicing
fees amounting to $139.3 million for fiscal 1998 were eliminated as a result of
the September 30, 1998 sale of the bank's credit card portfolio.
The $50.6 million increase in gain on real estate held for investment or sale
was primarily attributable to the $31.6 million gain on sale of one of the
communities located in Loudoun County, Virginia and, to a lesser extent, a
decrease of $20.6 million in the provision for losses on such assets. See
"Financial Condition - Banking - Asset Quality - Allowances for Losses."
Deposit servicing fees increased $17.6 million, or 33.8%, during fiscal 1999
primarily due to an increase in fees generated from the expansion of the bank's
branch and ATM network.
Operating Expenses. Operating expenses during fiscal 1999 decreased $178.7
million, or 35.5%, from the level in fiscal 1998. Primarily as a result of the
sale of the bank's credit card operations during fiscal 1999, marketing expenses
decreased $67.0 million, loan expenses decreased $40.9 million and data
processing expenses decreased $27.2 million and salaries and employee benefits
decreased $24.4 million. Additions of staff to the bank's consumer lending
department and branch operations partially offset the decrease of salaries and
employee benefits resulting from the sale.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Trust and its consolidated subsidiaries are
included in this report on the pages indicated and are incorporated herein by
reference:
(a) Report of Independent Public Accountants.
(b) Consolidated Balance Sheets - As of September 30,
2000 and 1999.
(c) Consolidated Statements of Operations - For the
years ended September 30, 2000, 1999 and 1998.
(d) Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity (Deficit) - For the
years ended September 30, 2000, 1999 and 1998.
(e) Consolidated Statements of Cash Flows - For the
years ended September 30, 2000, 1999 and 1998.
(f) Notes to Consolidated Financial Statements.
The selected quarterly financial data included in Note 37 to the
Consolidated Financial Statements referred to above are incorporated herein by
reference.
Summary financial information with respect to the bank is also included in Part
I, Item 1.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust
We have audited the accompanying consolidated balance sheets of B.F. Saul Real
Estate Investment Trust (the "Trust") and subsidiaries as of September 30, 2000
and 1999, and the related consolidated statements of operations, comprehensive
income and changes in shareholders' equity (deficit), and cash flows for each of
the three years in the period ended September 30, 2000. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of B.F. Saul Real Estate
Investment Trust and subsidiaries as of September 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
December 13, 2000
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
September 30
-----------------------------
(In thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 209,861 $ 197,075
Office and industrial 148,581 111,183
Other 3,991 3,923
-------------- --------------
362,433 312,181
Accumulated depreciation (124,184) (104,774)
-------------- --------------
238,249 207,407
Land parcels 39,716 39,448
Construction in progress 49,096 20,498
Cash and cash equivalents 18,129 17,857
Other assets 85,674 79,861
-------------- --------------
Total real estate assets 430,864 365,071
---------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks 357,792 326,758
Interest-bearing deposits 30,441 69,388
Federal funds sold and securities purchased under agreements to resell 40,000 194,000
Loans held for sale 126,108 116,797
Loans held for securitization and sale 70,000 --
Investment securities (market value $45,559 and $44,434, respectively) 45,648 44,400
Trading securities 3,380 6,955
Mortgage-backed securities (market value $1,025,540 and $1,285,442, respectively) 1,046,809 1,311,370
Loans and leases receivable (net of allowance for losses of $54,018 and $58,139, respectively) 8,105,031 6,312,073
Federal Home Loan Bank stock 97,676 87,183
Real estate held for investment or sale (net of allowance for losses of $80,954 and $84,607,
respectively) 49,386 52,369
Property and equipment, net 362,469 304,533
Goodwill and other intangible assets, net 25,270 27,902
Interest only strips, net 16,763 7,626
Servicing assets, net 75,045 30,479
Other assets 233,176 254,936
-------------- --------------
Total banking assets 10,684,994 9,146,769
---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 11,115,858 $ 9,511,840
---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable $ 307,214 $ 213,447
Notes payable - secured 200,000 216,000
Notes payable - unsecured 47,463 46,122
Deferred gains - real estate 112,834 112,834
Accrued dividends payable - preferred shares of beneficial interest 25,885 32,967
Other liabilities and accrued expenses 44,971 42,268
-------------- --------------
Total real estate liabilities 738,367 663,638
---------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 7,037,789 5,763,486
Securities sold under repurchase agreements and other short-term borrowings 540,042 630,771
Notes payable 307 373
Federal Home Loan Bank advances 1,946,971 1,743,188
Custodial accounts 64,152 22,628
Amounts due to banks 51,902 42,718
Other liabilities 180,382 109,120
Capital notes -- subordinated 250,000 250,000
-------------- --------------
Total banking liabilities 10,071,545 8,562,284
---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 79,028 73,236
Minority interest -- other 218,307 218,307
---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,107,247 9,517,465
---------------------------------------------------------------------------------------------------------------------------------
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 (49,642) (63,884)
Net unrealized holding gains -- 6
-------------- --------------
50,459 36,223
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 8,611 (5,625)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 11,115,858 $ 9,511,840
---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands, except per share amounts) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 95,381 $ 78,914 $ 71,424
Office and industrial (including $2,672, $203 and $192
of rental income from banking segment, respectively) 34,341 24,289 22,883
Other 3,136 2,822 4,285
-------------- -------------- --------------
Total income 132,858 106,025 98,592
---------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
Hotels 59,436 50,039 45,516
Office and industrial properties 9,635 8,071 7,631
Land parcels and other 1,309 880 1,607
Interest expense 46,495 40,247 42,653
Capitalized interest (1,175) (961) (208)
Amortization of debt expense 654 299 372
Depreciation 14,309 12,508 11,170
Advisory, management and leasing fees - related parties 11,013 9,431 8,742
General and administrative 3,808 1,162 1,153
-------------- -------------- --------------
Total expenses 145,484 121,676 118,636
---------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities 7,711 5,360 1,918
Gain (loss) on sale of property 994 -- (331)
---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $ (3,921) $ (10,291) $ (18,457)
---------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans $ 635,246 $ 402,263 $ 299,566
Mortgage-backed securities 74,614 96,589 113,441
Trading securities 1,288 3,553 2,005
Investment securities 2,643 2,466 2,138
Other 22,868 14,622 20,254
-------------- -------------- --------------
Total interest income 736,659 519,493 437,404
---------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 222,263 146,345 179,318
Short-term borrowings 55,977 38,446 33,294
Long-term borrowings 116,160 60,716 25,798
-------------- -------------- --------------
Total interest expense 394,400 245,507 238,410
-------------- -------------- --------------
Net interest income 342,259 273,986 198,994
Provision for loan and lease losses (49,930) (22,880) (150,829)
---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 292,329 251,106 48,165
---------------------------------------------------------------------------------------------------------------------------------
Other income
Servicing and securitization income 38,441 31,670 231,674
Credit card fees -- -- 53,881
Deposit servicing fees 88,253 69,570 51,997
Gain on sales of trading securities, net 1,490 7,243 982
Net unrealized loss trading securities -- 1,192 (1,258)
Gain (loss) on real estate held for investment or sale, net (1,523) 34,049 (16,539)
Gain on sales of loans, net 1,486 3,779 290,434
Other 26,112 22,693 29,089
-------------- -------------- --------------
Total other income 154,259 170,196 640,260
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Continued on following page.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands, except per share amounts) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 193,204 $ 175,149 $ 199,557
Loan 14,441 13,292 54,147
Property and equipment (including $2,672, $203 and $192
of rental expense paid to real estate segment, respectively) 31,347 26,089 28,114
Marketing 11,424 12,664 79,642
Data processing 24,447 18,247 45,419
Depreciation and amortization 32,434 33,362 33,989
Deposit insurance premiums 2,291 4,431 4,859
Amortization of goodwill and other intangible assets 2,632 3,083 5,862
Other 53,096 39,005 52,429
-------------- -------------- --------------
Total operating expenses 365,316 325,322 504,018
---------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME $ 81,272 $ 95,980 $ 184,407
---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Operating income $ 77,351 $ 85,689 $ 165,950
Income tax provision 23,217 29,302 42,869
-------------- -------------- --------------
Income before extraordinary item and minority interest 54,134 56,387 123,081
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (166) -- (9,601)
-------------- -------------- --------------
Income before minority interest 53,968 56,387 113,480
Minority interest held by affiliates (6,298) (7,604) (22,043)
Minority interest -- other (25,313) (25,313) (25,313)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME $ 22,357 $ 23,470 $ 66,124
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 16,939 $ 18,052 $ 60,706
NET INCOME PER COMMON SHARE
Income before extraordinary item and minority interest $ 10.08 $ 10.56 $ 24.38
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (0.03) -- (1.99)
-------------- -------------- --------------
Income before minority interest 10.05 10.56 22.39
Minority interest held by affiliates (1.30) (1.58) (4.57)
Minority interest -- other (5.24) (5.24) (5.24)
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 3.51 $ 3.74 $ 12.58
---------------------------------------------------------------------------------------------------------------------------------
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
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(Dollars in thousands) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPREHENSIVE INCOME
Net income $ 22,357 $ 23,470 $ 66,124
Other comprehensive income:
Net unrealized holding gains (losses) (6) (38) 440
---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 22,351 $ 23,432 $ 66,564
---------------------------------------------------------------------------------------------------------------------------------
CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516 $ 516
-------------- -------------- --------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642
-------------- -------------- --------------
PAID-IN SURPLUS
Beginning and end of period 92,943 92,943 92,943
-------------- -------------- --------------
DEFICIT
Beginning of period (63,884) (81,936) (142,642)
Net income 22,357 23,470 66,124
Minority interest in capital contribution (2,697) -- --
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (5,418) (5,418) (5,418)
-------------- -------------- --------------
End of period (49,642) (63,884) (81,936)
-------------- -------------- --------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period 6 44 (396)
Net unrealized holding gains (losses) (6) (38) 440
-------------- -------------- --------------
End of period -- 6 44
-------------- -------------- --------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ 8,611 $ (5,625) $ (23,639)
---------------------------------------------------------------------------------------------------------------------------------
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
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (2,836) $ (6,946) $ (22,048)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 14,308 12,481 11,170
(Gain) loss on sale of property (994) -- 331
Early extinguishment of debt, net of taxes 166 -- 9,601
(Increase) decrease in accounts receivable and accrued income 3,059 (1,546) (1,229)
(Increase) decrease in deferred tax asset 5,205 (803) 954
Increase in accounts payable and accrued expenses 1,892 3,346 2,708
(Increase) decrease in tax sharing receivable (88) 3,794 (6,545)
Amortization of debt expense 1,620 1,270 372
Equity in earnings of unconsolidated entities (7,711) (5,360) (1,918)
Other 10,359 24,152 21,342
-------------- -------------- --------------
24,980 30,388 14,738
-------------- -------------- --------------
Banking
Net income 25,193 30,416 88,172
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees (2,817) 1,578 8,727
Depreciation and amortization 32,434 33,362 33,989
Provision for loan and lease losses 49,930 22,880 150,829
Capitalized interest on real estate under development (3,786) (3,392) (1,954)
Proceeds from sales of trading securities 299,881 933,596 320,942
Net fundings of loans held for sale and/or securitization (708,955) (1,035,602) (366,915)
Proceeds from sales of loans held for sale and/or securitization 1,056,157 57,337 2,005,143
Proceeds from sales of spread accounts -- -- 36,000
Gain on sale of credit card relationships -- (3,500) (288,332)
Gain on sales of real estate held for sale (9,257) (30,791) (2,609)
Provision for losses on real estate held for investment or sale 1,400 -- 18,860
Gain on sales of trading securities, net (1,490) (7,243) (982)
(Increase) decrease in interest-only strips (9,137) 5,882 73,503
(Increase) decrease in servicing assets (44,577) (3,336) 14,550
(Increase) decrease in goodwill and other intangible assets 2,643 2,990 (22,017)
(Increase) decrease in other assets 12,993 (14,283) 147,079
Increase (decrease) in other liabilities 80,447 (5,335) (11,982)
Increase (decrease) in tax sharing payable 88 (3,794) 6,545
Minority interest held by affiliates 6,298 7,604 22,043
Minority interest - other 9,750 9,750 9,750
Other 90,790 (8,653) (29,752)
-------------- -------------- --------------
887,985 (10,534) 2,211,589
-------------- -------------- --------------
Net cash provided by operating activities 912,965 19,854 2,226,327
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (54,915) (46,987) (19,815)
Property acquisitions (19,518) -- (26,650)
Property sales 1,897 -- --
Equity investment in unconsolidated entities 6,527 2,748 1,348
Other (22,656) 2 2
-------------- -------------- --------------
(88,665) (44,237) (45,115)
-------------- -------------- --------------
Banking
Net proceeds from maturities of investment securities 44,000 -- 5,000
Net proceeds from redemption of Federal Home Loan Bank stock 11,877 24,165 2,504
Net proceeds from sales of real estate 28,590 36,479 25,305
Proceeds from the sale of credit card receivables -- 3,500 1,337,678
Net fundings of loans receivable (1,110,357) (1,361,713) (2,983,595)
Principal collected on mortgage-backed securities 267,273 710,426 1,180,995
Purchases of Federal Home Loan Bank stock (22,371) (62,311) (18,370)
Purchases of investment securities (45,231) (394) (44,001)
Purchases of loans receivable (1,549,508) (2,278,834) (1,645,458)
Purchases of property and equipment (107,336) (52,766) (58,106)
Disbursements for real estate held for investment or sale (9,607) (6,911) (14,814)
Other 17,404 (6,746) 10,637
-------------- -------------- --------------
(2,475,266) (2,995,105) (2,202,225)
-------------- -------------- --------------
Net cash used in investing activities (2,563,931) (3,039,342) (2,247,340)
---------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 130,802 $ 25,562 $ 60,929
Principal curtailments and repayments of mortgages (37,035) (10,989) (38,602)
Proceeds from secured note financings 24,200 16,000 224,075
Repayments of secured note financings (40,200) -- (199,075)
Proceeds from sales of unsecured notes 10,246 5,355 5,802
Repayments of unsecured notes (8,905) (9,568) (2,100)
Costs of obtaining financings (2,651) (2,104) (7,295)
Loan prepayment fees -- -- (10,055)
Dividends paid - preferred shares of beneficial interest (12,500) (6,500) (7,600)
-------------- -------------- --------------
63,957 17,756 26,079
-------------- -------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 38,470,514 40,084,375 24,799,407
Customer withdrawals of deposits and payments for maturing certificates of deposit (37,196,211) (39,209,119) (24,804,933)
Net increase (decrease) in securities sold under repurchase agreements (156,943) 139,267 384,699
Advances from the Federal Home Loan Bank 2,348,672 2,926,366 1,759,817
Repayments of advances from the Federal Home Loan Bank (2,144,889) (1,535,205) (1,596,301)
Net proceeds from other borrowings 66,148 (307) 25,645
Cash dividends paid on preferred stock (9,750) (9,750) (9,750)
Cash dividends paid on common stock (16,000) (33,000) (6,500)
Other 63,827 16,702 3,117
-------------- -------------- --------------
1,425,368 2,379,329 555,201
-------------- -------------- --------------
Net cash provided by financing activities 1,489,325 2,397,085 581,280
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (161,641) (622,403) 560,267
Cash and cash equivalents at beginning of year 608,003 1,230,406 670,139
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 446,362 $ 608,003 $ 1,230,406
---------------------------------------------------------------------------------------------------------------------------------
Components of cash and cash equivalents at end of year as presented in the
consolidated balance sheets:
Real Estate
Cash and cash equivalents $ 18,129 $ 17,857 $ 13,950
Banking
Cash and due from banks 357,792 326,758 336,858
Interest-bearing deposits 30,441 69,388 499,598
Federal funds sold and securities purchased under agreements to resell 40,000 194,000 380,000
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 446,362 $ 608,003 $ 1,230,406
---------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) 449,449 $ 261,664 $ 276,817
Income taxes paid (refunded) (69,691) 95,417 7,454
Shares of Saul Centers, Inc. common stock 3,770 3,393 4,806
Limited partnership units of Saul Holdings Limited Partnership -- 6,120 2,893
Transfer of Tysons Park Place to real estate segment from banking segment 37,000 -- --
Cash received during the year from:
Dividends on shares of Saul Centers, Inc. common stock 3,770 3,393 3,014
Distributions from Saul Holdings Limited Partnership 6,527 6,120 5,567
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 5,335 6,581 5,510
Loans held for sale exchanged for trading securities 297,462 924,710 320,695
Loans receivable transferred to (from) loans held for sale and/or securitization 744,823 (125,000) 1,788,831
Loans made in connection with the sale of real estate 1,260 31,615 7,274
Loans receivable transferred to real estate acquired in settlement of loans 5,695 1,909 4,938
Loans receivable exchanged for mortgage-backed securities held-to-maturity 4,798 1,792 1,225,279
---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
B.F. Saul Real Estate Investment Trust operates as a Maryland real
estate investment trust. The principal business activities of B.F. Saul and its
consolidated subsidiaries (the "Trust") are the ownership of 80% of the
outstanding common stock of Chevy Chase Bank, F.S.B., whose assets accounted for
96% of the Trust's consolidated assets as of September 30, 2000, and the
ownership and development of income-producing properties. The properties are
located predominantly in the mid-Atlantic and Southeastern regions of the United
States and consist principally of hotels, office projects, and undeveloped land
parcels. Chevy Chase Bank, F.S.B. is a federally chartered and federally insured
stock savings bank. By virtue of its ownership of a majority of Chevy Chase
Bank, F.S.B., the Trust is a "savings and loan holding company" and subject to
regulation, examination and supervision by the Office of Thrift Supervision
("OTS").
"Real Estate Trust" refers to B.F. Saul Real Estate Investment Trust and its
wholly owned subsidiaries. Chevy Chase Bank, F.S.B. and its subsidiaries are
referred to in the consolidated financial statements and notes thereto as the
"bank" or the "Corporations". The accounting and reporting practices of the
Trust conform to accounting principles generally accepted in the United States
and, as appropriate, predominant practices within the real estate and banking
industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Real Estate
Trust and its subsidiaries. Accordingly, the accompanying financial statements
reflect the assets, liabilities, operating results, and cash flows for two
business segments: Real Estate and Banking. Entities in which the Trust holds a
non-controlling interest (generally 50% or less) are accounted for on the equity
method. See Note 2. All significant intercompany transactions, except as
disclosed elsewhere in the financial statements, have been eliminated in
consolidation.
Although the financial results of Trust subsidiaries are included in these
consolidated financial statements, each Trust subsidiary, including, but not
limited to, Arlington Hospitality Corp., Auburn Hills Hotel Corporation, Dulles
Hospitality Corp., Herndon Hotel Corporation, Pueblo Hotel Corp. and Sharonville
Hotel Corporation, is a separate legal entity whose assets are not available to
pay the claims of creditors of other entities included in these consolidated
financial statements.
USE OF ESTIMATES
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the balance sheet and revenues and expenses for
the reporting period. Actual results could differ from those estimates.
<PAGE>
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, the Trust recognizes an impairment loss.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that the Trust expects to hold and use is based on the fair value of
the asset. Long-lived assets and certain identifiable intangibles to be disposed
of are generally reported at the lower of carrying amount or fair value less the
cost to sell.
INCOME TAXES
The Trust files a consolidated federal income tax return which includes
operations of all 80% or more owned subsidiaries. It voluntarily terminated its
qualification as a real estate investment trust under the Internal Revenue Code
during fiscal 1978.
The Trust uses an asset and liability approach in accounting for income taxes.
Deferred income taxes are recorded using currently enacted tax laws and rates.
To the extent that realization of deferred tax assets is more likely than not,
such assets are recognized.
NET INCOME PER COMMON SHARE
Net income per common share is determined by dividing net income, after
deducting preferred share dividend requirements, by the weighted average number
of common shares outstanding during the year. For fiscal years 2000, 1999 and
1998, the weighted average number of shares used in the calculation was
4,826,910. The Trust has no common share equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 1999 and 1998 to conform with the
presentation used for the year ended September 30, 2000.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - REAL ESTATE TRUST
CASH EQUIVALENTS
The Real Estate Trust considers all highly liquid, temporary investments with an
original maturity of three months or less to be cash equivalents.
PROPERTIES
Income-producing properties are stated at the lower of depreciated cost (except
those which were acquired through foreclosure or equivalent proceedings, the
carrying amounts of which are based on the lower of cost or fair value at the
time of acquisition) or net realizable value.
<PAGE>
Interest, real estate taxes and other carrying costs are capitalized on projects
under construction. Once construction is completed and the assets are placed in
service, rental income, direct operating expenses, and depreciation associated
with such properties are included in current operations. The Real Estate Trust
considers a project to be substantially complete and held available for
occupancy upon completion of tenant improvements, but no later than one year
from the cessation of major construction activity. Substantially completed
portions of a project are accounted for as separate projects. Expenditures for
repairs and maintenance are charged to operations as incurred.
Depreciation is calculated using the straight-line method and estimated useful
lives of 28 to 47 years for buildings and up to 20 years for certain other
improvements. Tenant improvements are amortized over the lesser of their
estimated useful lives or the lives of the related leases using the
straight-line method.
INCOME RECOGNITION
The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. The Real Estate Trust derives rental income under
noncancelable long-term leases from tenants at its commercial properties.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term maturity
of these instruments.
Liabilities
The carrying amount of notes payable - secured approximates their fair value
since most of the debt has been financed in recent periods at prevailing market
interest rates. The fair value of mortgage notes payable is based on
management's estimate of current market rates for its debt. At September 30,
2000, and 1999, the fair value of mortgage notes payable was $297,759 and
$213,447. The fair value of notes payable - unsecured is based on the rates
currently offered by the Real Estate Trust for similar notes. At September 30,
2000 and 1999, the fair value of notes payable - unsecured was $48.6 and $47.3
million.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK
Chevy Chase Bank, F.S.B. is a federally chartered and federally insured stock
savings bank and, as such, is subject to comprehensive regulation, examination
and supervision by OTS and by the Federal Deposit Insurance Corporation
("FDIC"). The bank is principally engaged in the business of attracting deposits
from the public and using such deposits, together with borrowings and other
funds, to make loans secured by real estate, primarily residential mortgage
loans, and various types of consumer loans and leases and commercial loans. The
bank's principal deposit market is the Washington, D.C. metropolitan area.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
<PAGE>
The bank maintains reserves in the form of cash and deposits at the Federal
Reserve Bank. The total average reserve balances maintained by the bank, which
consisted primarily of cash, were $190.2, $161.1 and $146.5 million during the
years ended September 30, 2000, 1999, and 1998.
LOANS HELD FOR SALE
The bank engages in mortgage banking activities. At September 30, 2000 and 1999,
loans held for sale are composed of single-family residential loans and home
improvement and related loans originated or purchased for sale in the secondary
market and are carried at the lower of aggregate cost or aggregate market value.
Single-family residential loans held for sale will either be sold or will be
exchanged for mortgage-backed securities and then sold. Gains and losses on
sales of whole loans held for sale are determined using the specific
identification method. See "Trading Securities."
LOANS HELD FOR SECURITIZATION AND SALE
The bank periodically securitizes and sells certain pools of loan receivables in
the public and private markets. These securitizations are recorded as sales.
Gains on the sale of loans are limited to amounts related to loans existing at
the date of sale and do not include amounts related to loans expected to be sold
during any future reinvestment period.
Loans held for securitization and sale are the lesser of loans eligible for
securitization or loans that management contemplates to securitize within six
months. Such loans held for securitization and sale are reported at the lower of
aggregate cost or aggregate market value for each asset type.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. Investment and mortgage-backed securities classified as
"held-to-maturity" are reported at amortized cost. Investment and
mortgage-backed securities classified as "available-for-sale" are reported at
fair value, with unrealized gains and losses, net of the related tax effect,
reported as a separate component of stockholders' equity. Investment and
mortgage-backed securities classified as "trading" are reported at fair value,
with unrealized gains and losses included in earnings. All investment securities
and mortgage-backed securities are classified as held-to-maturity at September
30, 2000 and 1999. Premiums and discounts on investment securities and
mortgage-backed securities are amortized or accreted using the level-yield
method. Realized gains and losses are determined using the specific
identification method.
Net unrealized holding gains, net of the related income tax effect, amounted to
$10,000 as of September 30, 1999 and resulted from the transfer of investment
securities and mortgage-backed securities previously classified as
available-for-sale to held-to-maturity. Such net gains were reported as a
separate component of stockholders' equity and were being accreted over the
remaining lives of the securities using the level-yield method. Net unrealized
holding gains were fully accreted during the fiscal year ended September 30,
2000.
<PAGE>
TRADING SECURITIES
As part of its mortgage banking activities, the bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $299.9,
$933.6 and $320.9 million during the years ended September 30, 2000, 1999 and
1998. The bank realized net gains of $1.5, $7.2 and $1.0 million on the sales of
trading securities for the years ended September 30, 2000, 1999 and 1998. Gains
and losses on sales of trading securities are determined using the specific
identification method. There were no mortgage-backed securities classified as
trading securities at September 30, 2000 and 1999.
At September 30, 2000 and 1999, the bank held automobile receivables-backed
securities with carrying amounts of $3.4 and $7.0 million, which were classified
as trading securities. These securities were established in conjunction with two
automobile loan securitization transactions and represent subordinate classes of
certificates retained by the bank. There were no changes in unrealized gains or
losses during fiscal 2000. The bank recognized net unrealized holding gains on
these securities of $1.2 million during fiscal 1999. During fiscal 1998, the
bank recognized net unrealized holding losses on these securities of $1.3
million. See Note 17.
LOAN ORIGINATION AND COMMITMENT FEES
Nonrefundable loan fees, such as origination and commitment fees, and
incremental loan origination costs relating to loans originated or purchased are
deferred. Net deferred fees (costs) related to loans held for investment are
amortized over the life of the loan using the level-yield or straight-line
method. Net fees (costs) related to loans held for sale are deferred until such
time as the loan is sold, at which time the net deferred fees (costs) become a
component of the gain or loss on sale.
CREDIT CARD FEES AND COSTS
Prior to the sale of the credit card portfolio on September 30, 1998, credit
card membership fees were deferred and recognized as income on a straight-line
basis over the period the fee entitled the cardholder to use the card, which was
one year. Credit card origination costs were deferred and recognized as a
reduction of income on a straight-line basis over the privilege period which was
generally one year. See Note 9.
<PAGE>
IMPAIRED LOANS
A loan is considered impaired when, based on all current information and events,
it is probable that the bank will be unable to collect all amounts due according
to the contractual terms of the agreement, including all scheduled principal and
interest payments. Loans reviewed by the bank for impairment include real estate
and commercial loans and loans modified in a troubled debt restructuring. Large
groups of smaller-balance homogeneous loans that have not been modified in a
troubled debt restructuring are collectively evaluated for impairment, which for
the bank include residential mortgage loans and consumer loans. Impaired loans
are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or, as a practical expedient,
impairment may be measured based on the loan's observable market price, or, if
the loan is collateral-dependent, the fair value of the collateral. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. Loans for which
foreclosure is probable continue to be accounted for as loans. Prior to the sale
of the credit card portfolio on September 30, 1998, certain credit card loans
for which customers had agreed to modified payment terms were also classified as
impaired loans. See Note 9.
Each impaired real estate or commercial loan is evaluated individually to
determine the income recognition policy. Generally, payments received are
applied in accordance with the contractual terms of the note or as a reduction
of principal. Interest income on impaired credit card loans was recognized using
the interest rate of the loan and the accrual method. Interest income continued
to accrue on delinquent credit card loans until such loan was either paid or
charged off.
At September 30, 2000, the bank did not have any impaired loans. The average
recorded investment in impaired commercial and real estate loans for the year
ended September 30, 2000 was $51,000. At September 30, 1999, the bank had three
impaired real estate loans with a book value of $268,000. The average recorded
investment in impaired commercial and real estate loans for the year ended
September 30, 1999 was $65,000. The average recorded investment in impaired
loans, consisting of credit card and real estate loans, for the year ended
September 30, 1998 was $113.2 million. The bank did not recognize any interest
income on its impaired loans for the years ended September 30, 2000 and 1999.
The bank recognized interest income of $14.4 million on its impaired loans
(primarily credit card) for the year ended September 30, 1998.
ALLOWANCES FOR LOSSES
Management reviews the loan and lease, real estate held for investment and real
estate held for sale portfolios to establish allowances for estimated losses.
The allowances for losses are reviewed periodically, and allowances are provided
after consideration of the borrower's financial condition and/or the estimated
value of collateral or real estate, including estimated selling and holding
costs. Allowances are also provided by management after considering such factors
as the economy in lending areas, delinquency statistics and past loss
experience.
The allowances for losses are based on estimates and ultimate losses may vary
from current estimates. As adjustments to the allowances become necessary,
provisions for losses are reported in operations in the periods they are
determined to be necessary.
<PAGE>
ACCRUED INTEREST RECEIVABLE ON LOANS
Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management, the full collection of principal or interest has
become unlikely. Uncollectible accrued interest receivable on non-accrual loans
is charged against current period interest income.
REAL ESTATE HELD FOR INVESTMENT OR SALE
Real Estate Held for Investment
At September 30, 2000 and 1999, real estate held for investment consists of
developed land owned by one of the bank's subsidiaries. Real estate held for
investment is carried at the lower of cost or net realizable value. See Note 15.
Real Estate Held for Sale
Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value (less estimated
selling costs). Costs relating to the development and improvement of property,
including interest, are capitalized, whereas costs relating to the holding of
property are expensed. Capitalized interest amounted to $3.8, $3.4 and $2.0
million for the years ended September 30, 2000, 1999 and 1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method which allocates the cost of the applicable assets over their estimated
useful lives. Major improvements and alterations to office premises and
leaseholds are capitalized. Leasehold improvements are amortized over the
shorter of the terms of the respective leases (including renewal options that
are expected to be exercised) or 20 years. Maintenance and repairs are charged
to operating expenses as incurred. Capitalized interest amounted to $2,068,000,
$376,000 and $95,000 during the years ended September 30, 2000, 1999 and 1998.
The bank is developing an office building to use as its new corporate
headquarters. The project is expected to be completed summer 2001.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is stated net of accumulated amortization and is being amortized using
the straight-line method generally over a period of 15 years. At September 30,
2000 and 1999, goodwill totaled $22.0 and $23.1 million. On
November 12, 1997, the bank purchased ASB Capital Management Inc. ("ASB"), one
of the largest SEC-registered investment managers headquartered in the
Washington, D.C. metropolitan area, for $27.2 million in cash. In connection
with the purchase, the bank recorded $25.3 million of goodwill. The acquisition
was accounted for using the purchase method and the operating results of ASB
have been included in the Consolidated Statements of Operations since the date
of acquisition.
<PAGE>
During fiscal 1999, the bank purchased approximately $135.1 million of home
equity loans. The premium attributable to the value of the home equity
relationships, amounting to $3.3 and $4.8 million at September 30, 2000 and
1999, is included in goodwill and other intangible assets in the Consolidated
Balance Sheets. The bank did not purchase any home equity loans in fiscal 2000.
This premium is being amortized over the estimated term of the underlying
relationships. Accumulated amortization of goodwill and other intangible assets
was $49.3 and $46.7 million at September 30, 2000 and 1999.
SERVICING ASSETS
Servicing assets, which are stated net of accumulated amortization, are
amortized in proportion to the remaining net servicing revenues estimated to be
generated by the underlying loans. Amortization of these assets amounted to
$10.9, $12.3 and $10.8 million for the years ended September 30, 2000, 1999 and
1998. Accumulated amortization was $91.0 and $80.0 million at September 30, 2000
and 1999. During fiscal 2000, 1999 and 1998, the bank recorded $49.4, $14.8 and
$8.6 million, of servicing assets.
The bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets at
September 30, 2000 and 1999 was $78.0 and $30.3 million.
Activity in the valuation allowance for servicing assets is summarized as
follows.
Year Ended September 30,
-----------------------------------------------
(In thousands) 2000 1999 1998
------------------------------ --------------- --------------- ---------------
Balance at beginning of year $ 9,724 $ 13,498 $ 1,129
Additions charged/(reductions)
credited to loan expenses (6,133) (3,774) 12,369
--------------- --------------- ---------------
Balance at end of year $ 3,591 $ 9,724 $ 13,498
=============== =============== ===============
There were no sales of rights to service mortgage loans during fiscal 2000, 1999
and 1998. Servicing fees are included in servicing and securitization income in
the Consolidated Statements of Operations.
<PAGE>
INTEREST-ONLY STRIPS
Interest-only strips capitalized in the year ended September 30, 2000 amounted
to $13.8 million and were related to the securitization and sale of automobile
receivables. Interest-only strips capitalized in the year ended September 30,
1999 amounted to $2.7 million and were primarily related to the sale of new home
equity receivables to existing trusts. Interest-only strips capitalized in the
year ended September 30, 1998 amounted to $124.0 million and were related to the
securitization and sale of credit card, home equity, automobile and home loan
receivables. See Note 17.
Interest-only strips are amortized using the effective yield method over the
estimated lives of the underlying loans. Amortization amounted to $7.3, $8.7 and
$99.0 million for the years ended September 30, 2000, 1999 and 1998,
and is included in servicing and securitization income in the Consolidated
Statements of Operations. The bank uses certain assumptions to calculate
amortization of the interest-only strips, mainly estimates of prepayment speeds,
credit losses and interest rates. To the extent actual results differ from the
assumptions, amortization is adjusted accordingly.
The bank accounts for its interest-only strips as trading securities and,
accordingly, carries them at fair value. The bank estimates the fair value of
the interest-only strips on a discounted cashflow basis using appropriate
discount and prepayment rates. The fair value adjustments for interest-only
strips are included in servicing and securitization income. The fair value
adjustment amounted to a net gain of $2.6 million in fiscal 2000. There were no
fair value adjustments during fiscal year 1999. Fair value adjustments amounted
to a net loss of $42.9 million in fiscal 1998. Certain assumptions inherent in
the determination of the amortization and fair value of interest-only strips are
influenced by factors outside the bank's control, and actual performance could
materially differ from such assumptions.
DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the bank uses various strategies to minimize interest-rate
risk, including interest-rate cap agreements and forward sale or purchase
commitments. Premiums paid for interest-rate cap agreements are included in
other assets in the Consolidated Balance Sheets and are amortized to expense
over the terms of the interest-rate caps on a straight-line basis. Funds payable
to the bank are recognized as income in the month such funds are earned. There
were no unamortized premiums at September 30, 2000 and 1999. Gains and losses on
forward sale or purchase commitments are deferred and recorded as a component of
the gain on sales of loans at the time the forward sale or purchase commitment
matures. See Note 29. The bank does not hold any derivative financial
instruments for trading purposes.
<PAGE>
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133" ("SFAS 138"). This statement addresses a
limited number of issues causing implementation difficulties for numerous
entities required to apply SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 and SFAS 138 establish accounting
and reporting standards for derivative instruments and hedging activities. They
require that an entity recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. Changes in the
fair value of those instruments will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of the derivative and the effect on the
consolidated financial statements will depend on its hedge designation and
whether the hedge is highly effective in achieving offsetting changes in the
fair value of cash flows of the asset or liability hedged. Effective October 1,
2000, the bank adopted SFAS 133. The bank believes that the adoption of these
statements will not have a material impact on the bank's financial position or
results of operations in future periods. On October 1, 2000, the bank booked an
after tax loss of $476,000 to other comprehensive income representing its
transition adjustment from the adoption of SFAS 133 and 138.
SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 140") was issued in September 2000 and
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS 140 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Under SFAS 140, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS 140 is effective for transfers after March 31, 2001, and is effective for
disclosures about securitizations and collateral and for recognition and
reclassification of collateral for fiscal years ending after December 15, 2000.
The impact on the bank's financial condition and results of operations has not
yet been determined.
<PAGE>
1. LIQUIDITY AND CAPITAL RESOURCES - REAL ESTATE TRUST
The Real Estate Trust's primary cash requirements include operating expenses,
debt service, debt principal repayment and capital expenditures. During fiscal
2000, 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 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 dividends and
tax sharing payments from the bank.
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 2001 and subsequent years, will depend in significant
part on its receipt of dividends from the bank. The availability and amount of
dividends in future periods is dependent upon, among other things, the bank's
operating performance and income, and regulatory restrictions on such payments.
The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods, as well as the bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive dividends from the
bank. During fiscal 2000, 1999 and 1998, the bank made tax sharing payments
totaling $6.6, $6.6 and $5.6 million to the Real Estate Trust. During fiscal
2000, 1999 and 1998, the bank made dividend payments totaling $12.8, $26.4 and
$5.2 million to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. The Trust's consolidation of the bank's
operations into the Trust's federal income tax return has resulted in the use of
the Trust's net operating losses to reduce the federal income taxes the bank
would otherwise have owed. If in any future year, the bank has taxable losses or
unused credits, the Trust would be obligated to reimburse the bank for the
greater of (i) the tax benefit to the group using such tax losses or unused tax
credits in the group's consolidated federal income tax returns or (ii) the
amount of the refund which the bank would otherwise have been able to claim if
it were not being included in the consolidated federal income tax return of the
group.
<PAGE>
2. SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST
In fiscal 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The Real
Estate Trust transferred its 22 shopping centers and one of its office
properties together with the debt associated with such properties to a newly
formed partnership, Saul Holdings Limited Partnership ("Saul Holdings"), in
which as of September 30, 2000, the Real Estate Trust owns (directly or through
one of its wholly owned subsidiaries) a 22.1% interest, other entities
affiliated with the Real Estate Trust own a 5.2% interest, and Saul Centers owns
a 72.6% interest. Certain officers and trustees of the Trust are also officers
and/or directors of Saul Centers.
In connection with the transfer of its properties to Saul Holdings, the Real
Estate Trust was relieved of approximately $196 million in mortgage debt and
deferred interest. Pursuant to a reimbursement agreement among the partners of
Saul Holdings and its subsidiary limited partnerships (collectively, the
"Partnerships"), the Real Estate Trust and its subsidiaries that are partners in
the Partnerships have agreed to reimburse Saul Centers and the other partners in
the event the Partnerships fail to make payments with respect to certain
portions of the Partnerships' debt obligations and Saul Centers or any such
other partners personally make payments with respect to such debt obligations.
At September 30, 2000, the maximum potential obligations of the Real Estate
Trust and its subsidiaries under this agreement totaled approximately $115.5
million.
The fair market value of each of the properties contributed to the Partnerships
by the Real Estate Trust at the date of transfer (the FMV of each such property)
exceeded the tax basis of such property (with respect to each property, such
excess is referred to as the FMV-Tax Difference). In the event Saul Centers, as
general partner of the Partnerships, causes the Partnerships to dispose of one
or more of such properties, a disproportionately large share of the total gain
for federal income tax purposes would be allocated to the Real Estate Trust or
its subsidiaries. In general, if the gain recognized by the Partnerships on a
property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of
depreciation deductions to the partners), a gain equal to the FMV-Tax Difference
(as adjusted) will be allocated to the Real Estate Trust. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all the
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of gain allocated to the Real Estate Trust in the event of
such a property disposition is likely to exceed, perhaps substantially, the
amount of cash, if any, distributable to the Real Estate Trust as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, or any release of the guarantees of such debt by the Real
Estate Trust, could cause the Real Estate Trust to have taxable constructive
distributions without the receipt of any corresponding amounts of cash.
Currently, management does not intend to seek a release of or a reduction in the
guarantees or to convert its limited partner units in Saul Holdings into shares
of Saul Centers common stock.
<PAGE>
At the date of transfer of the Real Estate Trust properties to Saul Holdings,
liabilities exceeded assets transferred by approximately $104.3 million on an
historical cost basis. The assets and liabilities were recorded by Saul Holdings
and Saul Centers at their historical cost rather than market value because of
affiliated ownership and common management and because the assets and
liabilities were the subject of the business combination between Saul Centers
and Saul Holdings, newly formed entities with no prior operations.
Immediately subsequent to the business combination and initial public offering
of common stock by Saul Centers, Saul Centers had total owners' equity of
approximately $16.4 million of which approximately $3.5 million related to the
Real Estate Trust's original 21.5% ownership interest. Recognition by the Real
Estate Trust of the change in its investment in the properties of approximately
$107.8 million has been deferred due to the Real Estate Trust's guarantee of
$115.5 million under the Saul Centers reimbursement agreement. The deferred gain
of $107.8 million is included in "Deferred gains - real estate" in the financial
statements. The gain will be recognized in future periods to the extent the Real
Estate Trust's obligations are terminated under the reimbursement agreement.
The management of Saul Centers has adopted a strategy of maintaining a ratio of
total debt to total asset value, as estimated by management, of fifty percent or
less. The management of Saul Centers has concluded at September 30, 2000, that
the total debt of Saul Centers remains below fifty percent of total asset value.
As a result, the management of the Real Estate Trust has concluded that fundings
under the reimbursement agreement are remote.
In addition to the deferred gains, as of September 30, 2000, the Real Estate
Trust's investment in the consolidated entities of Saul Centers, which is
accounted for under the equity method, consisted of the following.
(In thousands)
-------------------------------------------------------------------
Saul Holdings:
Acquisition of partnership units $ 9,011
Distributions in excess of allocated net income (13,584)
Saul Centers:
Acquisition of common shares 40,999
Distributions in excess of allocated net income (8,909)
-------------
Total $ 27,517
=============
The $27.5 million balance is included in "Other assets" in the financial
statements.
As of September 30, 2000, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of common shares of Saul Centers,
effectively owns 35.1% of the consolidated entities of Saul Centers. Some of
these shares and/or units have been deposited as collateral for the Trust's
revolving lines of credit. See Note 4.
The unaudited Condensed Consolidated Balance Sheet as of September 30, 2000 and
1999, and the unaudited Condensed Consolidated Statements of Operations for the
twelve-month periods ended September 30, 2000, 1999 and 1998 of Saul Centers
follow.
<PAGE>
Saul Centers, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30,
-----------------------------
(In thousands) 2000 1999
----------------------------------------------- -------------- --------------
Assets
Real estate investments $ 384,923 $ 355,465
Accumulated depreciation (120,660) (109,838)
Other assets 61,418 45,632
-------------- --------------
Total assets $ 325,681 $ 291,259
============== ==============
Liabilities and stockholders' deficit
Notes payable $ 335,995 $ 302,511
Other liabilities 21,016 21,353
-------------- --------------
Total liabilities 357,011 323,864
Total stockholders' deficit (31,330) (32,605)
-------------- --------------
Total liabilities and stockholders' deficit $ 325,681 $ 291,259
============== ==============
<PAGE>
Saul Centers, Inc.
Condensed Consolidated Statements of Operations
(Unaudited) For the Twelve Months
Ended September 30
-----------------------------
(In thousands) 2000 1999 1998
----------------------------------------------- -------- --------- ---------
Revenue
Base rent $62,763 $57,789 $54,724
Other revenue 14,754 14,704 15,145
-------- --------- ---------
Total revenue 77,517 72,493 69,869
-------- --------- ---------
Expenses
Operating expenses 14,741 14,363 14,423
Interest expense 23,529 22,389 22,669
Amortization of deferred debt expense 434 416 416
Depreciation and amortization 12,817 12,883 11,299
General and administrative 3,871 3,551 3,492
-------- --------- ---------
Total expenses 55,392 53,602 52,299
-------- --------- ---------
Operating income 22,125 18,891 17,570
Non-operating items
Gain on sale of property 553 -- --
Sales of interest rate protection
agreements -- -- (4,392)
-------- --------- ---------
Net income before extraordinary item,
cumulative effect of change in
accounting method and minority
interest 22,678 18,891 13,178
Cumulative effect of change in
accounting method -- -- (771)
Extraordinary item - loss on early
extinguishment of debt -- -- (2,878)
-------- --------- ---------
Net income before minority interest 22,678 18,891 9,529
Minority interest (8,068) (7,779) (7,080)
-------- --------- ---------
Net income $14,610 $11,112 $ 2,449
======== ========= =========
<PAGE>
3. INVESTMENT PROPERTIES - REAL ESTATE TRUST
The following table summarizes the cost basis of income-producing properties and
land parcels together with their related debt.
(Dollars in Buildings and Related
thousands) No. Land Improvements Total Debt
---------------------- ------ --------- --------------- ---------- ----------
September 30, 2000
Income-producing
properties:
Hotels 16 $17,068 $192,793 $209,861 $144,012
Office & industrial 10 7,883 140,698 148,581 137,153
Other 5 3,075 916 3,991 1,790
------ --------- --------------- ---------- ----------
31 $28,026 $334,407 $362,433 $282,955
====== ========= =============== ========== ==========
Land Parcels 9 $39,716 $ -- $ 39,716 $ 206
====== ========= =============== ========== ==========
September 30, 1999
Income-producing
properties:
Hotels 15 $16,635 $180,440 $197,075 $126,820
Office & industrial 7 4,555 106,628 111,183 74,447
Other 5 3,075 848 3,923 4,790
------ --------- --------------- ---------- ----------
27 $24,265 $287,916 $312,181 $206,057
====== ========= =============== ========== ==========
Land Parcels 10 $39,448 $ -- $ 39,448 $ 312
====== ========= =============== ========== ==========
4. DEBT - REAL ESTATE TRUST
Mortgage notes payable are secured by various income-producing properties and
land parcels. Almost all mortgage notes are payable in monthly installments,
have maturity dates ranging to 2012 and accrue interest at annual rates from
7.6% to 10.0%. Certain mortgages contain a number of restrictions, including
cross default provisions.
Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization, but are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates were
10.1% at September 30, 2000 and 1999. During fiscal 2000 and 1999, the Real
Estate Trust sold notes amounting to approximately $10.2 and $11.9 million.
<PAGE>
In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of the 1998 Notes. After providing for the retirement of $175.0 million
aggregate principal amount of 11 5/8% Senior Secured Notes issued in 1994,
including a prepayment premium of $10.0 million and debt issuance costs of
approximately $5.9 million, the Real Estate Trust realized approximately $9.1
million in net proceeds. In addition, the Real Estate Trust received about $13.2
million in cash which had been held as additional collateral by the indenture
agent under the 1994 Notes. The 1998 Notes are secured by a first priority
perfected security interest in 8,000 shares (80%) of the issued and outstanding
common stock of the bank, which constitute all of the bank common stock held by
the Real Estate Trust. The 1998 Notes are nonrecourse obligations of the Real
Estate Trust.
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 for this line 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 September 30, 2000, the Real Estate Trust had no
outstanding borrowings under the facility and unrestricted availability was
$31.8 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, 1998 and 2000, the line of
credit was increased to $10.0, $20.0 and $25.0 million. The current maturity
date for this line is July 31, 2002. Interest is computed by reference to a
floating rate index. At September 30, 2000, the Real Estate Trust had no
outstanding borrowings and unrestricted availability was $19.1 million.
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 net proceeds from the financing.
In June 2000, the Real Estate Trust completed the refinancing of one office
property. The new loan was for $6.6 million at a fixed rate of 8.47% and
replaces 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.
In August 2000, the Real Estate Trust completed an additional $25.0 million
financing with a lender on four hotel and two office properties, resulting in an
outstanding balance of $116.6 million on the combined loans. The blended
interest rate on these loans is 8.12% and the maturity is March 2006.
<PAGE>
Also in August 2000, the Real Estate Trust completed the refinancing of one
hotel property. The new loan was for $4.9 million at a fixed rate of 8.79% and
replaces a floating-rate construction loan with an outstanding balance of $5.7
million. The new loan has a 10-year term and requires amortization based on a
20-year schedule.
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 2000 for the fiscal years commencing October 1, 2000 is set forth in the
following table.
Debt Maturity Schedule
(In thousands)
--------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable -- Payable --
Year Notes Secured Unsecured Total
------------- --------- ----------- ----------- --------------
2001 $ 29,507 $ -- $ 6,046 $ 35,553
2002 26,314 -- 7,872 34,186
2003 20,044 -- 11,551 31,595
2004 8,435 -- 9,646 18,081
2005 10,076 -- 7,755 17,831
Thereafter 212,838 200,000 4,593 417,431
--------- ----------- ----------- --------------
Total $307,214 $200,000 $ 47,463 $ 554,677
--------------------------------------------------------------
Of the $307.2 million of mortgage notes outstanding at September 30, 2000,
$268.1 million was nonrecourse to the Real Estate Trust.
5. LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST
The Real Estate Trust has no minimum future rental commitments and no long term
leases.
6. INCOME FROM COMMERCIAL PROPERTIES - REAL ESTATE TRUST
Income from commercial properties consists of minimum rent arising from
noncancelable commercial leases. Minimum rent for fiscal years 2000, 1999, and
1998 amounted to $32.1, $23.2 and $21.5 million. Future minimum
rentals as of September 30, 2000 under noncancelable leases are as follows:
Fiscal Year (In thousands)
------------------------------------------------------------
2001 $ 32,498
2002 27,714
2003 24,376
2004 19,756
2005 15,773
Thereafter 50,895
-----------
Total $171,012
------------------------------------------------------------
<PAGE>
7. TRANSACTIONS WITH RELATED PARTIES - REAL ESTATE TRUST
TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES
The Real Estate Trust is managed by B. F. Saul Advisory Company (the "Advisor"),
a wholly-owned subsidiary of B. F. Saul Company ("Saul Co."). All of the Real
Estate Trust officers and four Trustees of the Trust are also officers and/or
directors of Saul Co. The Advisor is paid a fixed monthly fee which is subject
to annual review by the Trustees. The monthly fee was $349,000 during fiscal
2000, $337,000 during fiscal 1999, and $317,000 during fiscal 1998. The advisory
contract has been extended until September 30, 2001, and will continue
thereafter unless canceled by either party at the end of any contract year.
Certain loan agreements prohibit termination of this contract.
Saul Co. and Franklin Property Company ("Franklin"), a wholly-owned subsidiary
of Saul Co., provide services to the Real Estate Trust through commercial
property management and leasing, hotel management, development and construction
management, and acquisitions, sales and financings of real property. Fees paid
to Saul Co. and Franklin amounted to $7.2, $5.7 and $5.2 million in fiscal 2000,
1999 and 1998.
The Real Estate Trust reimburses the Advisor and Franklin for costs and expenses
incurred on behalf of the Real Estate Trust, in-house legal expenses, and for
all travel expenses incurred in connection with the affairs of the Real Estate
Trust.
The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of the unsecured notes as they are issued to offset its costs of administering
the program. These payments amounted to $102,000, $120,000 and $113,000 in
fiscal 2000, 1999 and 1998.
A subsidiary of Saul Co. is a general insurance agency which receives
commissions and countersignature fees in connection with the Real Estate Trust's
insurance program. Such commissions and fees amounted to approximately $200,000,
$167,000 and $157,000 in fiscal 2000, 1999 and 1998.
As of October 1, 1998, the Real Estate Trust had unsecured loans outstanding to
the Saul Co. totalling $15.3 million. During fiscal 2000 and 1999, curtails of
$3.75 and $1.5 million were paid by the Saul Co. Interest on the loans is
computed by reference to a floating rate index. At September 30, 2000, the total
due the Real Estate Trust was $10.0 million in principal and $1.75 million in
deferred interest. Interest accrued on these loans amounted to $1.1, $1.1 and
$1.3 million during fiscal 2000, 1999 and 1998.
REMUNERATION OF TRUSTEES AND OFFICERS
For fiscal years 2000, 1999, and 1998, the Real Estate Trust paid the Trustees
approximately $94,000 each year for their services. No compensation was paid to
the officers of the Real Estate Trust for acting as such; however, one Trustee
was paid by the bank for his services as Chairman and Chief Executive Officer of
the bank, and four received payments for their services as directors of the
bank. Four of the Trustees and all of the officers of the Real Estate Trust
receive compensation from Saul Co. as directors and/or officers.
<PAGE>
LEGAL SERVICES
The law firm in which one of the Trustees is a senior counsel received $976,000,
$530,000 and $792,000 during fiscal 2000, 1999, and 1998 for legal services to
the Real Estate Trust and its wholly-owned subsidiaries.
SAUL HOLDINGS LIMITED PARTNERSHIP
The Real Estate Trust accounts for this investment under the equity method. The
Real Estate Trust's share of earnings for fiscal 2000, 1999 and 1998 was $5.1,
$4.2 and $2.0 million. See Note 2.
OTHER TRANSACTIONS
The Real Estate Trust leases space to the bank and Franklin at two of its
income-producing properties. Minimum rents and expense recoveries paid by these
affiliates amounted to approximately $2.7, $0.3 and $0.3 million in fiscal
2000, 1999 and 1998.
8. SUBSEQUENT EVENT - REAL ESTATE TRUST
On November 15, 2000, the Real Estate Trust purchased a 19.1 acre land parcel in
Laurel, Maryland, which contained a 105,000 square foot office/warehouse
building. The purchase price was $12.3 million and was financed from the Real
Estate Trust's bank lines. The entire building has been leased to Chevy Chase
under a long-term agreement.
9. DISPOSITION OF ASSETS - THE BANK
Pursuant to the terms of a purchase agreement, dated as of September 2, 1998 and
as amended on September 30, 1998, by and between the bank and CCB Holding
Corporation (formerly a wholly-owned subsidiary of the bank) ("CCBH"), and First
USA Bank, NA, ("FUSA"), the bank and CCBH sold their credit card portfolio and
the bank sold its credit card operations to FUSA. This transaction was
consummated on September 30, 1998. The credit card portfolio purchased by FUSA
included approximately $4.8 billion of managed credit card loans and 3.1 million
Visa and MasterCard credit card accounts. The bank recognized a net gain on this
sale of $3.5 and $288.3 million during the years ended September 30, 1999 and
1998, which is included in gain on sale of loans, net in the Consolidated
Statements of Operations.
All significant assets and liabilities used in or related directly to the credit
card business, including those associated with credit card securitization
activities, were sold to or assumed by FUSA, with the exception of the bank's
operations center which housed the majority of credit card operations (other
than origination activities). Concurrently with the transaction, the bank and
FUSA entered into a lease agreement for that facility.
<PAGE>
10. LOANS HELD FOR SALE - THE BANK
Loans held for sale are composed of the following:
September 30,
------------------------------------------------
(In thousands) 2000 1999
--------------------------- ---------------------- ----------------------
Single-family residential $ 116,480 $ 112,434
Home improvement and
related loans 9,628 4,363
---------------------- ----------------------
Total $ 126,108 $ 116,797
====================== ======================
11. LOANS HELD FOR SECURITIZATION AND SALE - THE BANK
At September 30, 2000, loans held for securitization and sale totaled $70.0
million and were composed of automobile loans. At September 30, 1999 there were
no loans held for securitization and sale.
12. INVESTMENT SECURITIES - THE BANK
At September 30, 2000 and 1999, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the bank's
investment securities at September 30, 2000 and 1999 are as follows:
<TABLE>
Gross Gross
Unrealized Unrealized Aggregate Fair
(In thousands) Amortized Cost Holding Gains Holding Losses Value
------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
September 30, 2000
------------------
U.S. Government securities:
Maturing after one year,
but within five years $ 45,648 $ 84 $ (173) $ 45,559
================= ================= ================= =================
September 30, 1999
------------------
U.S. Government securities:
Maturing within one year,
but within five years $ 44,400 $ 34 $ -- $ 44,434
================= ================= ================= =================
There were no sales of investment securities during the years ended September
30, 2000, 1999 and 1998.
</TABLE>
<PAGE>
13. MORTGAGE-BACKED SECURITIES - THE BANK
At September 30, 2000 and 1999, all mortgage-backed securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the bank's
mortgage-backed securities at September 30, 2000 and 1999 are as follows:
<TABLE>
(In thousands) Gross Unrealized Gross Unrealized
Holding Holding Losses Aggregate
Amortized Cost Gains Fair
Value
---------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
September 30, 2000
FNMA $ 349,258 $ 84 $ (19,171) $ 330,171
FHLMC 170,894 745 (2,007) 169,632
Private label, AAA-rated 522,192 10,657 (11,555) 521,294
Private label, AA-rated 4,465 - (22) 4,443
------------------ ------------------ ------------------ ------------------
Total $ 1,046,809 $ 11,486 $ (32,755) $ 1,025,540
================== ================== ================== ==================
September 30, 1999
FNMA $ 384,069 $ 96 $ (19,417) $ 364,748
FHLMC 236,809 650 (2,209) 235,250
Private label, AAA-rated 680,436 9,951 (15,016) 675,371
Private label, AA-rated 10,056 17 - 10,073
------------------ ------------------ ------------------ ------------------
Total $ 1,311,370 $ 10,714 $ (36,642) $ 1,285,442
================== ================== ================== ==================
</TABLE>
There were no sales of mortgage-backed securities from the held-to-maturity
portfolio during the years ended September 30, 2000, 1999 and 1998. See "Summary
Of Significant Accounting Policies - The bank - Trading Securities."
Accrued interest receivable on mortgage-backed securities totaled $5,569 and
$7,468 at September 30, 2000 and 1999, and is included in other assets in the
Consolidated Balance Sheets.
14. LOANS AND LEASES RECEIVABLE - THE BANK
<PAGE>
Loans receivable is composed of the following:
<TABLE>
September 30,
--------------------------------------
(In thousands) 2000 1999
-------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Single-family residential $ 4,896,439 $ 3,986,212
Home equity 274,355 239,673
Real estate construction and ground 507,461 419,211
Commercial real estate and multifamily 39,917 60,607
Commercial 1,015,146 579,668
Automobile 719,276 717,712
Subprime automobile 620,588 480,533
Automobile leasing 568,091 109,724
Home improvement and related loans 77,345 102,483
Overdraft lines of credit and
other consumer 31,608 31,646
---------------- ---------------
8,750,226 6,727,469
---------------- ---------------
Less:
Undisbursed portion of loans 630,205 379,829
Unearned discounts and net
deferred loan origination costs (39,028) (22,572)
Allowance for losses on loans and leases 54,018 58,139
---------------- ---------------
645,195 415,396
---------------- ---------------
Total $ 8,105,031 $ 6,312,073
================ ===============
</TABLE>
The bank serviced loans owned by others amounting to $6.4 and $4.3 billion at
September 30, 2000 and 1999.
Accrued interest receivable on loans totaled $43.4 and $33.6 million at
September 30, 2000 and 1999, and is included in other assets in the Consolidated
Balance Sheets.
<PAGE>
15. REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK
Real estate held for investment or sale is composed of the following:
<TABLE>
September 30,
---------------------------------
(In thousands) 2000 1999
----------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Real estate held for investment (net of allowance for
losses of $202 for both periods) $ 925 $ 3,617
Real estate held for sale (net of allowance for losses of
$80,752 and $84,405, respectively) 48,461 48,752
-------------- ---------------
Total real estate held for investment or sale $ 49,386 $ 52,369
============== ===============
</TABLE>
Gain (loss) on real estate held for investment or sale is composed of the
following:
<TABLE>
Year Ended September 30,
-----------------------------------------------------
(In thousands) 2000 1999 1998
-------------------------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
Provision for losses $ (1,400) $ -- $ (18,860)
Net gain (loss) from operating properties (260) 1,519 (288)
Net gain on sales 137 32,530 2,609
--------------- -------------- ---------------
Total $ (1,523) $ 34,049 $ (16,539)
=============== ============== ===============
</TABLE>
<PAGE>
16. ALLOWANCE FOR LOSSES - THE BANK
Activity in the allowance for losses on loans and leases receivable is
summarized as follows:
Loans and
Leases
(In thousands) Receivable
------------------------------------------------------ ----------------
Balance, September 30, 1997 $ 105,679
Provision for losses 150,829
Reduction due to sale of credit card portfolio (87,609)
Charge-offs (122,652)
Recoveries 13,910
----------------
Balance, September 30, 1998 60,157
Provision for losses 22,880
Charge-offs (26,774)
Recoveries 1,876
----------------
Balance, September 30, 1999 58,139
Provision for losses 49,930
Charge-offs (58,883)
Recoveries 4,832
----------------
Balance, September 30, 2000 $ 54,018
================
The allowance for losses at September 30, 2000 is based on management's
estimates of the amount of allowance required to reflect the losses incurred in
the loan and lease portfolio based on circumstances and conditions known at the
time. As adjustments to the allowance become necessary, provisions for losses
are reported in operations in the periods they are determined to be necessary.
17. ASSET-BACKED TRANSACTIONS - THE BANK
The bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.
<PAGE>
The bank sold automobile loan receivables and received gross proceeds of $674.8
million during the year ended September 30, 2000 and recognized a gain of $4.6
million. The bank did not sell automobile loan receivables during the year ended
September 30, 1999. The bank sold automobile loan receivables and received gross
proceeds of $534.7 million during the year ended September 30, 1998 and
recognized a gain of $23.1 million. The outstanding trust certificate balances
and the related receivable balances contained in the trusts were $867.0 million
at September 30, 2000, $3.4 million of which represents subordinate classes of
certificates retained by the bank. The outstanding trust certificate balances
and the related receivable balances contained in the trusts were $556.2 million
at September 30, 1999, $7.0 million of which represents a subordinate class of
certificates retained by the bank. These retained certificates were classified
as trading securities at September 30, 2000 and 1999 and had carrying values of
$3.4 and $7.0 million. See "Summary Of Significant Accounting Policies - The
bank." The bank continues to service the underlying loans and is contingently
liable under various credit enhancement facilities related to these
transactions. See Note 29.
The bank sold credit card receivables and received gross proceeds of $1.0
billion during the year ended September 30, 1998. The bank recognized gains of
$83.4 million on credit card securitization transactions during fiscal 1998,
including gains on sales of new receivables into existing trusts. On September
30, 1998, the bank sold its credit card portfolio and related operations,
including its rights to the excess cash flows generated from such credit card
securitizations. See Note 9.
The bank sold amounts on deposit in certain spread accounts associated with
certain outstanding credit card securitizations and received gross proceeds of
$36.0 million during fiscal 1998. A loss of $1.8 million was recognized for the
year ended September 30, 1998 and is included in servicing and securitization
income in the Consolidated Statements of Operations. On September 30, 1998, the
bank sold its credit card portfolio and related operations, including its
obligations associated with such spread account securitizations. See Note 9.
The bank did not sell any home equity credit line receivables into new trusts
during the years ended September 30, 2000 and 1999. The bank sold home equity
credit line receivables of $64.4 and $79.4 million into existing trusts and
recognized gains of $2.3 and $2.9 million during the years ended September 30,
2000 and 1999. The bank sold home equity credit line receivables and received
gross proceeds of $181.4 million during the year ended September 30, 1998, and
recognized a gain of $13.8 million. The outstanding trust certificate balances
and the related receivable balances contained in the trusts were $146.7 million
at September 30, 2000 and $193.1 million at September 30, 1999. The bank
continues to service the underlying loans and is contingently liable under
various credit enhancement facilities related to these transactions. See Note
29.
<PAGE>
The bank did not sell any home loan and home equity receivables during the years
ended September 30, 2000 and 1999. During the year ended September 30, 1998, the
bank sold home loan and home equity receivables in asset-backed transactions to
investors. The bank received gross proceeds on the sale of $163.3 million and
recognized a gain of $8.8 million. During the year ended September 30, 1999, the
bank purchased, at auction, the remaining home loan and home equity receivables
sold during the year ended September 30, 1998, and placed these receivables back
in the bank's loan portfolio. See Note 29.
The bank did not sell any home loan receivables into new trusts during the years
ended September 30, 2000 and 1999. The bank sold home loan receivables of $1.9
million into an existing trust during the year ended September 30, 2000 and
recognized a gain of $27,000. The bank sold home loan receivables of $1.8
million into an existing trust during the year ended September 30, 1999 and did
not recognize a gain on that transaction. The bank sold home loan receivables
and received gross proceeds of $4.0 million for a gain of $386,000 for the year
ended September 30, 1998. The outstanding trust certificate balances and the
related receivable balances contained in the trusts were $82.1 million at
September 30, 2000 and $111.2 million at September 30, 1999. The bank continues
to service the underlying loans and is contingently liable under credit
enhancement facilities related to these transactions. See Note 29.
18. PROPERTY AND EQUIPMENT - THE BANK
Property and equipment is composed of the following:
<TABLE>
Estimated September 30,
Useful -----------------------------------------
(Dollars in thousands) Lives 2000 1999
----------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Land - $ 46,813 $ 52,391
Construction in progress - 97,569 22,029
Buildings and improvements 10-45 years 117,220 138,275
Leasehold improvements 5-20 years 103,925 98,900
Furniture and equipment 5-10 years 188,918 173,069
Automobiles 3-5 years 4,000 2,557
----------------- ----------------
558,445 487,221
Less:
Accumulated depreciation and amortization 195,976 182,688
----------------- ----------------
Total $ 362,469 $ 304,533
================= ================
</TABLE>
Depreciation and amortization expense amounted to $32.4, $33.4 and $34.0 million
for the years ended September 30, 2000, 1999 and 1998. Capitalized interest
amounted to $2,068,000, $376,000 and $95,000 during the years ended September
30, 2000, 1999 and 1998. The bank is developing an office building to use as its
new corporate headquarters. The project is expected to be completed summer 2001.
<PAGE>
19. LEASES - THE BANK
The bank has noncancelable, long-term leases for office premises and retail
space which have a variety of terms expiring from fiscal 2001 to 2020 and ground
leases which have terms expiring from fiscal 2029 to 2080. These leases are
accounted for as operating leases. Some of the leases are subject to rent
adjustments in the future based upon changes in the Consumer Price Index and
some also contain renewal options. The following is a schedule by years of
future minimum lease payments required at September 30, 2000:
Year Ending
September 30, (In thousands)
----------------------- -----------------
2001 $ 21,396
2002 19,884
2003 17,990
2004 16,700
2005 15,724
Thereafter 84,789
-----------------
Total $ 176,483
=================
Rent expense totaled $23.2, $17.9 and $16.6 million for the years ended
September 30, 2000, 1999 and 1998.
20. DEPOSIT ACCOUNTS - THE BANK
An analysis of deposit accounts and the related weighted average effective
interest rates at year-end are as follows:
<TABLE>
September 30,
-------------------------------------------------------------------------
(Dollars in thousands) 2000 1999
----------------------------------------------------------------------------------------- ------------------------------------
Weighted Weighted Average
Average Rate
Amount Rate Amount
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Demand accounts $ 559,320 - $ 432,114 -
NOW accounts 1,289,883 0.88% 1,174,055 0.89%
Money market deposit accounts 1,156,829 3.98% 1,125,405 3.38%
Statement savings accounts 779,344 1.90% 888,212 1.92%
Other deposit accounts 113,245 1.66% 108,749 1.70%
Certificate accounts, less than $100 2,524,769 6.21% 1,558,281 4.99%
Certificate accounts, $100 or more 614,399 6.30% 476,670 5.13%
----------------- ----------------
Total $ 7,037,789 3.83% $ 5,763,486 2.94%
================= ================
</TABLE>
The bank's deposits are insured by the FDIC up to $100,000 for each insured
depositor.
<PAGE>
Interest expense on deposit accounts is composed of the following:
<TABLE>
Year Ended September 30,
-------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------- --------------- --------------- --------------
<S> <C> <C> <C>
NOW accounts $ 10,585 $ 11,598 $ 19,796
Money market deposit accounts 39,351 36,395 38,756
Statement savings accounts 15,684 19,226 28,419
Certificate accounts 154,738 77,084 89,958
Other deposit accounts 1,905 2,042 2,389
--------------- --------------- --------------
Total $ 222,263 $ 146,345 $ 179,318
=============== =============== ==============
</TABLE>
Outstanding certificate accounts at September 30, 2000 mature in the years
indicated as follows:
Year Ending
September 30, (In thousands)
----------------------- ------------------
2001 $2,388,385
2002 582,576
2003 124,716
2004 11,079
2005 32,412
------------------
Total $3,139,168
==================
<PAGE>
At September 30, 2000, certificate accounts of $100,000 or more have contractual
maturities as indicated below:
(In thousands)
-----------------
Three months or less $ 324,679
Over three months through six months 109,673
Over six months through 12 months 128,826
Over 12 months 51,221
-----------------
Total $ 614,399
=================
21. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
SHORT-TERM BORROWINGS - THE BANK
Short-term borrowings are summarized as follows:
<TABLE>
September 30,
------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
--------------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Securities sold under repurchase agreements:
Balance at year-end $ 369,628 $ 526,571 $ 387,305
Average amount outstanding during the year 490,333 371,660 302,564
Maximum amount outstanding at any month-end 647,779 526,571 806,393
Amount maturing within 30 days 369,628 526,571 387,305
Weighted average interest rate during the year 6.27% 5.22% 5.68%
Weighted average interest rate on year-end balances 6.74% 5.78% 5.63%
Other short-term borrowings:
Balance at year-end $ 170,414 $ 104,200 $ 104,449
Average amount outstanding during the year 137,607 99,593 72,826
Maximum amount outstanding at any month-end 170,414 134,313 107,845
Amount maturing within 30 days 170,414 104,200 104,449
Weighted average interest rate during the year 5.42% 4.46% 5.08%
Weighted average interest rate on year-end balances 5.87% 4.62% 5.19%
</TABLE>
The investment and mortgage-backed securities underlying the repurchase
agreements were delivered to the dealers who arranged the transactions. The
dealers may have loaned such securities to other parties in the normal course of
their operations and agreed to resell to the bank the identical securities at
the maturities of the agreements.
At September 30, 2000, the bank had pledged mortgage-backed securities with a
book value of $197.8 million to secure certain other short-term borrowings.
<PAGE>
22. FEDERAL HOME LOAN BANK ADVANCES - THE BANK
At September 30, 2000, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $1.9 billion. The advances bear interest at a weighted average
interest rate of 5.77%, which is fixed for the term of the advances, and mature
over varying periods between October 2000 and February 2014.
Under a Specific Collateral Agreement with the FHLB, advances are secured by the
bank's FHLB stock, qualifying first mortgage loans with a total principal
balance of $3.1 billion and certain mortgage-backed securities with a book value
of $123.1 million. The FHLB requires that members maintain qualifying collateral
at least equal to 100% of the member's outstanding advances at all times. The
collateral held by the FHLB in excess of the September 30, 2000 advances is
available to secure additional advances from the FHLB, subject to its
collateralization guidelines.
23. CAPITAL NOTES - SUBORDINATED - THE BANK
Capital notes, which are subordinated to the interest of deposit account holders
and other senior debt, are composed of the following:
<TABLE>
Issue September 30, Interest
-------------------------------
(Dollars in thousands) Date 2000 1999 Rate
------------------------------------------ ----------------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Subordinated debentures due 2005 November 23, 1993 $150,000 $150,000 9 1/4%
Subordinated debentures due 2008 December 3, 1996 100,000 100,000 9 1/4%
------------- -------------
Total $250,000 $250,000
============= =============
</TABLE>
The 9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures") are subject
to redemption at any time on or after December 1, 1998, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:
If redeemed during the
12-month period beginning Redemption
December 1, Price
----------------------------- -----------
1999.......................... $ 103.700
2000.......................... $ 102.775
2001.......................... $ 101.850
2002.......................... $ 100.925
2003 and thereafter........... $ 100.000
<PAGE>
The 9 1/4% Subordinated Debentures due 2008 (the "1996 Debentures") are subject
to redemption at any time on or after December 1, 2001, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:
If redeemed during the
12-month period beginning Redemption
December 1, Price
----------------------------- ----------
2001.......................... $ 104.625
2002.......................... $ 103.700
2003.......................... $ 102.775
2004.......................... $ 101.850
2005.......................... $ 100.925
2006 and thereafter........... $ 100.000
The indenture pursuant to which the 1993 Debentures were sold (the "Indenture")
provides that the bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be
continuing and the bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15.0 million, (ii) 66 2/3% of the bank's consolidated net income
(as defined in the Indenture) accrued on a cumulative basis commencing on
October 1, 1993 and (iii) the aggregate net cash proceeds received by the bank
after October 1, 1993 from the sale of qualified capital stock or certain debt
securities, minus the aggregate amount of any restricted payments made by the
bank. Notwithstanding the above restrictions on dividends, provided no event of
default has occurred or is continuing, the Indenture does not restrict the
payment of dividends on the 13% Preferred Stock (as defined below) or any
payment-in-kind preferred stock issued in lieu of cash dividends on the
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 24.
The bank received OTS approval to include the principal amount of the 1996
Debentures and the 1993 Debentures in the bank's supplementary capital for
regulatory capital purposes.
Deferred debt issuance costs, net of accumulated amortization, amounted to $6.9
and $7.9 million at September 30, 2000 and 1999, and are included in other
assets in the Consolidated Balance Sheets.
<PAGE>
24. REAL ESTATE INVESTMENT TRUST SUBSIDIARY - THE BANK
On December 3, 1996, a new real estate investment trust subsidiary of the bank
(the "REIT Subsidiary") sold $150.0 million of its Noncumulative Exchangeable
Preferred Stock, Series A, par value $5.00 per share (the "REIT Preferred
Stock"), and received net cash proceeds of $144.0 million. Cash dividends on the
REIT Preferred Stock are payable quarterly in arrears at an annual rate of
10 3/8%. The liquidation value of each share of REIT Preferred Stock is $50 plus
accrued and unpaid dividends. Except under certain limited circumstances, the
holders of the REIT Preferred Stock have no voting rights. The REIT Preferred
Stock is automatically exchangeable for a new series of Preferred Stock of the
bank upon the occurrence of certain events.
The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at
any time on or after January 15, 2007, in whole or in part, at the following per
share redemption prices plus accrued and unpaid dividends:
If redeemed during the
12-month period beginning Redemption
January 15, Price
----------------------------- ----------
2007.......................... $ 52.594
2008.......................... $ 52.075
2009.......................... $ 51.556
2010.......................... $ 51.038
2011.......................... $ 50.519
2012 and thereafter........... $ 50.000
The bank received OTS approval to include the proceeds from the sale of the REIT
Preferred Stock in the core capital of the bank for regulatory capital purposes
in an amount up to 25% of the bank's core capital. The net cash proceeds from
the sale of the REIT Preferred Stock are reflected as minority interest in the
Consolidated Balance Sheets. Dividends on the REIT Preferred Stock are presented
as a reduction of net income in the Consolidated Statements of Operations.
25. PREFERRED STOCK - THE BANK
Cash dividends on the bank's Noncumulative Perpetual Preferred Stock, Series A
(the "Preferred Stock") are payable quarterly in arrears at an annual rate of
13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the bank.
The OTS has approved the inclusion of the Preferred Stock as core capital and
has approved the payment of dividends on the Preferred Stock, provided certain
conditions are met. The holders of the Preferred Stock have no voting rights,
except in certain limited circumstances.
<PAGE>
Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25 per share, plus accrued and unpaid dividends
for the then-current dividend period in the event of any voluntary liquidation
of the bank, after payment of the deposit accounts and other liabilities of the
bank, and out of the assets available for distribution to shareholders. The
Preferred Stock ranks superior and prior to the issued and outstanding common
stock of the bank with respect to dividend and liquidation rights.
The Preferred Stock is redeemable by the bank at its option at any time on and
after May 1, 2003, in whole or in part, at the following per share redemption
prices in cash, plus, in each case, an amount in cash equal to accrued and
unpaid dividends for the then-current dividend period:
If redeemed during the
12-month period beginning Redemption
May 1, Price
----------------------------- ---------
2003.......................... $ 27.250
2004.......................... $ 27.025
2005.......................... $ 26.800
2006.......................... $ 26.575
2007.......................... $ 26.350
2008.......................... $ 26.125
2009.......................... $ 25.900
2010.......................... $ 25.675
2011.......................... $ 25.450
2012.......................... $ 25.225
2013 and thereafter........... $ 25.000
26. RETIREMENT PLAN - THE BANK
The bank participates in a defined contribution profit sharing retirement plan
(the "Plan") which covers those full-time employees who meet the requirements as
specified in the Plan. The Plan, which can be modified or discontinued at any
time, requires participating employees to contribute 2.0% of their compensation.
Corporate contributions, at the discretionary amount of three times the employee
contribution, were $8.0, $7.2 and $7.3 million for the years ended September 30,
2000, 1999 and 1998. There are no past service costs associated with the Plan
and the bank has no liability under the Plan other than its current
contributions. The Plan owns 4.0% of the bank's common stock.
27. REGULATORY MATTERS - THE BANK
The bank's regulatory capital requirements at September 30, 2000 were a 1.5%
tangible capital requirement, a 4.0% core capital requirement and an 8.0% total
risk-based capital requirement. Under the OTS "prompt corrective action"
regulations, the bank must maintain minimum leverage, tier 1 risk-based and
total risk-based capital ratios of 4.0%, 4.0% and 8.0%, to meet the ratios
established for "adequately capitalized" institutions. At September 30, 2000,
the bank was in compliance with its tangible, core and total risk-based
regulatory capital requirements and exceeded the capital standards established
for "well capitalized" institutions under the "prompt corrective action"
regulations. The information below is based upon the bank's understanding of the
applicable regulations and related interpretations.
<PAGE>
<TABLE>
SEPTEMBER 30, 2000
------------------------------------------------------------------------------------
MINIMUM EXCESS
(Dollars in thousands) ACTUAL CAPITAL REQUIREMENT CAPITAL
----------------------------------------- -------------------------- -------------------------- ------------------------
As a % As a % of As a %
Amount of Assets Amount Assets Amount of Assets
------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $ 492,406
Minority interest in REIT
Subsidiary(1) 144,000
------------
Adjusted capital 636,406
Adjustments for tangible and core capital:
Intangible assets
(50,797)
Non-includable subsidiaries(2) (1,424)
Non-qualifying
purchased/originated loan servicing (188)
------------
Total tangible capital 583,997 5.48% $ 159,840 1.50% $ 424,157 3.98%
------------ ========== ========== ============ ========== ==========
Total core capital(3) 583,997 5.48% $ 426,239 4.00% $ 157,758 1.48%
------------ ========== ========== ============ ========== ==========
Tier 1 risk-based capital(3) 583,997 7.21% $ 324,089 4.00% $ 259,908 3.21%
------------ ========== ========== ============ ========== ==========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and
lease losses 54,018
------------
Total supplementary capital 304,018
------------
Total available capital 888,015
Equity investments(2) (6,463)
------------
Total risk-based capital(3) $ 881,552 11.01% $ 648,178 8.00% $ 233,374 3.01%
============ ========== ========== ============ ========== ==========
(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) Reflects an aggregate offset of $2.0 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.
(3) 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>
At September 30, 1999, the bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "well capitalized" institutions under the "prompt
corrective action" regulations. The information below is based upon the bank's
understanding of the applicable regulations and related interpretations.
<PAGE>
<TABLE>
SEPTEMBER 30, 1999
------------------------------------------------------------------------------------
MINIMUM EXCESS
(Dollars in thousands) 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>
Capital per financial statements $466,679
Minority interest in REIT
Subsidiary(1) 144,000
Net unrealized holding gains(2) (10)
-----------
Adjusted capital 610,669
Adjustments for tangible and core capital:
Intangible assets (56,887)
Non-allowable minority interest in
REIT Subsidiary(1) (8,725)
Non-includable subsidiaries(3) (3,957)
-----------
Total tangible capital 541,100 5.94% $ 136,686 1.50% $ 404,414 4.44%
----------- ========== =========== ========== =========== =========
Total core capital(4) 541,100 5.94% $ 364,497 4.00% $ 176,603 1.94%
----------- ========== =========== ========== =========== =========
Tier 1 risk-based capital(4) 541,100 8.33% $ 260,261 4.00% $ 280,839 4.33%
----------- ========== =========== ========== =========== =========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and
lease losses 51,392
-----------
Total supplementary capital 301,392
-----------
Total available capital 842,492
Equity investments(3) (6,542)
-----------
Total risk-based capital(4) $ 835,950 13.04% $520,522 8.00% $315,428 5.04%
=========== ========== =========== ========== =========== =========
(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 $633,000 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>
At September 30, 2000 and 1999, the bank had $1.6 and $4.2 million, in loans to
and investments in subsidiaries engaged in activities impermissible for national
banks ("non-includable subsidiaries") which were fully deducted from all three
capital requirements. At September 30, 2000 and 1999, the bank also had an
equity investment with a balance, after subsequent valuation allowances, of $8.3
and $7.0 million, which was fully deducted from total risk-based capital.
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. Accordingly, if the bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In August 2000, the
bank received from the OTS an extension of the holding periods for certain of
its REO properties through August 4, 2001. The following table sets forth the
bank's REO at September 30, 2000, after valuation allowances of $80.8 million,
by the fiscal year in which the property was acquired through foreclosure.
Fiscal Year (In thousands)
-------------------------- -------------------------
1990 $ 14,696(1)(2)
1991 23,538(2)
1992 --
1993 --
1994 --
1995 5,041(2)
1996 --
1997 --
1998 --
1999 --
2000 5,186
-------------------------
Total REO $ 48,461
=========================
(1) Includes REO with an aggregate net book value of $6.5 million, which the
bank treats as an equity investment for= regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $36.8 million, for
which the bank received an extension of the holding periods through
August 4, 2001.
<PAGE>
28. TRANSACTIONS WITH RELATED PARTIES - THE BANK
LOANS RECEIVABLE
From time to time, in the normal course of business, the bank may make loans to
executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same terms
as similar loans with unrelated parties. An analysis of activity with respect to
these loans for the year ended September 30, 2000 is as follows:
(In thousands)
---------------------
Balance, September 30, 1999 $ 4,443
Additions 1,359
Reductions (842)
-------------------
Balance, September 30, 2000 $ 4,960
===================
SERVICES
B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the bank. These services include property
management, insurance brokerage and leasing. Fees for these services were
$850,000, $35,000 and $24,000 for the years ended September 30, 2000, 1999 and
1998.
The law firm in which one director of the bank is a senior counsel received
$2.1, $4.7 and $4.6 million for legal services rendered to the bank during the
years ended September 30, 2000, 1999 and 1998.
For the years ended September 30, 2000, 1999 and 1998, one of the directors of
the bank was paid $100,000, $50,000 and $75,000, for consulting services
rendered to the bank. Another director of the bank was paid total fees of
$100,000 for each of the years ended September 30, 2000, 1999 and 1998,
for consulting services. A third director of the bank was paid $50,000, $100,000
and $50,000 for consulting services rendered to the bank for the years ended
September 30, 2000, 1999 and 1998.
TAX SHARING AGREEMENT
The bank and the other companies in the Trust's affiliated group are parties to
a tax sharing agreement dated June 28, 1990 (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides for payments to be made by members of the Trust's
affiliated group to the Trust based on their separate company tax liabilities.
The Tax Sharing Agreement also provides that, to the extent net operating losses
or tax credits of a particular member are used to reduce the overall tax
liability of the Trust's affiliated group, such member will be reimbursed by the
other members of the affiliated group that have taxable income in an amount
equal to such tax reduction. The bank paid $6.6, $6.6 and $5.6 million to the
Trust during fiscal 2000, 1999 and 1998, under the Tax Sharing Agreement. OTS
approval of the tax sharing payments during fiscal 1999 and 1998 was conditioned
on a pledge by the Trust of certain assets to secure certain of its obligations
under the Tax Sharing Agreement. At September 30, 2000 and 1999, the estimated
tax sharing payment payable to the Trust by the bank was $3.5 and $3.6 million.
<PAGE>
OTHER
The bank sold an office building located in McLean, Virginia to its parent
company, the B.F. Saul Real Estate Investment Trust, during December 1999. This
transaction was accounted for as a transfer from the banking segment to the real
estate segment. See Note 1.
The bank paid $5.2, $5.0 and $5.0 million for office space leased from or
managed by companies affiliated with the bank or its directors during the years
ended September 30, 2000, 1999 and 1998.
The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and Van
Ness Square Corporation, affiliates of the bank, from time to time maintain
interest-bearing deposit accounts with the bank. Those accounts totaled $16.8
and $31.0 million at September 30, 2000 and 1999. The bank paid interest on the
accounts amounting to $736,000, $716,000 and $870,000 during fiscal years ended
2000, 1999 and 1998.
29. FINANCIAL INSTRUMENTS - THE BANK
The bank, in the normal course of business, is a party to financial instruments
with off-balance-sheet risk and other derivative financial instruments to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit at both fixed and variable rates, letters of credit,
interest-rate cap agreements and assets sold with limited recourse. All such
financial instruments are held or issued for purposes other than trading.
These instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the Consolidated
Balance Sheets.
The contractual or notional amount of these instruments reflect the extent of
involvement the bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
COMMITMENTS TO EXTEND CREDIT
The bank had approximately $1.4 billion of commitments to extend credit at
September 30, 2000. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments are subject to
the bank's normal underwriting and credit evaluation policies and procedures.
<PAGE>
STANDBY LETTERS OF CREDIT
Standby letters of credit are conditional commitments issued by the bank to
guarantee the performance of a customer to a third party. At September 30, 2000,
the bank had written standby letters of credit in the amount of $50.3 million,
which were issued to guarantee the performance of and irrevocably assure payment
by customers under construction projects.
Of the total, $33.4 million will expire in fiscal 2001 and the remainder will
expire over time through fiscal 2004. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan commitments to customers. Mortgage-backed securities with a book value of
$4.8 million were pledged as collateral for certain of these letters of credit
at September 30, 2000.
RECOURSE ARRANGEMENTS
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 $42.1 and $18.9
million, at September 30, 2000, and $67.0 and $12.3 million, at September 30,
1999, both of which are included in other assets in the Consolidated Balance
Sheets. In addition, the bank owned subordinated automobile receivables-backed
securities with carrying values of $3.4 and $7.0 million at September 30, 2000
and 1999, 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 September 30, 2000, recourse to the bank under these arrangements was
$10.8 million, consisting of restricted cash accounts amounting to $8.3 million
and overcollateralization of receivables of $2.5 million.
The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. The recourse to the bank under
this arrangement was $3,366,000 and $752,000 at September 30, 2000 and 1999.
DERIVATIVE FINANCIAL INSTRUMENTS
Interest-rate cap agreements may be used to limit the bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 2000, the bank was not a party to
any interest-rate cap agreements.
To manage the potentially adverse impact of interest rate movements on its held
for sale fixed-rate mortgage loan pipeline, the bank hedges its pipeline by
entering into whole loan and mortgage-backed security forward sale commitments
and mortgage-backed security forward purchase commitments.
<PAGE>
Forward sale commitments are used to sell specific financial instruments (whole
loans or mortgage-backed securities) at a future date for a specified price.
Forward purchase commitments are used to purchase specific financial instruments
(whole loans or mortgage-backed securities) at a future date for a specified
price.
At September 30, 2000, the bank had mortgage-backed security forward sale
commitments of $144.5 million and mortgage-backed security forward purchase
commitments of $42.0 million related to its hedging activities. In addition, the
bank had whole loan forward sale commitments of $27.4 million at September 30,
2000. Forward commitments generally settle within 90 days. Gains and losses are
deferred and recorded as a component of the gain on sales of loans at the time
the forward commitment matures.
Effective October 1, 2000 the bank adopted SFAS 133 and SFAS 138, which
establish accounting and reporting standards for derivative instruments and
hedging activities. See "Summary Of Significant Accounting Policies - The bank."
CONCENTRATIONS OF CREDIT
The bank's principal real estate lending market is the metropolitan Washington,
D.C. area. In addition, a significant portion of the bank's consumer loan
portfolio was generated by customers residing in the metropolitan Washington,
D.C. area. Service industries and federal, state and local governments employ a
significant portion of the Washington, D.C. area labor force. Adverse changes in
economic conditions could have a direct impact on the timing and amount of
payments by borrowers.
30. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - THE BANK
The majority of the bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting in a
great degree of subjectivity inherent in the indicated fair value amounts.
Because the fair value is estimated as of the balance sheet date, the amount
which will actually be realized or paid upon settlement or maturity could be
significantly different. Comparability among financial institutions may be
difficult due to the wide range of permitted valuation techniques and the
numerous estimates and assumptions which must be made. The estimated fair values
of the bank's financial instruments at September 30, 2000 and 1999 are as
follows:
<PAGE>
<TABLE>
September 30,
--------------------------------------------------------------------------
2000 1999
------------------------------------ -----------------------------------
Carrying Fair Carrying Amount Fair
(In thousands) Amount Value Value
------------------------------------------------- ----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks,
interest-bearing deposits, federal
funds sold and securities purchased
under agreements to resell $ 428,233 $ 428,233 $ 590,146 $ 590,146
Loans held for sale 126,108 126,577 116,797 116,825
Loans held for securitization and sale 70,000 70,000 - -
Trading securities 3,380 3,380 6,955 6,955
Investment securities 45,648 45,559 44,400 44,434
Mortgage-backed securities 1,046,809 1,025,540 1,311,370 1,285,442
Loans and leases receivable, net 8,105,031 7,993,260 6,312,073 6,243,689
Other financial assets 327,211 327,211 325,207 326,257
Financial liabilities:
Deposit accounts with
no stated maturities 3,898,621 3,898,621 3,728,535 3,728,535
Deposit accounts with
stated maturities 3,139,168 3,165,895 2,034,951 2,081,821
Securities sold under repurchase agreements
and other short-term borrowings,
notes payable and Federal Home
Loan bank advances 2,487,320 2,515,858 2,374,332 2,406,806
Capital notes-subordinated 243,102(1) 235,750 242,123(1) 250,000
Other financial liabilities 292,495 292,495 131,939 131,939
---------------------------------------------------------------------------------------------------------------------------
(1) Net of deferred debt issuance costs which are included in other assets in
the Consolidated Balance Sheets.
</TABLE>
The following methods and assumptions were used to estimate the fair value
amounts at September 30, 2000 and 1999:
Cash, due from banks, interest-bearing deposits, federal funds sold and
securities purchased under agreements to resell: Carrying amount approximates
fair value.
Loans held for sale: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.
Loans held for securitization and sale: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.
<PAGE>
Trading securities: Fair value is equal to carrying value.
Investment securities: Fair value is based on quoted market prices.
Mortgage-backed securities: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.
Loans receivable, net: Fair value of certain homogeneous groups of loans (e.g.
single-family residential, automobile loans, home improvement loans and
fixed-rate commercial and multifamily loans) is estimated using discounted cash
flow analyses based on contractual repayment schedules. The discount rates used
in these analyses are based on either the interest rates paid on U.S. Treasury
securities of comparable maturities adjusted for credit risk and non-interest
operating costs, or the interest rates currently offered by the bank for loans
with similar terms to borrowers of similar credit quality. For loans which
reprice frequently at market rates (e.g. home equity, variable-rate commercial
and multifamily, real estate construction and ground loans), the carrying amount
approximates fair value. The fair value of the bank's loan portfolio as
presented above does not include the value of established credit line customer
relationships, or the value relating to estimated cash flows from future
receivables and the associated fees generated from existing customers.
Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips are carried at fair value. The fair value of one of
the bank's investments is based on quoted market prices.
Deposit accounts with no stated maturities: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
bank's established deposit customer relationships.
Deposit accounts with stated maturities: Fair value of fixed-rate certificates
of deposit is estimated based on discounted cash flow analyses using the
remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.
Borrowings: These instruments consist of securities sold under repurchase
agreements and other short-term borrowings, notes payable and Federal Home Loan
bank advances. For borrowings which either reprice frequently to market interest
rates or are short-term in duration, the carrying amount approximates fair
value. Fair value of the remaining amounts borrowed is estimated based on
discounted cash flow analyses using interest rates currently charged by the
lender for comparable borrowings with similar remaining maturities.
Capital notes-subordinated: Fair value of the 1993 Debentures and the 1996
Debentures is based on quoted market prices.
<PAGE>
Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable and other short-term payables
approximates fair value.
Off-balance sheet instruments: The difference between the original fees charged
by the bank for commitments to extend credit and letters of credit and the
current fees charged to enter into similar agreements is immaterial. Fair value
of forward commitments is based on the estimated amount that the bank would pay
to terminate the arrangements at the reporting date, taking into account the
remaining terms of the arrangements and the counterparties' credit standing,
where applicable, which is immaterial.
31. LITIGATION - THE BANK
During the normal course of business, the bank is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the bank is a defendant may be material, the bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the bank.
32. SUBSEQUENT EVENT - THE BANK
Effective November 9, 2000, Consumer Finance Corporation ("CFC"), a wholly owned
subsidiary of the bank engaged in indirect subprime automobile lending ceased to
originate new loans. "Subprime" refers to a category of loans made to applicants
who have experienced certain adverse credit events, but who meet other credit
worthiness tests. CFC continues to own its existing portfolio of loans and, as
such, will continue its servicing and collection efforts.
33. COMMITMENTS AND CONTINGENCIES - THE TRUST
The Trust is involved in a number of lawsuits arising from the normal course of
its business. On the basis of consultations with counsel, management does not
believe that any material loss will result from the resolution of these matters.
<PAGE>
34. MINORITY INTEREST - THE TRUST
At September 30, 2000 and 1999, minority interest held by affiliates of $79.0
and $73.2 million represent the 20% minority interest in the bank's common
shares.
Minority interest -- other consists of the following:
September 30,
--------------------------------------
(In thousands) 2000 1999
---------------------------------------- ---------------- ---------------
Preferred Stock of Chevy Chase's
REIT subsidiary (See Note 24) $ 144,000 $ 144,000
Chevy Chase's Preferred Stock
(See Note 25) 74,307 74,307
---------------- ---------------
Total minority interest -- other $ 218,307 $ 218,307
================ ===============
The proceeds paid by the Real Estate Trust to Chevy Chase for Tysons Park Place
exceeded Chevy Chase's carrying value. The $2.7 million minority interest in
capital contribution shown on the Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity (Deficit) for fiscal 2000 represents
the 20% minority interest in the excess of proceeds over the carrying value, net
of related income taxes. See Note 1.
<PAGE>
35. INCOME TAXES - THE TRUST
The Trust voluntarily terminated its qualification as a real estate investment
trust under the Internal Revenue Code during fiscal 1978.
The provisions for income taxes for the years ended September 30, 2000, 1999 and
1998, consist of the following:
<TABLE>
Year Ended September 30,
---------------------------------------------------------------
(In thousands) 2000 1999 1998
------------------------------------------------------------------- ------------------- ------------------- -------------------
Current provision (benefit):
<S> <C> <C> <C>
Federal $ (43,603) $ (50,552) $ 94,828
State (1,071) 619 2,948
------------------- ------------------- -------------------
(44,674) (49,933) 97,776
------------------- ------------------- -------------------
Deferred provision (benefit):
Federal 65,044 73,415 (35,291)
State 2,847 5,820 (19,616)
------------------- ------------------- -------------------
67,891 79,235 (54,907)
------------------- ------------------- -------------------
Subtotal 23,217 29,302 42,869
Tax effect of other items:
Tax effect of extraordinary item (89) -- (5,169)
Tax effect of net unrealized holding gains (losses) reported in
stockholders' equity (12) (26) 361
------------------- ------------------- -------------------
Total $ 23,116 $ 29,276 $ 38,061
=================== =================== ===================
</TABLE>
The Trust's effective income tax rate varies from the statutory Federal income
tax rate as a result of the following factors:
<TABLE>
Year Ended September 30,
---------------------------------------------------------------
(In thousands) 2000 1999 1998
------------------------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Computed tax at statutory Federal income tax rate $ 27,073 $ 29,990 $ 58,077
Increase (reduction) in taxes resulting from:
Minority interest (5,447) (5,447) (5,447)
Goodwill and other purchase accounting adjustments 124 189 389
Change in valuation allowance for deferred
tax asset allocated to income tax expense (1,979) 366 (7,074)
State income taxes 2,635 3,952 (4,397)
Other 811 252 1,321
------------------- ------------------- -------------------
$ 23,217 $ 29,302 $ 42,869
=================== =================== ===================
</TABLE>
<PAGE>
The components of the net deferred tax asset (liability) were as follows:
<TABLE>
September 30,
-----------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------------- ------------------- -------------------
Deferred tax assets:
<S> <C> <C>
Intangible assets and goodwill, net $ 6,669 $ 6,236
Deferred compensation 4,441 5,678
Unrealized losses on servicing assets 2,076 4,483
Asset securitizations, net 1,965
State net operating loss carry forwards 42,524 41,562
Partnership investments 1,338 345
Forgiveness of debt 2,583 3,037
Unrealized losses on property, net 9,155 8,691
Depreciation -- 2,868
Other 11,399 9,054
------------------- -------------------
Gross deferred tax assets 80,185 83,919
------------------- -------------------
Deferred tax liabilities:
Net unrealized holding losses (40,454) (30,930)
Mortgage servicing rights (6,004) (2,897)
Asset securitizations, net (860) --
Saul Holdings (4,606) (4,509)
Lease financing (40,456) (6,645)
Depreciation (17,657) (2,303)
FHLB stock dividends (1,957) (1,883)
Deferred Expenses (4,395) --
Other (3,889) (4,674)
------------------- -------------------
Gross deferred tax liabilities (120,278) (53,841)
------------------- -------------------
Valuation allowance (15,709) (17,989)
------------------- -------------------
Net deferred tax asset (liability) $ (55,802) $ 12,089
=================== ===================
</TABLE>
A valuation allowance has been established to reduce the net deferred tax asset
for net operating loss carryforwards related to state taxes. The state net
operating loss carryforwards generated in prior years related primarily to costs
associated with the support of the bank's retail activities, most significantly
the credit card operations. These costs are being reduced with the sale of the
credit card operations and the continued reorganization of the bank's cost
structure. As a result, the bank is expected to generate future taxable income
at the state level sufficient to utilize the net operating loss carryforwards
prior to their expiration which begins in 2010. However, management established
a valuation allowance to reduce the deferred tax asset associated with these
state net operating loss carryforwards to an amount whose realization is
considered more likely than not.
Management believes the existing net deductible temporary differences will
reverse during periods in which the bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive
consolidated earnings will continue as a result of the bank's earnings.
<PAGE>
TAX SHARING AGREEMENT
The Trust's affiliated group, including the bank, entered into a tax sharing
agreement dated June 28, 1990. This agreement provides that payments be made by
members of the affiliated group to the Trust based on their respective allocable
shares of the overall federal income tax liability of the affiliated group for
taxable years and partial taxable years beginning on or after that date.
Allocable shares of the overall tax liability are prorated among the members
with taxable income calculated on a separate return basis. The agreement also
provides that, to the extent net operating losses or tax credits of a particular
member are used to reduce overall tax liability of the Trust's affiliated group,
such member will be reimbursed on a dollar-for-dollar basis by the other members
of the affiliated group that have taxable income in an amount equal to such tax
reduction. Under the tax sharing agreement, the bank paid $6.6, $6.6 and $5.6
million, to the Trust during fiscal 2000, 1999 and 1998.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. It is anticipated that the Trust's
consolidation of the bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the bank would otherwise owe. If in any future year, the
bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated Federal income
tax returns or (ii) the amount of tax 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.
As of September 30, 2000, there was no alternative minimum tax carryforward.
36. SHAREHOLDERS' EQUITY - THE TRUST
In June 1990, the Trust acquired from affiliated companies an additional equity
interest in the bank, which raised the Trust's ownership share of the bank to
80%. In exchange for the interest acquired, the Trust issued 450,000 shares of a
new class of $10.50 cumulative preferred shares of beneficial interest with a
par value of $1 (the "preferred shares"). The transaction has been accounted for
at historical cost in a manner similar to the pooling of interests method
because the entities are considered to be under common control. In addition, the
Trust acquired two real estate properties from an affiliate in exchange for
66,000 preferred shares.
The Trust paid preferred dividends of $12.5, $6.5 and $7.6 million in fiscal
2000, 1999 and 1998. At September 30, 2000, 1999, and 1998, the amount of
dividends in arrears on the preferred shares was $25.9 million ($50.16 per
share), $33.0 million ($63.88 per share) and $34.0 million ($65.98 per share).
<PAGE>
37. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST
Year Ended September 30, 2000
--------------------------------------
(In thousands, except per share amounts) December March June September
---------------------------------------- --------- -------- --------- ---------
Real Estate Trust:
Total income $ 28,434 $ 32,247 $ 37,020 $ 35,157
Operating income (loss) (4,060) (1,886) 2,221 (196)
The Bank:
Interest income 168,751 178,288 192,926 196,694
Interest expense 87,374 92,166 104,242 110,618
Provision for loan losses (10,988) (12,774) (10,760) (15,408)
Other income 32,170 30,540 43,468 48,081
Operating income 16,758 13,352 25,901 25,261
Total Company:
Operating income 12,698 11,466 28,122 25,065
Income before minority interest 9,081 8,364 19,587 17,102
Net income 1,679 1,368 10,898 8,412
Net income per common share 0.07 0.00 1.98 1.46
-------------------------------------------------------------------------------
Year Ended September 30, 1999
--------------------------------------
(In thousands, except per share amounts) December March June September
---------------------------------------- --------- -------- --------- ---------
Real Estate Trust:
Total income $ 24,690 $24,522 $ 29,392 $ 27,421
Operating income (loss) (3,532) (2,625) 181 (4,315)
The Bank:
Interest income 110,405 124,271 134,537 150,280
Interest expense 52,102 57,597 62,560 73,248
Provision for loan losses (3,773) (6,616) (5,727) (6,764)
Other income 29,517 67,648 36,612 36,419
Operating income 7,317 49,671 19,973 19,019
Total Company:
Operating income 3,785 47,046 20,154 14,704
Income before minority interest 3,779 31,100 12,543 8,965
Net income (loss) (2,505) 19,534 4,923 1,518
Net income (loss) per common share (0.80) 3.77 0.74 0.03
-------------------------------------------------------------------------------
<PAGE>
38. INDUSTRY SEGMENT INFORMATION - THE TRUST
Industry segment information with regard to the Real Estate Trust is presented
below. For information regarding the bank, please refer to the "Banking"
sections of the accompanying financial statements.
<TABLE>
Year Ended September 30
-----------------------------------------------------
(In thousands) 2000 1999 1998
------------------------------------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
INCOME
Hotels $ 95,381 $ 78,914 $ 71,424
Office and industrial properties 34,341 24,289 22,883
Other 3,136 2,822 4,285
---------------- ---------------- ----------------
$ 132,858 $ 106,025 $ 98,592
================ ================ ================
OPERATING PROFIT (LOSS)
Hotels $ 27,013 $ 21,167 $ 19,175
Office and industrial properties 19,380 11,465 10,865
Other 9,487 7,255 4,546
---------------- ---------------- ----------------
55,880 39,887 34,586
Gain (loss) on sales of property 994 -- (331)
Interest and debt expense (45,974) (39,585) (42,817)
Advisory fee, management and leasing fees - related parties (11,013) (9,431) (8,742)
General and administrative (3,808) (1,162) (1,153)
---------------- ---------------- ----------------
Operating loss $ (3,921) $ (10,291) $ (18,457)
================ ================ ================
IDENTIFIABLE ASSETS (AT YEAR END)
Hotels $ 151,615 $ 146,585 $ 119,258
Office and industrial properties 105,493 73,613 75,332
Other 173,756 144,873 128,842
---------------- ---------------- ----------------
$ 430,864 $ 365,071 $ 323,432
================ ================ ================
DEPRECIATION
Hotels $ 8,932 $ 7,708 $ 6,733
Office and industrial properties 5,326 4,753 4,387
Other 51 47 50
---------------- ---------------- ----------------
$ 14,309 $ 12,508 $ 11,170
================ ================ ================
CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS
Hotels $ 37,681 $ 40,803 $ 39,539
Office and industrial properties 32,947 5,249 6,389
Other 3,805 935 537
---------------- ---------------- ----------------
$ 74,433 $ 46,987 $ 46,465
================ ================ ================
</TABLE>
<PAGE>
39. CONDENSED FINANCIAL STATEMENTS - THE TRUST
These condensed financial statements reflect the Real Estate Trust and all its
consolidated subsidiaries except for the bank which has been reflected on the
equity method.
<TABLE>
CONDENSED BALANCE SHEETS
September 30
--------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------- --------------------------------------------
ASSETS
<S> <C> <C>
Income-producing properties $ 362,433 $ 312,181
Accumulated depreciation (124,184) (104,774)
--------------------------------------------
238,249 207,407
Land parcels 39,716 39,448
Construction in progress 49,096 20,498
Equity investment in bank 316,114 292,942
Cash and cash equivalents 18,129 17,857
Other assets 85,674 79,861
--------------------------------------------
TOTAL ASSETS $ 746,978 $ 658,013
============================================
LIABILITIES
Mortgage notes payable $ 307,214 $ 213,447
Notes payable - secured 200,000 216,000
Notes payable - unsecured 47,463 46,122
Deferred gains - real estate 112,834 112,834
Accrued dividends payable - preferred shares
of beneficial interest 25,885 32,967
Other liabilities and accrued expenses 44,971 42,268
--------------------------------------------
Total liabilities 738,367 663,638
--------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT* 8,611 (5,625)
--------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 746,978 $ 658,013
============================================
* See Consolidated Statements of Shareholders' Deficit
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
For the Year Ended September 30
-------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C>
Total income $ 132,858 $ 106,025 $ 98,592
Total expenses (145,484) (121,676) (118,636)
Equity in earnings of unconsolidated entities 7,711 5,360 1,918
Gain (loss) on sales of property 994 -- (331)
-------------------------------------------------------------------
Real estate operating loss (3,921) (10,291) (18,457)
Equity in earnings of bank 25,193 30,416 88,172
-------------------------------------------------------------------
Total company operating income 21,272 20,125 69,715
Income tax benefit (1,251) (3,345) (6,010)
-------------------------------------------------------------------
Income before extraordinary item 22,523 23,470 75,725
Extraordinary item: loss on early extinguishment of debt (166) -- (9,601)
-------------------------------------------------------------------
TOTAL COMPANY NET INCOME $ 22,357 $ 23,470 $ 66,124
===================================================================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
For the Year Ended September 30
-------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,357 $ 23,470 $ 66,124
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 14,308 12,481 11,170
(Gain) loss on sales of property (994) -- 331
Early extinguishment of debt, net of taxes 166 -- 9,601
Equity in earnings of bank (25,193) (30,416) (88,172)
(Increase) decrease in deferred tax asset 5,205 (803) 954
(Increase) decrease in accounts receivable and
accrued income 3,059 (1,546) (1,229)
Increase in accounts payable and accrued expenses 1,892 3,346 2,708
(Increase) decrease in tax sharing receivable (88) 3,794 (6,545)
Other 4,268 20,062 19,796
-------------------------------------------------------------------
Net cash provided by operating activities 24,980 30,388 14,738
-------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - properties (54,915) (46,987) (19,815)
Property acquisitions (19,518) -- (26,650)
Property sales 1,897 -- --
Equity investment in bank (22,302) -- --
Equity investment in unconsolidated entities 6,527 2,748 1,348
Other (354) 2 2
-------------------------------------------------------------------
Net cash used in investing activities (88,665) (44,237) (45,115)
-------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 165,248 53,498 296,316
Repayments of long-term debt (86,140) (27,138) (245,287)
Costs of obtaining financings (2,651) (2,104) (7,295)
Loan prepayment fees -- -- (10,055)
Dividends paid - preferred shares of beneficial interest (12,500) (6,500) (7,600)
-------------------------------------------------------------------
Net cash provided by financing activities 63,957 17,756 26,079
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 272 3,907 (4,298)
Cash and cash equivalents at beginning of year 17,857 13,950 18,248
-------------------------------------------------------------------
Cash and cash equivalents at end of year $ 18,129 $ 17,857 $ 13,950
===================================================================
</TABLE>
<PAGE>
MANAGEMENT'S STATEMENT ON RESPONSIBILITY
The Consolidated Financial Statements and related financial information in this
report have been prepared by the Advisor in accordance with generally accepted
accounting principles appropriate in the circumstances, based on best estimates
and judgments, with consideration given to materiality.
The Trust maintains a system of internal accounting control supported by
documentation to provide reasonable assurance that the books and records reflect
authorized transactions of the Trust, and that the assets of the Trust are
safeguarded.
The Board of Trustees exercises its responsibility for the Trust's financial
statements through its Audit Committee, which is composed of two outside
Trustees who meet periodically with the Trust's independent accountants and
management. The committee considers the audit scope, discusses financial and
reporting subjects, and reviews management actions on these matters. The
independent accountants have full access to the Audit Committee.
The independent accountants are recommended by the Audit Committee and confirmed
by the Board of Trustees. They provide an objective assessment of the fairness
and accuracy of the financial statements, consider the adequacy of the system of
internal accounting controls, and perform such tests and other procedures as
they deem necessary to express an opinion on the fairness of the financial
statements. Management believes that the policies and procedures it has
established provide reasonable assurance that its operations are conducted in
conformity with law and a high standard of business conduct.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The Declaration of Trust provides that there shall be no fewer than three nor
more than twelve trustees, as determined from time to time by the trustees in
office. The Board of Trustees has fixed its permanent membership at six trustees
divided into three classes with overlapping three-year terms. The term of each
class expires at the Annual Meeting of Shareholders, which is usually held on
the last Friday of January.
The following list sets forth the name, age, position with the Trust, present
principal occupation or employment and material occupations, positions, offices
or employments during the past five years of each trustee and executive officer
of the Trust. Unless otherwise indicated, each individual has held an office
with the Trust for at least the past five years.
Class Two Trustees -- Terms End at 2001 Annual Meeting
George M. Rogers, Jr., age 67, has served as a Trustee since 1969. Mr. Rogers is
a Senior Counsel in the law firm of Shaw Pittman, Washington, DC, which serves
as counsel to the Trust and Chevy Chase Bank, F.S.B. Mr. Rogers serves as a
Director of the bank, B. F. Saul Company, Chevy Chase Property Company,
Westminster Investing Corporation, and Chevy Chase Lake Corporation.
B. Francis Saul III, age 38, has served as Trustee and Vice President of the
Trust since 1997. Mr. Saul also serves as a Director and/or Officer of Chevy
Chase Bank, F.S.B., B. F. Saul Company, B. F. Saul Advisory Company, Franklin
Property Company, Chevy Chase Property Company, Westminster Investing
Corporation, and Saul Centers, Inc. He is also a Director of Children's
Hospital, the Boys and Girls Club of Greater Washington, and The Heights School.
Mr. Saul is the son of B. Francis Saul II.
Class Three Trustees -- Terms End at 2002 Annual Meeting
Garland J. Bloom, Jr., age 69, has served as a Trustee since 1964. He is
currently a real estate consultant. Mr. Bloom was formerly Executive Vice
President and Principal of GMB Associates, Inc. (a real estate finance and
management firm) from 1988 to 1990 and Vice Chairman and Chief Operating Officer
of Smithy-Braedon Company (a real estate finance and management firm) from 1985
to 1987.
John R. Whitmore, age 67, has served as a Trustee since 1984. He also has served
as Senior Advisor to The Bessemer Group, Incorporated (a financial management
and banking firm) and its Bessemer Trust Company subsidiaries since 1998. Mr.
Whitmore is a director of Chevy Chase Bank, F.S.B., Chevy Chase Property
Company, B. F. Saul Company and Saul Centers, Inc. During the period 1975-1998,
Mr. Whitmore was President and Chief Executive Officer of Bessemer Group,
Incorporated and its Bessemer Trust Company subsidiaries and a director of
Bessemer Securities Corporation.
<PAGE>
Class One Trustees -- Terms End at 2003 Annual Meeting
Gilbert M. Grosvenor, age 69, has served as a Trustee since 1971. Mr. Grosvenor
also serves as Chairman of the Board of Trustees of the National Geographic
Society and as a Director of the bank, Saul Centers, Inc., Marriott
International Corp., and Ethyl Corporation.
B. Francis Saul II, age 68, has served as Chairman and Chief Executive Officer
of the Trust since 1969 and as a Trustee since 1964. Mr. Saul also serves as
President and Chairman of the Board of Directors of B. F. Saul Company, B. F.
Saul Advisory Company, Chevy Chase Property Company, Westminster Investing
Corporation, and Chevy Chase Lake Corporation, as Chairman of the Board and
Chief Executive Officer of Chevy Chase Bank, F.S.B. and Saul Centers, Inc.,
and as a Trustee of the National Geographic Society, the Brookings Institute,
The Johns Hopkins Medicine Board and Washington College. Mr. Saul is the father
of B. Francis Saul III.
Executive Officers of the Trust Who Are Not Directors
Philip D. Caraci, age 62, serves as Senior Vice President and Secretary of the
Trust, Executive Vice President of B.F. Saul Company, Senior Vice President of
B. F. Saul Advisory Company, Chairman of the Board of Franklin Property Company,
and a Director and President of Saul Centers, Inc.
Stephen R. Halpin, Jr., age 45, serves as Vice President and Chief Financial
Officer of the Trust, and Senior Vice President and Chief Financial Officer of
B.F. Saul Company. He also serves as Executive Vice President and Chief
Financial Officer of the bank.
Patrick T. Connors, age 38, has served as Vice President of the Trust and Senior
Vice President of B.F. Saul Company since January 2000. For the previous five
years, he was an attorney with the law firm of Shaw Pittman, Washington, DC.
Ross E. Heasley, age 61, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company, Franklin Property Company and Saul
Centers, Inc.
Henry Ravenel, Jr., age 66, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company and Saul Centers, Inc.
William K. Albright, age 69, serves as Vice President and Treasurer of the
Trust, B. F. Saul Company, Franklin Property Company and B. F. Saul Advisory
Company, and as Vice President of Saul Centers, Inc.
Committees of the Board of Trustees
The Board of Trustees met four times during fiscal 2000. Each member of the
board attended at least 75% of the aggregate number of meetings of the board and
of the committees of the board on which he served.
The Board of Trustees has three standing committees: the Audit Committee, the
Executive Committee and the Nominating Committee.
The Audit Committee is composed of Messrs. Bloom and Grosvenor. Its duties
include nominating the Trust's independent auditors, discussing with them the
scope of their examination of the Trust, reviewing with them the Trust's
financial statements and accompanying report, and reviewing their
recommendations regarding internal controls and related matters. This committee
met four times during fiscal 2000.
<PAGE>
The Executive Committee is composed of Messrs. Rogers, Saul II and Whitmore. It
is empowered to oversee day-to-day actions of the Advisor and Franklin Property
Company in connection with the operations of the Trust, including the
acquisition, administration, sale or disposition of investments. This committee
did not meet during fiscal 2000.
The Nominating Committee is composed of Messrs. Rogers and Whitmore. Its
function is to screen and make recommendations to the Board of Trustees
regarding potential candidates for membership on the board and to perform such
other duties as may be assigned to it from time to time. This committee did not
meet during fiscal 2000.
Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee
of $600 for each board or committee meeting attended. Trustees from outside the
Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul II is not paid for
attending Executive Committee meetings. For the fiscal year ended September 30,
2000, the Real Estate Trust paid total fees of $94,000 to the trustees,
including $15,000 to Mr. Saul II.
ITEM 11. EXECUTIVE COMPENSATION
The Trust pays no compensation to its executive officers for their services in
such capacity. Mr. Saul II receives compensation from the bank for his services
as the bank's Chairman of the Board of Directors and Chief Executive Officer,
and Mr. Halpin receives compensation from the bank for his services as
Executive Vice President and Chief Financial Officer. No other executive
officers of the Trust received any compensation from the Trust or its
subsidiaries with respect to any of the fiscal years ended September 30, 2000,
1999, or 1998.
The following table set forth the cash compensation paid by the bank to Mr. Saul
and Mr. Halpin for or with respect to the fiscal years ended September 30, 2000,
1999 and 1998 for all capacities in which they served during such fiscal years.
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation
Other All
Name and Principal Annual Other Compensation
Position Year Salary Bonus Compensation
------------------------------ ------ --------------- -------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
B. Francis Saul II, 2000 $1,553,504 $1,500,000 $ - $ 331,604(1)
Chairman and Chief 1999 1,430,448 1,500,000 - 339,860(2)
Executive Officer 1998 1,353,528 700,000 - 725,873(3)
Stephen R. Halpin, Jr., 2000 $ 458,666 $ 67,500 $ - $ 62,341(1)
Executive Vice President 1999 419,240 160,000 - 68,405(2)
and Chief Financial Officer 1998 400,010 60,000 - 159,073(3)
---------------------------
(1) The total amounts shown in the "All Other Compensation" column for fiscal
2000 consist of the following:
o contributions made by the bank to the bank's Supplemental Executive Retirement
Plan on behalf of Mr. Saul in the amount of $213,258 and Mr. Halpin in the
amount of $27,421;
o the taxable benefit of premiums paid by the bank for group term insurance on
behalf of Mr. Saul in the amount of $19,197 and Mr. Halpin in the amount of
$1,527;
o contributions to the Retirement Plan, a defined contribution plan, on behalf
of Mr. Halpin in the amount of $10,200; and
o accrued earnings on awards previously made under the bank's Deferred
Compensation Plan on behalf of Mr. Saul in the amount of $99,149 and Mr. Halpin
in the amount of $23,193.
(2) The total amounts shown in the "All Other Compensation" column for fiscal
1999 consist of the following:
o contributions made by the bank to the bank's Supplemental Executive Retirement
Plan on behalf of Mr. Saul in the amount of $193,839 and Mr. Halpin in the
amount of $29,059;
o the taxable benefit of premiums paid by the bank for group term insurance on
behalf of Mr. Saul in the amount of $23,940 and Mr. Halpin in the amount of
$2,157;
o contributions to the Retirement Plan, a defined contribution plan, on behalf
of Mr. Halpin in the amount of $9,600; and
o accrued earnings on awards previously made under the bank's Deferred
Compensation Plan on behalf of Mr. Saul in the amount of $122,081 and Mr. Halpin
in the amount of $27,589.
(3) The total amounts shown in the "All Other Compensation" column for fiscal
1998 consist of the following:
o contributions made by the bank to the bank's Supplemental Executive Retirement
Plan on behalf of Mr. Saul in the amount of $136,018 and Mr. Halpin in the
amount of $20,170;
o the taxable benefit of premiums paid by the bank for group term insurance on
behalf of Mr. Saul in the amount of $14,724 and Mr. Halpin in the amount of
$2,621;
o contributions to the Retirement Plan, a defined contribution plan, on behalf
of Mr. Halpin in the amount of $9,600; and
o accrued earnings on awards previously made under the bank's Deferred
Compensation Plan on behalf of Mr. Saul in the amount of $575,131 and Mr. Halpin
in the amount of $126,682.
</TABLE>
<PAGE>
Long-Term Incentive Plan Awards. The following table sets forth certain
information concerning the principal contributions (the "Principal
Contributions") credited by the bank to the accounts (the "Accounts") of the
executive officers of the bank named above for fiscal 2000 under the bank's
Deferred Compensation Plan (the "Plan").
<TABLE>
LONG-TERM INCENTIVE PROGRAM - AWARDS IN LAST FISCAL YEAR
Number
of Estimated Future Payouts (1)
Shares Performance or Other Under Non-Stock Price-Based Plans
Units Period -----------------------------------------------------------
or Other Until Maturation
Name Rights(1) or Payout Threshold Target(2) Maximum
------------------------ --------- ---------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
B. Francis Saul II(3)(4) N/A 2002 $ 650,000 $ 1,164,051 $ 4,024,629
Chairman of the Board and
Chief Executive Officer
Stephen R. Halpin, Jr.(4) N/A 2010 $ 140,000 $ 250,719 $ 866,843
Executive Vice President
and Chief Financial Officer
---------------------
(1) The estimated future payouts shown in the table are based on assumed
performance rates for the bank during each year in the ten-year performance
period. The actual payouts under the plan may vary substantially from the
payouts shown in the table, depending upon the bank's actual rate of return on
average assets for each fiscal year in the ten-year performance period ending
September 30, 2010.
(2) The plan does not establish any target performance levels. The payout
amounts shown in this column have been calculated assuming that the bank's rate
of return on average assets during each of the years in the performance period
are the same as the bank's rate of return during the fiscal year ended September
30, 2000.
(3) The payout amounts shown for all participants are the estimated amounts that
would be payable to such participants if their employment continued with the
bank for the entire ten-year performance period of the plan. Mr. Saul will
attain the age of 70 in 2002 at which time he will become fully vested in the
account maintained for his benefit under the plan. Under the plan, if Mr. Saul
were to retire after that date, he could elect to have the bank pay out the net
contribution as defined in his account prior to the year 2010. Certain of the
awards; credited by the bank to the account maintained for the benefit of Mr.
Saul under the planvested at the time Mr. Saul attained age 60 in 1992. Certain
other awards credited by the bank to the account maintained for the benefit of
Mr. Saul will vest upon the earlier of (a) five years after the date of the
award; (b) his attainment of age 70 in 2002; (c) his death; (d) his total or
permanent disability; or (e) a change in control of the bank as defined in the
plan. Accordingly, as of September 30, 2000, Mr. Saul was partially vested in
the account maintained for his benefit under the Plan. As of that date, the
vested account balance maintained for Mr. Saul's benefit under the plan was
$1,321,488.
(4) As of September 30, 2000 the following individuals have vested accounts that
are payable within 120 days after September 30, 2000: Mr. Saul in the amount of
$440,496; and Mr. Halpin in the amount of $88,099.
The plan provides that, as of the end of each fiscal year in the ten-year period
ending September 30, 2010, or the executive officer's earlier termination of
employment with the bank, the bank will add to or deduct from each executive
officer's account a contribution or deduction, as the case may be, which
represents, the hypothetical interest, which may be positive or negative, earned
on the principal contribution, based on the bank's rate of return on average
assets, as computed under the plan, for the fiscal year then ended. The
principal contribution, plus or minus any interest credited or deducted, is
referred to as the "net contribution."
Executive officers are entitled to receive the net contribution in their
respective account only upon full or partial vesting. Plan participants become
fully vested in their account under the plan, provided that they remain
continuously employed by the bank during the vesting period, upon the earliest
to occur of any of the following: (a) September 30, 2010; (b) attainment of age
62; (c) death; (d) total and permanent disability; or (e) a change in control of
the bank as defined in the plan. Plan participants become partially vested to
the extent of 50% of the net contribution in the account, upon the termination
of their employment by the bank without cause, as defined in the plan after
September 30, 2005.
Payouts are made under the plan within 120 days after September 30, 2010, or the
earlier termination of the executive officer's employment with the bank,
provided that vesting or partial vesting has occurred under the plan.
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information, as of December 1, 2000,
concerning beneficial ownership of Common Shares and preferred shares of
beneficial interest, referred to in this report as the "Preferred Shares," by
(a) each person known by the Trust to be the beneficial owner of more than 5% of
the Common Shares and the Preferred Shares, (b) each member of the Board of
Trustees, (c) each executive officer of the Trust named in the Summary
Compensation Table under "Executive Compensation" and (d) all trustees and
executive officers of the Trust as a group.
<PAGE>
Aggregate Number of Percent
Name of Shares of
Beneficial Owner Beneficially Owned (1) Class (1)
----------------------- ---------------------- ------------------
B. Francis Saul II Preferred:
516,000 (2) 100.00%
Common:
4,807,510 (3) 99.60%
Philip D. Caraci Common:
19,400 (4) 0.40%
All Trustees and Preferred:
executive officers 516,000 (2) 100.00%
as a group (10 persons) Common:
4,826,910 100.00%
-----------------------
(1) Beneficial owner and percent of class are calculated pursuant to rule 13d-3
under the Securities Exchange Act of 1934.
(2) Consists of Preferred Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer, director and/or more than 10%
shareholder, comprising 270,000 Preferred Shares owned by B. F. Saul Company,
90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000
Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares
owned by Westminster Investing Corporation. The address of each person listed in
this footnote is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815. Pursuant
to Rule 13d-3, the Preferred Shares described above are considered to be
beneficially owned by Mr. Saul because he has or may be deemed to have sole or
shared voting and/or investment power in respect thereof.
(3) Consists of Common Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer and director and/or more than 10%
shareholder, comprising 1,125,739 Common Shares owned by Westminster Investing
Corporation, 43,673 Common Shares owned by Derwood Investment Corporation, a
subsidiary of Westminster Investing Corporation, 34,400 Common Shares owned by
Somerset Investment Company, Inc., a subsidiary of Westminster Investing
Corporation, 2,545,362 Common Shares owned by B. F. Saul Company, 206,300 Common
Shares owned by Columbia Credit Company, a subsidiary of B. F. Saul Company,
283,400 Common Shares owned by Columbia Securities Company of Washington, D. C.,
172,918 Common Shares owned by Franklin Development Company, Inc., and 395,718
Common Shares owned by The Klingle Corporation. The address of each person
listed in this footnote is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
Pursuant to Rule 13d-3, the Common Shares described above are considered to be
beneficially owned by Mr. Saul because he has or may be deemed to have sole or
shared voting and/or investment power in respect thereof.
<PAGE>
(4) Mr. Caraci has entered into an agreement with the Trust under which he is
required to sell all Common Shares he then owns to the Trust when his employment
by B. F. Saul Company and any of its affiliates ceases for any reason, including
retirement, termination, death or disability. The price Mr. Caraci will receive
for his Common Shares will be the greater of $28.00 per Share or the price the
Trust determines at the time is the fair market value thereof.
The Preferred Shares were issued in June 1990 in connection with the transaction
in which the Trust increased its equity interest in the bank from 60% to 80%.
The dividend rate on the Preferred Shares is $10.50 per share per annum.
Dividends are cumulative and are payable annually or at such other times as the
Trustees may determine, as and when declared by the Trustees out of any assets
legally available therefor. The Preferred Shares have a liquidation preference
of $100 per share. Subject to limits in certain of the Trust's loan agreements,
the Preferred Shares are subject to redemption at the option of the Trust at a
redemption price equal to their liquidation preference. Except as otherwise
required by applicable law, the holders of Preferred Shares are entitled to vote
only in certain limited situations, such as the merger of the Trust or a sale of
all or substantially all of the assets of the Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Personnel.
All of the officers of the Trust and each of Messrs. Saul II, Saul III, Rogers
and Whitmore, each of whom is a trustee of the Trust, are also officers and/or
directors of the B.F. Saul Company and/or its subsidiaries. In addition, Messrs.
Saul II, Saul III, Whitmore, Grosvenor, Caraci, Heasley, Ravenel and Albright
are also officers and/or directors of Saul Centers and/or its subsidiaries.
Transactions with B. F. Saul Company and its Subsidiaries.
The Real Estate Trust is managed by the Advisor, a wholly owned subsidiary of
Saul Company. The Advisor is paid a fixed monthly fee subject to annual review
by the trustees. The monthly fee was $337,000 for the period October 1998
through September 1999 and $349,000 for the period October 1999 through
September 2000. The advisory contract has been extended until September 30,
2001,will continue thereafter unless cancelled by either party at the end of any
contract year. Certain loan agreements prohibit termination of this contract.
Saul Company and Franklin Property Company, a wholly owned subsidiary of Saul
Company, provide services to the Real Estate Trust in the areas of commercial
property management and leasing, hotel management, development and construction
management, and acquisitions, sales and financings of real property. Fees to the
two companies amounted to $7.2 million in fiscal 2000.
The Real Estate Trust reimburses the Advisor and Franklin Property Company for
costs and expenses incurred in connection with the acquisition and development
of real property on behalf of the Real Estate Trust, in-house legal expenses,
and all travel expenses incurred in connection with the affairs of the Real
Estate Trust.
The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of publicly offered Unsecured Notes as they are issued to offset the Advisor's
costs of administering the program. The Advisor received $102,000 in such fees
in fiscal 2000.
<PAGE>
B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of Saul Company, is
a general insurance agency that receives commissions and counter-signature fees
in connection with the Real Estate Trust's insurance program. Such commissions
and fees amounted to approximately $200,000 in fiscal 2000.
At October 1, 1998, the Real Estate Trust had an unsecured note receivable from
Saul Company with an outstanding balance of $15.3 million. During
fiscal 1999 and 2000, curtails of $1.5 and $3.75 million were paid. Interest on
the loans is computed by reference to floating rate index. At September 30,
2000, the total due the Real Estate Trust was $10.0 million in principal and
$1.75 million in deferred interest. Interest accrued on these loans amounted to
$1.1 million in fiscal 2000.
The Board of Trustees of the Trust, including the two independent trustees,
reviews the fees and compensation arrangements between the Real Estate Trust and
Saul Company and its related entities and affiliates and believe that such fees
and compensation arrangements are as favorable to the Real Estate Trust as would
be obtainable from unaffiliated sources.
Transactions with Saul Centers.
Exclusivity Agreement and Right of First Refusal. The Real Estate Trust has
entered into an Exclusivity Agreement with, and has granted a right of first
refusal to, Saul Centers and Saul Holdings Partnership. The purpose of these
agreements is to minimize potential conflicts of interest between the Real
Estate Trust, Saul Centers and Saul Holdings Partnership. The exclusivity
agreement and right of first refusal generally require the Real Estate Trust to
conduct its shopping center business exclusively through Saul Centers and Saul
Holdings Partnership and to grant these entities a right of first refusal to
purchase commercial properties and development sites that become available to
the Real Estate Trust in the District of Columbia or adjacent suburban Maryland.
Subject to the exclusivity agreement and right of first refusal, the Real Estate
Trust will continue to develop, acquire, own and manage commercial properties
and own land suitable for development as, among other things, shopping centers
and other commercial properties.
Reimbursement Agreement. Pursuant to a reimbursement agreement among the
partners of the Saul Holdings Partnership and certain of their affiliates, the
Real Estate Trust and two of its subsidiaries have agreed to reimburse Saul
Centers and the other partners in the event the Saul Holdings Partnership fails
to make payments with respect to certain portions of its debt obligations and
Saul Centers or any such other partners personally make payments with respect to
such debt obligations. As of September 30, 2000, the maximum potential
obligation of the Real Estate Trust and its subsidiaries under the agreement was
$115.5 million. See Note 2 to the Consolidated Financial Statements in this
report. The Real Estate Trust believes that Saul Holdings Partnership will be
able to make all payments due with respect to its debt obligations.
Tax Conflicts. The fair market value of each of the properties contributed to
Saul Holdings Partnership and its subsidiaries by the Real Estate Trust and its
subsidiaries in connection with the formation of Saul Centers and Saul Holdings
Partnership in 1993 exceeded the tax basis of such properties. In the event,
Saul Centers or its wholly owned subsidiary, Saul QRS, Inc., acting as general
partner, causes Saul Holdings Partnership to dispose of, or there is an
involuntary disposition of, one or more of such properties, a disproportionately
large share of the total gain for federal income tax purposes would be allocated
to the Real Estate Trust and its subsidiaries as a result of the property
disposition. See Note 2 to the Consolidated Financial Statements in this report.
<PAGE>
Property Dispositions. In October 1999, the bank sold a 6.58 acre land parcel to
Saul Centers located in Ashburn, Virginia. The $1,438,000 purchase price was
paid in cash. In October 2000, the Real Estate Trust sold a newly constructed
30,000 square foot office/flex building located on a 2.2 acre site in the Avenel
Business Park in Gaithersburg, Maryland to Saul Centers. The $4.2 million
purchase price was paid in cash. The prices for each of these properties were
determined by independent third party appraisals. Management believes that the
disposition of these properties was on terms no less favorable than those that
could have been obtained in a comparable transaction with an unaffiliated third
party.
Remuneration of Trustees and Officers. For fiscal 2000, the Trust paid the
trustees $94,000 in fees for their services. See "Item 10. Trustees and
Executive Officers of the Trust." No compensation was paid to the officers of
the Trust for acting as such; however, Mr. Saul II was paid by the bank for his
services as the bank's Chairman and Chief Executive Officer and Mr. Halpin was
paid by the bank for his services as Executive Vice President and Chief
Financial Officer. See "Item 11. Executive Compensation." Messrs. Grosvenor,
Rogers, Saul II and Saul III receive compensation for their services as
directors of the bank and Messrs. Rogers, Saul II, Saul III and Whitmore and all
of the officers of the Trust receive compensation from B.F. Saul Company and/or
its affiliated corporations as directors or officers thereof.
Related Party Rents
The Real Estate Trust leases space to the bank and Franklin Property Company at
two of its income-producing properties. Minimum rents and expense recoveries
paid under these leases amounted to approximately $2.7 million in fiscal 2000.
The bank leases space in several of the shopping centers owned by Saul Centers.
The total rental payments made to Saul Centers by the bank in fiscal year 2000
were $1.2 million. The Trust believes that these leases have comparable terms to
leases that would have been entered into with unaffiliated parties.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements of the Trust are
incorporated by reference in Part II, Item 8.
(a) Report of Independent Public Accountants.
(b) Consolidated Balance Sheets - As of September 30, 2000 and 1999.
(c) Consolidated Statements of Operations - For the years ended
September 30, 2000, 1999 and 1998.
(d) Consolidated Statements of Comprehensive Income and Changes in
Shareholders' Equity (Deficit) - For the years ended
September 30, 2000, 1999 and 1998.
(e) Consolidated Statements of Cash Flows - For the years ended
September 30, 2000, 1999 and 1998.
(f) Notes to Consolidated Financial Statements.
2. Financial Statement Schedules and Supplementary Data
(a) Selected Quarterly Financial Data for the Real Estate Trust
are incorporated by reference in Part II, Item 8.
(b) Report of Independent Public Accountants on Financial Statement
Schedules.
(c) Schedules of the Real Estate Trust:
Schedule I - Condensed Financial Information - For the years
ended September 30, 2000, 1999 and 1998.
Schedule III - Consolidated Schedule of Investment Properties
As of September 30, 2000.
(b) Reports on Form 8-K
None
(c) Exhibits
<PAGE>
EXHIBITS DESCRIPTION
-------- -----------------------------------------------------------------
3. ORGANIZATIONAL DOCUMENTS
(a) Amended and Restated Declaration of Trust filed with the Maryland
State Department of Assessments and Taxation on June 22, 1990 as
filed as Exhibit 3(a) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
(b) Amendment to Amended and Restated Declaration of Trust reflected
in Secretary Certificate filed with the Maryland State Department
of Assessments and Taxation on June 26, 1990 as filed as Exhibit
3(b) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(c) Amended and Restated By-Laws of the Trust dated as of February
28, 1991 as filed as Exhibit T3B to the Trust's Form T-3
Application for Qualification of Indentures under the Trust
Indenture Act of 1939 (File No. 22-20838) is hereby incorporated
by reference.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
(a) Indenture dated as of March 25, 1998 between the Trust and
Norwest Bank Minnesota, National Association, as Trustee, with
respect to the Trust's 9 3/4% Series B Senior Secured Notes due
2008, as filed as Exhibit 4(a) to Registration Statement
333-49937 is hereby incorporated by reference.
(b) Indenture with respect to the Trust's Senior Notes Due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration No. 33-19909 is hereby incorporated by reference.
(c) First Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit T-3C to the Trust's Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939
(File No. 22-20838) is hereby incorporated by reference.
(d) Indenture with respect to the Trust's Senior Notes due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration Statement No. 33-9336 is hereby incorporated by
reference.
(e) Fourth Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby
incorporated by reference.
(f) Third Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby
incorporated by reference.
(g) Second Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby
incorporated by reference.
(h) Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue as filed as
Exhibit 4(a) to Registration Statement No. 2-68652 is hereby
incorporated by reference.
(i) Indenture with respect to the Trust's Senior Notes due from One
Year to Five Years from Date of Issue as filed as Exhibit T-3C to
the Trust's Form T-3 Application for Qualification of Indentures
under
<PAGE>
EXHIBITS DESCRIPTION
-------- -----------------------------------------------------------------
the Trust Indenture Act of 1939 (file No. 22-10206) is hereby
incorporated by reference
(j) Indenture dated as of September 1, 1992 with respect to the
Trust's Notes due from One to Ten Years form Date of Issue filed
as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(k) First Supplemental Indenture dated as of January 16, 1997 with
respect to the Trust's Notes due from One to Ten years from Date
of Issue filed as Exhibit 4(b) to Registration Statement No.
33-34930 is hereby incorporated by reference.
(l) Second Supplemental Indenture dated as of January 13, 1999 with
respect to the Trust's Notes due from One to Ten Years from Date
of Issuance as filed as Exhibit 4(l) to Registration Statement No.
333-70753 is hereby incorporated by reference.
10. MATERIAL CONTRACTS
(a) Advisory Contract with B.F. Saul Advisory Company effective
October 1, 1982 filed as Exhibit 10(a) to Registration Statement
No. 2-80831 is hereby incorporated by reference.
(b) Commercial Property Leasing and Management Agreement effective
October 1, 1982 between the Trust and Franklin Property Company
filed as Exhibit 10(b) to Registration Statement No. 2-80831 is
hereby incorporated by reference.
(c) Tax sharing Agreement dated June 28,1990 among the Trust, Chevy
Chase Savings Bank F.S.B. and certain of their subsidiaries filed
as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company,
Franklin Development Co., Inc., The Klingle Corporation and
Westminster Investing Corporation relating to the transfer of
certain shares of Chevy Chase Savings Bank, F.S.B. and certain
real property to the Trust in exchange for Preferred Shares of
the Trust filed as Exhibit 10(d) to Registration Statement
No. 33-34930 is hereby incorporated by reference.
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17,
1988 among B.F. Saul Company, the Trust and the Federal Savings
and Loan Insurance Corporation filed as Exhibit 10(e) to the
Trust's Annual Report on Form 10-K (File No. 1-7184) for the
fiscal year ended September 30, 1991 is hereby incorporated by
reference.
(f) Written Agreement dated September 30, 1991 between the Office of
Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as
Exhibit 10(f) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(g) Amendments to Commercial Property Leasing and Management
Agreement between the Trust and Franklin Property Company dated
as of December 31, 1992 (Amendment No. 5), July 1, 1989
(Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1,
1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed
as Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(h) Advisory Contract between B.F. Saul Advisory Company and Dearborn
Corporation dated as of December 31, 1992 filed as Exhibit 10(p)
to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(i) Commercial Property Leasing and Management Agreement between
Dearborn Corporation and Franklin Property Company dated as of
December 31, 1992 filed as Exhibit 10(q) to Registration
Statement No. 33-34930 is hereby incorporated by reference.
<PAGE>
EXHIBITS DESCRIPTION
-------- -----------------------------------------------------------------
(j) Registration Rights and Lock-Up Agreement dated August 26, 1993
by and among Saul Centers, Inc. and the Trust, Westminster
Investing Corporation, Van Ness Square Corporation, Dearborn
Corporation, Franklin Property Company and Avenel Executive Park
Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement
No. 33-64562 is hereby incorporated by reference.
(k) Exclusivity and Right of First Refusal Agreement dated August 26,
1993 among Saul Centers, Inc., the Trust, B. F. Saul Company,
Westminster Investing Corporation, Franklin Property Company, Van
Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as
filed as Exhibit 10.7 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(l) Fourth Amended and Restated Reimbursement Agreement dated as of
April 25, 2000 by and among Saul Centers, Inc., Saul Holdings
Limited Partnership, Saul Subsidiary I Limited Partnership, Saul
Subsidiary II Limited Partnership, Saul QRS, Inc., Franklin
Property Company, Westminster Investing Corporation, Van Ness
Square Corporation, Dearborn, L.L.C., Avenel Executive Park
Phase II, L.L.C., and the Trust.
(m) Amendment to Written Agreement dated October 29, 1993 between the
Office of Thrift Supervision and Chevy Chase Savings Bank, F.S.B.
filed as Exhibit 10(u) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
(n) Registration Rights Agreement dated as of March 25, 1998 among
the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Friedman, Billings, Ramsey & Co., Inc. as
filed as Exhibit 4(c) to Registration Statement No. 333-49937 is
hereby incorporated by reference.
(o) Bank Stock Registration Rights Agreement dated as of March 25,
1998 between the Trust and Norwest Bank Minnesota, National
Association, as Trustee, as filed as Exhibit 4(d) to Registration
Statement No. 333-49937 is hereby incorporated by reference.
21.* List of Subsidiaries of the Trust.
27.* Financial Data Schedule.
---------------------
* Filed herewith.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust
We have audited the consolidated financial statements of B.F. Saul Real Estate
Investment Trust (the "Trust") as of September 30, 2000 and 1999 and for each of
the three years in the period ended September 30, 2000, in accordance with
auditing standards generally accepted in the United States, and have issued our
report thereon dated December 13, 2000. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedules listed in Item 14 are the responsibility of the Trust's management and
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. This
information has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects as to the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Vienna, Virginia
December 13, 2000
<PAGE>
B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION SCHEDULE I
(a) Required condensed financial information on the Trust is disclosed in
the audited consolidated financial statements included herewith.
(b) Amounts of cash dividends paid to the Trust by consolidated subsidiaries
were as follows:
Year Ended September 30
----------------------------------------
2000 1999 1998
$12,800,000 $26,400,000 $5,200,000
<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust Schedule III
September 30, 2000
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
--------------------------------------
Initial Subsequent Buildings
Basis to to and Accumulated
Hotels Trust Acquisition Land Improvements Total Depreciation
--------------------------------------------- ---------- ------------ ----------- -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Crowne Plaza -- National Airport,
Arlington VA $ 26,979 $ 4,853 $ 4,229 $ 27,603 $ 31,832 $ 2,927
Hampton Inn -- Dulles Airport, Sterling VA -- 6,607 290 6,317 6,607 3,052
Holiday Inn, Cincinnati OH 6,859 3,987 245 10,601 10,846 6,019
Holiday Inn -- Dulles Airport, Sterling VA 6,950 20,742 862 26,830 27,692 14,711
Holiday Inn, Gaithersburg MD 3,849 15,741 1,781 17,809 19,590 8,457
Holiday Inn -- National Airport, Arlington VA 10,187 7,163 1,183 16,167 17,350 7,641
Holiday Inn, Pueblo CO 3,458 2,553 564 5,447 6,011 2,847
Holiday Inn -- Rochester Airport,
Rochester NY 3,340 9,771 605 12,506 13,111 6,636
Holiday Inn -- Tysons Corner, McLean VA 6,976 13,782 2,265 18,493 20,758 8,635
Holiday Inn Express, Herndon VA 5,259 367 1,178 4,448 5,626 682
Holiday Inn Select, Auburn Hills MI 10,450 1,645 1,031 11,064 12,095 2,430
SpringHill Suites, Boca Raton FL 10,942 358 1,220 10,080 11,300 423
TownePlace Suites, Boca Raton FL 7,527 10 869 6,668 7,537 273
TownePlace Suites -- Dulles Airport,
Sterling VA 5,849 212 219 5,842 6,061 434
TownePlace Suites -- Ft. Lauderdale FL 7,059 -- 420 6,639 7,059 209
TownePlace Suites, Gaithersburg MD 6,382 4 107 6,279 6,386 265
----------- ------------ ----------- -------------- ----------- -----------------
Subtotal - Hotels $ 122,066 $ 87,795 $ 17,068 $ 192,793 $ 209,861 $ 65,641
----------- ------------ ----------- -------------- ----------- -----------------
Commercial
---------------------------------------------
900 Circle 75 Pkway, Atlanta GA $ 33,434 $ 2,295 $ 563 $ 35,166 $ 35,729 $ 15,802
1000 Circle 75 Pkway, Atlanta GA 2,820 1,357 248 3,929 4,177 2,301
1100 Circle 75 Pkway, Atlanta GA 22,746 3,988 419 26,315 26,734 13,663
8201 Greensboro, Tysons Corner VA 28,890 3,702 1,633 30,959 32,592 13,226
Commerce Ctr-Ph II, Ft Lauderdale FL 4,266 838 782 4,322 5,104 1,935
Dulles North, Loudoun County VA 5,882 66 507 5,441 5,948 1,686
Dulles North Two, Loudoun County VA 7,729 -- 404 7,325 7,729 341
Dulles North Five, Loudoun County VA 5,078 -- 470 4,608 5,078 64
Metairie Tower, Metairie LA 2,729 949 403 3,275 3,678 1,918
Tysons Park Place 19,459 2,353 2,454 19,358 21,812 7,364
----------- ------------ ----------- -------------- ----------- -----------------
Subtotal - Commercial $ 133,033 $ 15,548 $ 7,883 $ 140,698 $ 148,581 $ 58,300
----------- ------------ ----------- -------------- ----------- -----------------
</TABLE>
<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued) Schedule III - Continued
September 30, 2000
(Dollars in Thousands)
Date Improvements
Related Date of Acquired/ Depreciable
Hotels Debt Construction Transferred Lives (Years)
------------------------------------------------- --------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Crowne Plaza -- National Airport, Arlington VA $ 17,290 1959 12/97 39
Hampton Inn -- Dulles Airport, Sterling VA 6,586 1987 4/87 31.5
Holiday Inn, Cincinnati OH 6,076 1975 2/76 40
Holiday Inn -- Dulles Airport, Sterling VA 13,775 1971 11/84 28
Holiday Inn, Gaithersburg MD 7,637 1972 6/75 45
Holiday Inn -- National Airport, Arlington VA 7,358 1973 11/83 30
Holiday Inn, Pueblo CO 4,624 1973 3/76 40
Holiday Inn -- Rochester Airport, Rochester NY 14,878 1975 3/76 40
Holiday Inn -- Tysons Corner, McLean VA 17,585 1971 6/75 47
Holiday Inn Express, Herndon VA 4,902 1987 10/96 40
Holiday Inn Select, Auburn Hills MI 12,141 1989 11/94 31.5
SpringHill Suites, Boca Raton FL 8,890 1999 9/99 40
TownePlace Suites, Boca Raton FL 5,950 1999 6/99 40
TownePlace Suites -- Dulles Airport, Sterling VA 6,472 1998 8/98 40
TownePlace Suites -- Ft. Lauderdale FL 5,390 1999 10/99 40
TownePlace Suites, Gaithersburg MD 3,996 1999 6/99 40
----------------
Subtotal - Hotels $ 143,550
----------------
Commercial
---------------------------------------------
900 Circle 75 Pkway, Atlanta GA $ 23,953 1985 12/85 35
1000 Circle 75 Pkway, Atlanta GA 4,859 1974 4/76 40
1100 Circle 75 Pkway, Atlanta GA 13,482 1982 9/82 40
8201 Greensboro, Tysons Corner VA 39,706 1985 4/86 35
Commerce Ctr-Ph II, Ft Lauderdale FL 3,692 1986 1/87 35
Dulles North, Loudoun County VA 4,889 1990 10/90 31.5
Dulles North Two, Loudoun County VA 8,431 1999 10/99 40
Dulles North Five, Loudoun County VA 6,631 2000 3/00 40
Metairie Tower, Metairie LA -- 1974 11/76 40
Tysons Park Place 31,510 1976 12/99 30
----------------
Subtotal - Commercial $ 137,153
----------------
</TABLE>
<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued) Schedule III-Continued
September 30, 2000
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
--------------------------------------
Initial Subsequent Buildings
Basis to to and Accumulated
Purchase-Leasebacks Trust Acquisition Land Improvements Total Depreciation
--------------------------------------------- ---------- ------------ ----------- -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Chateau di Jon, Metairie, LA $ 1,125 $ -- $ 1,125 $ -- $ 1,125 $ --
Country Club, Knoxville, TN 500 -- 500 -- 500 --
Houston Mall, Warner Robbins, GA 650 -- 650 -- 650 --
Old National, Atlanta, GA 550 -- 550 -- 550 --
----------- ------------ ----------- -------------- ----------- -----------------
Subtotal - Purchase-Leasebacks $ 2,825 $ -- $ 2,825 $ -- $ 2,825 $ --
----------- ------------ ----------- -------------- ----------- -----------------
Miscellaneous investments $ 250 $ 916 $ 250 $ 916 $ 1,166 $ 243
----------- ------------ ----------- -------------- ----------- -----------------
Total Income-Producing Properties $ 258,174 $ 104,259 $ 28,026 $ 334,407 $ 362,433 $ 124,184
----------- ------------ ----------- -------------- ----------- -----------------
Land Parcels
---------------------------------------------
Arvida Park of Commerce,
Boca Raton, FL $ 7,378 (1,748) $ 5,630 $ -- $ 5,630 $ --
Church Road, Loudoun Co., VA 2,586 2,483 5,069 -- 5,069 --
Circle 75, Atlanta, GA 12,927 3,694 16,621 -- 16,621 --
Flagship Centre, Rockville, MD 1,729 39 1,768 -- 1,768 --
Holiday Inn - Auburn Hills, Auburn Hills MI 656 423 1,079 -- 1,079 --
Holiday Inn - Rochester, Roch., NY 68 -- 68 -- 68 --
Overland Park, Overland Park, KA 3,771 726 4,497 -- 4,497 --
Prospect Indust. Pk, Ft. Laud., FL 2,203 (396) 1,807 -- 1,807 --
Sterling Blvd., Loudoun Co., VA 505 2,672 3,177 -- 3,177 --
----------- ------------ ----------- -------------- ----------- -----------------
Subtotal $ 31,823 $ 7,893 $ 39,716 $ -- $ 39,716 $ --
----------- ------------ ----------- -------------- ----------- -----------------
Total Investment Properties $ 289,997 $ 112,152 $ 67,742 $ 334,407 $ 402,149 $ 124,184
=========== ============ =========== ============== =========== =================
</TABLE>
<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued) Schedule III-Continued
September 30, 2000
(Dollars in Thousands)
Buildings
and
Date Improvements
Related Date of Acquired/ Depreciable
Purchase-Leasebacks Debt Construction Transferred Lives (Years)
------------------------------------------------- --------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Chateau di Jon, Metairie, LA $ 1,790 11/73
Country Club, Knoxville, TN -- 5/76
Houston Mall, Warner Robbins, GA -- 2/72
Old National, Atlanta, GA -- 8/71
----------------
Subtotal - Purchase-Leasebacks $ 1,790
----------------
Miscellaneous investments $ --
----------------
Total Income-Producing Properties $ 282,493
----------------
Land Parcels
---------------------------------------------
Arvida Park of Commerce,
Boca Raton, FL $ -- 12/84 & 5/85
Church Road, Loudoun Co., VA -- 9/84 & 4/85
Circle 75, Atlanta, GA -- 2/77 & 1/84
Flagship Centre, Rockville, MD -- 8/85
Holiday Inn - Auburn Hills, Auburn Hills MI 206 7/97
Holiday Inn - Rochester, Roch., NY -- 9/86
Overland Park, Overland Park, KA -- 1/77 & 2/85
Prospect Indust. Pk, Ft. Laud., FL -- 10/83 & 8/84
Sterling Blvd., Loudoun Co., VA -- 4/84
----------------
Subtotal $ 206
----------------
Total Investment Properties $ 282,699
================
</TABLE>
<PAGE>
<TABLE>
Schedule III (Continued)
CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES - REAL ESTATE TRUST
NOTES:
(1) See Summary of Significant Accounting Policies for basis of recording
investment properties and computing depreciation. Investment
properties are discussed in Note 3 to Consolidated Financial
Statements.
(2) A reconciliation of the basis of investment properties and accumulated
depreciation follows.
BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
(In thousands)
For The Year Ended September 30
------------------------------------------------------------
2000 1999 1998
------------------- -------------------- -------------------
Basis of investment properties
---------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 351,629 $ 320,061 $ 284,610
Additions (reductions) during the period:
Capital expenditures and property acquisitions from
nonaffiliates 17,404 15,476 34,079
Transfer from banking segment 21,787 -- --
Sales to nonaffiliates (904) -- (415)
Transferred from construction in progress, net 13,909 19,872 2,681
Other (1,676) (3,780) (894)
------------------- -------------------- -------------------
Balance at end of period $ 402,149 $ 351,629 $ 320,061
=================== ==================== ===================
Accumulated depreciation
---------------------------------------------------------------
Balance at beginning of period $ 104,774 $ 96,072 $ 85,915
Additions (reductions) during the period:
Depreciation expense 14,309 12,508 11,170
Transfer from banking segment 6,833 -- --
Sales to nonaffiliates -- -- (216)
Other (1,732) (3,806) (797)
------------------- -------------------- -------------------
Balance at end of period $ 124,184 $ 104,774 $ 96,072
=================== ==================== ===================
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Trust has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
B.F. Saul Real Estate Investment Trust
December 28, 2000 B. Francis Saul II
---------------------------------------------
B. Francis Saul II
Chairman of the Board
Pursuant to the requirements of the Securities Exchanges Act of 1934. this
report had been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates shown.
Signature Title Date
--------- ----- ----
B. Francis Saul II
-------------------------- Trustee, Chairman of the Board
B. Francis Saul II (Principal Executive Officer) December 28, 2000
Stephen R. Halpin, Jr. December 28, 2000
-------------------------- Vice President and Chief
Stephen R. Halpin, Jr. Financial Officer (Principal
Financial Officer)
Ross E. Heasley December 28, 2000
-------------------------- Vice President (Principal
Ross E. Heasley Accounting Officer)
Garland J. Bloom, Jr. December 28, 2000
-------------------------- Trustee
Garland J. Bloom, Jr.
Gilbert M. Grosvenor December 28, 2000
-------------------------- Trustee
Gilbert M. Grosvenor
George M. Rogers, Jr. December 28, 2000
-------------------------- Trustee
George M. Rogers, Jr.
B. Francis Saul III December 28, 2000
-------------------------- Trustee
B. Francis Saul III
John R. Whitmore December 28, 2000
-------------------------- Trustee
John R. Whitmore
