<PAGE>
Registration No. 333-70753
Rule 424(b)(3)
Supplement Dated May 15, 2000 to
Prospectus Dated January 28, 2000
----------------------------
B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
MARCH 31, 2000
----------------------------
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Statements (Unaudited):
(a) Consolidated Balance Sheets at March 31, 2000 and
September 30, 1999
(b) Consolidated Statements of Operations for the three-month
and six-month periods ended March 31, 2000 and 1999
(c) Consolidated Statements of Comprehensive Income and Changes
in Shareholders' Deficit for the three-month and six-month
periods ended March 31, 2000 and 1999
(d) Consolidated Statements of Cash Flows for the six-month
periods ended March 31, 2000 and 1999
(e) Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three months ended March 31, 2000 compared to three
months ended March 31, 1999
Six months ended March 31, 2000 compared to six months
ended March 31, 1999
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
March 31 September 30
--------------------------------
(In thousands) 2000 1999
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<S> <C> <C>
ASSETS
Real Estate
Income-producing properties
Hotel $ 208,517 $ 197,075
Office and industrial 146,166 111,183
Other 3,974 3,923
--------------- ---------------
358,657 312,181
Accumulated depreciation (119,105) (104,774)
--------------- ---------------
239,552 207,407
Land parcels 41,719 39,448
Construction in progress 21,467 20,498
Cash and cash equivalents 17,578 17,857
Other assets 92,135 79,861
--------------- ---------------
Total real estate assets 412,451 365,071
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Banking
Cash and other deposits 276,840 396,146
Federal funds sold and securities purchased under agreements to resell 80,000 194,000
Loans held for sale 116,207 116,797
Loans held for securitization and sale 275,000 --
Investment securities (market value $45,099 and $44,434, respectively) 45,469 44,400
Trading securities 5,004 6,955
Mortgage-backed securities (market value $1,155,695 and $1,285,442, respectively) 1,186,041 1,311,370
Loans and leases receivable (net of allowance for losses of $58,139 for both periods) 7,359,029 6,312,073
Federal Home Loan Bank stock 93,317 87,183
Real estate held for investment or sale (net of allowance for losses of $83,551
and $84,607, respectively) 45,654 52,369
Property and equipment, net 313,673 304,533
Goodwill and other intangible assets, net 26,515 27,902
Interest only strips, net 7,719 7,626
Other assets 303,256 285,415
--------------- ---------------
Total banking assets 10,133,724 9,146,769
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TOTAL ASSETS $ 10,546,175 $ 9,511,840
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LIABILITIES
Real Estate
Mortgage notes payable $ 257,543 $ 213,447
Notes payable - secured 236,200 216,000
Notes payable - unsecured 45,832 46,122
Deferred gains - real estate 112,834 112,834
Accrued dividends payable - preferred shares of beneficial interest 28,176 32,967
Other liabilities and accrued expenses 44,143 42,268
--------------- ---------------
Total real estate liabilities 724,728 663,638
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Banking
Deposit accounts 6,543,592 5,763,486
Borrowings 636,123 631,144
Federal Home Loan Bank advances 1,894,956 1,743,188
Other liabilities 210,388 174,466
Capital notes -- subordinated 250,000 250,000
--------------- ---------------
Total banking liabilities 9,535,059 8,562,284
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Commitments and contingencies
Minority interest held by affiliates 76,073 73,236
Minority interest -- other 218,307 218,307
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TOTAL LIABILITIES 10,554,167 9,517,465
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SHAREHOLDERS' DEFICIT
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares
authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million 516 516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
6,641,598 shares issued 6,642 6,642
Paid-in surplus 92,943 92,943
Deficit (66,242) (63,884)
Net unrealized holding loss (3) 6
--------------- ---------------
33,856 36,223
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
--------------- ---------------
TOTAL SHAREHOLDERS' DEFICIT (7,992) (5,625)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 10,546,175 $ 9,511,840
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
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<TABLE>
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months For the Six Months
Ended March 31 Ended March 31
---------------------------------------------------------------------
(In thousands, except per share amounts) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
REAL ESTATE
Income
Hotels $ 22,594 $ 17,713 $ 43,315 $ 35,775
Office and industrial properties 8,717 5,989 15,740 11,930
Other 936 820 1,626 1,507
------------------- --------------- --------------- ---------------
Total income 32,247 24,522 60,681 49,212
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Expenses
Direct operating expenses:
Hotels 14,101 11,821 27,691 23,419
Office and industrial properties 2,426 1,922 4,419 3,792
Land parcels and other 331 (141) 634 247
Interest expense 11,615 9,927 22,551 20,121
Capitalized interest (242) (154) (467) (375)
Amortization of debt expense 162 66 318 164
Depreciation 4,044 2,905 7,498 5,781
Advisory, management and leasing fees - related parties 2,717 2,245 5,194 4,505
General and administrative 854 182 2,767 487
------------------- --------------- --------------- ---------------
Total expenses 36,008 28,773 70,605 58,141
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Equity in earnings of unconsolidated entities 1,875 1,626 3,978 2,773
Loss on sale of property -- -- -- (1)
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REAL ESTATE OPERATING LOSS $ (1,886) $ (2,625) $ (5,946) $ (6,157)
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BANKING
Interest income
Loans and leases $ 152,454 $ 94,633 $ 291,958 $ 170,576
Mortgage-backed securities 18,877 24,791 38,846 53,679
Trading securities 354 1,033 737 1,602
Investment securities 655 614 1,297 1,229
Other 5,948 2,903 14,201 7,590
------------------- --------------- --------------- ---------------
Total interest income 178,288 123,974 347,039 234,676
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Interest expense
Deposit accounts 51,276 34,891 97,037 72,119
Borrowings 40,890 22,706 82,503 37,580
------------------- --------------- --------------- ---------------
Total interest expense 92,166 57,597 179,540 109,699
------------------- --------------- --------------- ---------------
Net interest income 86,122 66,377 167,499 124,977
Provision for loan and lease losses (12,774) (6,616) (23,762) (10,389)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 73,348 59,761 143,737 114,588
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Other income
Servicing and securitization income 7,629 7,070 13,452 13,582
Deposit servicing fees 19,503 15,815 40,397 31,710
Gain on sales of trading securities, net 80 2,663 358 3,328
Gain (loss) on real estate held for investment or sale, net (1,370) 32,422 (1,486) 32,373
Gain (loss) on sales of loans, net (405) 3,751 (1,317) 3,995
Other 5,103 6,224 11,306 12,177
------------------- --------------- --------------- ---------------
Total other income 30,540 67,945 62,710 97,165
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Continued on following page.
</TABLE>
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<TABLE>
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
===================================================================================================================================
For the Three Months For the Six Months
Ended March 31 Ended March 31
---------------------------------------------------------------------
(In thousands, except per share amounts) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 49,094 $ 42,422 $ 95,996 $ 83,218
Loan 1,755 3,021 2,829 6,352
Property and equipment 8,373 6,409 15,308 12,632
Marketing 2,826 2,937 5,009 5,871
Data processing 6,437 4,052 12,528 8,377
Depreciation and amortization 7,983 8,263 15,979 16,307
Deposit insurance premiums 301 1,096 1,474 2,166
Amortization of goodwill and other intangible assets 670 769 1,386 1,620
Other 13,097 9,066 25,828 18,222
------------------- --------------- --------------- ---------------
Total operating expenses 90,536 78,035 176,337 154,765
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BANKING OPERATING INCOME $ 13,352 $ 49,671 $ 30,110 $ 56,988
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TOTAL COMPANY
Operating income $ 11,466 $ 47,046 $ 24,164 $ 50,831
Income tax provision 3,102 15,946 6,719 15,952
------------------- --------------- --------------- ---------------
Income before minority interest 8,364 31,100 17,445 34,879
Minority interest held by affiliates (669) (5,239) (1,742) (5,194)
Minority interest -- other (6,327) (6,327) (12,656) (12,656)
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TOTAL COMPANY NET INCOME $ 1,368 $ 19,534 $ 3,047 $ 17,029
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NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 14 $ 18,180 $ 339 $ 14,321
NET INCOME PER COMMON SHARE
Income before minority interest $ 1.45 $ 6.17 $ 3.05 $ 6.67
Minority interest held by affiliates (0.14) (1.09) (0.36) (1.08)
Minority interest -- other (1.31) (1.31) (2.62) (2.62)
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NET INCOME PER COMMON SHARE $ -- $ 3.77 $ 0.07 $ 2.97
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Comprehensive Income and Changes in Shareholders' Deficit
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Three Months For the Six Months
Ended March 31 Ended March 31
---------------------------------------------------------------------
(Dollars in thousands) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME
Net income $ 1,368 $ 19,534 $ 3,047 $ 17,029
Other comprehensive income:
Net unrealized holding gains (losses) (6) 7 (9) (28)
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TOTAL COMPREHENSIVE INCOME $ 1,362 $ 19,541 $ 3,038 $ 17,001
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CHANGES IN SHAREHOLDERS' DEFICIT
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516 $ 516 $ 516
------------------- --------------- --------------- ---------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642 6,642
------------------- --------------- --------------- ---------------
PAID-IN SURPLUS
Beginning and end of period 92,943 92,943 92,943 92,943
------------------- --------------- --------------- ---------------
DEFICIT
Beginning of period (66,256) (85,795) (63,884) (81,936)
Net income 1,368 19,534 3,047 17,029
Minority interest in capital contribution -- -- (2,697) --
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (1,354) (1,354) (2,708) (2,708)
------------------- --------------- --------------- ---------------
End of period (66,242) (67,615) (66,242) (67,615)
------------------- --------------- --------------- ---------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period 3 9 6 44
Net unrealized holding gains (losses) (6) 7 (9) (28)
------------------- --------------- --------------- ---------------
End of period (3) 16 (3) 16
------------------- --------------- --------------- ---------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848) (41,848)
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TOTAL SHAREHOLDERS' DEFICIT $ (7,992) $ (9,346) $ (7,992) $ (9,346)
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Six Months
Ended March 31
--------------------------------
(In thousands) 2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (3,919) $ (3,745)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 7,498 5,781
Decrease in accounts receivable and accrued income 707 588
Increase in deferred tax asset (2,112) (2,504)
Increase in accounts payable and accrued expenses 25 1,517
Decrease in tax sharing receivable -- 6,610
Amortization of debt expense 793 643
Equity in earnings of unconsolidated entities (3,978) (2,773)
Other 7,718 20,412
--------------- ---------------
6,732 26,529
--------------- ---------------
Banking
Net income 6,966 20,774
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees (2,199) 4,370
Depreciation and amortization 15,979 16,307
Provision for loan and leases losses 10,988 10,389
Capitalized interest on real estate under development (1,815) (1,642)
Proceeds from sales of trading securities 180,142 401,681
Net fundings of loans held for sale and/or securitization (423,386) (520,011)
Proceeds from sales of loans held for sale and/or securitization 237,733 22,993
Gain on sales of real estate held for sale (959) (31,267)
Gain on sales of trading securities, net (358) (3,328)
(Increase) decrease in interest-only strips (93) 3,104
(Increase) decrease in servicing assets (34,316) 1,679
Decrease in goodwill and other intangible assets 1,393 1,665
(Increase) decrease in other assets 7,722 (70,572)
Increase in other liabilities 30,180 7,745
Minority interest held by affiliates 1,742 5,194
Minority interest - other 4,875 4,875
Decrease in tax sharing payable -- (6,610)
Other 38,717 (7,401)
--------------- ---------------
73,311 (140,055)
--------------- ---------------
Net cash provided by (used in) operating activities 80,043 (113,526)
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (24,867) (21,986)
Property sales 832 --
Property acquisitions (18,441) --
Equity investment in unconsolidated entities 3,263 1,500
Other (154) 1
--------------- ---------------
(39,367) (20,485)
--------------- ---------------
Banking
Proceeds from maturities of investment securities 34,000 --
Net proceeds from redemption of Federal Home Loan Bank stock 6,575 19,043
Net proceeds from sales of loans 11,203 --
Net proceeds from sales of real estate 9,061 29,114
Net fundings of loans and leases receivable (461,656) (654,952)
Principal collected on mortgage-backed securities 124,386 424,086
Purchases of Federal Home Loan Bank stock (12,709) (20,187)
Purchases of investment securities (35,061) (394)
Purchases of loans receivable (909,493) (1,496,079)
Purchases of property and equipment (25,495) (22,953)
Disbursements for real estate held for investment or sale 192 (5,456)
Other 356 (7,616)
--------------- ---------------
(1,258,641) (1,735,394)
--------------- ---------------
Net cash used in investing activities (1,298,008) (1,755,879)
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Continued on following page.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
====================================================================================================================================
For the Six Months
Ended March 31
--------------------------------
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 48,258 $ 9,838
Principal curtailments and repayments of mortgages (4,162) (5,115)
Proceeds from secured note financing 20,200 --
Proceeds from sales of unsecured notes 4,764 1,833
Repayments of unsecured notes (5,054) (6,725)
Costs of obtaining financings (1,848) (505)
Dividends paid - preferred shares of beneficial interest (7,500) (4,000)
--------------- ---------------
54,658 (4,674)
--------------- ---------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 18,024,942 21,580,112
Customer withdrawals of deposits and payments for maturing certificates of deposit (17,244,836) (21,223,140)
Net increase (decrease) in securities sold under repurchase agreements (37,130) 25,675
Advances from the Federal Home Loan Bank 947,471 1,578,325
Repayments of advances from the Federal Home Loan Bank (795,703) (930,282)
Net increase (decrease) in other borrowings 42,109 (3,274)
Cash dividends paid on preferred stock (4,875) (4,875)
Cash dividends paid on common stock (8,000) (26,000)
Other 5,744 13,474
--------------- ---------------
929,722 1,010,015
--------------- ---------------
Net cash provided by financing activities 984,380 1,005,341
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (233,585) (864,064)
Cash and cash equivalents at beginning of period 608,003 1,230,406
--------------- ---------------
Cash and cash equivalents at end of period $ 374,418 $ 366,342
- ------------------------------------------------------------------------------------------------------------------------------------
Components of cash and cash equivalents as presented in the consolidated balance
sheets:
Real Estate
Cash and cash equivalents $ 17,578 $ 15,320
Banking
Cash and other deposits 276,840 313,022
Federal funds sold and securities purchased under agreements to resell 80,000 38,000
--------------- ---------------
Cash and cash equivalents at end of period $ 374,418 $ 366,342
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) 186,691 $ 100,903
Income taxes paid (refunded) (66,810) 94,504
Shares of Saul Centers, Inc. common stock 1,835 1,652
Limited partnership units of Saul Holdings Limited Partnership -- 2,980
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock 1,835 1,652
Distributions from Saul Holdings Limited Partnership 3,263 2,980
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 2,732 3,194
Loans held for sale exchanged for trading securities 179,649 397,064
Loans receivable transferred to (from) loans held for sale and/or securitization 275,000 (125,000)
Loans made in connection with the sale of real estate 569 29,260
Loans receivable transferred to real estate acquired in settlement of loans 412 889
Loans receivable exchanged for mortgage-backed securities held-to-maturity -- 1,792
- ------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements reflect
all adjustments necessary for a fair presentation of the Trust's financial
position and results of operations. All such adjustments are of a normal
recurring nature. These financial statements and the accompanying notes should
be read in conjunction with the Trust's audited consolidated financial
statements included in its Form 10-K for the fiscal year ended September
30,1999. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year.
2. The accompanying consolidated financial statements include the accounts of
B.F.Saul Real Estate Investment Trust and its wholly owned subsidiaries (the
"Real Estate Trust"), which are involved in the ownership and development of
income-producing properties. The accounts of the Trust's 80%-owned banking
subsidiary, Chevy Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase" or the
"Bank") have also been consolidated. Accordingly, the accompanying consolidated
financial statements reflect the assets, liabilities, operating results, and
cash flows for two business segments: Real Estate and Banking. All significant
intercompany balances and transactions have been eliminated.
3. The Real Estate Trust voluntarily terminated its qualification as a real
estate investment trust under the Internal Revenue Code during fiscal 1978. As a
result of the Trust's acquisition of an additional 20% equity interest in the
Bank in June 1990, the Bank became a member of the Trust's affiliated group
filing consolidated federal income tax returns. The current effect of the
Trust's consolidation of the Bank's operations into its federal income tax
return results in the use of the Trust's net operating losses and net operating
loss carryforwards to reduce the federal income taxes the Bank would otherwise
owe.
4. BANKING:
LOANS HELD FOR SALE:
Loans held for sale is composed of the following:
March 31, September 30,
2000 1999
----------------- -----------------
(In thousands)
Single-family residential $ 97,195 $ 112,434
Home improvement and related loans 19,012 4,363
----------------- -----------------
Total $ 116,207 $ 116,797
================= =================
<PAGE>
LOANS HELD FOR SECURITIZATION AND SALE:
At March 31, 2000, loans held for securitization and sale totaled $275,000 and
was composed of automobile loans. There were no loans held for securitization
and sale at September 30, 1999.
LOANS AND LEASES RECEIVABLE:
Loans and leases receivable is composed of the following:
March 31, September 30,
2000 1999
------------- ------------
(In thousands)
Single-family residential $ 4,453,348 $ 3,986,212
Home equity 253,837 239,673
Real estate construction and ground 435,384 419,211
Commercial real estate and multifamily 55,002 60,607
Commercial 751,447 579,668
Automobile 894,300 717,712
Subprime automobile 578,121 480,533
Leasing 285,650 109,724
Home improvement and related loans 89,075 102,483
Overdraft lines of credit and other consumer 30,759 31,646
------------- ------------
7,826,923 6,727,469
------------- ------------
Less:
Undisbursed portion of loans 442,067 379,829
Unearned discounts and net deferred loan
origination costs (32,312) (22,572)
Allowance for loan losses 58,139 58,139
------------- ------------
467,894 415,396
------------- ------------
Total $ 7,359,029 $ 6,312,073
============= ============
<PAGE>
REAL ESTATE HELD FOR INVESTMENT OR SALE:
The Bank's real estate held for investment is carried at the lower of aggregate
cost or net realizable value. The Bank's real estate acquired in settlement of
loans or real estate owned ("REO") is considered to be held for sale and is
carried at the lower of cost or fair value (less estimated selling costs).
Real estate held for investment or sale is composed of the following:
March 31, September 30,
2000 1999
------------ ------------
(In thousands)
Real estate held for investment $ 3,819 $ 3,819
Real estate held for sale 125,386 133,157
------------ ------------
Subtotal 129,205 136,976
------------ ------------
Less:
Allowance for losses on real estate
held for investment 202 202
Allowance for losses on real estate
held for sale 83,349 84,405
------------ ------------
Subtotal 83,551 84,607
------------ ------------
Total real estate held for investment or sale $ 45,654 $ 52,369
============ ============
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The principal business conducted by the Trust and its wholly-owned subsidiaries
is the ownership and development of income-producing properties. The Trust owns
80% of the outstanding common stock of Chevy Chase Bank, F.S.B.("Chevy Chase" or
the "Bank"). At March 31,2000, the Bank's assets accounted for approximately 96%
of the Trust's consolidated assets. The Trust recorded net income of $3.0
million for the six-month period ended March 31,2000 compared to net income of
$17.0 million for the six-month period ended March 31,1999.
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B.F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real
Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The operations conducted by the Real Estate Trust are
designated as "Real Estate," while the business conducted by the Bank and its
subsidiaries is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The number of properties in the Real Estate Trust's investment portfolio at
March 31,2000, which consisted primarily of hotels, office and industrial
projects and land parcels, has increased from the number of properties at
September 30, 1999. As of October 1, 1999, Dulles North Building Two became
operational. This building contains 59,886 square feet of leasable area and is
100% leased. On October 25, 1999, the Real Estate Trust opened a newly
constructed 95-unit TownePlace Suites by Marriott in Ft. Lauderdale, Florida. On
December 13, 1999, the Real Estate Trust acquired an office building located in
McLean, Virginia known as Tyson Park Place. The building contains 247,581 square
feet of leasable area and is over 99% leased. The seller was Chevy Chase Bank.
On March 1, 2000, Dulles North Building Five became operational. This building
contains 80,391 square feet of leasable area and is 100% leased to a single
tenant for a 10-year period.
The twelve hotel properties owned by the Real Estate Trust throughout the first
six-month periods of fiscal 2000 and 1999 experienced average occupancy rates of
64.7% and 63.0%, respectively, and average room rates of $87.67 and $83.85
respectively. Six of these hotels registered improved occupancies and ten
registered higher average room rates in the current period. Overall, the hotel
portfolio experienced an average occupancy rate of 65.0% and an average room
rate of $87.28 during the six-month period ended March 31,2000.
The Real Estate Trust's office and industrial portfolio was 96% leased at March
31,2000, compared to leasing rates of 92% and 98% at September 30, 1999 and at
March 31, 1999, respectively. At March 31,2000, the office and industrial
portfolio had a total gross leasable area of 1.7 million square feet, of which
91,000(5.4%) and 344,000(20.4%), are subject to leases whose terms expire in the
balance of fiscal 2000 and in fiscal 2001, respectively.
<PAGE>
BANKING:
Financial Condition
General. The Bank continued its pattern of growth during the current quarter
with total assets increasing to $10.1 billion, an increase of $338 million from
December 31, 1999. Total loans increased $721 million during the quarter, funded
primarily with available cash and increases in brokered deposits. The Bank
recorded operating income of $13.4 million during the quarter ended March 31,
2000, compared to operating income of $49.7 million in the prior corresponding
quarter. The decrease in income for the quarter was attributable to a $37.4
million decrease in other (non-interest) income due to the inclusion in last
year's results of a $31.6 million gain on the sale of an REO property and an
increase in operating (non-interest) expense of $12.5 million. Partially
offsetting the reduction of income were increases in net interest income of
$19.7 million and deposit servicing fees of $3.7 million. See "Results of
Operations."
At March 31, 2000, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.50%, 5.50%, 7.44% and 11.48%,
respectively. The Bank's regulatory capital ratios exceeded the requirements
under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well-capitalized"
institutions under the prompt corrective action regulations issued pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
See "Capital."
During the quarter ended March 31, 2000, the Bank declared and paid out of the
retained earnings of the Bank a cash dividend on its Common Stock in the amount
of $400 per share.
Asset Quality. Non-Performing Assets. The following table sets forth information
concerning the Bank's non-performing assets at the dates indicated. The figures
shown are after charge-offs and, in the case of REO, after all valuation
allowances.
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)
March 31, December 31, September 30,
2000 1999 1999
------------------- ---------------- ---------------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 4,904 $ 5,132 $ 4,756
Residential construction 70 -- --
Commercial 43 85 269
Subprime automobile 7,878 9,257 6,640
Other consumer 2,684 2,937 1,607
------------------- ---------------- ---------------
Total non-accrual loans (1) 15,579 17,411 13,272
------------------- ---------------- ---------------
Real estate owned 125,386 128,865 133,157
Allowance for losses on real estate owned (83,349) (83,928) (84,405)
------------------- ---------------- ---------------
Real estate owned, net 42,037 44,937 48,752
------------------- ---------------- ---------------
Total non-performing assets $ 57,616 $ 62,348 $ 62,024
=================== ================ ===============
Troubled debt restructurings $ 11,714 $ 11,714 $ 11,714
=================== ================ ===============
Allowance for losses on loans and leases $ 58,139 $ 58,139 $ 58,139
Allowance for losses on real estate held for investment 202 202 202
Allowance for losses on real estate owned 83,349 83,928 84,405
------------------- ---------------- ---------------
Total allowances for losses $ 141,690 $ 142,269 $ 142,746
=================== ================ ===============
Ratios:
Non-performing assets, net to total assets (2)(3) 0.00% 0.04% 0.04%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 344.65% 334.88% 361.35%
Allowance for losses on consumer loans and leases to
non-accrual consumer loans (1)(4) 343.97% 297.93% 440.52%
Allowance for losses on loans and leases
to non-accrual loans (1) 373.19% 333.92% 438.06%
Allowance for losses on loans and leases to total loans
and leases receivable (5) 0.74% 0.82% 0.90%
(1) Before deduction of allowances for losses.
(2) Non-performing assets, net are presented after all allowances for losses on
loans and leases and real estate held for investment or sale.
(3) Total allowances for losses on loans and leases and real estate held for
investment or sale exceed non-performing assets at March 31, 2000.
(4) Includes subprime automobile loans.
(5) Includes loans and leases receivable and loans held for sale and/or
securitization, before deduction of allowance for losses.
</TABLE>
<PAGE>
Non-performing assets totaled $57.6 million, after valuation allowances on REO
of $83.3 million, at March 31, 2000, compared to $62.3 million, after valuation
allowances on REO of $83.9 million, at December 31, 1999. In addition to the
valuation allowances on REO, the Bank maintained $58.1 million of valuation
allowances on its loan and lease portfolio at March 31, 2000. The $4.7 million
decrease in non-performing assets for the current quarter was attributable to
decreases in REO of $2.9 million and non-accrual loans of $1.8 million. See
"Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $15.6 million at March
31, 2000, as compared to $17.4 million at December 31, 1999. At March 31, 2000,
non-accrual loans consisted of $5.0 million of non-accrual real estate loans and
$10.6 million of non-accrual consumer and other loans compared to non-accrual
real estate loans of $5.1 million and non-accrual consumer and other loans of
$12.3 million at December 31, 1999 The decrease in non-accrual consumer and
other loans was primarily due to decreased delinquency rates following
December's traditional seasonal highs.
REO. At March 31, 2000, the Bank's REO totaled $42.0 million, after valuation
allowances on such assets of $83.3 million as set forth in the following table.
The principal component of REO consists of four planned unit developments (the
"Communities"), all of which are under active development. Only commercial
ground properties remain in two of the four Communities.
<PAGE>
<TABLE>
Number Balance Before Balance After Percent
of Gross Charge- Valuation All Valuation Valuation of
Properties Balance Offs Allowances Allowances Allowances Total
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Communities 4 $ 143,922 $ 32,509 $ 111,413 $ 76,140 $ 35,273 83.9%
Residential ground 2 3,549 - 3,549 1,520 2,029 4.8%
Commercial ground 2 17,755 7,646 10,109 5,689 4,420 10.5%
Single-family
residential properties 3 373 58 315 - 315 0.8%
-----------------------------------------------------------------------------------------------------------
Total REO 11 $ 165,599 $ 40,213 $ 125,386 $ 83,349 $ 42,037 100.0%
============================================================================================================
</TABLE>
<PAGE>
During the three months ended March 31, 2000, REO decreased $2.9 million, which
was primarily attributable to additional sales in the Communities and other
properties, partially offset by additional capitalized costs.
During the three months ended March 31, 2000, the Bank received revenues of $4.3
million from dispositions of 71 residential lots or units in the Communities
($3.3 million), approximately 4.5 acres of commercial land in one of the
Communities ($0.3 million) and various single-family residential properties
($0.7 million).
Delinquent Loans. At March 31, 2000, delinquent loans totaled $61.9 million, or
0.8% of loans, compared to $76.7 million, or 1.1% of loans, at December 31,
1999. The following table sets forth information regarding the Bank's delinquent
loans at March 31, 2000.
<PAGE>
<TABLE>
Principal Balance
(Dollars in Thousands)
-------------------------------------------------------------------------------------
Subprime Other Consumer Total as a
Real Estate Automobile Loans Percentage
Loans Loans Total of Loans (1)
------------------ -------------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days...... $ 4,402 $ 38,597 $ 8,134 $ 51,133 0.7%
60-89 days...... 1,692 7,248 1,815 10,755 0.1%
------------------ -------------------- ----------------- ---------------- --------------
Total............ $ 6,094 $ 45,845 $ 9,949 $ 61,888 0.8%
================== ==================== ================= ================ ==============
- --------------------------
(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>
<PAGE>
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 $6.1 million at March 31, 2000, from
$8.4 million at December 31, 1999, as a result of declining delinquency rates
from December's traditional seasonal highs.
Total delinquent subprime automobile loans decreased to $45.8 million at March
31, 2000, from $58.4 million at December 31, 1999, as a result of declining
delinquency rates from December's traditional seasonal highs.
Other consumer loans delinquent 30-89 days remained at $9.9 million for both
March 31, 2000 and December 31, 1999.
Troubled Debt Restructurings. At March 31, 2000 and December 31, 1999, loans
accounted for as troubled debt restructurings totaled $11.7 million. The Bank
had commitments to lend $0.1 million of additional funds on loans that have been
restructured.
Real Estate Held for Investment. At March 31, 2000 and December 31, 1999, real
estate held for investment consisted of two properties with an aggregate book
value of $3.6 million, net of valuation allowances of $0.2 million.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and leases and the
allowance for losses on real estate held for investment or sale. These tables
reflect charge-offs taken against assets during the periods indicated and may
include charge-offs taken against assets which the Bank disposed of during such
periods.
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of Loans and Leases
(Dollars in thousands)
Six Months Ended Three Months
March 31, Ended
------------------------------------------ March 31,
2000 1999 2000
----------------- ----------------- ------------------
<S> <C> <C> <C>
Balance at beginning of period $ 58,139 $ 60,157 $ 58,139
----------------- ----------------- ------------------
Provision for loan and lease losses 23,762 10,389 12,774
----------------- ----------------- ------------------
Charge-offs:
Single-family residential and home equity (485) (316) (279)
Subprime automobile (20,010) (8,113) (10,633)
Other consumer (4,657) (4,463) (2,715)
----------------- ----------------- ------------------
Total charge-offs (25,152) (12,892) (13,627)
----------------- ----------------- ------------------
Recoveries:
Single-family residential and home equity 68 33 2
Subprime automobile 616 335 349
Other consumer 706 392 502
----------------- ----------------- ------------------
Total recoveries 1,390 760 853
----------------- ----------------- ------------------
Charge-offs, net of recoveries (23,762) (12,132) (12,774)
----------------- ----------------- ------------------
Balance at end of period $ 58,139 $ 58,414 $ 58,139
================= ================= ==================
Provision for loan losses to average loans and leases (1) (2) 0.68% 0.51% 0.70%
Net loan charge-offs to average loans and leases (1) (2) 0.68% 0.60% 0.70%
Ending allowance for losses on loans and leases to total
loans and leases (2) (3) 0.74% 1.16% 0.74%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of allowance for losses.
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans and Leases by Type
(Dollars in thousands)
March 31,
--------------------------------------------------------- September 30,
2000 1999 1999
--------------------------- --------------------------- ---------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period allocated to:
Single-family residential $ 3,578 58.5 % $ 1,769 68.2 % $ 3,578 63.4 %
Home equity 556 3.3 631 4.2 556 3.7
Commercial real estate and multifamily 9,189 0.7 10,830 1.5 11,355 0.9
Real estate construction and ground 3,820 3.3 3,222 4.0 1,697 3.5
Commercial 4,666 6.3 3,623 5.0 4,623 6.1
Automobile 3,334 18.7 3,035 7.8 3,334 12.8
Subprime automobile 28,782 7.4 24,365 6.9 28,782 7.4
Home improvement and related loans 3,523 1.4 3,403 1.8 3,523 1.7
Overdraft lines of credit and
other consumer 691 0.4 1,674 0.6 691 0.5
Unallocated -- -- 5,862 -- -- --
----------- ----------- -----------
Total $ 58,139 $ 58,414 $ 58,139
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowance for Losses
Six Months Ended Three Months
March 31, Ended
--------------------------------- March 31,
2000 1999 2000
-------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment $ 202 $ 202 $ 202
Real estate held for sale 84,405 153,564 83,928
-------------- ------------- -------------
Total 84,607 153,766 84,130
-------------- ------------- -------------
Charge-offs:
Real estate held for sale:
Residential ground (64) -- --
Commercial ground (111) -- (111)
Communities (881) (66,760) (468)
------------ ----------- -----------
Total (1,056) (66,760) (579)
------------ ----------- -----------
Balance at end of period:
Real estate held for investment 202 202 202
Real estate held for sale 83,349 86,804 83,349
-------------- ------------- -------------
Total $ 83,551 $ 87,006 $ 83,551
============== ============= =============
Components of Allowance for Losses
March 31, December 31, September 30,
2000 1999 1999
-------------- ------------- -------------
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202
-------------- ------------- -------------
Allowance for losses on real estate held for sale:
Residential ground 1,520 1,520 1,520
Commercial ground 5,689 5,800 5,800
Communities 76,140 76,608 77,085
-------------- ------------- -------------
Total 83,349 83,928 84,405
-------------- ------------- -------------
Total allowance for losses on real
estate held for investment or sale $ 83,551 $ 84,130 $ 84,607
============== ============= =============
</TABLE>
<PAGE>
At March 31, 2000 and December 31, 1999, the Bank's total valuation allowances
for losses on loans and leases and real estate held for investment or sale were
$141.7 million, which remained virtually unchanged from the $142.3 million at
December 31, 1999. Management reviews the adequacy of the valuation allowances
on loans and leases and real estate using a variety of measures and tools
including historical loss performance, delinquent status, internal risk ratings,
current economic conditions and current underwriting policies and procedures.
Using this analysis, management determines a range of acceptable valuation
allowances. Although the amount of delinquent and non-accrual consumer loans
increased during the six months ended March 31, 2000, the provision for loan and
lease losses approximated the amount of net charge-offs for the period,
reflecting management's determination that the overall level of the allowance
remained appropriate.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $100.7 million at March 31, 2000, which
constituted 77.2% of total non-performing real estate assets, before valuation
allowances. During the three months ended March 31, 2000, the Bank recorded net
charge-offs of $0.9 million on these assets. The allowance for losses on real
estate held for sale at March 31, 2000 is in addition to approximately $40.2
million of cumulative charge-offs previously taken against assets remaining in
the Bank's portfolio at March 31, 2000.
The combined allowance for losses on consumer loans and leases, including
automobile, subprime automobile, home improvement and related loans, overdraft
lines of credit and other consumer loans was $36.3 million, unchanged from the
amount at December 31, 1999. The ratios of the allowance for losses on consumer
loans to non-performing consumer loans and to outstanding consumer loans were
344.0% and 1.7%, respectively, at March 31, 2000 compared to 297.9% and 2.1%,
respectively, at December 31, 1999.
Asset and Liability Management. The following table presents the interest rate
sensitivity of the Bank's interest-earning assets and interest-bearing
liabilities at March 31, 2000, which reflects management's estimate of mortgage
loan prepayments, amortization and provisions for loans and leases with
adjustable interest rates. Adjustable and floating rate loans are included in
the period in which their interest rates are next scheduled to adjust, and
prepayment rates are assumed for the Bank's loans based on recent actual and
market experience. Statement savings and passbook accounts with balances under
$20,000 are classified based upon management's assumed attrition rate of 17.5%,
and those with balances of $20,000 or more, as well as all NOW accounts, are
assumed to be subject to repricing within six months or less.
<PAGE>
<TABLE>
Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
--------------- --------------- --------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000 Real estate
loans:
Adjustable-rate $ 778,690 $ 260,345 $ 633,149 $ 543,817 $ 385,474 $ 2,601,475
Fixed-rate 124,382 108,492 366,359 291,146 1,236,478 2,126,857
Home equity credit lines and
second mortgages 130,036 23,893 68,338 38,872 68,642 329,781
Commercial 346,528 15,937 51,106 35,222 40,092 488,885
Consumer and other 455,130 360,468 743,333 289,136 22,103 1,870,170
Loans held for sale 116,207 -- -- -- -- 116,207
Loans held for securitization
and sale 275,000 -- -- -- -- 275,000
Mortgage-backed securities 341,988 319,588 239,064 83,512 201,889 1,186,041
Trading securities 5,004 -- -- -- -- 5,004
Other investments 254,880 -- 45,469 -- -- 300,349
--------------- --------------- --------------- ---------------- -------------- ----------------
Total interest-earning assets 2,827,845 1,088,723 2,146,818 1,281,705 1,954,678 9,299,769
Total non-interest earning assets -- -- -- -- 833,955 833,955
--------------- --------------- --------------- ---------------- -------------- ----------------
Total assets $ 2,827,845 $ 1,088,723 $ 2,146,818 $ 1,281,705 $ 2,788,633 $ 10,133,724
=============== =============== =============== ================ ============== ================
Deposits:
Fixed maturity deposits $ 1,450,207 $ 952,177 $ 246,395 $ 50,771 $ -- $ 2,699,550
NOW, statement and passbook
accounts 1,730,109 43,347 144,372 98,263 209,410 2,225,501
Money market deposit accounts 1,110,958 -- -- -- -- 1,110,958
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 779,592 45,438 243,384 1,384,529 78,136 2,531,079
--------------- --------------- --------------- ---------------- -------------- ----------------
Total interest-bearing
liabilities 5,070,866 1,040,962 634,151 1,533,563 537,546 8,817,088
Total non-interest bearing
liabilities -- -- -- -- 861,971 861,971
Stockholders' equity -- -- -- -- 454,665 454,665
--------------- --------------- --------------- ---------------- -------------- ----------------
Total liabilities &
stockholders' equity $ 5,070,866 $ 1,040,962 $ 634,151 $ 1,533,563 $ 1,854,182 $ 10,133,724
=============== =============== =============== ================ ============== ================
Gap $ (2,243,021) $ 47,761 $ 1,512,667 $ (251,858) $ 1,417,132
Cumulative gap $ (2,243,021) $ (2,195,260) $ (682,593) $ (934,451) $ 482,681
Adjusted cumulative gap as
a percentage of total assets (22.1)% (21.7)% (6.7)% (9.2)% 4.8 %
</TABLE>
<PAGE>
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, as a percentage of total
assets, was a negative 21.7% at March 31, 2000 compared to a negative 26.8% at
December 31, 1999. The improvement in the Bank's one-year gap during this period
reflects an increase in production of adjustable rate mortgage loans with
repricing terms of less than one-year coupled with an increase of automobile
loans held for securitization and sale.
Capital. At March 31, 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 March 31, 2000
in relation to the regulatory requirements in effect at that date. The
information below is based upon the Bank's understanding of the regulations and
interpretations currently in effect and may be subject to change.
<PAGE>
<TABLE>
Regulatory Capital
(Dollars in thousands)
Minimum Excess
Actual Capital Requirement Capital
------------------------ ------------------------ --------------------------
As a % As a % As a %
Amount of Assets Amount of Assets Amount of Assets
------------ --------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity per financial statements $ 479,276
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding gains (2) 1
------------
623,277
Adjustments for tangible and core capital:
Intangible assets (53,806)
Non-allowable minority interest in
REIT Subsidiary (1) (5,300)
Non-includable subsidiaries (3) (4,001)
Non-qualifying purchased/originated loan servicing (5,371)
------------
Total tangible capital 554,799 5.50% $ 151,433 1.50% $ 403,366 4.00%
------------ ========= ============= ========= ============= ===========
Total core capital (4) 554,799 5.50% $ 403,821 4.00% $ 150,978 1.50%
------------ ========= ============= ========= ============= ===========
Tier 1 risk-based capital (4) 554,799 7.44% $ 298,215 4.00% $ 256,584 3.44%
------------ ========= ============= ========= ============= ===========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 51,018
------------
Total supplementary capital 301,018
------------
Total available capital 855,817
Equity investments (3) (4,552)
------------
Total risk-based capital (4) $ 851,265 11.48% $ 596,429 8.00% $ 254,836 3.48%
============ ========= ============= ========= ============= ===========
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(3) Reflects an aggregate offset of $0.6 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
</TABLE>
<PAGE>
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. The following table sets forth the Bank's REO at March 31, 2000, after
valuation allowances of $83.3 million, by the fiscal year in which the property
was acquired through foreclosure.
Fiscal Year (In thousands)
------------ --------------------
1990 (1) (2) $ 11,736
1991 (2) 23,537
1992 (2) 157
1993 -
1994 -
1995 6,292
1996 -
1997 -
1998 -
1999 -
2000 315
--------------------
Total REO $ 42,037
====================
- -----------------------
(1) Includes REO, with an aggregate net book value of $4.6 million, which the
Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $32.8 million, for which
the Bank received an extension of the holding periods through May 14, 2000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
General. The Real Estate Trust's primary cash requirements include operating
expenses, debt service, debt principal repayment and capital expenditures.
During fiscal 1999 and 1998, the Real Estate Trust generated positive cash flow
from operating activities, including the receipt of dividends and tax sharing
payments from Chevy Chase Bank, and is expected to do so for the foreseeable
future. However, the Real Estate Trust's cash flow from operating activities has
historically been insufficient to pay principal and interest on its outstanding
debt securities and to fund capital expenditures. These shortfalls have
historically been funded through external sources including additional
borrowings and refinancings and proceeds from asset sales. Overall, the Real
Estate Trust's ability to generate positive cash flow from operating activities
and to meet its liquidity needs in the future, including debt service payments,
repayment of debt principal and capital expenditures, will continue to depend on
dividends and tax sharing payments from the Bank.
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. This condition is currently the case and is
expected to continue to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes sold to the public, the payment of interest on its
senior secured notes, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financings (including the sale of unsecured
notes), refinancings of maturing mortgage debt, asset sales and tax sharing
payments and dividends from the Bank. See the Consolidated Statements of Cash
Flows included in the Consolidated Financial Statements in this report.
Liquidity. The Real Estate Trust's ability to meet its liquidity needs,
including debt service payments in the balance of fiscal 2000 and subsequent
years, will depend in significant part on its receipt of dividends from the Bank
and tax sharing payments from the Bank pursuant to the tax sharing agreement
among the Trust, the Bank, and their subsidiaries. The availability and amount
of tax sharing payments and dividends in future periods is dependent upon, among
other things, the Bank's operating performance and income, regulatory
restrictions on such payments, and in the case of tax sharing payments, the
continued consolidation of the Bank and the Bank's subsidiaries with the Trust
for federal income tax purposes.
The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods, should enhance prospects for the Real
Estate Trust to receive tax sharing payments and dividends from the Bank. In the
first six months of fiscal 2000, the Bank made no tax sharing payments, but did
make dividend payments of $6.4 million to the Real Estate Trust.
<PAGE>
In recent years, the operations of the Trust have generated net operating losses
while the Bank has reported net income. It is anticipated that the Trust's
consolidation of the Bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the Bank would otherwise owe. If, in any future year, the
Bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the Bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated federal income
tax returns or (ii) the amount of the refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.
Through March 31,2000, the Trust has purchased either in the open market or
through dividend reinvestment approximately 2,450,000 shares of common stock of
Saul Centers (representing 18.2% of such company's outstanding common stock). As
of March 31,2000, the market value of these shares was approximately $39.5
million. All shares have been pledged as collateral with the Real Estate Trust's
credit line banks.
In fiscal 1994, the Real Estate Trust refinanced a significant portion of its
outstanding secured indebtedness with the proceeds of the issuance of $175.0
million aggregate principal amount of 11 5/8% Senior Secured Notes due 2002 (the
"1994 Notes"). In March 1998, the Real Estate Trust issued $200.0 million
aggregate principal amount of 9 3/4% Senior Secured Notes due 2008 (the "1998
Notes"). After providing for the retirement of the 1994 Notes, including a
prepayment premium of $10.0 million and debt issuance costs of approximately
$5.9 million, the Real Estate Trust realized approximately $9.1 million in new
funds. In addition, the Real Estate Trust received about $13.2 million in cash
which had been held as additional collateral by the indenture agent under the
1994 Notes. The 1998 Notes are secured by a first priority perfected security
interest in 8,000 shares or 80% of the issued and outstanding common stock of
the Bank, which constitute all of the Bank common stock held by the Real Estate
Trust. The 1998 Notes are nonrecourse obligations of the Real Estate Trust.
The Real Estate Trust is currently selling unsecured notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
unsecured notes. To the degree that the Real Estate Trust does not sell new
unsecured notes in an amount sufficient to finance completely the scheduled
repayment of outstanding unsecured notes as they mature, it will finance such
repayments from other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. In September 1999, this facility was increased to
$50.0 million and its term was set at three years with provisions for extending
the term annually. The current maturity date is September 29, 2002. This
facility is secured by a portion of the Real Estate Trust's ownership in Saul
Holdings Partnership and Saul Centers. Interest is computed by reference to a
floating rate index. At March 31,2000, the Real Estate Trust had outstanding
borrowings of $27.2 million and unrestricted availability of $4.9 million.
<PAGE>
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 Limited Partnership ("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 credit was increased to $20.0 million and was
extended for an additional year. The current maturity date for this line is July
31, 2001. Interest is computed by reference to a floating rate index. At March
31,2000, the Real Estate Trust had outstanding borrowings of $9.0 million and
unrestricted availability of $7.9 million.
The maturity schedule for the Real Estate Trust's outstanding debt at March 31,
2000 for the balance of fiscal 2000 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- -------------------------------------------------------------------
2000 (1) $ 9,956 $ --- $ 3,851 $ 13,807
2001 34,899 9,000 6,046 49,945
2002 25,880 27,200 7,818 60,898
2003 18,607 --- 10,662 29,269
2004 7,496 --- 9,586 17,082
Thereafter 160,705 200,000 7,869 368,574
- -------------------------------------------------------------------
Total $257,543 $236,200 $ 45,832 $539,575
===================================================================
(1) April 1,2000 - September 30,2000
Of the $257.5 million of mortgage debt outstanding at March 31,2000, $193.7
million was nonrecourse to the Real Estate Trust.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Partnership, the Real Estate Trust shares
in cash distributions from operations and from capital transactions involving
the sale of properties. The partnership agreement of Saul Holdings Partnership
provides for quarterly cash distributions to the partners out of net cash flow.
During the six-month period ended March 31,2000, the Real Estate Trust received
total cash distributions of $3.3 million from Saul Holdings Partnership. During
the period April 1998 through July 1999, the Real Estate Trust reinvested its
quarterly distributions and obtained additional partnership units in Saul
Holdings Partnership. The majority of the Real Estate Trust's ownership interest
in Saul Holdings Partnership has been pledged as collateral with the Real Estate
Trust's lines of credit banks.
In April 2000, the Real Estate Trust completed the refinancing of one hotel and
four office/industrial properties. The new loans total $28.4 million, have a
15-year term, and require amortization based on a 20-year schedule. The new
loans replace floating rate loans and have fixed interest rates of 9.09% for the
hotel and 8.64% for the other properties. The Real Estate Trust received
approximately $8.9 million in new funds from the refinancing.
<PAGE>
Development and Capital Expenditures. During the quarter ended June 30, 1998,
the Real Estate Trust commenced development of four new extended stay hotels:
TownePlace Suites by Marriott containing 91 units located on 2 acre site
owned by the Trust in Avenel Business Park in Gaithersburg, Maryland. This
hotel opened for business on June 24,1999. TownePlace Suites by Marriott
containing 91 units located on part of a 9 acre site owned by the Real
Estate Trust in the Arvida Park of Commerce in Boca Raton, Florida. This
hotel opened for business on June 28,1999.
SpringHill Suites by Marriott containing 146 units located on part of a 9
acre site owned by the Real Estate Trust in the Arvida Park of Commerce in
Boca Raton, Florida. This hotel opened for business on July 9,1999.
TownePlace Suites by Marriott containing 95 units located on
a 3 acre site owned by the Real Estate Trust in Ft. Lauderdale
Commerce Center, Ft. Lauderdale, Florida. This hotel opened
for business on October 25,1999.
The costs for the four hotels aggregated $33 million and were largely funded
with the proceeds of a three year bank loan in the amount of $25.9 million. The
loan has two one-year renewal options.
During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 79,210 square foot single-story office/research and development
building located on a 7 acre site owned by the Real Estate Trust in Dulles North
Corporate Park, Sterling, Virginia. This project, known as Dulles North Building
Two, is adjacent to the Real Estate Trust's Dulles North office building and
near three of the Real Estate Trust's hotel properties. The development cost was
$7.3 million with bank financing of $6.5 million for a five-year term and a
two-year extension option. The project is 100% leased and became operational on
October 1, 1999.
During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia near
Reagan National Airport. The 308-room Crystal City Holiday Inn has been
converted into a Holiday Inn Crowne Plaza, while the 279-room Howard Johnsons
has been 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 are largely
an acceleration of normal capital improvement work as well as some exterior and
interior signage, new marketing materials and a facade upgrade at the Howard
Johnson hotel. A restaurant, which had been operated by an unaffiliated company,
has also been renovated. The incremental costs for the two conversions has been
funded by the Real Estate Trust in part from its internal resources and in part
from its lines of credit.
During the quarter ended June 30, 1999, the Real Estate Trust commenced the
development of an 11-story 229-room hotel on a site adjacent to its Tyson Corner
Holiday Inn in McLean, Virginia. The new hotel will be franchised as a Courtyard
by Marriott and will cost approximately $30.0 million. Financing of $25.0
million has been obtained for an initial period of three years with options for
two one-year extensions. Opening is projected for December 2000.
<PAGE>
Also during the quarter ended June 30, 1999, the Real Estate Trust began
development of an 80,391 square foot single-story office/research and
development building located on a 6.5 acre site owned by the Real Estate Trust
in Dulles North Corporate Park, Sterling, Virginia. The development cost of this
project, known as Dulles North Building Five, was $5.0 million, with financing
of $3.6 million for a three-year term. The project is 100% leased to a single
tenant and became operational on March 1, 2000.
On December 13, 1999, the Real Estate Trust purchased Tysons Park Place, an
office building owned by Chevy Chase Bank. 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. The Bank occupies
approximately 45% of the building. The Real Estate Trust purchased the property
and an adjacent land parcel suitable for further development for $37.0 million.
The transaction was financed with the proceeds of a $32.0 million mortgage loan,
which has a 20-year term and a fixed interest rate of 8.21%.
On December 16, 1999, the Real Estate Trust purchased a 4.6 acre site located in
the Cascades Town Center in Sterling, Virginia for the purpose of constructing a
152 room Hampton Inn. The purchase price was $1,060,000 and the seller was Chevy
Chase Bank. Development costs for the hotel are projected to be $11.3 million.
The hotel will be financed with the proceeds of a $9.15 million mortgage loan,
which has a 3-year term, a floating interest rate and two one-year renewal
options. Opening is projected for November 2000.
During the quarter ended March 31, 2000, the Real Estate Trust began the
development of a 30,000 square foot office flex building located on a 2.2 acre
site in the Avenel Business Park in Gaithersburg, Maryland. The development cost
is projected to be $3.2 million, which the Real Estate Trust is financing with
its lines of credit. Completion is expected in the summer of 2000. The project
is 100% leased to a single tenant.
Also, during the quarter ended March 31, 2000, the Real Estate Trust began the
development of a 53,000 square foot office flex building located on a 3.8 acre
site in Dulles North Corporate Park near other Real Estate Trust projects. The
new building will be known as Dulles North Building Six. Development costs are
projected to be $6.1 million with bank financing of $5.2 million.
Completion is expected in the summer of 2000. The project is 100% leased.
The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in the range of $8.0 to $10.0 million per
year for the next several years.
<PAGE>
Year 2000 Statement - Pursuant to The Year 2000 Information and Readiness
Disclosure Act.
The Trust's relatively smooth transition into the Year 2000 indicates that
remediation efforts were largely successful. The Trust has nonetheless planned
for the possibility that Year 2000 failures may yet be discovered.
The Real Estate Trust believes that there is risk that its operations may be
affected by vendors and tenants who are unable to perform as contracted due to
their own Year 2000 exposure, but there is no known major direct exposure. The
Real Estate Trust's commercial leases contain provisions empowering it to take
certain actions to enforce its right to the timely payment of rent regardless of
the tenant's Year 2000 exposure. While it is not possible at this time to
determine the likely impact of these potential problems, the Real Estate Trust
has evaluated these areas and developed contingency plans as appropriate. The
Real Estate estimates that its incremental cost to meet Year 2000 compliance was
less than $250,000.
<PAGE>
BANKING:
Liquidity. The required liquidity level under OTS regulations at March 31, 2000
was 4.0%. The Bank's average liquidity ratio for the quarter ended March 31,
2000 was 10.0%, compared to 14.7% for the quarter ended December 31, 1999.
The Bank did not securitize and sell any loan receivables during the current
quarter. At March 31, 2000, the Bank is considering the securitization and sale
of $275 million of outstanding automobile receivables. As part of its operating
strategy, the Bank continues to explore opportunities to sell assets and to
securitize and sell home equity, automobile and home loan receivables to meet
liquidity and other balance sheet objectives.
The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the Bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $51.7 million and
$11.9 million, respectively, at March 31, 2000, and $60.7 million and $11.1
million, respectively, at December 31, 1999, both of which are included in other
assets in the Consolidated Balance Sheets. In addition, the Bank owned
subordinated automobile receivables-backed securities with carrying values of
$5.0 million and $5.9 million at March 31, 2000 and December 31, 1999,
respectively, which were classified as trading securities in the Consolidated
Balance Sheets.
The Bank is also obligated under various recourse provisions related to the swap
of single family residential loans for mortgage-backed securities issued by the
Bank. At March 31, 2000, recourse to the Bank under these arrangements was $15.0
million, consisting of restricted cash accounts of $8.3 million and
overcollateralization of receivables of $6.7 million.
The Bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At March 31, 2000 and December 31,
1999 recourse to the Bank under this arrangement totaled $2.0 million and $1.4
million, respectively.
There were no material commitments for capital expenditures at March 31, 2000.
During fiscal 1999, the Bank leased 3.5 acres of land at 7501 Wisconsin Avenue
in Bethesda, Maryland, on which the Bank is developing an office building to use
as its new corporate headquarters. The project is expected to be completed July
2001.
The Bank's liquidity requirements in fiscal 2000 and for years subsequent to
fiscal 2000 will continue to be affected both by the asset size of the Bank, the
growth of which will be constrained by capital requirements, and the composition
of the asset portfolio. Management believes that the Bank's primary sources of
funds will be sufficient to meet the Bank's foreseeable long-term liquidity
needs. The mix of funding sources utilized from time to time will be determined
by a number of factors, including capital planning objectives, lending and
investment strategies and market conditions.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,2000 (the "2000 quarter") COMPARED TO
THREE MONTHS ENDED MARCH 31, 1999 (the "1999 quarter")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$2.3 million and an operating loss of $1.9 million in the 2000 quarter compared
to income before depreciation and amortization of $346,000 and an operating
loss of $2.6 million in the 1999 quarter. The decrease in the operating loss was
largely attributable to improved results from income-producing properties.
Income after direct operating expenses from hotel properties increased
$2,602,000 (44.2%) in the 2000 quarter over the level achieved in the 1999
quarter. $897,000 (15.2%) of this increase reflected improved results from the
twelve hotels owned throughout both quarters, and $1,705,000(29.0%)reflected
results from the non-comparable properties. The increase in total revenue of
$4,881,000(27.6%)exceeded the increase of $2,280,000(19.3%) in direct operating
expenses. For the twelve hotels owned throughout both periods, the increase in
total revenue was $1,995,000 (11.3%) and the increase in direct operating
expenses was $1,097,000(9.3%). The revenue increase was attributable to improved
market conditions, which permitted the Real Estate Trust to raise average room
rates at ten properties and average occupancy levels at six properties.
Income after direct operating expenses from office and industrial properties
increased $2,223,000(54.7%) in the 2000 quarter compared to such income in the
1999 quarter. $239,000(5.9%)of this increase reflected improved results from the
seven properties owned throughout both quarters and $1,984,000(48.8%)reflected
results from the non-comparable properties. The increase in total revenue of
$2,728,000(45.5%) exceeded the increase of $504,000(26.2%)in direct
operating expenses. For the seven properties owned throughout both periods, the
increase in total revenue was $291,000(4.9%) and the increase in direct
operating expenses was $52,000(2.7%).
Other income increased $116,000(14.2%) during the 2000 quarter due to higher
interest income.
Land parcels and other expense increased $472,000(334.1%) during the 2000
quarter. Last year's number reflected a multi-year tax refund at one property.
Interest expense increased $1,688,000(17.0%)in the 2000 quarter, primarily
because of higher mortgage interest and higher interest on bank lines of credit.
The average balance of the Real Estate Trust's outstanding borrowings increased
to $520.4 million for the 2000 quarter from $440.5 million for the 1999 quarter.
The increase in average borrowings was the result of mortgage loan refinancings
and lines of credit borrowings. The weighted average cost of borrowings was
9.20% in the 2000 quarter compared to 9.30% in the 1999 quarter.
Capitalized interest increased $88,000(57.1%) during the 2000 quarter due to the
higher level of development activity in the current period.
Amortization of debt expense increased $96,000(145.5%) in the 2000 quarter,
primarily due to costs experienced in adding new debt.
<PAGE>
Depreciation increased $1,139,000(39.2%) in the 2000 quarter as a result of the
addition of seven new properties and new assets placed in service at existing
properties.
Advisory, management and leasing fees paid to related parties increased $472,000
(21.0%) in the 2000 quarter from the 1999 quarter. The monthly advisory fee in
the 2000 quarter was $349,000 compared to $337,000 in the 1999 quarter, which
resulted in an aggregate increase of $35,000. Management fees increased
$437,000(35.4%) in the current quarter, reflecting both higher hotel sales and
office rents on which the fees are based.
General and administrative expense increased $672,000 in the 2000 quarter,
principally as a result of higher legal expense and the writeoff of abandoned
development expenses.
Equity on earnings of unconsolidated entities reflected earnings of $1,875,000
in the 2000 quarter, an increase of $249,000 (15.3%) over the amount recorded in
the 1999 quarter. The improvement was due to increased period-to-period earnings
of Saul Centers, Inc.
<PAGE>
BANKING:
Overview. The Bank recorded operating income of $13.4 million for the 2000
quarter, compared to operating income of $49.7 million for the 1999 quarter. The
decrease in income for the quarter was primarily attributable to a $37.4 million
decrease in other (non-interest) income resulting from the inclusion in last
year's results of a $31.6 million gain from the sale of one of the Bank's REO
properties. Operating (non-interest) expense also increased by $12.5 million. In
addition, increases in interest expense of $34.6 million and provision for loan
and lease losses of $6.2 million contributed to the reduced income in the 2000
quarter. Partially offsetting the reduction of income was an increase in
interest income of $54.3 million.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $19.7 million (or 29.7%) in the 2000 quarter compared to
the 1999 quarter. Included in interest income during the 2000 quarter was $0.1
million recorded on non-accrual assets and restructured loans. The Bank would
have recorded additional interest income of $0.8 million for the 2000 quarter if
non-accrual assets and restructured loans had been current in accordance with
their original terms. The Bank's net interest income in future periods will
continue to be adversely affected by the Bank's non-performing assets. See
"Financial Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)
Three Months Ended March 31,
---------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------- -----------------------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
---------------- --------------- ------------ ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $ 7,298,062 $ 152,454 8.36 % $ 4,540,011 $ 94,633 8.34 %
Mortgage-backed securities 1,220,651 18,877 6.19 1,698,616 24,791 5.84
Federal funds sold and securities
purchased under agreements to
resell 145,949 2,157 5.91 50,176 601 4.79
Trading securities 25,667 354 5.52 62,245 1,033 6.64
Investment securities 45,460 655 5.76 44,003 614 5.58
Other interest-earning assets 230,627 3,791 6.58 169,838 2,302 5.42
---------------- --------------- ----------------- ---------------
Total 8,966,416 178,288 7.95 6,564,889 123,974 7.55
--------------- ------------ --------------- -------------
Noninterest-earning assets:
Cash 281,102 244,734
Real estate held for investment
or sale 47,972 63,305
Property and equipment, net 305,904 289,668
Goodwill and other intangible
assets, net 26,947 29,701
Other assets 221,293 274,303
---------------- -----------------
Total assets $ 9,849,634 $ 7,466,600
================ =================
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,207,797 2,630 0.87 $ 1,120,073 2,947 1.05
Savings deposits 946,142 4,381 1.85 1,027,580 5,377 2.09
Time deposits 2,591,635 34,976 5.40 1,468,742 17,582 4.79
Money market deposits 1,091,708 9,289 3.40 1,090,268 8,985 3.30
---------------- --------------- ----------------- ---------------
Total deposits 5,837,282 51,276 3.51 4,706,663 34,891 2.97
Borrowings 2,765,613 40,890 5.91 1,623,698 22,706 5.59
---------------- --------------- ----------------- ---------------
Total liabilities 8,602,895 92,166 4.29 6,330,361 57,597 3.64
--------------- ------------ --------------- -------------
Noninterest-bearing items:
Noninterest-bearing deposits 498,612 490,799
Other liabilities 138,257 80,648
Minority interest 144,000 144,000
Stockholders' equity 465,870 420,792
---------------- -----------------
Total liabilities and
stockholders' equity $ 9,849,634 $ 7,466,600
================ =================
Net interest income $ 86,122 $ 66,377
=============== ===============
Net interest spread (2) 3.67 % 3.91 %
============ =============
Net yield on interest-earning
assets (3) 3.84 % 4.04 %
============ =============
Interest-earning assets to
interest-bearing liabilities 104.23 % 103.70 %
============ =============
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
<PAGE>
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Three Months Ended March 31, 2000
Compared to
Three Months Ended March 31, 1999
Increase (Decrease)
Due to Change in (1)
----------------------------------------
Total
Volume Rate Change
------------ ------------ ------------
Interest income:
Loans (2) $ 57,594 $ 227 $ 57,821
Mortgage-backed securities (14,678) 8,764 (5,914)
Federal funds sold and securities
purchased under agreements to resell 1,386 170 1,556
Trading securities (528) (151) (679)
Investment securities 21 20 41
Other interest-earning assets 932 557 1,489
------------ ------------ ------------
Total interest income 44,727 9,587 54,314
------------ ------------ ------------
Interest expense:
Deposit accounts 9,326 7,059 16,385
Borrowings 16,815 1,369 18,184
------------ ------------ ------------
Total interest expense 26,141 8,428 34,569
------------ ------------ ------------
Increase in net interest income $ 18,586 $ 1,159 $ 19,745
============ ============ ============
- --------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to volume
and the change due to rate.
(2) Includes loans held for sale and/or securitization.
<PAGE>
Interest income in the 2000 quarter increased $54.3 million (or 43.8%) from the
level in the 1999 quarter as a result of higher average balances and slightly
higher average yields on loans and leases receivable.
The Bank's net interest spread decreased to 3.67% in the 2000 quarter from 3.91%
in the 1999 quarter. The decrease in the net interest spread primarily reflected
an increase in the cost of deposits and Federal Home Loan Bank advances.
Partially offsetting the increase in deposit and borrowings cost was a slight
increase in the yield on loans and mortgage-backed securities. Average
interest-earning assets as a percentage of average interest bearing liabilities
increased slightly to 104.23% for the 2000 quarter compared to 103.70% for the
1999 quarter.
Interest income on loans, the largest category of interest-earning assets,
increased by $57.8 million from the 1999 quarter primarily because of higher
average balances. Higher average balances of the Bank's single-family
residential loans, which increased $1.2 billion (or 37.3%), resulted in a $20.8
million (or 37.2%) increase in interest income from such loans. Average balances
of automobile loans, commercial loans and real estate construction loans
increased $1.2 billion, $226.6 million and $94.5 million, respectively, and
contributed to a $28.5 million, $4.8 million and $2.5 million increase in
interest income from such loans, respectively. Lower average yields on
automobile loans partially offset the effects of the higher average balances.
The average yield on the loan portfolio in the 2000 quarter increased 2 basis
points (from 8.34% to 8.36%) from the average yield in the 1999 quarter.
Contributing to the slightly higher net yield was an increase in the average
yield on home equity loans (from 7.28% to 8.60%), residential construction loans
(from 8.21% to 9.11%) and commercial loans (from 7.13% to 7.77%). Partially
offsetting the increase was a decrease in the yield on automobile loans which
resulted from management's decision to shift from higher yielding subprime loans
which have higher risks of default to lower yielding prime automobile loans and
leases with relatively lower risk of default. Average subprime automobile loans
as a percentage of total automobile loans and leases declined to 29.8% during
the 2000 quarter from 49.7% during the 1999 quarter. Also offsetting the
increased average yield on the loan portfolio was a decrease in the average
yield on home improvement loans (from 9.62% to 8.55%).
Interest income on mortgage-backed securities decreased $5.9 million (or 23.9%)
primarily because of lower average balances. The effect of the $478.0 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.84% to 6.19%.
Interest expense on deposits increased $16.4 million (or 47.0%) during the 2000
quarter due to increased average rates and average balances. The 54 basis point
increase in the average rate on deposits (from 2.97% to 3.51%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal year 1999, the Bank began using brokered deposits as an alternative
funding source.
Interest expense on borrowings increased $18.2 million (or 80.1%) in the 2000
quarter over the 1999 quarter. A $1.1 billion (or 138.3%) increase in average
balances on Federal Home Loan Bank advances and, to a lesser extent, an increase
in the average rate on such borrowings (from 5.08% to 5.63%) resulted in an
increase of $17.0 million in interest expense from such borrowings.
<PAGE>
Provision for Loan and Lease Losses. The Bank's provision for loan and lease
losses increased to $12.8 million in the 2000 quarter from $6.6 million in the
1999 quarter. The $6.2 million increase was primarily due to increased
charge-offs as a result of the aging of the Bank's loan portfolio following last
year's growth. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other non-interest income decreased to $30.5 million in the 2000
quarter from $67.9 million in the 1999 quarter. The $37.4 million (or 55.1%)
decrease was primarily attributable to a gain of $31.6 million included in the
1999 quarter resulting from the sale of one of the Bank's REO properties in the
pre-development stage. Partially offsetting this decrease was an increase in
deposit service fees.
Deposit servicing fees increased $3.7 million (or 23.3%) during the 2000 quarter
primarily due to fees generated from the continued expansion of the Bank's
branch and ATM network.
Operating Expenses. Operating expenses for the 2000 quarter increased $12.5
million (or 16.0%) from the level in the 1999 quarter. Salaries and employee
benefits increased $6.7 million (or 15.7%) as a result of additions of staff to
the Bank's consumer lending department and branch operations. Also contributing
to increased operating expenses for the 2000 quarter was an increase in other
operating expenses of $4.0 million (or 44.5%). The 1999 quarter included a
reduction to other operating expenses related to services the Bank provided to
First USA following the sale of the credit card portfolio on September 30, 1998.
Partially offsetting the increase in operating expenses was a decrease in loan
expenses as a result of a $2.8 million recovery of prior valuation adjustments
recorded against the Bank's mortgage servicing assets.
<PAGE>
SIX MONTHS ENDED MARCH 31, 2000 (the "2000 period") COMPARED TO SIX MONTHS ENDED
MARCH 31, 1999 (the "1999 period").
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$1.9 million and an operating loss of $5.9 million in the 2000 period compared
to a loss before depreciation and amortization of $212,000 and an operating loss
of $6.2 million in the 1999 period. The decrease in the operating loss was
largely attributable to improved results from income-producing properties.
Income after direct operating expenses from hotels increased $3,268,000 (26.5%)
in the 2000 period over the level achieved in the 1999 period. $836,000(6.8%) of
this increase reflected improved results from twelve hotels owned throughout
both periods and $2,432,000(19.7%) reflected results from the non-comparable
properties. The increase in total revenue of $7,540,000(21.1%) exceeded the
increase of $4,272,000(18.2%) in direct operating expenses. For the twelve
hotels owned throughout both periods, the increase in total revenue was
$3,012,000(8.4%)and the increase in direct operating expenses was
$2,176,000(9.3%). The revenue increase was attributable to improved market
conditions which permitted the Real Estate Trust to raise average room rates at
ten properties and average occupancy levels at six properties.
Income after direct operating expenses from office and industrial properties
increased $3,183,000(39.1%) in the 2000 period compared to such income in the
1999 period. $551,000(6.8%) of this increase reflected improved results from the
seven properties owned throughout both periods and $2,632,000(32.3%) reflected
results from the non-comparable properties. The increase in total revenue of
$3,810,000(31.9%) exceeded the increase of $627,000(16.5%) in direct operating
expenses. For the seven properties owned throughout both periods, the increase
in total revenue was $635,000(5.3%) and the increase in direct operating
expenses was $84,000(2.2%).
Other income increased $119,000(7.9%) during the 2000 period due to higher
interest income.
Land parcels and other expense increased $387,000 (157.0%) during the 2000
period. Last year's number reflected a multi-year tax refund at one property.
Interest expense increased $2,430,000(12.1%) in the 2000 period, primarily
because of higher mortgage interest and higher interest on bank lines of credit
borrowings. Average balances of the Real Estate Trust's outstanding borrowings
increased to $499.9 million for the 2000 period from $444.0 million for the 1999
period. The increase in average borrowings occurred as a result of mortgage loan
refinancings and lines of credit borrowings. The weighted average cost of
borrowings was 9.27% in the 2000 period compared to 9.29% in the 1999 period.
Capitalized interest increased $92,000(24.5%) during the 2000 period due to the
higher level of development activity in the current period.
Amortization of debt expense increased $154,000(93.9%) in the 2000 period,
primarily due to costs experienced in adding new debt.
Depreciation increased $1,717,000(29.7%) in the 2000 period as a result of the
additions of new properties and new assets placed in service at existing
properties.
<PAGE>
Advisory, management and leasing fees paid to related parties increased $689,000
(15.3%) in the 2000 period from the 1999 period. The monthly advisory fee in the
2000 period was $349,000 compared to $337,000 in the prior period, which
resulted in an aggregate increase of $71,000. Management and leasing fees
increased $618,000(24.9%) in the current period, reflecting both higher hotel
sales and office rents on which fees are based.
General and administrative expense increased $2,280,000(468.2%)in the 2000
period, principally as a result of a $1.2 million payment to terminate the
Howard Johnson franchise at one hotel, start-up expenses for new hotels, higher
legal costs and the writeoff of abandoned development expenses.
Equity in earnings of unconsolidated entities reflected earnings of $3,978,000
for the 2000 period and earnings of $2,773,000 for the 1999 period, an increase
of $1,205,000(43.5%). The improvement was due to increased period-to-period
earnings of Saul Centers, Inc.
<PAGE>
BANKING:
Overview. The Bank recorded operating income of $30.1 million for the 2000
period, compared to operating income of $57.0 million for the 1999 period. The
decrease in income for the period was primarily attributable to a $34.5 million
decrease in other (non-interest) income resulting from the inclusion in last
year's results of a $31.6 million gain from the sale of one of the Bank's REO
properties. Operating (non-interest) expense also increased by $21.6 million. In
addition, an increase in provision for loan and lease losses of $13.4 million
contributed to the reduced income in the 2000 quarter. Partially offsetting the
reduction of income was an increase in net interest income of $42.5 million.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $42.5 million (or 34.0%) in the 2000 period compared to
the 1999 period. Included in interest income during the 2000 period was $0.2
million recorded on non-accrual assets and restructured loans. The Bank would
have recorded additional interest income of $1.5 million for the 2000 period if
non-accrual assets and restructured loans had been current in accordance with
their original terms. The Bank's net interest income in future periods will
continue to be adversely affected by the Bank's non-performing assets. See
"Financial Condition - Asset Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)
Six Months Ended March 31,
-----------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------ ----------------------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
----------------- --------------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $ 6,972,919 $ 291,958 8.37 % $ 4,008,650 $ 170,576 8.51 %
Mortgage-backed securities 1,254,203 38,846 6.19 1,812,352 53,679 5.92
Federal funds sold and securities
purchased under agreements to
resell 216,496 6,111 5.65 71,697 1,782 4.97
Trading securities 22,480 737 6.56 46,226 1,602 6.93
Investment securities 45,276 1,297 5.73 44,001 1,229 5.59
Other interest-earning assets 256,388 8,090 6.31 212,114 5,808 5.48
----------------- --------------- ---------------- --------------
Total 8,767,762 347,039 7.92 6,195,040 234,676 7.58
--------------- -------------- -------------- --------------
Noninterest-earning assets:
Cash 291,481 237,986
Real estate held for investment
or sale 48,907 65,087
Property and equipment, net 305,603 286,660
Goodwill and other intangible
assets, net 27,297 30,089
Other assets 220,114 247,794
----------------- ----------------
Total assets $ 9,661,164 $ 7,062,656
================= ================
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,181,148 5,181 0.88 $ 1,089,050 6,144 1.13
Savings deposits 963,498 8,997 1.87 1,022,143 11,097 2.17
Time deposits 2,418,167 64,172 5.31 1,490,806 36,980 4.96
Money market deposits 1,106,012 18,687 3.38 1,062,361 17,898 3.37
----------------- --------------- ---------------- --------------
Total deposits 5,668,825 97,037 3.42 4,664,360 72,119 3.09
Borrowings 2,784,774 82,503 5.93 1,286,277 37,580 5.84
----------------- --------------- ---------------- --------------
Total liabilities 8,453,599 179,540 4.25 5,950,637 109,699 3.69
--------------- -------------- -------------- --------------
Noninterest-bearing items:
Noninterest-bearing deposits 483,257 463,233
Other liabilities 123,302 75,737
Minority interest 144,000 144,000
Stockholders' equity 457,006 429,049
----------------- ----------------
Total liabilities and
stockholders' equity $ 9,661,164 $ 7,062,656
================= ================
Net interest income $ 167,499 $ 124,977
=============== ==============
Net interest spread (2) 3.67 % 3.89 %
============== ==============
Net yield on interest-earning
assets (3) 3.82 % 4.03 %
============== ==============
Interest-earning assets to
interest-bearing liabilities 103.72 % 104.11 %
============== ==============
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
<PAGE>
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Six Months Ended March 31, 2000
Compared to
Six Months Ended March 31, 1999
Increase (Decrease)
Due to Change in (1)
--------------------------------------
Total
Volume Rate Change
---------- ----------- -----------
Interest income:
Loans (2) $ 129,720 $ (8,338) $ 121,382
Mortgage-backed securities (21,444) 6,611 (14,833)
Federal funds sold and securities
purchased under agreements to resell 4,054 275 4,329
Trading securities (784) (81) (865)
Investment securities 36 32 68
Other interest-earning assets 1,322 960 2,282
---------- ----------- -----------
Total interest income 112,904 (541) 112,363
---------- ----------- -----------
Interest expense:
Deposit accounts 16,657 8,261 24,918
Borrowings 44,336 587 44,923
---------- ----------- -----------
Total interest expense 60,993 8,848 69,841
---------- ----------- -----------
Increase in net interest income $ 51,911 $ (9,389) $ 42,522
========== =========== ===========
- --------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to volume
and the change due to rate.
(2) Includes loans held for sale and/or securitization.
<PAGE>
Interest income in the 2000 period increased $112.4 million (or 47.9%) from the
level in the 1999 period as a result of higher average balances of loans and
leases receivable, which was partially offset by lower average yields on loans
and leases receivable.
The Bank's net interest spread decreased to 3.67% in the 2000 period from 3.89%
in the 1999 period. The 22 basis point reduction in the net interest spread
primarily reflected the decline in the yield on loans resulting from lower
yields in consumer loans. Partially offsetting this decline was an increase in
the average balances of earning assets, which was funded primarily with higher
cost Federal Home Loan Bank advances and brokered deposits. Average
interest-earning assets as a percentage of average interest bearing liabilities
decreased to 103.72% for the 2000 period compared to 104.11% for the 1999
period.
Interest income on loans, the largest category of interest-earning assets,
increased by $121.4 million from the 1999 period primarily because of higher
average balances. Higher average balances of the Bank's single-family
residential loans, which increased $1.5 billion (or 53.0%), resulted in a $51.5
million (or 52.0%) increase in interest income from such loans. Slightly lower
average yields on single-family residential loans partially offset the effects
of the higher average balances. Average balances of automobile loans, commercial
loans and real estate construction loans increased $1.1 billion, $220.6 million
and $109.1 million, respectively, and contributed to a $53.3 million, $8.7
million and $5.1 million increase in interest income from such loans,
respectively. Lower average yields on automobile loans partially offset the
effects of the higher average balances.
The average yield on the loan portfolio in the 2000 period decreased 14 basis
points (from 8.51% to 8.37%) from the average yield in the 1999 period.
Contributing to the lower net yield was a decrease in the yield on automobile
loans which resulted from management's decision to shift from higher yielding
subprime loans which have higher risks of default to lower yielding prime
automobile loans and leases with relatively lower risk of default. Average
subprime automobile loans as a percentage of total automobile loans and leases
declined to 31.9% during the 2000 period from 54.1% during the 1999 period. Also
contributing to the decreased average yield on the loan portfolio was a decrease
in the average yield on home improvement loans (from 9.97% to 8.89%). An
increase in the average yield on home equity loans (from 7.14% to 8.40%)
resulting from increases in the index on which the interest rates on such loans
are based slightly offset the decreases in the average yield on the loan
portfolio.
Interest income on mortgage-backed securities decreased $14.8 million (or 27.6%)
primarily because of lower average balances. The effect of the $558.1 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.92% to 6.19%.
Interest expense on deposits increased $24.9 million (or 34.6%) during the 2000
period due to increased average rates and average balances. The 33 basis point
increase in the average rate on deposits (from 3.09% to 3.42%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal year 1999, the Bank began using brokered deposits as an alternative
funding source.
<PAGE>
Interest expense on borrowings increased $44.9 million (or 119.5%) in the 2000
period over the 1999 period. A $1.3 billion (or 222.3%) 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 5.19% to 5.62%) resulted
in an increase of $38.8 million in interest expense. Also contributing to the
increase in interest expense on borrowings was an increase in the average
balance of $142.0 million and average yield (from 4.87% to 5.64%) in securities
sold under repurchase agreements.
Provision for Loan and Lease Losses. The Bank's provision for loan and lease
losses increased to $23.8 million in the 2000 period from $10.4 million in the
1999 period. The $13.4 million increase was primarily due to increased
charge-offs as a result of the aging of the Bank's loan portfolio following last
year's growth. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other non-interest income decreased to $62.7 million in the 2000
period from $97.2 million in the 1999 period. The $34.5 million (or 35.5%)
decrease was primarily attributable to a gain of $31.6 million included in the
1999 period resulting from the sale of one of the Bank's REO properties in the
pre-development stage. Partially offsetting this decrease was an increase in
deposit service fees.
Deposit servicing fees increased $8.7 million (or 27.4%) during the 2000 period
primarily due to fees generated from the continued expansion of the Bank's
branch and ATM network.
Operating Expenses. Operating expenses for the 2000 period increased $21.6
million (or 13.9%) from the level in the 1999 period. Salaries and employee
benefits increased $12.8 million (or 15.4%) as a result of additions of staff to
the Bank's consumer lending department and branch operations. Also contributing
to increased operating expenses for the 2000 period was an increase in other
operating expenses of $7.6 million (or 41.7%). The 1999 period included a
reduction to other operating expenses related to services the Bank provided to
First USA following the sale of the credit card portfolio on September 30, 1998.
Partially offsetting the increase in operating expenses was a decrease in loan
expenses as a result of a $6.3 million recovery of prior valuation adjustments
recorded against the Bank's mortgage servicing assets.
