As filed with the Securities and Exchange Commission on January 12, 2000.
Registration No. 333-70753
Post-Effective Amendment No. 11 to Registration No. 33-34930
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Post-Effective Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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B.F. Saul Real Estate Investment Trust Maryland
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(Exact name of registrant as (State or other jurisdiction
specified in its charter) of incorporation or organization)
6712 52-605334
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(Primary standard industrial (I.R.S. employer identification number)
classification code number)
8401 Connecticut Avenue,
Chevy Chase, Maryland 20815 301/986-6000
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Henry Ravenel, Jr.
8401 Connecticut Avenue,
Chevy Chase, Maryland 20815 301/986-6000
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of correspondence to:
Thomas H. McCormick, Esq.
Shaw Pittman
2300 N Street, N.W.
Washington, D.C. 20037
(202) 663-8000
Approximate date of commencement of proposed sale to the public: From time to
time following the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the General Rules and Regulations under the
Securities Act of 1933, the prospectus included herein also relates to
Registration Statement No. 33-34930.
PROSPECTUS SUBJECT TO COMPLETION DATED JANUARY 12, 2000
$70,704,000
B.F. SAUL REAL ESTATE INVESTMENT TRUST
UNSECURED NOTES
Due one year to ten years from date of issue Interest payable each six
months from date of issue and at maturity
Minimum Investment: $5,000
Note Maturities Interest Rate
From Issue Date Per Annum
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One Year 5.0%
Two Years 7.0%
Three Years 9.0%
Four Years 9.5%
Five to Ten Years 10.0%
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Per Note Total
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Public Offering Price 100% $ 70,704,000
Proceeds to Trust Before Expenses 100% $ 70,704,000
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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There is no established trading market for the notes, and the Trust does
not anticipate that an active trading market will be established. These notes
are unsecured obligations and are not guaranteed or insured by the FDIC or any
other government agency. Furthermore, an investment in the notes involves
significant risks.
See "Risk Factors" beginning on page 7 for a discussion of material risks
that you should consider before you invest in the notes being sold by this
prospectus.
The date of this prospectus is _________, 2000.
[The information in this prospectus is not complete and may be
changed. We may not sell these notes until the registration
statement filed with the Securities and Exchange Commission has
been declared effective. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.]
TABLE OF CONTENTS
PROSPECTUS SUMMARY .............................................................
RISK FACTORS ...................................................................
FORWARD LOOKING STATEMENTS DISCLOSURE...........................................
USE OF PROCEEDS ................................................................
PLAN OF DISTRIBUTION ...........................................................
HOW TO PURCHASE NOTES ..........................................................
DESCRIPTION OF NOTES ...........................................................
BUSINESS .......................................................................
General ................................................................
Real Estate ....................................................
Banking ........................................................
PROPERTIES .....................................................................
Real Estate ............................................................
Banking ................................................................
LEGAL PROCEEDINGS ..............................................................
SELECTED FINANCIAL DATA ........................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..........................
Financial Condition and Results of Operations for Fiscal Years 1999, 1998
and 1997
Financial Condition ....................................................
Real Estate ....................................................
Banking ........................................................
Results of Operations ..................................................
Fiscal 1999 Compared to Fiscal 1998 ............................
Real Estate ............................................
Banking ................................................
Fiscal 1998 Compared to Fiscal 1997 ............................
Real Estate ............................................
Banking ................................................
Liquidity and Capital Resources ................................................
General.........................................................
Real Estate ....................................................
Banking ........................................................
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................................
Management's Statement on Responsibility ...............................
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST ...................................
Executive Officers of the Trust Who Are Not Directors ..................
Committees of the Board of Trustees ....................................
EXECUTIVE COMPENSATION .........................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT .............................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................................
EXPERTS ........................................................................
LEGAL MATTERS ..................................................................
AVAILABLE INFORMATION ..........................................................
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. To
understand this offering fully, you should read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements and the notes
to those statements.
B.F. Saul Real Estate Investment Trust
The B.F. Saul Real Estate Investment Trust operates as a Maryland statutory real
estate investment trust. Our principal business activity is the ownership and
development of income-producing properties. In addition, we own 80% of the
outstanding common stock of Chevy Chase Bank, F.S.B., whose assets accounted for
96% of our consolidated assets at September 30, 1999. By virtue of our ownership
of a majority interest in Chevy Chase Bank, we are considered to be a savings
and loan holding company subject to certain government regulations.
Our long-term business objectives are to increase cash flow from operations and
to maximize the capital appreciation of our real estate. Our properties are
located predominantly in the mid-atlantic and southeastern regions of the United
States and consist principally of hotels, office and industrial projects and
undeveloped land parcels.
Chevy Chase Bank, F.S.B.
Chevy Chase Bank is a federally chartered and federally insured stock savings
bank which conducts business primarily in the metropolitan Washington, D.C.
area. The bank has its home office in McLean, Virginia and its executive offices
in Chevy Chase, Maryland. At September 30, 1999, the bank had total assets of
$9.1 billion and total deposits of $5.8 billion. Based on total consolidated
assets at September 30, 1999, Chevy Chase Bank is the largest bank headquartered
in the Washington, D.C. metropolitan area.
Address of the Real Estate Trust
The executive offices of the Real Estate Trust are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815 and the sales office is located at 7200
Wisconsin Avenue, Suite 903, Bethesda, Maryland 20814. Our telephone number is
301-986-6207.
Dependence on Payments from Chevy Chase Bank to Fund Trust Expenses
During the past five fiscal years, we had sufficient funds available to pay our
required interest, debt and ground rent expenses. On a consolidated basis, our
total available earnings exceeded our fixed charges by $85.7 million, $166.0
million, $61.2 million, $22.0 million and $28.3 million in fiscal years 1999,
1998, 1997, 1996 and 1995. However, the fixed charges of our real estate
operations have exceeded the revenues generated by our real estate operations
for the past five fiscal years. As a result, we have had to depend on the
receipt of dividends and tax sharing payments from Chevy Chase Bank to pay our
fixed charges, including payment of principal and interest on the notes.
Excluding the dividend and tax sharing payments from Chevy Chase Bank, our fixed
charges would have exceeded our available earnings by $10.2 million, $18.5
million, $19.0 million, $24.2 million and $27.3 million in fiscal years 1999,
1998, 1997, 1996 and 1995.
THE OFFERING
Securities Offered..... We are offering $70,704,000 in principal
amount of notes with varying interest
rates as fixed from time to time by us.
As of December 31, 1999, we had $61,502,000
in principal amount of notes available
to be issued.
Maturity Date.......... The notes will mature from one to ten
years from the date of issue, as selected
by you.
Interest Payment Dates. Interest on the notes will be payable each
six months after the date of issue and at
maturity.
Seniority.............. The notes will be unsecured obligations
and will rank junior to our secured debt,
which at September 30, 1999 totaled $431.5
million. In addition, the notes will rank
equally with all of our other unsecured
debt, which totaled $77.9 million at
September 30, 1999.
Set Asides............. We have not set aside any money for the
purpose of paying principal and interest
on the notes.
Independent Review..... No independent rating agency has reviewed
the terms of the notes to determine
whether they are a suitable investment.
Redemption............. At our sole option, we can repurchase from
you for the same price you paid us any
note that has been outstanding for more
than one year. We can redeem the note on
the first anniversary of the date of issue
or on any interest payment date
afterwards.
Covenants.............. The indenture under which the notes will
be sold does not impose any restrictions
on our ability to pay dividends, make
distributions to our shareholders, incur
debt or issue additional securities.
Claims of Noteholders.. You will not have any claim on the
assets of Chevy Chase Bank and you may
look only to our earnings and assets for
the payment of interest and principal on
your notes.
Use of Proceeds........ We will use the net proceeds of the
offering of these notes primarily to repay
maturing notes. Any proceeds not used to
repay maturing notes will be used for
other general corporate purposes.
RISK FACTORS
An investment in these notes involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences and
who are able to lose their entire investment. You should consider the following
risks in addition to the other information set forth in this prospectus before
making your investment decision.
Risks Relating to these Notes
The notes are not secured by the Real Estate Trust or Chevy Chase Bank and you
will only be paid principal and interest on your notes after other debts have
been paid.
You are only entitled to receive payments of principal and interest on your
notes from the funds and assets of the Real Estate Trust available after our
secured debt and other senior obligations have been paid. As of September 30,
1999, our secured debt was $431.5 million, including $200 million of debt
secured by the common stock of Chevy Chase Bank owned by us. In addition, we
will pay principal and interest on your notes at the same time we make payments
on our other unsecured debt, which totaled $77.9 million as of September 30,
1999.
During the past five fiscal years, we had sufficient funds available to pay our
required interest, debt and ground rent expenses. On a consolidated basis, our
total available earnings exceeded our fixed charges by $85.7 million, $166.0
million, $61.2 million, $22.0 million and $28.3 million in fiscal years 1999,
1998, 1997, 1996 and 1995. However, the fixed charges of our real estate
operations have exceeded the revenues generated by our real estate operations
for the past five fiscal years. As a result, we have had to depend on the
receipt of dividends and tax sharing payments from Chevy Chase Bank to pay our
fixed charges, including payment of principal and interest on the notes.
Excluding the dividend and tax sharing payments from Chevy Chase Bank, our fixed
charges would have exceeded our available earnings by $10.3 million, $18.5
million, $19.0 million, $24.2 million and $27.3 million in fiscal years 1999,
1998, 1997, 1996 and 1995.
During fiscal years 1999, 1998, 1997, 1996 and 1995, we were required to pay
$40.6 million, $34.2 million, $30.7 million, $30.8 million and $31.9 million in
principal and interest on our secured and unsecured notes. Based on our secured
and unsecured notes outstanding as of September 30, 1999, we will be required to
pay $34.2 million, $42.5 million and $35.1 million in principal and interest in
fiscal years 2000, 2001 and 2002.
If we are unable to pay principal and interest on your notes, you are only
entitled to be paid from the assets of the Real Estate Trust; you will not have
any claim on any of the assets of Chevy Chase Bank.
We are using the proceeds from the sale of these notes primarily to repay
maturing notes. As a result, we will need to rely on other sources of funds to
pay principal and interest on your notes.
We are using the proceeds from the sale of these notes primarily to repay
maturing notes and are not investing the proceeds in the Real Estate Trust's
business or setting aside money to pay principal and interest on the notes. As a
result, we will need to rely on other sources of funds to pay principal and
interest on your notes. In the future, our ability to make these payments will
depend on our available cash and our ability to borrow additional funds. In
addition, we may sell additional notes in the future as a source of funds to pay
principal and interest on your notes However, we cannot guarantee that we will
have sufficient funds in the future to make payments of principal and interest
on your notes.
The terms of the notes do not limit our ability to pay dividends, make
distributions, issue additional securities or borrow money, any of which may
diminish our ability to make payments on your notes.
The indenture under which the notes will be issued does not include certain
covenants intended to protect the rights of investors which are customary in
indentures for similar public debt securities. In particular, the indenture does
not limit our ability to pay dividends, make distributions, issue additional
securities or borrow money. However, our ability to pay dividends, make
distributions, issue additional securities and borrow money is limited by
various other agreements to which we are a party, including the indenture for
our outstanding 9 3/4% Senior Secured Notes due 2008. For more information about
the terms of the notes, see the disclosure under the subheading "Description of
the Notes."
We can repurchase the notes from you before you have received the full benefit
of your investment.
At our option, we can repurchase from you at the same price you paid us any note
that has been outstanding for more than one year. If market interest rates are
lower at the time we repurchase your notes than they were when you bought the
notes, you may not be able to reinvest your money at the same rate as your note.
Furthermore, if we choose to repurchase any of the notes prior to maturity, we
will have less money available to pay principal and interest on the remaining
outstanding notes.
No independent rating agency, underwriter, broker or dealer has reviewed the
terms of the notes to determine if they are a suitable investment for you.
We have not used and do not intend to use an underwriter or selling agent to
sell these notes. In addition, the notes have not been rated by an independent
rating agency. As a result, you will not have the benefit of an independent
review of the Real Estate Trust, the terms of the notes and the accuracy and
completeness of the information contained in the prospectus that a rating
agency, underwriter or other selling agent might provide if they were involved
in selling the notes. The officers of the Real Estate Trust who will be selling
these notes to you are not registered with the Securities and Exchange
Commission as brokers or dealers, so they will not be in a position to determine
the suitability of these notes for your investment profile and objectives. You
must decide for yourself or seek investment advice to determine whether these
notes represent a suitable investment for you.
We have not set aside or reserved any money for the purpose of paying principal
and interest on the notes.
Risks Relating to Our Business
Our ability to raise enough money to pay principal and interest on your notes is
limited by several factors.
We primarily rely on external sources of funds to repay principal on maturing
debt, including on the notes, and to make capital improvements. In the past,
these external sources of funds have included sales of debt securities,
including sale of the notes, refinancings of maturing mortgage debt, asset
sales, dividends paid by Chevy Chase Bank and tax sharing payments from Chevy
Chase Bank under a tax sharing agreement. In 2000 and beyond, we will be
required to raise substantial additional amounts of cash from these external
sources. Our ability to raise that cash depends on various factors including:
o Our ability to sell these notes. At present, we are selling these notes
principally to pay outstanding notes as they mature. If we do not sell enough
new notes to repay maturing notes, we will need to raise funds from other
sources. In fiscal 1999, we sold $11.9 million in new notes and repaid
principal on $16.1 million in maturing notes.
o Our continued receipt of dividends and tax sharing payments from Chevy Chase
Bank. To meet our cash needs, we rely substantially on dividends paid on the
common stock of Chevy Chase Bank, of which we own 80%, and payments made by
Chevy Chase Bank under the tax sharing agreement. The availability and amount
of tax sharing payments and/or dividends in the future depends primarily on
(1) Chevy Chase Bank's operating performance and income, (2) restrictions
imposed by Chevy Chase Bank's regulators, and (3) in the case of tax sharing
payments, the continued consolidation of Chevy Chase Bank and its
subsidiaries with the Real Estate Trust for federal income tax purposes. If
Chevy Chase Bank does not pay sufficient dividends or make sufficient
payments under the tax sharing agreement, we will need to raise funds from
other sources. In fiscal 1999, Chevy Chase Bank paid us $26.4 million in
dividends and $6.6 million in tax sharing payments.
The Real Estate Trust has historically experienced losses, before taking into
account asset sales, which may affect our ability to pay principal and interest
on the notes.
In the last eleven years, we have lost money before accounting for gains from
the sale of properties and before the consolidation of Chevy Chase Bank into our
financial statements. For the fiscal year ended September 30, 1999, this loss
was $(11.9 million). If we did not consolidate Chevy Chase Bank into our
financial statements, our overall operating results in fiscal 1999 and prior
years would have been worse. If we continue to operate at a loss, our ability to
pay principal and interest on the notes will be significantly diminished. For
more information regarding the financial performance of the Real Estate Trust as
viewed by management, see the disclosure under the subtitle "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Each year, the fixed expenses of our real estate operations are greater than our
earnings generated by our real estate operations available to pay those
expenses, which may hurt our ability to pay principal and interest on the notes.
During the past five fiscal years, we had sufficient funds available to pay our
required interest, debt and ground rent expenses. On a consolidated basis, our
total available earnings exceeded our fixed charges by $85.7 million, $166.0
million, $61.2 million, $22.0 million and $28.3 million in fiscal years 1999,
1998, 1997, 1996 and 1995. However, the fixed charges of our real estate
operations have exceeded the revenues generated by our real estate operations
for the past five fiscal years. As a result, we have had to depend on the
receipt of dividends and tax sharing payments from Chevy Chase Bank to pay our
fixed charges, including payment of principal and interest on the notes.
Excluding the dividend and tax sharing payments from Chevy Chase Bank, our fixed
charges would have exceeded our available earnings by $10.3 million, $18.5
million, $19.0 million, $24.2 million and $27.3 million in fiscal years 1999,
1998, 1997, 1996 and 1995. If we are unable to fund any future shortfall between
available earnings and required payments with payments from Chevy Chase Bank or
from other sources, our ability to pay principal and interest on the notes may
be diminished.
Our business of owning and developing real estate properties is inherently
risky.
Most of our operating expenses and almost all of our debt service payments
associated with the operation of our income-producing properties are fixed,
while the income generated from these properties can significantly fluctuate,
for example by reductions in occupancy and rental rates. In addition, the
operating expenses of income-producing properties can increase due to inflation
and other general economic factors outside our control. As a result, our ability
to pay the fixed costs with cash flow produced by our income-producing
properties is highly dependent on our ability to maintain or increase rental
income and hotel sales revenue.
Rental income, which is a major source of our revenues, is susceptible to
numerous risks, including adverse changes in national or local economic
conditions and other factors which might impair the ability of existing tenants
to make rental payments and reduce the demand of new tenants for vacant space.
Hotel income, another major source of our revenues, is also susceptible to rapid
declines if customer demand decreases because advance bookings represent only a
small portion of overall revenues and can be cancelled. In addition, the
profitability of our income-producing properties can be reduced by an increase
in real estate taxes or other governmental action.
Real estate investments, including ours, tend to be relatively illiquid, meaning
that they can not be sold quickly for cash. This lack of liquidity limits our
ability to promptly change the types of properties we own in response to changes
in economic, demographic, social, financial and investment conditions.
For more information regarding our business, see the disclosure under the
subtitle "Business -- General -- Real Estate."
Risks Relating to the Business of Chevy Chase Bank
The following risk factors relate to the business of Chevy Chase Bank. This
information is important because it affects Chevy Chase Bank's ability to pay
dividends and to make tax sharing payments to us. More information about the
business of Chevy Chase Bank can be found under the subtitle
"Business--General--Banking."
Chevy Chase Bank's ability to generate acceptable levels of earnings following
the sale of its credit card portfolio may take time and may reduce its ability
to pay dividends to the Real Estate Trust in the future.
On September 30, 1998, Chevy Chase Bank sold its credit card portfolio to First
USA Bank, N.A. The credit card program had historically been a major source of
earnings for the bank. The bank has been able to operate profitably by relying
on its branch system and retail customer base as a significant source of
low-cost funds, and investing those funds in assets that, although offering
lower yields than credit cards, involve less credit risk and overhead costs.
However, achieving acceptable levels of profitability may continue to take time
as the bank continues to restructure its operations, which could reduce the
ability of the bank to pay dividends to the Real Estate Trust. The bank's
operating income for fiscal 1999 was $96.0 million, which included a $31.6
million gain from the sale of a real estate project.
Chevy Chase Bank's operating results may be negatively affected by an increase
in interest rates, which may affect the ability of the bank to pay dividends to
the Real Estate Trust.
Chevy Chase Bank's operating results depend in large part on the difference
between the interest the bank receives from its loans, leases, securities and
other assets and the interest it pays on its deposits and liabilities. In
general, the bank's liabilities have shorter terms and adjust more quickly to
changes in market interest rates than its assets. In addition, the sale of the
bank's credit card portfolio and the recent demand for fixed rate rather than
adjustable rate loans have resulted in more of the bank's assets consisting of
loans that do not adjust as quickly to changes in market interest rates.
Accordingly, an increase in market interest rates could negatively affect the
operating results of the bank and may hurt the bank's ability to pay us
dividends.
Chevy Chase Bank continues to grow its residential mortgage, automobile and
commercial loan portfolios; automobile and commercial loans are riskier than
residential mortgage loans.
Chevy Chase Bank continues to grow its consumer and commercial lending business.
Automobile and commercial loans have shorter terms and higher interest rates
than residential mortgage loans, but are generally riskier than residential
mortgage loans. The bank, through one of its subsidiaries, also makes automobile
loans to applicants who have adverse credit events in their credit history.
These loans typically experience higher rates of delinquencies, repossessions
and losses than loans originated under the bank's traditional lending program.
If these loans are unprofitable or further additions to the bank's allowance for
loan losses become necessary, the ability of the bank to pay dividends to us may
be adversely affected.
Further reduction in the amount of non-interest income earned by Chevy Chase
Bank may affect the bank's ability to pay dividends to the Real Estate Trust.
In recent years, non-interest income had become an increasingly large component
of Chevy Chase Bank's net income. The bank historically earned non-interest
income from servicing and securitization income, credit card fees, deposit
servicing fees and gains on sales of loans; in particular, a substantial portion
of the bank's non-interest income was earned from credit card related
activities. However, the bank no longer earns non-interest income from credit
card related activities following the September 30, 1998 sale of its credit card
portfolio. The resulting reduction in non-interest income may affect the ability
of the bank to pay us dividends.
Chevy Chase Bank's allowance for losses might not be sufficient to cover its
actual losses from its loan and real estate portfolios. If the losses are
greater than expected, the bank may not be able to pay dividends to the Real
Estate Trust and, as a result, the Real Estate Trust will have less money
available to pay principal and interest on the notes.
Chevy Chase Bank records on its financial statements an allowance for possible
losses from its loan, lease and real estate portfolios. It is possible that the
bank will suffer losses in excess of its allowance for losses, or that future
evaluations of the bank's asset portfolios will require significant increases in
the allowance for losses as a result of changes in economic conditions,
regulatory examinations or the bank's own internal review process. As a result,
the bank may be unable to pay us the same amount of, or any, dividends in the
future.
Chevy Chase Bank's ability to pay dividends to the Real Estate Trust is limited
by government regulations.
Federal regulations provide that Chevy Chase Bank may not pay dividends to the
Real Estate Trust unless the bank is at least "adequately capitalized" as
defined in the regulations. At September 30, 1999, the bank was
"well-capitalized" and thus exceeded the tests established for "adequately
capitalized" institutions. However, the Office of Thrift Supervision has
discretion to lower the bank's capital adequacy category. The bank's ability to
maintain its capital ratios at the required levels depends on a number of
factors, including general economic conditions in the metropolitan Washington,
D.C. area. The Office of Thrift Supervision retains the discretion to limit the
bank's dividends based on general concerns over the safety and soundness of the
bank. For additional information regarding this board resolution and the other
regulatory restrictions on the bank's ability to pay dividends to the Real
Estate Trust, see the disclosure under the subtitle "Business--General--
Banking--Regulation."
The indentures for the bank's outstanding subordinated debt place restrictions
on the bank's ability to pay dividends to the Real Estate Trust, which may
result in less money available to the Real Estate Trust to pay principal and
interest on the notes.
The indentures for the bank's outstanding 9 1/4% Subordinated Debentures due
2005 and 9 1/4% Subordinated Debentures due 2008 restrict the bank's ability to
pay dividends on its common stock to the Real Estate Trust.
The Office of Thrift Supervision may require the Real Estate Trust to make cash
payments to Chevy Chase Bank.
In an agreement with the predecessor agency to the Office of Thrift Supervision,
the Real Estate Trust agreed to maintain the regulatory capital of Chevy Chase
Bank at certain minimum levels and to contribute additional capital to the bank
if necessary to meet those requirements. If the bank is unable to maintain its
capital at the prescribed levels, the Office of Thrift Supervision could require
the Real Estate Trust to contribute capital to the bank. Such a payment would
reduce the funds available to the Real Estate Trust to pay principal and
interest on the notes.
In addition, if Chevy Chase Bank becomes "undercapitalized" as defined by
federal regulations, the bank would be required to file a capital restoration
plan outlining the steps it will take to become "adequately capitalized." The
Office of Thrift Supervision could choose not to accept the plan unless the Real
Estate Trust guaranteed in writing the bank's compliance with the plan. If we
refused to provide such a guarantee, the bank could be subject to more
restrictive regulatory actions and would not be able to pay us dividends.
We may be required to make payments to Chevy Chase Bank under the tax sharing
agreement.
If in any fiscal year Chevy Chase Bank has a net operating loss, we would be
required under the tax sharing agreement with the bank to make payments to the
bank if we or any of our affiliated companies use that loss to offset our
taxable income. If Chevy Chase Bank has a net operating loss that is not used by
us in that year to offset our taxable income, Chevy Chase Bank can use those
losses to obtain a refund from the IRS of taxes paid in previous years or to
obtain a refund from us of tax sharing payments paid by the bank to the Real
Estate Trust, or both, depending on the amount of losses and the taxable year in
which they occurred.
At September 30, 1999, the maximum amount we could be required to pay Chevy
Chase Bank as a result of a carryback of the bank's losses as described above
was $53.9 million. If we are required to make these payments, our funds
available to pay principal and interest on the notes will be reduced.
Chevy Chase Bank's business is concentrated in the metropolitan Washington, D.C.
area and would be negatively impacted by an economic downturn in the local
economy.
Chevy Chase Bank's principal deposit and lending market is concentrated in the
metropolitan Washington, D.C. area. Accordingly, an economic downturn in the
local economy would negatively impact the overall financial performance of the
bank and its ability to pay dividends to the Real Estate Trust. If the bank is
unable to pay dividends to the Real Estate Trust, the Real Estate Trust will
have less money available to pay principal and interest on the notes.
Other Risks
The Real Estate Trust's Declaration of Trust does not contain investment or
borrowing limitations which protect your investment in the notes.
With certain minor exceptions, our Declaration of Trust does not require us to
invest our assets in any particular manner. The Board of Trustees, in their
discretion, may change the mix of our investment portfolio at any time or make
new types of investments, so as long as the investments are not prohibited by
the Declaration of Trust or by any indentures, loan documents or other
agreements applicable to us. In addition, the Declaration of Trust does not
limit the amount of money we can borrow or the types of debt securities we can
issue, including additional notes or debt securities which are senior to the
notes.
Our business, or the business of Chevy Chase Bank, may be hurt by the Year 2000
date change. Some of our internal business systems and systems operated by third
parties may not be compliant with the Year 2000 date change. We have implemented
a program to upgrade or replace our internal systems to address the Year 2000
problem and to seek certification from outside vendors of compliance of their
systems. Although we believe all of our necessary systems to be Year 2000
compliant, the failure of any system as a result of the Year 2000 date change
may adversely affect our business. In addition, Chevy Chase Bank is exposed to
the potential failure of internal or external business systems due to the Year
2000 date change. Although the management of Chevy Chase Bank has implemented a
program to achieve compliance of its internal and external business systems for
the Year 2000 date change, it is possible that these systems may fail and have a
negative impact on the bank's financial condition and results of operations. For
more information regarding the potential impact of the Year 2000 date change on
the business of the Real Estate Trust and the Bank, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
FORWARD LOOKING STATEMENTS DISCLOSURE
This prospectus contains forward looking statements which can be identified by
the use of terminology such as "may," "will," expect," "anticipate," "estimate,"
"continue," or other similar words. Although we believe that our expectations
reflected in the forward-looking statements are based on reasonable assumptions,
these expectations may not prove to be correct. Important factors that could
cause our actual results to differ materially from the expectations reflected in
these forward-looking statements include those set forth in the "Risk Factors"
section of this prospectus, as well as general economic, business and market
conditions, changes in Federal and local laws and regulations and increased
competitive pressures.
USE OF PROCEEDS
We will use the net proceeds from the sale of these notes primarily to retire
maturing notes, including the notes offered hereby. At December 31, 1999, $6.5
million and $6.0 million principal amount of notes were scheduled to mature in
fiscal 2000 and fiscal 2001. The interest rates on outstanding notes scheduled
to mature during this period vary from 5% to 15% per annum. Any proceeds not
used to pay maturing notes will be used for other general corporate purposes.
This offering is not contingent on the sale of any minimum amount of notes.
PLAN OF DISTRIBUTION
The notes will not be distributed through underwriters, brokers or dealers and
will be sold only by us acting through one or more of our duly authorized
officers. Such officers are salaried employees of the Saul Company, the parent
of the Advisor, and do not receive any compensation in connection with their
participation in the offering and sale of the notes in the form of commissions
or other remuneration based either directly or indirectly on sales of the notes.
Although we do not pay the officers who participate in the offering and sale of
the notes, we do pay the Advisor a fee of 1% of the principal amount of the
notes as they are issued to offset its costs of administering the note program.
Notes will be available for sale only at our office in Bethesda, Maryland. See
"How to Purchase Notes."
The offering of the notes by this prospectus will terminate when all of the
notes have been sold. See "Description of Notes -- General." We may also
terminate the offering of the notes at any time without notice.
HOW TO PURCHASE NOTES
You may purchase notes in person at our sales office located at 7200 Wisconsin
Avenue, Suite 903, Bethesda, Maryland 20814, or by mail by completing the
applicable Note Order Form, which may be found at the end of this prospectus,
and mailing the form and a check payable to the Trust in the enclosed envelope.
In either case, the note, in registered form, will be mailed directly to you by
U.S. Bank Trust National Association, the Indenture Trustee for the notes. For
further information on how to purchase notes, please telephone (301) 986-6207.
DESCRIPTION OF NOTES
The notes will be issued under an Indenture dated as of September 1, 1992, as
supplemented by the First Supplemental Indenture dated as of January 16, 1997,
as further supplemented by the Second Supplemental Indenture dated January 13,
1999 between the Trust and U.S. Bank Trust National Association, referred to in
this prospectus as the "Indenture Trustee". Included below is a summary of the
material terms of the notes and the material provisions of the indenture. The
summary does not purport to be complete and is subject in all respects to the
provisions of, and is qualified in its entirety by express reference to, the
cited sections and articles of, and definitions contained in, the indenture as
supplemented, a copy of which has been filed with the Commission as Exhibit
4(a), (b) and (l) to the registration statement of which this prospectus forms a
part, and which is available as described under "Available Information."
General
The notes are limited to the aggregate principal amount of $70,704,000 offered
hereby (Section 3.0 1). The Trust from time to time may enter into one or more
supplemental indentures providing for the issuance of additional notes without
the consent of the holders of outstanding notes (Section 9.01).
The notes will be issued in denominations of $5,000 or any amount in excess
thereof which is an integral multiple of $1,000. They will be issued in
registered form only, without coupons, to mature one to ten years from the date
of issue, as selected by the investor. The notes will be unsecured general
obligations of the Trust and will be identical except for interest rate, issue
date and maturity date (Section 3.02). Except as described below under
"Redemption of Certain Notes," the notes will not contain any provisions for
conversion, redemption, amortization, sinking fund or retirement prior to
maturity.
The notes are not guaranteed or insured and are not secured by any mortgage,
pledge or lien. The notes will rank on a parity in right of payment with all
unsecured debt of the Real Estate Trust. At September 30, 1999, the Real Estate
Trust's unsecured debt, consisting of notes and accounts payable and accrued
expenses, totaled $77.9 million.
Each note will bear interest from the date of issue to the date of maturity at
the annual rate stated on the face thereof. Such interest will be payable
semiannually, six months from the date of issue and each six months thereafter,
and at maturity, to the persons in whose names the notes are registered at the
close of business on the 20th day preceding such interest payment dates.
Interest rates applicable to notes will be subject to change by the Trust from
time to time, but no such change will affect any notes issued prior to the
effective date of such change (Section 3.01). Based on the amount of a proposed
investment in notes or the aggregate principal amount of the Trust's outstanding
unsecured notes held by a prospective investor, the Trust may offer to pay
interest on a note of any maturity at an annual rate of up to 2% in excess of
the interest rate shown on the cover page of this prospectus for a note of such
maturity.
At maturity of any note, principal will be payable upon surrender of such note
without endorsement at U.S. Bank Trust National Association, 100 Wall Street
Suite 1600, New York, New York 10005. Interest payments will be made by the
Trust by check mailed to the person entitled thereto (Sections 3.01 and 10.02).
Notes must be presented at the above office of the Indenture Trustee for
registration of transfer or exchange and for payment at maturity. No service
charge will be imposed for any transfer or exchange of notes, but the Trust may
require payment to cover taxes or other governmental charges that may be
assessed in connection with any such transfer or exchange (Section 3.05).
The indenture does not impose any restrictions on the Trust's ability to pay
dividends or other distributions to its shareholders, to incur debt or to issue
additional securities.
There is no established trading market for the notes, and the Trust does not
anticipate that an active trading market will be established.
Redemption of Notes
The Trust may, at its sole election, redeem any of the notes having a stated
maturity of more than one year from date of issue on any interest payment date
with respect to such note on or after the first anniversary of the date of issue
of such note at a redemption price, exclusive of the installment of interest due
on the redemption date, payment of which shall have been made or duly provided
for to the registered holder on the relevant record date, equal to the principal
amount of the note so redeemed. (Section 11.01). Notes called for redemption
will not bear interest after the redemption date. (Section 11.07).
If fewer than all of the notes having a stated maturity of more than one year
and the same interest payment date as the redemption date are to be redeemed,
the particular notes to be redeemed will be selected by such method as the Trust
shall deem appropriate and may include redemption of notes with higher interest
rates first. (Section 11.04).
Events of Default and Notice Thereof
The indenture provides that an "Event of Default" with respect to the notes will
result upon the occurrence of any of the following:
o default in the payment of any interest upon any note when it becomes due and
payable, and continuance of such default for a period of 30 days;
o default in the payment of the principal of and premium, if any, on any note
at its maturity;
o default in the performance, or breach, of any covenant or warranty of the
Trust in the indenture, other than a covenant or warranty a default in whose
performance or whose breach is elsewhere in the indenture specifically dealt
with, and continuance of such default or breach for a period of 60 days after
there has been given, by registered or certified mail, to the Trust by the
Indenture Trustee or to the Trust and the Indenture Trustee by the holders of
at least 10% in principal amount of the notes outstanding, a written notice
specifying such default or breach and requiring it to be remedied and stating
that such notice is a "Notice of Default" under the indenture;
o certain events of bankruptcy or insolvency affecting the Trust; or
o B. F. Saul Advisory Company ceases to be the investment advisor to the Trust
without being immediately replaced by another entity the majority voting
interest of which is owned by the Saul Company or B. Francis Saul II (Section
5.01).
Within 90 days after the occurrence of a default, the Indenture Trustee is
required to give the noteholders notice of all defaults known to it; provided
that, except in the case of a default in the payment of principal of, and
premium if any, or interest on, any of the notes, the Indenture Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of the noteholders (Section 6.02).
If an Event of Default occurs and is continuing, the Indenture Trustee or the
holders of not less than 25% in principal amount of the notes outstanding may
declare the principal of all the notes to be due and payable immediately, by a
notice in writing to the Trust, and to the Indenture Trustee if given by
noteholders, and upon any such declaration such principal will become
immediately due and payable (Section 5.02). At any time after such a declaration
of acceleration has been made and before a judgment or decree for payment of the
money due has been obtained by the Indenture Trustee, the holders of a majority
in principal amount of the notes outstanding, by written notice to the Trust and
the Indenture Trustee, may rescind and annul such declaration and its
consequences if
(1) the Trust has paid or deposited with the Indenture Trustee a sum sufficient
to pay:
o all overdue installments of interest on all notes;
o the principal of and premium, if any, on any notes which have become due
otherwise than by such declaration of acceleration and interest thereon at
the rate borne by the notes;
o to the extent that payment of such interest is lawful, interest upon overdue
installments of interest at the rate borne by the notes; and
o all sums paid or advanced by the Indenture Trustee under the indenture and
the reasonable compensation, expenses, disbursements and advances of the
Indenture Trustee, its agents and counsel; and
(2) all Events of Default, other than the nonpayment of the principal of notes
which have become due solely by such acceleration, have been cured or have been
waived as provided in the indenture (Section 5.02).
The indenture provides that if (1) default is made in the payment of any
interest on any note when such interest becomes due and payable and such default
continues for a period of 30 days, or (2) default is made in the payment of the
principal of or premium, if any, on any note at the maturity thereof, the Trust
will, upon demand of the Indenture Trustee, pay to it, for the benefit of the
holders of such notes, the whole amount then due and payable on such notes for
principal and premium, if any, and interest, with interest upon the overdue
principal and premium, if any and, to the extent that payment of such interest
is legally enforceable, upon overdue installments of interest, at the rate borne
by the notes. (Section 5.03).
In the case of an Event of Default which is not cured or waived, the Indenture
Trustee will be required to exercise such of its rights and powers under the
indenture, and to use the degree of care and skill in their exercise, that a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs, but it otherwise need only perform such duties as are specifically
set forth in the indenture (Section 6.01). Subject to such provisions, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the indenture at the request of any of the noteholders unless they
offer to the Indenture Trustee reasonable security or indemnity (Section 6.03).
Modification of Indenture
The indenture, the rights and obligations of the Trust and the rights of the
noteholders may be modified by the Trust and the Indenture Trustee without the
consent of the noteholders:
o to evidence the succession of a corporation or other entity to the Trust, and
the assumption by any such successor of the covenants of the Trust in the
indenture and the notes;
o to add to the covenants of the Trust, for the benefit of the noteholders, or
to surrender any right or power conferred in the indenture upon the Trust;
o to cure any ambiguity, to correct or supplement any provision of the
indenture which may be defective or inconsistent with any other provisions,
or to make any other provisions with respect to matters or questions arising
under the indenture which are not inconsistent with the indenture, provided
such action does not adversely affect the interests of the noteholders;
o to create, from time to time, notes in addition to the notes initially
issuable under the indenture and any supplemental indenture thereto, which
subsequently created notes are identical to the notes initially issuable
under the indenture and any supplemental indenture thereto, except for
interest rate, issue date and maturity date; or
o to modify, amend or supplement the indenture to effect the qualification of
the indenture under the Trust Indenture Act of 1939 and to add to the
indenture specified provisions permitted by such Act (Section 9.01).
With certain exceptions, the indenture, the rights and obligations of the Trust
and the rights of the noteholders may be modified in any manner by the Trust
with the consent of the holders of not less than 66-2/3% in aggregate principal
amount of the outstanding notes; but no such modification may be made without
the consent of each noteholder affected thereby which would (1) change the
maturity of the principal of, or any installment of interest on, any note or
reduce the principal amount thereof or the interest thereon, or impair the right
of such noteholder to institute suit for the enforcement of any such payment on
or after the maturity thereof, or (2) reduce the percentage in principal amount
of the outstanding notes, the consent of whose holders is required for any
modification of the indenture, or the consent of whose holders is required for
any waiver of compliance with certain provisions of the indenture or certain
defaults thereunder and the consequences thereof provided for in the indenture
(Section 9.02).
Compliance Reports
The Trust and each other obligor on the notes, if any, must deliver annually to
the Indenture Trustee, within 120 days after the end of each fiscal year, an
officers' certificate stating whether the Trust is in default in the performance
and observance of any of the conditions or covenants of the indenture, and if
the Trust is in default, specifying all such defaults and the nature and status
thereof (Section 10.06).
Reports to Noteholders
The Trust will furnish to the holders of notes such summaries of all quarterly
and annual reports which it files with the Commission as may be required by the
rules and regulations of the Commission to be furnished to holders of any notes
(Section 7.04).
SELECTED FINANCIAL DATA
The selected financial data of the Trust herein have been derived from the
Consolidated Financial Statements of the Trust. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements included
elsewhere in this prospectus.
SELECTED FINANCIAL DATA
=================================================================================================================================
Year Ended September 30
------------------------------------------------------------------
(In thousands, except per share amounts and other data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Real Estate:
Revenues $ 106,025 $ 98,592 $ 84,569 $ 76,839 $ 77,285
Operating expenses 121,676 118,636 108,601 104,321 109,971
Equity in earnings of partnership investments 5,360 1,918 4,150 3,374 3,681
Gain (loss) on sales of property -- (331) 895 (68) 1,664
------------------------------------------------------------------
Real estate operating loss (10,291) (18,457) (18,987) (24,176) (27,341)
------------------------------------------------------------------
Banking:
Interest income 519,493 437,404 454,352 388,196 365,439
Interest expense 245,507 238,410 239,815 188,836 189,114
------------------------------------------------------------------
Net interest income 273,986 198,994 214,537 199,360 176,325
Provision for loan losses (22,880) (150,829) (125,115) (115,740) (54,979)
------------------------------------------------------------------
Net interest income after provision for loan and lease losses 251,106 48,165 89,422 83,620 121,346
------------------------------------------------------------------
Other income:
Servicing and securitization income 31,670 231,674 303,216 284,964 195,744
Credit card fees -- 53,881 57,381 30,765 9,855
Deposit servicing fees 69,570 51,997 41,893 29,900 24,442
Gain (loss) on sales of trading securities, net 7,243 982 1,203 1,158 (600)
Net unrealized gains (losses) on trading securities 1,192 (1,258) -- -- --
Gain (loss) on real estate held for investment or sale, net 34,049 (16,539) (18,688) (24,413) (5,549)
Gain on sales of assets 4,152 290,434 1,527 1,732 1,289
Other 22,320 29,089 22,573 19,713 7,320
------------------------------------------------------------------
Total other income 170,196 640,260 409,105 343,819 232,501
------------------------------------------------------------------
Operating expenses 325,322 504,018 418,346 381,328 298,164
------------------------------------------------------------------
Banking operating income 95,980 184,407 80,181 46,111 55,683
------------------------------------------------------------------
Total Company:
Operating income 85,689 165,950 61,194 21,935 28,342
Provision for income taxes 29,302 42,869 12,810 8,301 2,021
------------------------------------------------------------------
Income before extraordinary items, cumulative
effect of change in accounting principle and
minority interest 56,387 123,081 48,384 13,634 26,321
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (9,601) -- -- --
------------------------------------------------------------------
Income before minority interest 56,387 113,480 48,384 13,634 26,321
Minority interest held by affiliates (7,604) (22,043) (6,848) (3,962) (5,721)
Minority interest -- other (25,313) (25,313) (22,676) (9,750) (9,750)
------------------------------------------------------------------
Total company net income (loss) $ 23,470 $ 66,124 $ 18,860 $ (78) $ 10,850
==================================================================
Net income (loss) available to common shareholders $ 18,052 $ 60,706 $ 13,442 $ (5,498) $ 5,430
Net income (loss) per common share:
Income before extraordinary items, cumulative
effect of change in accounting principle and
minority interest $ 10.56 $ 24.38 $ 8.90 $ 1.70 $ 4.33
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (1.99) -- -- --
------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle and minority interest 10.56 22.39 8.90 1.70 4.33
Cumulative effect of change in accounting principle -- -- -- -- --
------------------------------------------------------------------
Income before minority interest 10.56 22.39 8.90 1.70 4.33
Minority interest held by affiliates (1.58) (4.57) (1.42) (0.82) (1.19)
Minority interest -- other (5.24) (5.24) (4.70) (2.02) (2.02)
------------------------------------------------------------------
Total company net income (loss) $ 3.74 $ 12.58 $ 2.78 $ (1.14) $ 1.12
==================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
SELECTED FINANCIAL DATA
(Continued)
=================================================================================================================================
Year Ended September 30
------------------------------------------------------------------
(In thousands, except per share amounts and other data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Assets:
Real estate assets $ 365,071 $ 323,432 $ 300,573 $ 294,503 $ 313,412
Income-producing properties, net 207,407 183,879 156,535 156,115 163,787
Land parcels 39,448 40,110 42,160 41,580 38,458
Banking assets 9,146,769 6,721,149 6,057,413 5,693,074 4,911,536
Total company assets 9,511,840 7,044,581 6,357,986 5,987,577 5,224,948
Liabilities:
Real estate liabilities 663,638 636,036 590,910 578,092 555,814
Mortgage notes payable 213,447 198,874 180,204 173,345 184,502
Notes payable - secured 216,000 200,000 175,000 177,500 175,500
Notes payable - unsecured 46,122 50,335 46,633 42,367 41,057
Banking liabilities 8,562,284 6,141,636 5,582,167 5,388,444 4,619,451
Minority interest held by affiliates 73,236 72,242 51,388 46,065 43,556
Minority interest - other 218,307 218,306 218,306 74,307 74,307
Total company liabilities 9,517,465 7,068,220 6,442,771 6,086,908 5,293,128
Shareholders' deficit (5,625) (23,639) (84,785) (99,331) (68,180)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA:
Net cash flows provided by (used in) operating activities:
Real estate $ 30,388 $ 14,738 $ 6,911 $ 9,782 $ 4,324
Banking (10,534) 2,211,589 2,368,287 1,747,887 2,088,022
------------------------------------------------------------------
Total Company 19,854 2,226,327 2,375,198 1,757,669 2,092,346
------------------------------------------------------------------
Net cash flows provided by (used in) investing activities:
Real estate (44,237) (45,115) (11,664) (4,907) (17,143)
Banking (2,995,105) (2,202,225) (2,276,165) (2,567,763) (2,261,803)
------------------------------------------------------------------
Total Company (3,039,342) (2,247,340) (2,287,829) (2,572,670) (2,278,946)
------------------------------------------------------------------
Net cash flows provided by (used in) financing activities:
Real estate 17,756 26,079 7,485 (6,714) (271)
Banking 2,379,329 555,201 293,344 727,019 160,966
------------------------------------------------------------------
Total Company 2,397,085 581,280 300,829 720,305 160,695
------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (622,403) 560,267 388,198 (94,696) (25,905)
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Hotels:
Number of hotels 15 12 10 9 10
Number of guest rooms 3,103 2,772 2,370 2,261 2,608
Average occupancy 68% 68% 70% 68% 67%
Average room rate $85.46 $81.01 $72.21 $68.79 $60.82
Office properties:
Number of properties 7 7 8 8 9
Leasable area (square feet) 1,277,243 1,270,087 1,308,000 1,308,000 1,368,000
Leasing percentages 95% 100% 99% 93% 84%
Land parcels:
Number of parcels 10 10 10 9 10
Total acreage 417 434 439 446 433
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS
General
B.F. Saul Real Estate Investment Trust operates as a Maryland real estate
investment trust. The Trust began its operations in 1964 as an unincorporated
business trust organized under a Declaration of Trust governed by District of
Columbia law. The Trust terminated its status as a qualified real estate
investment trust for federal income tax purposes in 1978 and is now taxable as a
corporation. On October 24, 1988, the Trust amended its Declaration of Trust to
qualify the Trust as a statutory real estate investment trust under Maryland
law.
The principal business activity of the Trust and its real estate 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., whose assets
accounted for 96% of the Trust's consolidated assets at September 30, 1999. The
Trust is a thrift holding company by virtue of its ownership of a majority
interest in Chevy Chase. See "Real Estate - Holding Company Regulation."
The Trust recorded net income of $23.5 million in the fiscal year ended
September 30, 1999, compared to net income of $66.1 million in the fiscal year
ended September 30, 1998 and net income of $18.9 million in the fiscal year
ended September 30, 1997. Fiscal 1998's results reflected the sale by the bank
of its credit card operations.
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The Term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B. F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B. F. Saul Real
Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The operations conducted by the Real Estate Trust are
designated as "Real Estate," while the business conducted by Chevy Chase and its
subsidiaries is identified by "Banking."
Real Estate
The Real Estate Trust's long-term objectives are to increase cash flow from
operations and to maximize capital appreciation of its real estate. The
properties owned by the Real Estate Trust are located predominantly in the
mid-atlantic and southeastern regions of the United States and consist
principally of hotels, office and industrial projects, and undeveloped land
parcels.
Banking
Chevy Chase is a federally chartered and federally insured stock savings bank
which at September 30, 1999 was conducting business from 161 full-service branch
offices, including 30 grocery store banking centers, and 854 automated teller
machines in Maryland, Delaware, Virginia and the District of Columbia. The bank
has its home office in McLean, Virginia and its executive offices in Chevy
Chase, Maryland, both suburban communities of Washington, DC. The bank also
maintains one commercial loan production office located in Baltimore, Maryland,
11 mortgage loan production offices in the mid-Atlantic region, 10 of which are
operated by a wholly-owned mortgage banking subsidiary, and 32 consumer loan
production offices, 25 of which are operated by a wholly-owned finance
subsidiary. At September 30, 1999, the bank had total assets of $9.1 billion,
total deposits of $5.8 billion. Based on total assets at September 30, 1999,
Chevy Chase is the largest bank headquartered in the Washington, DC metropolitan
area.
Chevy Chase is a consumer oriented, full service banking institution principally
engaged in the business of attracting deposits from the public and using such
deposits, together with borrowings and other funds, to make loans secured by
real estate, primarily residential mortgage loans, and consumer loans. The bank
also has an active commercial lending program. The bank's principal deposit and
lending markets are located in the Washington, DC metropolitan area. As a
complement to its basic deposit and lending activities, the bank provides a
number of related financial services to its customers, including securities
brokerage and insurance products offered through its subsidiaries. In addition,
the bank offers a variety of investment products and provides fiduciary services
to a primarily institutional customer base through its subsidiary ASB Capital
Management, Inc.
On September 30, 1998, the bank sold its credit card operations to First USA
Bank, N.A. The credit card portfolio purchased by FUSA included approximately
$4.8 billion of managed credit card loans and 3.1 million Visa(R) and
MasterCard(R) credit card accounts. The bank recognized a net gain on this sale
of $288.3 million. See Note 8 to the Consolidated Financial Statements in this
prospectus. Selling its credit card operations has enabled the bank to
concentrate its resources on capitalizing on the bank's status as the largest
locally-headquartered bank in the Washington, DC and Baltimore metropolitan
areas and furthering its community banking objectives. Accordingly, the bank
continues to build its branch and alternative delivery systems, to maintain and
expand its mortgage banking operations, and continues to offer a broad range of
non-credit card consumer products, including home equity lines of credit, home
improvement loans and automobile loans. In addition, the bank will continue to
expand its business banking program, with an emphasis on businesses in the
Washington, DC metropolitan area. The bank also continues to develop further the
fee based services it provides to customers, including securities brokerage,
asset management and insurance products offered through its subsidiaries.
Chevy Chase recorded operating income of $96.0 million and for the year ended
September 30, 1999, compared to operating income of $184.4 million for the year
ended September 30, 1998. Last year's results include the impact of the sale of
the bank's credit card operations on September 30, 1998. At September 30, 1999,
the bank's tangible, core, tier 1 risk-based and total risk-based regulatory
capital ratios were 5.94%, 5.94%, 8.33% and 13.04%. The bank's regulatory
capital ratios exceeded the requirements under the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989, also known as "FIRREA," as well
as the standards established for "well capitalized" institutions under the
prompt corrective action regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, also known as "FDICIA."
Chevy Chase is subject to comprehensive regulation, examination and supervision
by the Office of Thrift Supervision and, to a lesser extent, by the Federal
Deposit Insurance Corporation. The bank's deposit accounts are fully insured up
to $100,000 per insured depositor by the Savings Association Insurance Fund,
also known as "SAIF," which is administered by the FDIC.
REAL ESTATE
Real Estate Investments
The following tables set forth, at and for the periods indicated, certain
information regarding the properties in the Real Estate Trust's investment
portfolio at September 30, 1999.
HOTELS
Average Occupancy (2) Average Room Rate
------------------------ ------------------------
Year Ended September 30, Year Ended September 30,
Available ------------------------ ------------------------
Location Name Rooms(1) 1999 1998 1997 1999 1998 1997
- ------------ -------------------------------------- ---------- ------------------------ -------------------------
COLORADO
Pueblo Pueblo Holiday Inn 193 66% 74% 74% $48.80 $51.39 $53.09
FLORIDA
Boca Raton Boca Raton SpringHill Suites (3) 146 NA -- -- $64.35 -- --
Boca Raton Boca Raton TownePlace Suites (4) 91 NA -- -- $70.35 -- --
MARYLAND
Gaithersburg Gaithersburg Holiday Inn 300 65% 64% 65% $80.25 $75.75 $70.10
Gaithersburg Gaithersburg TownePlace Suites (5) 91 NA -- -- $74.21 -- --
MICHIGAN
Auburn Hills Auburn Hills Holiday Inn Select 190 78% 76% 74% $106.05 $99.78 $94.79
NEW YORK
Rochester Rochester Airport Holiday Inn 280 61% 69% 71% $76.47 $72.25 $68.26
OHIO
Cincinnati Cincinnati Holiday Inn 275 66% 64% 58% $70.59 $65.70 $63.21
VIRGINIA
Arlington National Airport Crowne Plaza (6) 308 60% 57% -- $104.32 $102.38 --
Arlington National Airport Holiday Inn (7) 280 58% 63% 66% $80.26 $76.10 $67.99
Herndon Herndon Holiday Inn Express 115 81% 75% 74% $84.49 $76.83 $64.70
McLean Tysons Corner Holiday Inn 316 72% 72% 74% $104.22 $99.15 $87.52
Sterling Dulles Airport Hampton Inn 127 82% 74% 77% $82.97 $82.17 $71.70
Sterling Dulles Airport Holiday Inn 296 77% 75% 75% $90.44 $85.10 $72.18
Sterling Dulles Airport TownePlace Suites (8) 95 74% NA -- $78.08 $83.65 --
----- --- --- --- ------ ------ ------
Totals 3,103 68% 68% 70% $85.46 $81.01 $72.21
- --------------------------------------------------------------------------------
(1) Available rooms as of September 30, 1999.
(2) Average occupancy is calculated by dividing the rooms occupied by the
rooms available.
(3) Opened July 9, 1999.
(4) Opened June 28, 1999.
(5) Opened June 24, 1999.
(6) Acquired December 10, 1997 as a Holiday Inn. Converted to
Crowne Plaza in October 1999.
(7) Operated as a Howard Johnson fiscal 1997 - 1999 Converted to
Holiday Inn in October 1999.
(8) Opened August 13, 1998.
OFFICE AND INDUSTRIAL
Expiring Leases (1)
-------------------
Leasing Percentages Year Ending
Gross ------------------------- -------------------
September 30, September 30,
Leasable ------------------------- -------------------
Location Name Area (1) 1999 1998 1997 2000 2001
- --------------- -------------------------- -------- ------------------------- --------- ---------
FLORIDA
Fort Lauderdale Commerce Center - Phase II 61,149 89% 100% 97% 10,230 18,965
GEORGIA
Atlanta 900 Circle 75 Parkway 345,502 99% 100% 98% 68,235 85,258
Atlanta 100 Circle 75 Parkway 89,412 93% 100% 98% 30,838 24,611
Atlanta 1100 Circle 75 Parkway 269,049 77% 100% 99% 12,321 30,856
LOUISIANA
Metairie Metairie Tower 91,391 100% 100% 95% 9,858 39,790
VIRGINIA
McLean 8201 Greensboro Drive 360,854 93% 100% 99% 6,437 38,355
Sterling Dulles North 59,886 100% 100% 100% -- 8,570
--------- ---- ---- ---- ------- -------
Totals 1,277,243 92% 100% 99% 137,919 246,405
10.8% 19.3%
- --------------------------------------------------------------------------------
(1) Square feet
LAND PARCELS
Location Name Acres Zoning
- ---------------- -------------------------------- -------- -----------------------------
FLORIDA
Boca Raton Arvida Park of Commerce 5 Mixed Use
Fort Lauderdale Commerce Center 14 Office & Warehouse
GEORGIA
Atlanta Circle 75 133 Office & Industrial
KANSAS
Overland Park Overland Park 162 Residential, Office & Retail
MARYLAND
Gaithersburg Avenel Business Park 3 Commercial
Rockville Flagship Centre 8 Commercial
MICHIGAN
Auburn Hills Holiday Inn - Auburn Hills 4 Commercial
NEW YORK
Rochester Holiday Inn - Rochester Airport 3 Commercial
VIRGINIA
Loudoun County Church Road 40 Office & Industrial
Loudoun County Sterling Boulevard (1) 45 Industrial
---
Total 417
- ------------------------------------------------------------------------------
(1) The Real Estate Trust developed a 78,000 square foot office/research and
development building on a portion of this parcel. This building became
operational October 1, 1999. In addition, the Real Estate Trust is currently
developing an 80,000 square foot office/research and development building on
this parcel.
OTHER REAL ESTATE INVESTMENTS
Location Name
--------------- ------------------------------
PURCHASE - LEASEBACK PROPERTIES (1)
APARTMENTS
Number
of Units
--------
LOUISIANA
Metairie Chateau Dijon 336
TENNESSEE
Knoxville Country Club 232
---
Total 568
SHOPPING CENTERS
Gross
Leasable
Area (2)
--------
GEORGIA
Atlanta Old National 160,000
Warner Robbins Houston Mall 264,000
-------
Total 424,000
APARTMENT PROJECT
Number
of Units
TEXAS --------
Dallas San Simeon 124
- -----------------------------------------------------------------------------
(1) The Trust owns the ground under certain income-producing properties and
receives fixed ground rent, which is subject to periodic escalation, from
the owners of the improvements. In certain instances, the Real Estate Trust
also receives percentage rent based upon the income generated by the
properties.
(2) Square feet.
The investment portfolio consists principally of seasoned operating properties.
The Real Estate Trust expects to hold its properties as long-term investments
and has no maximum period for retention of any investment. It may acquire or
develop additional income-producing properties, expand and improve its
properties, or sell such properties, as and when circumstances warrant. The Real
Estate Trust also may participate with other entities in property ownership,
through joint ventures or other types of co-ownership.
Investment in Saul Holdings Limited Partnership
On August 26, 1993, the Real Estate Trust consummated a series of transactions
in which it transferred its 22 shopping center properties and one of its office
properties, together with the debt associated with such properties, to a newly
organized limited partnership, Saul Holdings Limited Partnership, and one of
two newly organized subsidiary limited partnerships of Saul Holdings
Partnership.
In exchange for the transferred properties, the Real Estate Trust received
securities representing a 21.5% limited partnership interest in Saul Holdings
Partnership. Entities under common control with the Trust received limited
partnership interests collectively representing a 5.5% partnership interest in
Saul Holdings Partnership in exchange for the transfer of property management
functions and certain other properties to Saul Holding Partnership and its
subsidiaries. Saul Centers, Inc., a newly organized, publicly held real estate
investment trust, received a 73.0% general partnership interest in Saul Holdings
Partnership in exchange for the contribution of approximately $220.7 million to
Saul Holdings Partnership.
Affiliates of the Trust received certain cash distributions from Saul Holdings
Partnership and purchased 4.0% of the common stock of Saul Centers in a private
offering consummated concurrently with the initial public offering of such
common stock. B. Francis Saul II, the Chairman of the Board of Trustees and
Chief Executive Officer of the Trust, also serves as Chairman of the Board of
Directors and Chief Executive Officer of Saul Centers.
The Real Estate Trust and affiliates of the Trust own rights enabling them to
convert their limited partnership interests in Saul Holdings Partnership into
shares of Saul Centers common stock on the basis of one share of Saul Centers
common stock for each partnership unit provided that they do not own rights to
the extent that they collectively would be treated as owning, directly or
indirectly, more than 24.9% of the value of the outstanding equity securities of
Saul Centers. The shares of Saul Centers common stock are listed on the New York
Stock Exchange under trading symbol "BFS."
In January 1998, in accordance with its obligation under an exclusivity
agreement described below, the Real Estate Trust offered Saul Centers the right
to purchase its newly constructed, 100% leased office/flex building located in
the Avenel Business Park adjacent to Saul Centers' Avenel I - III buildings. The
new building contained 46,227 square feet of leasable area. An independent
appraisal determined the purchase price of $5.6 million. Saul Centers agreed to
purchase the property as of April 1, 1998, by assuming the mortgage of $3.7
million and issuing 105,992 new units in Saul Centers' operating partnership to
the Real Estate Trust.
At September 30, 1999, Saul Holdings Partnership owned, directly or indirectly
through the Subsidiary Partnerships, 34 community and neighborhood shopping
centers located in seven states and the District of Columbia, one office
property and one office/retail property located in the District of Columbia, one
research park located in a Maryland suburb of Washington, D.C. and one property
planned to be converted to an industrial/warehouse facility located in Oklahoma.
Saul Centers. Saul Centers made an election to be treated as a real estate
investment trust for federal income tax purposes under Sections 856 through 860
of the Internal Revenue Code commencing with the year ended December 31, 1993.
Under the Internal Revenue Code, REITs are subject to numerous organizational
and operational requirements. If Saul Centers continues to qualify as a REIT, it
generally will not be subject to federal income tax, provided it makes certain
distributions to its stockholders and meets certain organizational and other
requirements. Saul Centers has announced that it intends to make regular
quarterly dividend distributions to its stockholders.
Management of the Properties. Saul Holdings Partnership and its subsidiaries
manage their portfolio properties and any subsequently acquired properties
through their management functions, which include personnel and such functions
as property management, leasing, design, renovation, development and accounting.
Saul Holdings Partnership and its subsidiaries have a fully integrated property
management capability through approximately 150 professionals and staff
personnel and with an extensive and mature network of relationships with tenants
and potential tenants as well as with members of the brokerage and property
owners' communities.
Saul Centers shares with affiliates of the Trust certain ancillary functions at
cost, such as computer and payroll services, benefit administration and in-house
legal services, and shares insurance expense on a pro rata basis. Affiliates of
the Trust sublease office space to Saul Centers at cost. The terms of all
sharing arrangements, including payments related thereto, are reviewed
periodically by the independent directors of Saul Centers, who constitute six
of the eleven members of the board of directors.
Exclusivity Agreement and Right of First Refusal. The Real Estate Trust has
entered into an exclusivity agreement with, and has granted a right of first
refusal to, Saul Centers and Saul Holdings Partnership. The purpose of these
agreements is to minimize potential conflicts of interest between the Real
Estate Trust, Saul Centers and Saul Holdings Partnership. The exclusivity
agreement and right of first refusal generally require the Real Estate Trust to
conduct its shopping center business exclusively through Saul Centers and Saul
Holdings Partnership and to grant these entities a right of first refusal to
purchase commercial properties and development sites that become available to
the Real Estate Trust in the District of Columbia or adjacent suburban Maryland.
Subject to the exclusivity agreement and right of first refusal, the Real Estate
Trust will continue to develop, acquire, own and manage commercial properties
and own land suitable for development as, among other things, shopping centers
and other commercial properties.
Allocations and Distributions of Saul Holdings Partnership. The net income or
net loss of Saul Holdings Partnership for tax purposes generally will be
allocated to Saul Centers and the limited partners in accordance with their
percentage interests, subject to compliance with the applicable provisions of
the Internal Revenue Code and the regulations promulgated thereunder. Net cash
flow after reserves of Saul Holdings Partnership and after reimbursement of
specified expenses will be distributed quarterly to the partners in proportion
to their respective partnership interests.
Reimbursement Agreement. Pursuant to a reimbursement agreement among the
partners of Saul Holdings Partnership and certain of their affiliates, the Real
Estate Trust and two of its subsidiaries have agreed to reimburse Saul Centers
and the other partners in the event Saul Holdings Partnership fails to make
payments with respect to certain portions of its debt obligations and Saul
Centers or any such other partners personally make payments with respect to such
debt obligations. The maximum potential obligations of the Real Estate Trust and
its subsidiaries under this agreement total $115.5 million. See Note 2 to the
Consolidated Financial Statements in this prospectus. The Real Estate Trust
believes that Saul Holdings Partnership will be able to make all payments due
with respect to their debt obligations.
Tax Conflicts. The fair market value of each of the properties contributed to
Saul Holdings Partnership and its subsidiaries by the Real Estate Trust and its
subsidiaries at the date of the formation transactions exceeded the tax basis of
such property. In the event Saul Centers or its wholly owned subsidiary Saul
QRS, Inc., acting as general partner, causes such partnership to dispose of, or
there is an involuntary disposition of, one or more of such properties, a
disproportionately large share of the total gain for federal income tax purposes
would be allocated to the Real Estate Trust or its subsidiaries as a result of
the property disposition. See Note 2 to the Consolidated Financial Statements in
this prospectus.
Registration Rights. Saul Centers has granted the Real Estate Trust and its
affiliates certain "demand" and "piggyback" registration rights with respect to
the shares of Saul Centers common stock acquired in connection with the
formation transactions or as a consequence of exercise of those rights. Subject
to certain limitations, the registration rights grant the Real Estate Trust and
its affiliates the opportunity to cause Saul Centers to register all or any
portion of their shares once in each calendar year and to have the shares
registered incidentally to any registration by Saul Centers of shares of common
stock or other securities substantially similar to common stock. Saul Centers
will bear expenses incident to its registration obligations upon exercise of the
registration rights, except that it will not bear any underwriting discounts or
commissions, Securities and Exchange Commission or state Blue Sky registration
fees, or transfer taxes relating to registration of the shares.
Competition
As an owner of, or investor in, commercial real estate properties, the Real
Estate Trust is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use.
Management believes that success in such competition is dependent upon the
geographic location of the property, the performance of property managers, the
amount of new construction in the area and the maintenance and appearance of the
property. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities such as parking, and the ability to provide rent concessions
and additional tenant improvements without increasing rent. Management believes
that general economic circumstances and trends and new properties in the
vicinity of each of the Real Estate Trust's properties also will be competitive
factors.
Environmental Matters
The Real Estate Trust's properties are subject to various laws and regulations
relating to environmental and pollution controls. The Real Estate Trust requires
an environmental study to be performed with respect to a property that may be
subject to possible environmental hazards prior to its acquisition to ascertain
that there are no material environmental hazards associated with such property.
Although the effect upon the Real Estate Trust of the application of
environmental and pollution laws and regulations cannot be predicted with
certainty, management believes that their application either prospectively or
retrospectively will not have a material adverse effect on the Real Estate
Trust's property operations.
Relationships with the B. F. Saul Company
The Real Estate Trust has significant relationships with B. F. Saul Company and
two of B. F. Saul Company's wholly owned subsidiaries, B. F. Saul Advisory
Company, referred to in this prospectus as the "Advisor," and Franklin Property
Company. B. F. Saul Company, founded in 1892, specializes in real estate
investment services, including acquisitions, financing, management and leasing,
and insurance. B. Francis Saul II, Chairman of the Board of Trustees and Chief
Executive Officer of the Trust, is Chairman of the Board and President of B. F.
Saul Company and the Advisor.
The Advisor acts as the Real Estate Trust's investment advisor and manages the
day-to-day financial, accounting, legal and administrative affairs of the Real
Estate Trust. Franklin acts as leasing and management agent for the
income-producing properties owned by the Real Estate Trust, and plans and
oversees the development of new properties and the expansion and renovation of
existing properties.
The Trustees, including the two independent Trustees, review the fees and
compensation arrangements between the Real Estate Trust and B. F. Saul Company
and its related entities and affiliates and believe that such fees and
compensation arrangements are as favorable to the Real Estate Trust as would be
obtainable from unaffiliated sources. See "Certain Relationships and Related
Transactions."
Holding Company Regulation
The Trust and B.F. Saul Company, by virtue of their direct and indirect control
of the bank, and Chevy Chase Property Company, referred to in this prospectus as
"CCPC," and CCPC's wholly-owned subsidiary, Westminster Investing Corporation,
by virtue of Westminster's direct and indirect ownership of 24.9% of the common
stock of the Trust, are "savings and loan holding companies" subject to
regulation, examination and supervision by the OTS.
The bank is prohibited from making or guaranteeing loans or advances to or for
the benefit of the holding companies or other affiliates engaged in activities
beyond those permissible for bank holding companies and from investing in the
securities of the holding companies or other affiliates. Further, transactions
between the bank and the holding companies must be on terms substantially the
same, or at least as favorable to the bank, as those that would be available to
non-affiliates. The holding companies must obtain the prior approval of the OTS
before acquiring by merger, consolidation or purchase of assets any federally
insured savings institution or any savings and loan holding company.
As unitary savings and loan holding companies, the holding companies are
virtually unrestricted in the types of business activities in which they may
engage, provided the bank continues to meet the qualified thrift lender test.
See "Banking Regulation - Qualified Thrift Lender Test." If the holding
companies were to acquire one or more federally insured institutions and operate
them as separate subsidiaries rather than merging them into the bank, the
holding companies would become "multiple" savings and loan holding companies.
As multiple savings and loan holding companies, the holding companies would be
subject to limitations on the types of business activities in which they would
be permitted to engage, unless the additional thrifts were troubled institutions
acquired pursuant to certain emergency acquisition provisions and all subsidiary
thrifts met the Qualified Thrift Lender Test. The holding companies may acquire
and operate additional savings institution subsidiaries outside of Maryland and
Virginia only if the laws of the target institution's state specifically permit
such acquisitions or if the acquisitions are made pursuant to emergency
acquisition provisions.
The Trust and B. F. Saul Company entered into an agreement with OTS's
predecessor, the Federal Savings and Loan Insurance Corporation, to maintain the
bank's regulatory capital at the required levels, and, if necessary, to infuse
additional capital to enable the bank to meet those requirements. Since the
execution of this agreement among the Trust, B. F. Saul Company and the OTS's
predecessor, the OTS has changed its policy and now accepts more limited
agreements from those acquiring thrift institutions. In addition, the regulatory
capital requirements applicable to the bank have changed significantly as a
result of FIRREA. The OTS has stated that capital maintenance agreements entered
into prior to such modification of OTS policy and the enactment of FIRREA were
not affected by such changes. The Trust and B. F. Saul Company have not sought
to modify the existing agreement. To the extent the bank is unable to meet
regulatory capital requirements in the future, the OTS could seek to enforce the
obligations of the Trust and B. F. Saul Company under the agreement. The bank's
business plan does not contemplate any future capital contributions from the
Trust or B. F. Saul Company.
If the bank were to become "undercapitalized" under the prompt corrective action
regulations, it would be required to file a capital restoration plan with the
OTS setting forth, among other things, the steps the bank would take to become
"adequately capitalized." The OTS could not accept the plan unless the holding
companies guaranteed in writing the bank's compliance with that plan. The
aggregate liability of the holding companies under such a commitment would be
limited to the lesser of (1) an amount equal to 5.0% of the bank's total assets
at the time the bank became "undercapitalized" and (2) the amount necessary to
bring the bank into compliance with all applicable capital standards as of the
time the bank fails to comply with its capital plan. If the holding companies
refused to provide the guarantee, the bank would be subject to the more
restrictive supervisory actions applicable to "significantly undercapitalized"
institutions.
Federal Taxation
The Trust terminated its status as a real estate investment trust for federal
income tax purposes in 1978 and is now taxable as a corporation. The Trust and
its subsidiaries join in the filing of a consolidated federal income tax return
using the accrual method of accounting on the basis of a fiscal year ending
September 30.
Since June 28, 1990, the bank and its subsidiaries have joined in the
consolidated federal income tax returns filed by the Trust on a fiscal year
basis. Each member of an affiliated group of corporations which files
consolidated income tax returns is liable for the group's federal income tax
liability. Prior to June 28, 1990, the bank and its subsidiaries filed a
consolidated federal income tax return on a calendar-year basis.
Savings institutions, such as the bank, generally are taxed in the same manner
as other corporations. There are, however, several special rules that apply
principally to savings institutions and, in some cases, other financial
institutions. Certain significant aspects of the federal income taxation of the
bank are discussed below.
The Internal Revenue Service has notified the Trust that its consolidated
federal tax returns for the fiscal years ended September 30, 1996 and 1995 have
been selected for review.
Bad Debt Reserve. For taxable years beginning before December 31, 1995, savings
institutions that satisfied certain requirements were permitted to establish
reserves for bad debts and to deduct each year reasonable additions to those
reserves in lieu of taking a deduction for bad debts actually sustained during
the taxable year. To qualify for this treatment, at least 60% of a savings
institution's assets had to be "qualifying assets," including cash, certain U.S.
and state government securities and loans secured by interests in residential
real property.
In establishing its reserves from calendar year 1988 through fiscal 1996, the
bank calculated its bad debt deduction for tax purposes using the experience
method. The experience method was based on the institution's actual loan loss
experience over a prescribed period. As of September 30, 1996 accumulated
reserves were approximately $111.8 million.
Provisions that repealed the thrift bad debt provisions of the Internal Revenue
Code were included in the Small Business Act of 1996 and took effect for taxable
years beginning after December 31, 1995. As a result, for fiscal 1999 and fiscal
1998 taxable years, the bank no longer is able to use the "reserve method" for
computing its bad debt deduction and can deduct only those bad debts actually
incurred during the respective taxable years. The bad debt provisions of this
legislation also require thrifts to recapture and pay income tax on bad debt
reserves accumulated since 1987 over a six year period, beginning with a
thrift's taxable year starting after December 31, 1995 or, if the thrift meets a
loan origination test, beginning up to two years later. The bank's accumulated
reserves since 1987 which are subject to recapture under this rule are $101.3
million. The tax liability related to the recapture of the bad debt reserves
accumulated since 1987 has been reflected in the bank's financial statements.
Consolidated Tax Returns; Tax Sharing Payments. Generally, the operations of the
Trust have generated significant net operating losses. The bank's taxable income
generally has been sufficient to fully utilize the losses of the Trust. Under
the terms of a tax sharing agreement dated June 28, 1990, as amended, the bank
is obligated to make payments to the Trust based on its taxable income, as
explained more fully below.
The tax sharing agreement generally provides that each member of the Trust's
affiliated group is required to pay the Trust an amount equal to 100% of the tax
liability that the member would have been required to pay to the IRS if the
member had filed on a separate return basis. These amounts generally must be
paid even if the affiliated group has no tax liability or the group's tax
liability is less than the sum of such amounts. Under the tax sharing agreement,
the Trust, in turn, is obligated to pay to the applicable taxing authorities the
overall tax liability, if any, of the group. In addition, to the extent the net
operating losses or tax credits of a particular member reduce the overall tax
liability of the group, the Trust is required to reimburse such member on a
dollar-for-dollar basis, thereby compensating the member for the group's use of
its net operating losses or tax credits. Under the tax sharing agreement, the
bank and its subsidiaries are treated as a single member of the Trust's
affiliated group.
The bank made tax sharing payments of $6.6 million in fiscal 1999. During the
quarter ended December 31, 1998, the tax sharing payments were conditioned on a
pledge by or on behalf of the Trust of certain Trust or other assets to secure
certain of its obligations under the tax sharing agreement pursuant to a
calculation contained in an agreement between the Trust and the bank. All
pledged assets were released as of December 31, 1998, based on that calculation.
At September 30, 1999, the amount of tax sharing payments due to the Trust from
the bank was $3.6 million. It is expected that the bank will have taxable income
in future years and additional operating losses of the Trust will be utilized to
reduce the overall tax liability of the group which would otherwise arise from
such taxable income of the bank or from the taxable income of other members of
the Trust's affiliated group.
In general, if the bank has net operating losses or unused tax credits in any
taxable year, under the tax sharing agreement the Trust is obligated to
reimburse the bank in an amount generally equal to (1) the tax benefit to the
group of using such tax losses or unused tax credits in the group's consolidated
federal income tax return for such year, plus (2) to the extent such losses or
credits are not used by the group in such year, the amount of the tax refunds
which the bank would otherwise have been able to claim if it were not included
in the consolidated federal income tax return of the group, but not in excess of
the net amount paid by the bank to the Trust pursuant to the tax sharing
agreement. There is no assurance that the Trust would be able to fulfill this
obligation. If the Trust did not make the reimbursement, the OTS could attempt
to characterize such nonpayment as an extension of credit by the bank to the
Trust which, as described above under "Holding Company Regulation," is
prohibited under current law. The tax sharing agreement itself does not provide
for any specific remedies upon a breach by any party of its obligations under
the agreement.
The bank, as a member of an affiliated group of corporations filing consolidated
income tax returns, is liable under the Internal Revenue Code for the group's
tax liability. Although the bank would be entitled to reimbursement under the
tax sharing agreement for income tax paid with respect to the income of other
members of the affiliated group, there can be no assurance that the Trust or
other members would be able to fulfill this obligation.
State Taxation
Maryland law does not allow the filing of consolidated income tax returns, and
thus the Trust and its subsidiaries, which includes the bank and its
subsidiaries, that are subject to Maryland income tax are required to file
separately in Maryland. The Trust and its subsidiaries are also subject to
income taxes in other states, some of which allow or require combined or
consolidated filings.
BANKING
Regulation
Federal Home Loan Bank System. The bank is a member of the Federal Home Loan
Bank of Atlanta. The 12 FHLBs are administered by the Federal Housing Finance
Board, an independent agency within the executive branch of the federal
government. The FHLBs serve as a central credit facility for their members.
Their primary credit mission is to facilitate residential mortgage lending and
support community and economic development activity in rural and urban
communities. From time to time, the bank obtains advances from the FHLB of
Atlanta. At September 30, 1999, the bank had outstanding advances of $1.7
billion. See Note 21 to the Consolidated Financial Statements in this prospectus
and "Deposits and Other Sources of Funds - Borrowings."
As a member of the FHLB of Atlanta, the bank is required to acquire and hold
shares of capital stock in that bank in an amount equal to the greater of:
o 1.0% of mortgage-related assets;
o 0.3% of total assets;
o $500; or
o 5.0% of outstanding advances.
The bank had an investment of $87.2 million in FHLB of Atlanta stock at
September 30, 1999. The bank earned dividends of $4.0 million and $2.4 million
during the years ended September 30, 1999 and 1998. Recently enacted legislation
makes a number of reforms to the existing FHLB system. See "Recent Legislation."
Liquidity Requirements. The bank is required to maintain a daily average balance
of liquid assets equal to 4.0% of its average daily balance of deposits, plus
borrowings payable in one year or less. Liquid assets include cash, federal
funds, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and commercial paper, securities of certain mutual funds,
certain mortgage-related securities, certain mortgage loans and U.S. Government,
state government and federal agency obligations. Failure to meet this
requirement could subject the bank to monetary penalties imposed by the OTS. At
September 30, 1999, the bank was in compliance with the liquidity requirement,
with a liquid assets ratio of 10.5%.
Deposit Insurance Premiums. Under FDIC insurance regulations, the bank is
required to pay premiums to the SAIF for insurance of its deposit accounts. The
FDIC utilizes a risk-based premium system in which an institution pays premiums
for deposit insurance on its SAIF-insured deposits based on supervisory
evaluations and on the institution's capital category under the OTS's prompt
corrective action regulations. See "Prompt Corrective Action."
Although the FDIC insures commercial banks as well as thrifts, the insurance
funds for commercial banks and thrifts have been segregated into the Bank
Insurance Fund, also known as "BIF," and the SAIF. The FDIC is required to
maintain the reserve levels of both the BIF and the SAIF at 1.25% of insured
deposits.
A prior differential between BIF and SAIF assessment rates was eliminated when,
pursuant to legislation enacted in 1996, thrift institutions paid a one-time
assessment to recapitalize the SAIF. Since that time, the basic deposit
insurance rates for SAIF members have been the same as the rates for BIF
members.
Beginning in 1997, commercial banks have been required to share in the payment
of interest due on Financing Corporation bonds used to provide liquidity to the
savings and loan industry in the 1980s. Annual FICO assessments added to deposit
insurance premiums equaled 5.99 basis points for SAIF members and 1.198 basis
points for BIF members for the first semi-annual period of 1999 and 5.86 basis
points for SAIF members and 1.172 basis points for BIF members for the second
semi-annual period of 1999. This differential will remain in effect through
December 31, 1999, after which BIF and SAIF members will pay identical FICO
assessments, which are expected to be approximately 2.12 basis points. As a
result, the bank and other institutions with SAIF-assessable deposits will no
longer pay higher deposit insurance premiums than comparable institutions with
BIF-assessable deposits.
SAIF insurance may be terminated by the FDIC, after notice and a 30-day
corrective period, if the FDIC finds that a financial institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or condition
imposed by the FDIC. The 30-day period may be eliminated by the FDIC with the
approval of the OTS.
Regulatory Capital. The bank is subject to:
o a minimum tangible capital requirement,
o a minimum core (or leverage) capital requirement, and
o a minimum risk-based capital requirement.
Each of these requirements generally must be no less stringent than the capital
standards for national banks. At September 30, 1999, the bank's tangible capital
ratio was 5.94%, its core (or leverage) ratio was 5.94%, and its total
risk-based capital ratio was 13.04%, compared to the minimum requirements of
1.50%, 4.00% and 8.00%.
The tangible capital requirement adopted by the OTS requires the bank to
maintain "tangible capital" in an amount not less than 1.5% of tangible assets.
"Tangible capital" is defined as core capital less investments in certain
subsidiaries and any intangible assets (including supervisory goodwill), plus
qualifying servicing assets valued at the amount that can be included in core
capital.
Under the minimum leverage ratio requirement, Chevy Chase must maintain a ratio
of "core capital" to tangible assets of not less than 4.0%. "Core capital"
generally includes common shareholders' equity, noncumulative perpetual
preferred stock and minority interests in consolidated subsidiaries, less
investments in certain subsidiaries and certain intangible assets.
Under OTS regulations, servicing assets and purchased credit card relationships,
referred to in this prospectus as "PCCRs," can be included in core capital in an
amount up to 100% of core capital. PCCRs and non-mortgage servicing assets are
subject to a sublimit of 25% of core capital. For these purposes, servicing
assets and PCCRs are valued at the lesser of 90% of fair market value or 100% of
the current unamortized book value. At September 30, 1999, the bank had
qualifying servicing assets of $30.3 million, which constituted 5.6% of core
capital at that date, and had no PCCRs.
The risk-based capital requirements imposed by the OTS vary the amount of
capital required for an asset based on the degree of credit risk associated with
that asset and include off-balance sheet assets in the asset base used to
compute the bank's risk-based capital ratio.
Capital must be maintained against assets sold with recourse despite the fact
that the assets are accounted for as having been sold. Under the OTS's capital
requirements, the bank maintains dollar-for-dollar capital against securitized
assets up to the otherwise applicable capital requirement on the underlying
loans in an amount equal to:
o the amounts on deposit in spread accounts,
o the amount of any interest-only strips relating to the securitized assets, and
o certain other items representing recourse for regulatory capital purposes
The OTS and the other federal bank regulatory agencies have proposed revisions
to their risk-based capital regulations to address the regulatory capital
treatment of recourse obligations and direct credit substitutes involving
exposure to credit risk.
The most significant revisions, if adopted, would:
o define recourse to include, among other things, providing credit enhancement
beyond any contractual obligation to support assets sold and providing
representations and warranties other than those that relate to an existing
state of facts that the seller can either control or verify with reasonable
due diligence at the time the assets are sold;
o treat direct credit substitutes and recourse obligations consistently; and
o use credit ratings and possibly certain other alternative approaches to match
the risk-based capital assessment more closely to an institution's relative
risk of loss in asset securitizations.
Any final rules adopted in connection with these revisions that result in
increased risk-based capital requirements for an institution would apply only to
transactions completed after the effective date of the final rules.
There are currently four categories of risk-weightings:
o 0% for cash and similar assets,
o 20% for qualifying mortgage-backed securities,
o 50% for qualifying residential permanent real estate loans, and
o 100% for other assets, including consumer loans, commercial real estate loans,
loans more than 90 days past due, and real estate acquired in settlement of
loans.
The bank generally must maintain risk-based capital equal to 8.0% of
risk-weighted assets, with at least half of that amount in the form of core
capital.
The bank may use supplementary capital to satisfy the risk-based capital
requirement to the extent of its core capital. Supplementary capital includes
cumulative perpetual preferred stock, qualifying non-perpetual preferred stock,
qualifying subordinated debt, nonwithdrawable accounts and pledged deposits, and
allowances for loan and lease losses up to a maximum of 1.25% of risk-weighted
assets. At September 30, 1999, the bank had $51.4 million in general allowances
for loan and lease losses, all of which was includable as supplementary capital.
Subordinated debt may be included in supplementary capital with OTS approval
subject to a phase-out based on its remaining term to maturity. The phase-out
permits these instruments to be included in supplementary capital under one of
two options:
o at the beginning of each of the last five years prior to the maturity date of
the instrument, the bank must reduce the amount eligible to be included by 20%
of the original amount, or
o the bank must include only the aggregate amount of maturing capital
instruments that mature in any one year during the seven years immediately
prior to an instrument's maturity that does not exceed 20% of its capital.
Once the bank selects either option, it must continue to select the same option
for all subsequent issuances of maturing capital instruments as long as the
prior issuance remains outstanding. At September 30, 1999, the bank had $250.0
million in maturing subordinated capital instruments, all of which was
includable as supplementary capital. Of that amount, $150.0 million matures in
2005 and $100.0 million matures in 2008. See "Deposits and Other Sources of
Funds - Borrowings."
The OTS has indefinitely delayed implementation of an interest-rate risk
component of its risk-based capital regulation. Under that component, an
institution that would experience a change in "portfolio equity" in an amount in
excess of 2.0% of the institution's assets as a result of a 200 basis point
increase or decrease in the general level of interest rates would be required to
maintain additional amounts of risk-based capital based on the lowest interest
rate exposure at the end of the three previous quarters.
The OTS also considers concentration of credit risk and risks arising from
non-traditional activities, as well as a thrift's ability to manage these risks,
in evaluating whether the thrift should be subject to increase capital
requirements.
All or a portion of the assets of each of the bank's subsidiaries are generally
consolidated with the assets of the bank for regulatory capital purposes unless
all of the bank's investments in, and extensions of credit to, such subsidiary
are deducted from capital. The bank's investments in, and loans to, subsidiaries
engaged in activities not permissible for a national bank referred to as
"non-includable subsidiaries" are, with certain exceptions, deducted from
capital under each of the three regulatory capital requirements. Chevy Chase's
real estate development subsidiaries are its only subsidiaries engaged in
activities not permissible for a national bank. At September 30, 1999, the
bank's investments in, and loans to, its non-includable subsidiaries totaled
approximately $4.2 million, of which $4.0 million constituted a deduction from
tangible capital.
OTS capital regulations also require a 100% deduction from total capital of all
equity investments that are not permissible for national banks and the portion
of land loans and non-residential construction loans in excess of an 80%
loan-to-value ratio. The bank's equity investments at September 30, 1999
consisted of certain properties classified as real estate held for sale, which
the bank has agreed to treat as equity investments for regulatory capital
purposes. At September 30, 1999, the book value of these properties after
subsequent valuation allowances was $7.1 million, of which $6.5 million was
required to be deducted from total capital. The bank had no land loans or
non-residential construction loans with loan-to-value ratios greater than 80% at
September 30, 1999. The bank has $0.6 million of general valuation allowances
maintained against its non-includable subsidiaries and equity investments,
which, pursuant to OTS guidelines, are available as a credit against the
otherwise required deductions from capital.
OTS capital regulations provide a five-year holding period for real estate
acquired in settlement of loans, referred to in this prospectus as "REO" or
"real estate held for sale," to qualify for an exception from treatment as an
equity investment. The five year period maybe extended by the OTS. If an REO
property is considered an equity investment, its then-current book value is
deducted from total capital. Accordingly, if the bank is unable to dispose of
any REO property prior to the end of its applicable five-year holding period and
is unable to obtain an extension of that five-year holding period from the OTS,
the bank could be required to deduct the then-current book value of such REO
property from risk-based capital. In May 1999, the bank received from the OTS
additional extensions through May 14, 2000 of the holding periods for certain of
its REO properties acquired through foreclosure in fiscal 1990, 1991 and 1992.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Capital."
The bank's ability to maintain capital compliance depends on a number of
factors, including, for example, general economic conditions and the condition
of local markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Capital." The OTS
has the authority to require an institution to maintain capital at levels above
the minimum levels generally required, but has not done so for the bank.
In June, 1999, the Basle Committee on Banking Supervision outlined proposed
revisions to its 1988 risk-based capital accord which forms the basis for the
risk-based capital requirements of the OTS and the other U.S. federal financial
institution regulators. Key components of the proposed revisions include:
o adding a fifth risk-weighting of 150 percent for loans to low quality
companies;
o using rating agency assessments to determine risk-weightings for claims on
banks, commercial loans and securitization interests;
o liberalizing capital requirements for certain collateralized and guaranteed
loans;
o requiring a specific level of additional capital for banks with interest rates
"significantly above average";
o establishing a methodology for requiring that capital be maintained against
operational risk; and
o authorizing regulators to impose explicit capital requirements on managed or
securitized assets.
Comments on the release are due March 31, 2000 and the Basle Committee intends
to issue a more detailed proposed new risk-based capital framework later that
year. The bank is unable to predict whether or in what form any final changes
will be adopted by the Basle Committee, or the extent to which any changes
actually adopted will be reflected in the capital requirements that apply to the
bank.
Prompt Corrective Action. The OTS and the other federal agencies regulating
financial institutions have adopted regulations which apply to every
FDIC-insured commercial bank and thrift institution a system of mandatory and
discretionary supervisory actions which generally become more severe as the
capital levels of an individual institution decline. The regulations establish
five capital categories for purposes of determining an institution's treatment
under these prompt corrective action provisions.
An institution is categorized as "well capitalized" under the regulations if (i)
it has a leverage ratio of at least 5.0%, a tier 1 risk-based capital ratio of
at least 6.0% and a total risk-based capital ratio of at least 10.0%, and (ii)
is not subject to any written agreement, order, capital directive or prompt
corrective action directive issued by the OTS to meet and maintain a specific
capital level.
An institution is considered "adequately capitalized" if its leverage ratio is
at least 4.0% (3.0% if rated in the highest supervisory category), its tier 1
risk-based capital ratio is at least 4.0% and its total risk-based capital ratio
is at least 8.0%.
An institution with a leverage ratio below 4.0% (3.0% if rated in the highest
supervisory category), a tier 1 risk-based capital ratio below 4.0% or a total
risk-based capital ratio below 8.0% is considered "undercapitalized." An
institution with a leverage ratio or tier 1 risk-based ratio under 3.0% or a
total risk-based ratio under 6.0% is considered "significantly
undercapitalized." Finally, an institution is considered "critically
undercapitalized," and subject to provisions mandating appointment of a
conservator or receiver, if its ratio of "tangible equity" to total assets is
2.0% or less. "Tangible equity" generally includes core capital plus cumulative
perpetual preferred stock.
An institution's classification category could be downgraded if, after notice
and an opportunity for a hearing, the OTS determined that the institution is in
an unsafe or unsound condition or has received and has not corrected a less than
satisfactory examination rating for asset quality, management, earnings or
liquidity.
At September 30, 1999, the bank's leverage ratio of 5.94%, its tier 1 risk-based
ratio of 8.33%, and its total risk-based capital ratio of 13.04% exceeded the
minimum ratios established for "well capitalized" institutions.
Board Resolution. At the request of the OTS, the Board of Directors of the bank
adopted a resolution in March 1996, which, among other things, permitted the
bank:
o to make tax sharing payments without OTS approval to the Trust, which owns
80% of the bank's Common Stock, of up to $15.0 million relating to any single
fiscal year; and
o to declare dividends on its stock in any quarterly period up to the lesser of:
o 50% of its after tax net income for the immediately preceding quarter, or
o 50% of the average quarterly after tax net income for the immediately
preceding four-quarter period, minus (in either case) dividends declared on
the bank's preferred stock during that quarterly period.
The resolution also required the bank to present a plan annually to the OTS
detailing anticipated consumer loan securitization activity. Effective May 18,
1999, the Board of Directors of the bank rescinded this resolution reflecting
improvement in the bank's overall condition since its original adoption.
Qualified Thrift Lender Test. The bank must meet a QTL test to avoid imposition
of certain restrictions. The QTL test requires the bank to maintain a "thrift
investment percentage" equal to a minimum of 65%. The numerator of the
percentage is the bank's "qualified thrift investments" and the denominator is
the bank's "portfolio assets." "Portfolio assets" is defined as total assets
minus
o the bank's premises and equipment used to conduct the bank's business,
o liquid assets up to 20 percent of total assets, and
o intangible assets, including goodwill.
The QTL test must be met on a monthly average basis in nine out of every 12
months.
The bank's "qualified thrift investments" consist of residential housing loans
(including home equity loans and manufactured housing loans), mortgage-backed
securities, FHLB and Federal National Mortgage Association stock, small business
loans, credit card loans and educational loans. Portions of other assets are
also includable, provided that the total of these assets does not exceed 20% of
portfolio assets. Assets in this category include consumer loans (other than
credit card and educational loans), 50% of residential housing loans originated
and sold within 90 days, investments in real estate-oriented service
corporations, 200% of mortgage loans for residences, churches, schools, nursing
homes and small businesses in low or moderate income areas where credit demand
exceeds supply. Intangible assets, including goodwill, are specifically excluded
from qualified thrift investments.
The bank had 84.6% of its assets invested in qualified thrift investments at
September 30, 1999, and met the QTL test in each of the previous 12 months.
An institution that fails to meet the QTL test is subject to significant
penalties. Immediately after an institution ceases to meet the QTL test, it may
not:
o make any new investment or engage directly or indirectly in any other new
activity unless the investment or activity would be permissible for a national
bank,
o establish any new branch office at any location at which a national bank could
not establish a branch office,
o obtain new advances from the FHLB, and
o pay dividends beyond the amounts permissible if it were a national bank.
One year following an institution's failure to meet the test, the institution's
holding company parent must register and be subject to supervision as a bank
holding company. Three years after failure to meet the QTL test, an institution
may not retain any investments or engage in any activities that would be
impermissible for a national bank, and must repay any outstanding FHLB advances
as promptly as possible consistent with the safe and sound operation of the
institution. Failure to meet the QTL test also could limit the bank's ability to
establish and maintain branches outside of its home state of Virginia.
Because Chevy Chase is engaged in activities that are not currently permissible
for national banks, such as investing in subsidiaries that engage in real estate
development activities, failure to satisfy the QTL test would require Chevy
Chase to terminate these activities and divest itself of any prohibited assets
held at such time. Based on a review of the bank's current activities,
management of the bank believes that compliance with these restrictions would
not have a significant adverse effect on the bank. In addition, the Trust is
engaged in real estate ownership and development, which are activities that are
currently prohibited for bank holding companies. As a result, failure by Chevy
Chase to meet the QTL test, in the absence of a significant restructuring of the
Trust's operations, would, in effect, require the Trust to reduce its ownership
of Chevy Chase to a level at which it no longer would be deemed to control the
bank.
The bank has taken, and will continue to take, steps to meet the QTL test by
structuring its balance sheet to include the required percentage of qualified
thrift investments.
Dividends and Other Capital Distributions. OTS regulations limit the ability of
the bank to make "capital distributions." "Capital distributions" include
payment of dividends, stock repurchases, cash-out mergers, repurchases of
subordinated debt and other distributions charged against the capital accounts
of an institution. The regulations do not apply to interest or principal
payments on debt, including interest or principal payments on the bank's
outstanding subordinated debentures.
The bank must notify the OTS before making any capital distribution. In
addition, the bank must apply to the OTS to make any capital distribution
regardless of its size if the bank does not qualify for expedited treatment
under OTS regulations. If the bank qualifies for expedited treatment, an
application is required only if the total amount of all of the bank's capital
distributions for the year exceeds the sum of the bank's net income for the year
and its retained net income for the previous two years.
In considering a notice or application, the OTS will not permit a capital
distribution if:
o the bank would be undercapitalized following the distribution;
o the capital distribution raises safety and soundness concerns; or
o the capital distribution violates any statute, regulation, agreement with the
OTS, or condition imposed by the OTS.
The OTS has approved the payment of dividends on the bank's outstanding 13%
Noncumulative Perpetual Preferred Stock, Series A, referred to in this
prospectus as the "13% Preferred Stock," provided that:
o immediately after giving effect to the dividend payment, the bank's core and
risk-based regulatory capital ratios would not be less than 4.0% and 8.0%;
o dividends are earned and payable in accordance with the OTS capital
distribution regulation; and
o the bank continues to make progress in the disposition and reduction of its
non-performing loans and real estate owned.
Dividends paid on the 10 3/8% Noncumulative Exchangeable Preferred Stock, Series
A, referred to in this prospectus as the "REIT Preferred Stock," issued by Chevy
Chase Preferred Capital Corporation, referred to in this prospectus as the "REIT
Subsidiary," are not considered "capital distributions" provided the bank is
classified as "well-capitalized." However, if the bank were not classified as
"well-capitalized," the entire amount of the REIT Subsidiary preferred dividends
would be treated as a capital distribution. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
- - Capital."
Under OTS capital distribution resolutions in effect prior to April 1, 1999, the
bank was permitted to make capital distributions without regulatory approval in
amounts up to the greater of:
o 100% of the bank's net income for the calendar year to date, plus up to
one-half of the excess of its capital over the regulatory requirements at the
beginning of the calendar year in which the distribution was made; or
o 75% of net income for the most recent four quarters.
The bank could seek OTS approval to pay dividends beyond these amounts.
In May 1988, in connection with the merger of a Virginia thrift into the bank,
B.F. Saul Company and the Trust entered into a capital maintenance agreement
in which they agreed not to cause the bank without prior written approval of the
OTS to pay dividends in any fiscal year in excess of 50% of the bank's net
income for that fiscal year, provided that any dividends permitted under such
limitation could be deferred and paid in a subsequent year.
The bank is subject to other limitations on its ability to pay dividends. The
indenture pursuant to which $150 million principal amount of the bank's 9 1/4%
Subordinated Debentures due 2005 was issued in 1993 provides that the bank may
not pay dividends on its capital stock unless, after giving effect to the
dividend, no event of a continuing default shall have occurred and the bank is
in compliance with its regulatory capital requirements. In addition, the amount
of the proposed dividend may not exceed the sum of:
o $15 million,
o 66 2/3 % of the bank's consolidated net income (as defined) accrued on a
cumulative basis commencing on October 1, 1993, and
o the aggregate net cash proceeds received by the bank after October 1, 1993
from the sale of qualified capital stock or certain debt securities, minus the
aggregate amount of any restricted payments made by the bank.
Notwithstanding these restrictions on dividends, provided no event of default
has occurred or is continuing under the 1993 Indenture, the 1993 Indenture does
not restrict the payment of dividends on the 13% Preferred Stock or any
payment-in-kind preferred stock issued in lieu of cash dividends on the 13%
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which $100 million principal amount of the bank's 1996
Debentures was issued provides that the proposed dividend may not exceed the sum
of the restrictions discussed above for the 1993 Indenture and the aggregate
liquidation preference of the bank's 10 3/8% Noncumulative Preferred Stock,
Series B, referred to in this prospectus as the "Series B Preferred Stock," if
issued in exchange for the outstanding REIT Preferred Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition - Capital" and "Security Ownership of Certain Beneficial
Owners and Management."
Effective May 18, 1999, the Board of Directors of the bank rescinded a 1996
resolution containing additional limits on the amount of dividends that could be
paid by the bank. See "Board Resolution."
The payment of any dividends on the bank's common stock and preferred stock will
be determined by the Board of Directors based on the bank's liquidity, asset
quality profile, capital adequacy and recent earnings history, as well as
economic conditions and other factors that the Board of Directors determines are
relevant, including applicable government regulations and policies. See
"Deposits and Other Sources of Funds - Borrowings."
Lending Limits. The bank generally is prohibited from lending to one borrower
and its related entities amounts in excess of 15% of unimpaired capital and
unimpaired surplus. The bank may lend an additional 10% for loans fully secured
by readily marketable collateral. The bank's regulatory lending limit was
approximately $127.0 million at September 30, 1999, and no group relationships
exceeded this limit at that date.
Safety and Soundness Standards. The federal financial institution regulators
have developed standards to evaluate the operations of depository institutions,
as well as standards relating to asset quality, earnings and compensation. The
operational standards cover internal controls and audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. An institution that fails to meet a standard that is
imposed through regulation may be required to submit a plan for corrective
action within 30 days. If a savings association fails to submit or implement an
acceptable plan, the OTS must order it to correct the deficiency, and may:
o restrict its rate of asset growth,
o prohibit asset growth entirely,
o require the institution to increase its ratio of tangible equity to assets,
o restrict the interest rate paid on deposits to the prevailing rates of
interest on deposits of comparable amounts and maturities, or
o require the institution to take any other action the OTS determines will
better carry out the purpose of prompt corrective action.
Imposition of these sanctions is within the discretion of the OTS in most cases,
but is mandatory if the savings institution commenced operations or experienced
a change in control during the 24 months preceding the institution's failure to
meet these standards, or underwent extraordinary growth during the preceding 18
months.
The asset quality standards require that the bank establish and maintain a
system to identify problem assets and prevent deterioration of those assets. The
earnings standards require that the bank establish and maintain a system to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves.
Regulatory Assessments. The OTS imposes five separate fees to fund its
operations:
o semi-annual assessments for all savings institutions,
o examination fees for certain affiliates of savings associations,
o application fees,
o securities filing fees and
o publication fees.
Of these fees, the semi-annual assessments are the most significant, totaling
$1.28 million for the bank for the twelve-month period ending December 31, 1999.
Beginning January 1, 1999, the OTS began charging examination and supervisory
assessments based on a revised formula intended to more accurately reflect the
OTS's estimates of the actual cost of examining and supervising an institution.
Unlike the previous formula, the revised formula imposes a surcharge on
institutions with a supervisory rating of 3 in addition to institutions with a
supervisory rating of 4 or 5 that already paid a surcharge. Surcharges are also
imposed on "complex institutions," which the OTS defines as any institution with
over $1 billion of off-balance sheet assets consisting of loans serviced for
others, trust assets and recourse obligations or direct credit substitutes. The
bank is treated as a "complex institution" for these purposes.
Other Regulations and Legislation. Chevy Chase must obtain prior approval of the
OTS before merging with another institution or before acquiring insured deposits
through certain transactions. Also, as an SAIF-insured institution, the bank is
subject to limitations on its ability to buy or sell deposits from or to, or to
combine with, a BIF-insured institution. Despite these restrictions,
SAIF-insured thrifts may be acquired by banks or by bank holding companies under
certain circumstances.
The federal agencies regulating financial institutions possess broad enforcement
authority over the institutions they regulate, including the authority to impose
civil money penalties of up to $1 million per day for violations of laws and
regulations.
Federally chartered thrifts like Chevy Chase generally are permitted to
establish new branches anywhere in the United States, provided that they meet
the QTL test and their regulatory capital requirements and have at least a
satisfactory rating under the Community Reinvestment Act, also known as "CRA."
Amounts realized by the FDIC from the liquidation or other resolution of any
insured depository institution must be distributed to pay claims (other than
secured claims to the extent of any such security) in the following order of
priority:
o administrative expenses of the receiver,
o any deposit liability of the institution,
o any other general or senior liability of the institution (which is not an
obligation described below ), o any obligation subordinated to depositors or
general creditors which is not a stockholder obligation, and
o any obligation to stockholders arising as a result of their status as
stockholders.
On February 4, 1999, the OTS and the other federal bank regulatory agencies
adopted changes to the regulatory classification policies for retail credit,
including:
o a revised charge-off policy for open-end credit at 180 days delinquency and
closed-end credit at 120 days delinquency;
o a charge-off policy for loans affected by bankruptcy, fraudulent activity,
and/or death of a borrower;
o a revised policy for treatment of partial payments;
o a revised re-aging policy for past due accounts; and
o a classification policy for delinquent residential mortgage and home equity
loans.
The changes will take effect December 31, 2000.
Recent Legislation
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act,
which amends existing federal and state law beginning March 11, 2000 to permit
affiliations among banks, securities firms, insurance companies, and other
financial services providers. The Act also contains a variety of other
provisions affecting the financial services industry. While many of the Act's
key provisions apply only to commercial banks, several provisions directly
affect thrift institutions such as the bank and its parent companies.
The Act preserves the existing thrift charter and the regulatory authority of
the OTS, but eliminates the prior authority for companies engaged in
non-financial activities to control a single thrift institution that meets the
QTL test (so-called "unitary thrift holding companies"). Existing unitary thrift
holding companies retain broad grandfather rights under the Act. Thus, the
Trust, B.F. Saul Company, CCPC and Westminster (together the "Holding
Companies") -- each of which is registered as a unitary thrift holding company
because of its direct or indirect ownership interests in the bank or the Trust--
may continue to engage directly or through existing or new subsidiaries in any
commercial or financial activities in which they were engaged or authorized to
engage as of May 4, 1999. However, the Act prohibits the sale of grand-fathered
unitary thrift holding companies such as the Holding Companies (together with
their thrift subsidiaries) or their thrift subsidiaries alone to commercial
companies. Corporate reorganizations are expressly permitted.
The Act imposes significant new obligations on the bank with respect to consumer
privacy. Under the Act, the bank must establish and disclose annually its
privacy policies, provide consumers the right to "opt out" of disclosures to
unaffiliated third parties, and abide by regulatory standards to protect the
security and confidentiality of consumer information. The Act also expressly
prohibits the bank from disclosing customer account numbers to any
non-affiliated party for marketing purposes. The Act's privacy provisions do not
preempt state laws that provide greater protections to consumers, and the
federal banking agencies together with Treasury, the Securities and Exchange
Commission and the Federal Trade Commission must adopt regulations implementing
the Act's privacy provisions, which will take effect on November 12, 2000 unless
postponed by the agencies.
The Act also eliminates the SAIF special reserve and returns those funds to the
general SAIF insurance fund, thus reducing the risk of new deposit insurance
premium disparities between banks and thrifts.
The Act reforms the FHLB system by, among other things, making membership in the
FHLB voluntary rather mandatory for federal thrifts such as the bank, imposing
specific regulatory capital requirements on the FHLBs, and expanding access to
FHLB advances particularly for smaller banks and thrifts. Because membership is
required to obtain advances from the FHLB and the bank expects to continue to
rely on FHLB advances as an important source of funds, the bank currently plans
to remain a member of the FHLB of Atlanta.
The Act amends the Community Reinvestment Act by:
o establishing CRA requirements that must be met by financial holding companies
in order to engage in the expanded activities authorized under the Act;
o reducing the CRA examination schedule for qualifying community banks and
thrifts with assets of $250 million or less; and
o requiring public disclosure of CRA agreements between banking organizations
and community groups or other private parties.
The Act contains a variety of other provisions, including, for example,
provisions codifying existing practices regarding disclosure of ATM surcharges,
and, effective May 12, 2001, permitting thrift institutions to offer common
trust funds without registering those funds under the federal securities laws.
The bank is currently reviewing the various provisions of the Act.
Federal Reserve System
The Federal Reserve Board requires the bank to maintain reserves against its
transaction accounts and certain non-personal deposit accounts. Because reserves
generally must be maintained in cash or non-interest-bearing accounts, the
effect of the reserve requirement is to decrease the bank's earnings.
FRB regulations generally require that reserves be maintained against net
transaction accounts. Prior to December 1, 1998, the first $4.7 million of the
bank's transaction accounts were subject to a 0% reserve requirement. The next
$43.1 million in net transaction accounts were subject to a 3.0% reserve
requirement and any net transaction accounts over $47.8 million were subject to
a 10.0% reserve requirement. Effective December 1, 1998, the FRB increased the
amount of transaction accounts subject to a 0% reserve requirement from $4.7
million to $4.9 million and decreased the "low reserve tranche" from $43.1
million to $41.6 million. The bank met its reserve requirements for each period
during the year ended September 30, 1999. The balances maintained to meet the
reserve requirements imposed by the FRB also may be used to satisfy liquidity
requirements imposed by the OTS.
Savings institutions may borrow from the FRB "discount window," although FRB
regulations require these institutions to exhaust all reasonable alternate
sources of funds, including FHLB sources, before borrowing from the FRB. FDICIA
imposes additional limitations on the ability of the FRB to lend to
undercapitalized institutions through the discount window.
Community Reinvestment Act
Under the CRA and the OTS's regulations, the bank has a continuing and
affirmative obligation to help meet the credit needs of its local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. The OTS is required to assess the
institution's record in satisfying the intent of the CRA in connection with its
examination of the bank. In addition, the OTS is required to take into account
the bank's record of meeting the credit needs of its community in determining
whether to grant approval for certain types of applications.
The bank is committed to fulfilling its CRA obligation by providing access to a
full range of credit-related products and services to all segments of its
community. Based on the last OTS examination covering the period from January
1995 through June 1997, the bank received an "outstanding" CRA rating, the
highest rating given by the OTS. The bank is scheduled for its next CRA
examination in the year 2000.
The bank is evaluated under CRA primarily on the basis of its lending and
investment in, and provision of services, to low- and moderate-income areas.
In August 1994, Chevy Chase and its subsidiary, B. F. Saul Mortgage Company,
entered into an agreement with the United States Department of Justice which
committed them to continue the types of lending practices, branching strategies
and promotional programs that are designed to increase the level of banking
services available to traditionally underserved areas of the Washington, DC
metropolitan area. Specifically, the companies agreed to invest $11.0 million in
the African-American community of the Washington, DC metropolitan area over a
five-year period. As part of their ongoing strategy to serve all of the
community, the companies fulfilled the requirements of the agreement. Although
this agreement expired during August 1999, the companies will maintain their
commitment to serving all areas of their community.
Other Aspects of Federal Law
The bank is also subject to federal statutory provisions covering matters such
as security procedures, currency transactions reporting, insider and affiliated
party transactions, management interlocks, truth-in-lending, electronic funds
transfers, funds availability and equal credit opportunity.
Holding Company Regulation
The Holding Companies are "savings and loan holding companies" subject to
regulation, examination and supervision by the OTS. The bank is prohibited from
making or guaranteeing loans or advances to or for the benefit of the Holding
Companies or other affiliates engaged in activities beyond those permissible for
bank holding companies and from investing in the securities of the Holding
Companies or other affiliates. Transactions between the bank and the Holding
Companies must be on terms substantially the same, or at least as favorable to
the bank, as those that would be available to non-affiliates.
The Holding Companies must obtain the OTS approval before acquiring any
federally insured savings institution or any savings and loan holding company.
The status of the Holding Companies as "unitary thrift holding companies" and
the activities in which the Holding Companies may engage have been grandfathered
under recently enacted legislation. See "Recent Legislation." As grandfathered
unitary thrift holding companies, the Holding Companies are virtually
unrestricted in the types of business activities in which they may engage
provided the bank continues to meet the QTL test. See "Qualified Thrift Lender
Test." If the Holding Companies were to acquire one or more federally
insured institutions and operate them as separate subsidiaries rather than
merging them into the bank, the Holding Companies would become "multiple"
savings and loan holding companies. As multiple savings and loan holding
companies, the Holding Companies would be subject to limitations on the types of
business activities in which they would be permitted to engage, unless the
additional thrifts were troubled institutions acquired pursuant to certain
emergency acquisition provisions and all subsidiary thrifts met the QTL test.
The Holding Companies may acquire and operate additional savings institution
subsidiaries outside of Maryland and Virginia only if the laws of the target
institution's state specifically permit such acquisitions or if the acquisitions
are made pursuant to emergency acquisition provisions.
The Trust and B.F. Saul Company entered into an agreement with OTS's
predecessor, the Federal Savings and Loan Insurance Corporation, to maintain the
bank's regulatory capital at the required levels, and, if necessary, to infuse
additional capital to enable the bank to meet those requirements. Since the
execution of this agreement, the OTS has changed its policy and no longer
requires such agreements from companies acquiring thrift institutions. In
addition, the regulatory capital requirements applicable to the bank have
changed significantly as a result of FIRREA. The OTS has stated that capital
maintenance agreements entered into prior to the modification of OTS policy and
the enactment of FIRREA were not affected by those changes. The Trust and
B.F. Saul Company have not sought to modify the existing agreement. To the
extent the bank is unable to meet regulatory capital requirements in the future,
the OTS could seek to enforce the obligations of the Trust and the B.F. Saul
Company under the agreement.
If the bank were to become "undercapitalized" under the prompt corrective action
regulations, it would be required to file a capital restoration plan with the
OTS setting forth, among other things, the steps the bank would take to become
"adequately capitalized." The OTS could not accept the plan unless the Holding
Companies guaranteed in writing the bank's compliance with that plan. The
aggregate liability of the Holding Companies under such a commitment would be
limited to the lesser of:
o an amount equal to 5.0% of the bank's total assets at the time the bank became
"undercapitalized," and
o the amount necessary to bring the bank into compliance with all applicable
capital standards as of the time the bank fails to comply with its capital
plan.
If the Holding Companies refused to provide the guarantee, the bank would be
subject to the more restrictive supervisory actions applicable to "significantly
undercapitalized" institutions. See "Prompt Corrective Action."
Recent Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998 and establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 becomes
effective for the first quarter of fiscal years beginning after June 15, 2000.
The impact of SFAS 133 on the bank's financial statements has not yet been
determined.
Market Area
The bank's principal deposit and lending markets are located in the Washington,
DC metropolitan area. Service industries and federal, state and local
governments employ a significant portion of the Washington, DC area labor force,
while a substantial number of the nation's 500 largest corporations have some
presence in the area. The Washington, DC area's seasonally unadjusted
unemployment rate is generally below the national rate and was 2.6% in September
1999, compared to the national rate of 4.1%.
Chevy Chase historically has relied on retail deposits originated in its branch
network as its primary funding source. See "Deposits and Other Sources of
Funds." Chevy Chase's principal market for deposits consists of Montgomery and
Prince George's Counties in Maryland and Fairfax County in Virginia.
Approximately 15.4% of the bank's deposits at September 30, 1999 were obtained
from depositors residing outside of Maryland, Northern Virginia and the District
of Columbia. Chevy Chase had the largest market share of deposits in Montgomery
County, and ranked third in market share of deposits in Prince George's County
at June 30, 1998, according to the most recently published industry statistics.
The per capita income of each of Montgomery and Fairfax Counties ranks among the
highest of counties and equivalent jurisdictions nationally. These two counties
are also the Washington, DC area's largest suburban employment centers, with a
substantial portion of their labor force consisting of federal, state and local
government employees. Private employment is concentrated in services and retail
trade centers. The unemployment rate in both Montgomery and Fairfax Counties in
September 1999 of 1.8% was below the national rate of 4.1% and state rates of
3.3% for Maryland and 3.0% for Virginia for the same month.
The bank historically has concentrated its lending activities in the Washington,
DC metropolitan area. See "Lending Activities."
Investment and Other Securities
The bank is required by OTS regulations to maintain a specific minimum amount of
liquid assets and short-term liquid assets invested in certain qualifying types
of investments. See "Regulation - Liquidity Requirements." To meet these
requirements, the bank maintains a portfolio of cash, federal funds and
mortgage-backed securities with final maturities of five years or less. The
balance of investments in excess of regulatory requirements reflects
management's objective of maintaining liquidity at a level sufficient to assure
adequate funds to meet expected and unexpected balance sheet fluctuations.
The bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. All investment securities and mortgage-backed
securities were classified as held-to-maturity at September 30, 1999 and 1998.
As part of its mortgage banking activities, the bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
1999 and 1998.
At September 30, 1999 and 1998, the bank held automobile receivables-backed
securities which were classified as trading securities. These securities were
created as part of two automobile loan securitizations and represent subordinate
classes of certificates retained by the bank.
Lending Activities
Loan and Lease Portfolio Composition. At September 30, 1999, the bank's loan and
lease portfolio totaled $6.5 billion, which represented 70.7% of its total
assets. It should be noted that all references in this prospectus to the bank's
loan portfolio refer to loans, whether they are held for sale and/or
securitization or for investment, and exclude mortgage-backed securities. Loans
collateralized by single-family residences constituted 67.1% of the loan and
lease portfolio at that date.
The following table sets forth information concerning the bank's loan and lease
portfolio net of unfunded commitments for the periods indicated.
Loan and Lease Portfolio
(Dollars in thousands)
September 30,
------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------ ------------------- ------------------- -------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
------------ ------- ------------ ------- ----------- ------- ----------- ------- ----------- -------
Single family
residential (1) $ 4,098,523 63.4 % $ 1,821,982 65.7 % $ 849,955 33.2 % $1,601,483 47.2 % $1,391,694 47.3 %
Home equity (1) 239,673 3.7 135,122 4.9 94,088 3.7 32,052 0.9 29,024 1.0
Commercial real estate
and multifamily 57,051 0.9 74,164 2.7 53,551 2.1 78,866 2.3 85,781 2.9
Real estate
construction and ground 228,464 3.5 108,379 3.9 54,998 2.2 63,907 1.9 32,652 1.1
Commercial 394,142 6.1 174,076 6.3 98,346 3.9 57,023 1.7 13,986 0.5
Credit card (1) 0 0.0 0 0.0 1,077,149 42.3 1,118,271 33.0 1,012,548 34.4
Automobile (1) 827,436 12.8 121,372 4.4 113,241 4.4 239,006 7.2 207,266 7.0
Subprime automobile (1) 480,533 7.4 236,454 8.5 116,627 4.6 62,060 1.8 31,951 1.1
Home improvement and
related loans (1) 106,847 1.7 67,355 2.4 55,453 2.2 99,192 2.9 112,705 3.8
Overdraft lines of
credit and other
consumer 31,645 0.5 33,484 1.2 36,029 1.4 37,954 1.1 26,206 0.9
------------ ------- ---------- ------- ----------- ------- ----------- ------- ----------- -------
6,464,314 100.0% 2,772,388 100.0% 2,549,437 100.0% 3,389,814 100.0% 2,943,813 100.0%
------------ ======= ---------- ======= ----------- ======= ----------- ======= ----------- =======
Less:
Unearned premiums
and discounts (6,562) (2,163) 280 677 872
Net deferred loan
origination
fees (costs) (16,133) (850) (2,170) (13,856) (13,520)
Allowance for loan
and lease losses 58,139 60,157 105,679 95,523 60,496
------------ ---------- ----------- ----------- -----------
35,444 57,144 103,789 82,344 47,848
------------ ---------- ----------- ----------- -----------
Total loans and
leases receivable $ 6,428,870 $ 2,715,244 $2,445,648 $3,307,470 $2,895,965
============ ========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization, if any.
The bank adjusts the composition of its loan and lease portfolio in response to
a variety of factors, including regulatory requirements and asset and liability
management objectives. In addition, the composition of the bank's loan and lease
portfolio as of September 30, 1998 was significantly affected by the sale of the
bank's credit card portfolio on that date. See "Regulation Regulatory Capital,"
"- Qualified Thrift Lender Test" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition - Asset and
Liability Management."
Contractual Principal Repayments of Loans and Leases. The following table shows
the scheduled contractual principal repayments of the bank's loans and leases at
September 30, 1999. The entire balance of loans held for sale and/or
securitization is shown in the year ending September 30, 2000, because such
loans are expected to be sold in less than one year.
Contractual Principal Repayments
(In thousands)
Principal
Balance Approximate Principal Repayments
Outstanding Due in Years Ending September 30,
at --------------------------------------------------------------------------------------
September 30, 2015 and
1999 (1) 2000 2001 2002 2003-2004 2005-2009 2010-2014 Thereafter
------------ ----------- ----------- ----------- ------------ ------------ ------------- ------------
Single family residential $ 3,986,212 $ 67,656 $ 71,196 $ 74,539 $ 160,067 $ 489,819 $ 638,227 $ 2,484,708
Home equity 239,673 3,404 996 957 2,500 10,334 17,158 204,324
Commercial real estate
and multifamily 57,051 16,125 9,596 3,504 5,180 20,179 2,467 --
Real estate construction
and ground 228,464 142,219 69,191 6,910 10,144 -- -- --
Commercial 394,142 74,948 15,459 24,052 81,197 186,313 6,950 5,223
Automobile 1,307,969 264,265 288,712 310,012 428,277 16,310 393 --
Home improvement and
related loans 102,483 7,218 7,499 7,651 14,922 33,402 22,637 9,154
Overdraft lines of credit
and other consumer 31,646 4,996 4,831 5,504 14,305 1,997 13 --
Loans held for sale 116,674 116,674 -- -- -- -- -- --
------------ ----------- ----------- ----------- ------------ ------------ ------------- ------------
Total loans receivable (2) $ 6,464,314 $ 697,505 $ 467,480 $ 433,129 $ 716,592 $ 758,354 $ 687,845 $ 2,703,409
============ =========== =========== =========== ============ ============ ============= ============
Fixed-rate loans $ 4,071,861 $ 499,431 $ 420,041 $ 388,837 $ 583,375 $ 503,962 $ 455,924 $ 1,220,291
Adjustable-rate loans 2,275,779 81,400 47,439 44,292 133,217 254,392 231,921 1,483,118
Loans held for sale 116,674 116,674 -- -- -- -- -- --
------------ ----------- ----------- ----------- ------------ ------------ ------------- ------------
Total loans receivable (2) $ 6,464,314 $ 697,505 $ 467,480 $ 433,129 $ 716,592 $ 758,354 $ 687,845 $ 2,703,409
============ =========== =========== =========== ============ ============ ============= ============
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Of the total amount of loans outstanding at September 30, 1999 which were
due after one year, an aggregate principal balance of approximately $3.6 billion
had fixed interest rates and an aggregate principal balance of approximately
$2.2 billion had adjustable interest rates.
(2) Before deduction of allowance for loan losses, unearned premiums and
discounts and deferred loan origination fees (costs).
Actual payments may not reflect scheduled contractual principal repayments due
to the effect of loan refinancings, prepayments and enforcement of due-on-sale
clauses. Due-on-sale clauses give the bank the right to declare a "conventional
loan" -- one that is neither insured by the Federal Housing Administration nor
partially guaranteed by the Veterans' Administration -- immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. Although the bank's
single-family residential loans historically have had stated maturities of
generally 30 years, such loans normally have remained outstanding for
substantially shorter periods because of these factors. At September 30, 1999,
principal repayments of $580.8 million are contractually due within the next
year. Of this amount, $499.4 million is contractually due on fixed-rate loans
and $81.4 million is contractually due on adjustable-rate loans.
Origination, Purchase and Sale of Real Estate Loans. The bank has general
authority to make loans secured by real estate located throughout the United
States. The following table shows changes in the composition of the bank's real
estate loan portfolio and the net change in mortgage-backed securities.
Origination, Purchase and Sale of Real Estate Loans
(In thousands)
For the Year Ended September 30,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
Real estate loan originations and purchases: (1)
Single family residential $ 3,526,750 $ 2,814,171 $ 1,438,333
Home equity 331,371 448,071 259,999
Commercial real estate and multifamily 28,416 21,184 29
Real estate construction and ground 289,228 126,295 64,430
---------------- ---------------- ---------------
Total originations and purchases 4,175,765 3,409,721 1,762,791
---------------- ---------------- ---------------
Principal repayments (710,376) (348,676) (501,190)
Sales (2) (52,914) (423,078) (413,645)
Loans transferred to real estate acquired
in settlement of loans (1,909) (4,938) (4,706)
---------------- ---------------- ---------------
(765,199) (776,692) (919,541)
---------------- ---------------- ---------------
Transfers to mortgage-backed securities (3) (926,502) (1,545,974) (1,566,966)
---------------- ---------------- ---------------
Increase (decrease) in real estate loans $ 2,484,064 $ 1,087,055 $ (723,716)
================ ================ ===============
(1) Excludes unfunded commitments.
(2) Includes securitization and sale of home equity receivables into new trusts
of $298.8 million and $170.6 million for the years ended September 30, 1998 and
1997. There were no securitizations or sales of home equity receivables into new
trusts during the year ended September 30, 1999.
(3) Represents real estate loans which were pooled and exchanged for
mortgage-backed securities.
Single-Family Residential Real Estate Lending. The bank originates a variety of
loans secured by single-family residences. At September 30, 1999, $4.3 billion,
or 67.1%, of the bank's loan and lease portfolio consisted of loans secured by
first or second mortgages on such properties, as compared to $2.0 billion, or
70.6%, at September 30, 1998. Of these amounts, $20.7 million and $25.5 million
consisted of FHA-insured or VA-guaranteed loans at September 30, 1999 and 1998.
Approximately 55.0% of the principal balance of the bank's single-family
residential real estate loans at September 30, 1999, were secured by properties
located in Maryland, Virginia or the District of Columbia.
The bank originates VA, FHA and a wide variety of conventional residential
mortgage loans through its wholly-owned mortgage banking subsidiary, B. F. Saul
Mortgage Company, and through Chevy Chase Mortgage, a division of the bank.
Chevy Chase currently offers fixed-rate loans with maturities of 10 to 30 years
and adjustable-rate residential mortgage loans, principally with maturities of
30 years.
The bank maintains a wholesale network of correspondents, including loan brokers
and financial institutions, in order to supplement its direct origination of
single-family residential mortgage loans. The bank determines the specific loan
products and rates under which the correspondents originate the loans, and
subjects the loans to the bank's underwriting criteria and review. During the
year ended September 30, 1999, approximately $2.1 billion of loans settled under
the correspondent program.
Interest rates on the majority of the bank's ARMs are adjusted based on changes
in yields on U.S. Treasury securities of varying maturities. The interest rate
adjustment provisions of the bank's ARMs contain limitations on the frequency
and maximum amount of interest rate adjustments, although such limitations are
not required by law. These limitations are determined by a variety of factors,
including mortgage loan competition in the bank's markets. The ARMs currently
offered by the bank are generally subject to a limitation on the annual increase
in the interest rate of 2.0% and a limitation on the increase in the interest
rate over the term of the loan ranging from 6.0% to 9.0%. At September 30, 1999,
48.0% of the bank's residential mortgage loans were comprised of ARMs.
Loan sales provide the bank with liquidity and additional funds for lending,
enabling the bank to increase the volume of loans originated and thereby
increase loan interest and fee income as well as gains on sales of loans. In
fiscal 1999, sales of mortgage loans originated or purchased for sale by the
bank totaled $52.9 million compared to $423.1 million during fiscal 1998. The
decline from the 1998 level is primarily attributable to decreased home equity
securitization activity following the sale of the credit card portfolio at
September 30, 1998. The marketability of loans, loan participations and
mortgage-backed securities depends on purchasers' investment limitations,
general market and competitive conditions, mortgage loan demand and other
factors.
The bank's conforming fixed-rate, single-family loans are originated on terms
which conform to Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association and Government National Mortgage Association guidelines in
order to facilitate the sale and/or securitization of those loans. In order to
manage its interest-rate exposure, the bank hedges its held for sale mortgage
loan pipeline by entering into whole loan and mortgage-backed security forward
sale commitments. Sales of residential mortgage loans are generally made without
recourse to the bank. At September 30, 1999, the bank had $112.4 million of
single-family residential loans held for sale to investors.
From time to time, as part of its capital and liquidity management plans, the
bank may consider exchanging loans held in its portfolio for lower risk-weighted
mortgage-backed securities and retaining those securities in its portfolio
rather than selling them. During fiscal years 1999 and 1998 the bank exchanged
$1.8 million and $1.2 billion of single-family residential loans held in its
portfolio for mortgage-backed securities which the bank retained for its own
portfolio. The decline in exchanges during fiscal year 1999 reflects the bank's
improved capital position following the sale of its credit card portfolio and
operations on September 30, 1998.
When the bank sells a residential whole loan or loan participation and retains
servicing, or purchases mortgage servicing assets from third parties, it
collects and remits loan payments, inspects the properties, makes certain
insurance and tax payments on behalf of borrowers and otherwise services the
loans. The servicing fee, generally ranging from 0.25% to 0.50% of the
outstanding loan principal amount per annum, is recognized as income over the
life of the loans. The bank also typically derives income from temporary
investment for its own account of loan collections pending remittance to the
participation or whole loan purchaser. At September 30, 1999, the bank was
servicing residential permanent loans totaling $3.5 billion for other investors.
See "Loan Servicing."
Sales of Mortgage-Backed Securities. The bank originates and sells
mortgage-backed securities pursuant to its normal mortgage banking operations.
The securities are generally issued in the same month as they are sold. The
securities are formed from conforming mortgage loans originated for sale or from
conforming mortgage loans resulting from the borrower's election to convert from
an adjustable-rate loan to a fixed-rate loan. Mortgage-backed securities held
for sale in conjunction with mortgage banking activities are classified as
trading securities. During the years ended September 30, 1999 and 1998, the bank
originated and sold $924.7 million and $320.7 million of mortgage-backed
securities and recognized gains of $7.2 million and $1.0 million. As a result of
the sale of trading securities in the month such securities are formed, the
Consolidated Statements of Cash Flows in this prospectus reflect significant
proceeds from the sales of trading securities, even though there are no balances
of such securities at September 30, 1999.
Home Equity Lending. The bank's home equity credit line loans provide revolving
credit secured principally by a second mortgage on the borrower's home. Home
equity credit line loans bear interest at a variable rate that adjusts monthly
based on changes in the applicable interest rate index and generally are subject
to a maximum annual interest rate of between 18.0% and 24.0%. Generally, except
for any amortization of principal that may occur as a result of monthly
payments, there are no required payments of principal until maturity. In order
to promote its home equity credit line loan program, the bank currently offers
prospective borrowers a below-market interest rate for an introductory period
and settlement without closing costs.
During fiscal 1999, the bank purchased $135.1 million of home equity credit line
loans at a premium. The bank may make additional purchases of such loans in the
future as a way to supplement its direct origination of such loans.
Securitization and sale of home equity receivables has been an important element
of the bank's strategies to enhance liquidity and to maintain compliance with
regulatory capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition." The bank
transferred $79.4 million of home equity credit line receivables in existing
trusts to investors and recognized a gain of $2.9 million during the year ended
September 30, 1999. The bank transferred $298.8 million and $170.6 million of
home equity receivables in fiscal 1998 and fiscal 1997 to trusts for
securitization and sale to investors. Gains of $19.7 million and $11.8 million
were recognized by the bank as a result of these transactions. The bank
continues to service the underlying accounts.
Commercial Real Estate and Real Estate Construction Lending. Commercial real
estate, real estate construction and ground loans are originated directly by the
bank. Aggregate balances of residential and commercial construction, ground and
commercial real estate and multifamily loans increased 56.4% in fiscal 1999 to
$285.5 million at September 30, 1999, from $182.5 million at September 30, 1998.
The bank provides financing, generally at market rates, to certain purchasers of
its real estate owned. Additionally, the bank finances the construction of
residential real estate, principally single-family detached homes and
townhouses, but generally only when a home is under contract for sale by the
builder to a consumer.
Commercial Lending. The bank makes loans to business entities for a variety of
purposes, including working capital, acquisitions of machinery and equipment or
other assets, and facilitating cash flows. The bank also provides acquisition,
construction and permanent financing of real estate used in the borrower's
business. A wide variety of products are offered, including revolving lines of
credit for working capital or seasonal needs; term loans for the financing of
fixed assets; letters of credit; cash management services; and other deposit and
investment products.
Business development efforts originated by the bank's Business Banking Group
have been concentrated in the major industry groups in the metropolitan
Washington, DC and Baltimore areas, as well as a broad base of businesses and
community service organizations. Commercial loans increased $220.1 million
during fiscal 1999 from $174.0 million at September 30, 1998 to $394.1 million
at September 30, 1999. During fiscal year 1999, the bank purchased commercial
loan participations to a greater extent than in previous years. Of the $394.1
million, 35.7% represents participations by the bank in commercial loans which
were originated by other financial institutions. The bank believes its balances
of commercial loans will increase as it continues to expand this aspect of its
business. In addition, management believes that the acquisition of ASB will
continue to enhance the operations of the Business Banking Group by allowing the
bank to offer a broader variety of investment products and fiduciary services to
institutional customers.
Federal laws and regulations limit the bank's commercial loan portfolio to 20%
of assets, with at least 10% consisting of small business loans. At September
30, 1999 the bank was in compliance with this limit.
Consumer Lending. Chevy Chase currently offers a variety of consumer loans,
including automobile loans, overdraft lines of credit, home improvement loans
and other unsecured loans for traditional consumer purchases and needs. In the
later part of fiscal 1998, the bank also began offering automobile leases. In
addition, through a wholly-owned subsidiary, the bank offers "subprime"
automobile loans. "Subprime" refers to a category of loans made to applicants
who have experienced certain adverse credit events, but who meet certain other
creditworthiness tests. See "Consumer Loan Underwriting." Following the sale of
the credit card portfolio to FUSA on September 30, 1998, the bank no longer
offers its own credit card loans, but has an agreement with FUSA pursuant to
which the bank provides credit cards issued by FUSA to the bank's local
customers. The bank's portfolios of automobile loans and automobile leases, home
improvement and related loans and other consumer loans totaled $1.3 billion,
$106.8 million and $31.6 million at September 30, 1999, which accounted for a
combined 22.5% of total loans at that date. The largest areas of recent growth
have been in automobile loans and home improvement loans. During fiscal 1999,
the bank purchased or originated $1.2 billion and $67.7 million of automobile
loans and home improvement loans.
Federal laws and regulations limit the bank's secured and unsecured consumer
loans to 35% of its total assets. Home improvement, secured deposit account and
educational loans are not included in the 35% limit. At September 30, 1999, the
bank was in compliance with this limit.
Real Estate Loan Underwriting. In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security. The Board of Directors has
delegated credit approval authority to the Executive Loan Committee and certain
senior officers based on credit authorizations approved by the Board of
Directors. Generally, all construction and commercial real estate loans are
reviewed and approved by the Executive Loan Committee. Any significant loan not
conforming to the bank's approved policies must be approved by the Executive
Loan Committee or the Chief Executive Officer. All loans of $30 million or more
are presented to the Board of Directors for final approval.
The approval process for all types of real estate loans includes appraisals or
evaluations of the properties securing such loans and a review of the
applicant's financial statements and credit, payment and banking history,
financial statements of any guarantors, and tax returns of guarantors of
construction and commercial real estate loans.
In an effort to minimize the increased risk of loss associated with construction
and development loans, Chevy Chase considers the reputation of the borrower and
the contractor, reviews pre-construction sale and leasing information, and
requires an independent inspecting engineer or architect to review the progress
of multifamily and commercial real estate projects. In addition, the bank
generally requires personal guarantees of developers for all development loans
and, if a general contractor is used by the developer, may require the posting
of a performance bond.
The bank generally lends on its residential mortgage loans up to 95% of the
appraised value of owner-occupied single-family homes. The bank generally also
lends up to 80% of the appraised value of the completed project to finance the
construction of such homes. The loan-to-value ratio generally applied by the
bank to commercial real estate loans and multifamily residential loans has been
80% of the appraised value of the completed project. In some circumstances, the
bank originates a first and second mortgage loan simultaneously where the total
loan value does not exceed 95% of the appraised value of the property.
Currently, the bank offers home equity credit line loans up to a 125% maximum
loan-to-value ratio. Loan-to-value ratios are determined at the time a loan is
originated. Consequently, subsequent declines in the value of a loan's
collateral could expose the bank to losses. The bank's ability to make loans
with a loan-to-value ratio above 90 percent without mortgage insurance is
limited to 100 percent of the bank's total risk-based capital.
OTS regulations require institutions to adopt internal real estate lending
policies, including loan-to-value limitations conforming to specific guidelines
established by the OTS. The bank's current lending policies conform to these
regulations.
On all loans secured by real estate, other than home improvement and related
loans and certain home equity credit line loans, Chevy Chase requires title
insurance policies protecting the priority of the bank's liens. The bank
requires fire and casualty insurance for permanent loans including home equity
credit line loans and fire, casualty and builders' risk insurance for
construction loans. The borrower selects the insurance carrier, subject to Chevy
Chase's approval. Generally, for any residential loan, including home equity
credit line loans in an amount exceeding 80% of the appraised value of the
security property, Chevy Chase currently requires mortgage insurance from an
independent mortgage insurance company. The majority of the bank's mortgage
insurance is placed with six carriers.
Substantially all fixed-rate mortgage loans originated by the bank contain a
due-on-sale clause providing that the bank may declare a loan immediately due
and payable in the event, among other things, that the borrower sells the
property securing the loan without the consent of the bank. The bank's ARMs
generally are assumable.
Commercial Loan Underwriting. All commercial loan requests are underwritten and
approved under authorities granted to specified committees and individuals as
outlined in the bank's credit policies. The scope and depth of the underwriting
for a particular request are generally dictated by the size of the proposed
transaction. All commercial loans greater than $100,000 are assigned a risk
rating at inception, based on a risk-rating system established in the bank's
credit policies.
Consumer Loan Underwriting. Consumer loans, which include automobile loans, home
improvement and related loans and overdraft lines of credit, are originated or
purchased by the bank after a review in accordance with established underwriting
procedures.
The underwriting procedures are designed to provide a basis for assessing the
borrower's ability and willingness to repay the loan. In conducting this
assessment, the bank considers the borrower's ratio of debt to income, various
credit scoring models and evaluates the borrower's credit history through a
review of a written credit prospectus compiled by a recognized consumer credit
reporting bureau. The borrower's equity in the collateral and the terms of the
loan are also considered. The bank's guidelines are intended only to provide a
basis for lending decisions, and exceptions to such guidelines may, within
certain limits, be made based upon the credit judgment of the bank's lending
officer. The bank periodically conducts audits to ensure compliance with its
established underwriting policies and procedures.
The bank also makes subprime automobile loans through one of its operating
subsidiaries. The underwriting guidelines for this subsidiary apply to a
category of lending in which loans may be made to applicants who have
experienced certain adverse credit events and therefore would not necessarily
meet all of the bank's guidelines for its traditional loan program, but who meet
certain other creditworthiness tests. Such loans may experience higher rates of
delinquencies, repossessions and losses, especially under adverse economic
conditions, compared with loans originated pursuant to the bank's traditional
lending program. See "Subsidiaries Operating Subsidiaries."
Loan Servicing. In addition to interest earned on loans, the bank receives
income through servicing of loans and fees in connection with loan origination,
loan modification, late payments, changes of property ownership and
miscellaneous services related to its loans. Servicing income earned on
single-family residential mortgage loans owned by third parties and the bank's
securitization and servicing of credit card, home equity, automobile and home
loan receivables portfolios, had been a source of substantial earnings for the
bank in past years. Following the sale of its credit card portfolio and
operations on September 30, 1998, the bank has significantly curtailed its
securitization activities which, when combined with the elimination of credit
card servicing fees, has led to a substantial decrease in servicing and
securitization income. Income from these activities varies with the volume and
type of loans originated and sold.
The following table sets forth certain information relating to the bank's
servicing income as of or for the years indicated.
As of or For the Year Ended September 30,
-----------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
(in thousands)
Residential........................................ $ 3,459,750 $ 4,003,946 $ 3,930,371
Credit card........................................ - - 4,015,172
Home equity........................................ 195,296 421,432 459,130
Automobile......................................... 556,238 1,055,746 1,083,026
Home Improvement loans............................. 106,069 200,033 244,140
------------------- ------------------- --------------------
Total amount of loans
serviced for others (1)......................... $ 4,317,353 $ 5,681,157 $ 9,731,839
=================== =================== ====================
Servicing and securitization
income (2)...................................... $ 31,670 $ 231,674 $ 303,216
=================== =================== ====================
--------------------
(1) The bank's basis in its servicing assets and interest-only strips at
September 30, 1999, 1998 and 1997 was $38.1 million, $40.7 million and $128.8
million.
(2) In each of the years ended September 30, 1999, 1998 and 1997, servicing and
securitization income as a percentage of net interest income before provision
for loan and lease losses was 11.6%, 116.4% and 141.3%.
The bank earns fees in connection with the servicing of home equity loans, home
improvement loans, automobile loans and single-family residential mortgage
loans. The bank's level of servicing and securitization income varies based in
large part on the amount of the bank's securitization activities with respect to
these loan types. As the bank securitizes and sells assets, acquires servicing
assets either through purchase or origination, or sells mortgage loans and
retains the servicing rights on those loans, the level of servicing and
securitization income generally increases.
During fiscal 1999, the bank securitized and sold $81.1 million of loan
receivables into trusts compared to $1.9 billion during fiscal 1998. The bank's
servicing and securitization income decreased from fiscal 1998 principally
because of the elimination of the bank's credit card servicing income and the
reduction in the bank's securitization activity. The bank's level of servicing
and securitization income also declines upon repayment of assets previously
securitized and sold and repayment of mortgage loans serviced for others.
The bank's investment in servicing assets including servicing assets and
interest-only strips, and the amortization of such assets, are periodically
evaluated for impairment. Interest-only strips are evaluated quarterly based on
the discounted value of estimated future net cash flows to be generated by the
underlying loans. The difference between the book value of these assets and the
discounted value is recognized as an unrealized gain or loss in the period in
which the change occurs. Several estimates are used when determining the
discounted value, the most significant of which are the estimated rate of
repayment of the underlying loans and estimated credit losses. The bank
evaluates its servicing assets for impairment based on fair value. To measure
fair value of its servicing assets, the bank uses either quoted market prices or
discounted cash flow analyses using appropriate assumptions for servicing fee
income, servicing costs, prepayment rates and discount rates. If actual
prepayment or default rates significantly exceed the estimates used to calculate
the carrying values of the servicing assets, the actual amount of future cash
flow could be less than the expected amount and the value of the servicing
assets, as well as the bank's earnings, could be negatively impacted. No
assurance can be given that the bank's receivables will not experience
significant increases in prepayment or default rates or that the bank may not
have to write down the value of its servicing assets. Additionally, the bank
stratifies its capitalized servicing assets for purposes of evaluating
impairment by taking into consideration relevant risk characteristics, including
loan type, note rate and date of acquisition. See Notes to Consolidated
Financial Statements - Summary of Significant Accounting Policies - The bank in
this prospectus.
The bank prices its single-family mortgage loans to achieve a competitive yield.
Loan origination and commitment fees, and the related costs associated with
making the loans, are deferred. For fully amortizing loans originated for the
bank's portfolio, the net deferred fees are accreted to interest income over the
estimated life of the loans using the level-yield method. Fees deferred on
revolving credit lines or loans, which have no scheduled amortization,
originated for the bank's portfolio are accreted to income over the estimated
lives of the underlying loans using the straight-line method. Fees deferred on
loans originated and held for sale are not accreted to income but instead are
used in determining the gain or loss on the sale of the loans.
Delinquencies, Foreclosures and Allowances for Losses
Delinquencies and Foreclosures. When a borrower fails to make a required payment
on a mortgage loan, the loan is considered delinquent and, after expiration of
the applicable cure period, the borrower is charged a late fee. The bank follows
practices customary in the banking industry in attempting to cure delinquencies
and in pursuing remedies upon default. Generally, if the borrower does not cure
the delinquency within 90 days, the bank initiates foreclosure action. If the
loan is not reinstated, paid in full or refinanced, the security property is
sold. In some instances, the bank may be the purchaser. Thereafter, the acquired
property is listed in the bank's account for real estate acquired in settlement
of loans until it is sold. Deficiency judgments generally may be enforced
against borrowers in Maryland, Virginia and the District of Columbia, but may
not be available or may be subject to limitations in other jurisdictions in
which loans are originated by the bank.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Asset Quality - Delinquent Loans" for a
discussion of the bank's delinquent loan portfolio at September 30, 1999.
Allowances for Losses. It is the bank's policy to maintain adequate allowances
for estimated losses on loans and leases and real estate. Generally, the
allowances are based on, among other things, historical loan loss experience,
evaluation of economic conditions in general and in various sectors of the
bank's customer base, and periodic reviews of loan and lease portfolio quality
by bank personnel. The bank's specific methods for establishing the appropriate
levels of allowances vary depending upon the assets involved.
Allowances for losses on loans and leases and real estate are based on current
events or facts that may ultimately lead to future losses. In addition to
reviews of individual portfolio segments, the bank regularly reviews its overall
loan and lease portfolio consisting of performing non-classified assets and,
based on that review, may establish additional allowances for losses. The bank's
actual losses may vary from management's current estimates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Asset Quality - Allowances for Losses."
The bank's allowance on its consumer loans and leases is based on a number of
factors, including historical charge-off and repayment experience. The bank's
reserve methodology is based on an analysis of the characteristics of the
portfolio and trends at any particular time. In this regard, the bank considers
various historical information relative to the origination date, borrower
profiles, delinquencies and other factors. In the case of automobile loans,
management also considers the value of the underlying collateral, which can be
adversely impacted by the time required to liquidate the collateral as well as
the age and type of the collateral, and geographic trends.
The bank's methods for determining the allowance on loans secured by real estate
vary depending on whether the loans are secured by residences or by other real
estate. For residential mortgage loans, management analyzes the allowance by
stratifying residential permanent loans on a state by state basis and on whether
the property is occupied by the owner. After the residential permanent portfolio
has been stratified by state, historical loss ratios, as adjusted for
predictable or quantifiable trends, if known, for the specific states are
applied to delinquent loans. Based on this analysis, a reserve component is
assigned to residential permanent loans. In the bank's experience, this approach
has resulted in timely recognition of necessary allowances, which has been
generally supported by the bank's favorable results on the ultimate disposition
of the underlying collateral.
The bank assesses the adequacy of its allowances on non-residential mortgage
loans, commercial loans, REO and real estate held for investment based primarily
on an ongoing evaluation of individual assets. This evaluation takes into
consideration a variety of factors, including cash flow analyses, independent
appraisals, internal risk ratings, market studies, economic trends and
management's knowledge of the market and experience with particular borrowers.
The bank obtains current appraisals when properties are classified as REO. The
bank periodically reviews appraisals and orders new appraisals as appropriate
based on a number of factors, including the date of the previous appraisal,
changes in market conditions and regulatory requirements.
In addition to the allowances described above, allowances are provided for
individual loans where the ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the collateral or
guarantees, if applicable.
REO is carried at the lower of cost or fair value, less selling costs. To date,
sales of REO, non-residential mortgage loans, commercial loans and loans
classified as investments in real estate have resulted in no material additional
aggregate loss to the bank above the amounts already reserved. However, these
results do not necessarily assure that the bank will not suffer losses in the
future beyond its level of allowances.
The bank's individualized asset review takes place within its Asset Review and
Asset Classification Committees. The Asset Classification Committee meets on a
quarterly basis to ensure that the bank has adequate allowances for loan losses.
The Committee is composed of members of senior management, which reviews risk
performance trends within the bank's loan and REO portfolios. The Committee also
reviews economic trends and conditions which might impact these portfolios. The
allowances are then reviewed within the context of this information. The status
of individual criticized and classified assets from $500,000 up to $5,000,000
are also reviewed by this committee. The Asset Review Committee, which meets in
conjunction with the Asset Classification Committee and is composed of the same
members, reviews the status of individual criticized and classified assets of
$5,000,000 or greater. The actions of these Committees are reported to the Board
of Directors on an annual basis.
The Federal Financial Institution Examination Council, which is composed of the
OTS and the other federal banking agencies, has issued guidelines regarding the
appropriate levels of general valuation allowances that should be maintained by
insured institutions. The bank believes that its levels of general valuation
allowances at September 30, 1999 comply with the guidelines.
The bank's assets are subject to review and classification by the OTS upon
examination. Based on such examinations, the bank could be required to establish
additional valuation allowances or incur additional charge-offs.
Deposits and Other Sources of Funds
General. Deposits are the primary source of the bank's funds for use in lending
and for other general business purposes. In addition to deposits, Chevy Chase
receives funds from loan repayments and loan sales. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
influenced by general interest rates and money-market conditions. Borrowings may
be used to compensate for reductions in normal sources of funds, such as deposit
inflows at less than projected levels or deposit outflows, or to support the
bank's operating or investing activities.
Deposits. Chevy Chase currently offers a variety of deposit accounts with a
range of interest rates and maturities designed to attract both long-term and
short-term deposits. Deposit programs include Super Statement Savings, Super
NOW, Insured Money Fund, Checking, Simple Statement Savings, Young Savers,
Certificate, and special programs for Individual Retirement and Keogh
self-employed retirement accounts.
Chevy Chase attracts deposits through its branch network and advertisements, and
offers depositors access to their accounts through 854 ATMs, including 356 ATMs
located in grocery stores. These ATMs significantly enhance the bank's position
as a leading provider of convenient ATM service in its primary market area. The
bank is a member of the "STAR"(R) ATM network which offers approximately 200,000
locations nationwide. The bank is also a member of the "PLUS"(R) ATM network,
which offers over 457,000 locations worldwide. In addition, the bank has a
partnership agreement with a regional grocery store to provide in-store banking
centers at up to 135 Maryland, Virginia, Delaware and Washington DC area stores.
Chevy Chase accepted brokered deposits in fiscal 1999 as a way to diversify the
bank's funding sources. The bank had $532.6 million of brokered deposits at
September 30, 1999 and none at September 30, 1998. Under FDIC regulations, the
bank can accept brokered deposits as long as it meets the capital standards
established for well capitalized institutions, or with FDIC approval,
adequately-capitalized institutions, under the prompt corrective action
regulations. Brokered deposits typically have higher interest rates and are more
volatile than traditional retail deposits. However, during fiscal 1999, they
represented a viable alternative source of funds for the bank. The bank will
continue to explore using brokered deposits as a source of funds in the future.
The bank obtains deposits primarily from customers residing in Montgomery and
Prince George's Counties in Maryland and Northern Virginia. Approximately 39.0%
of the bank's deposits at September 30, 1999 were obtained from depositors
residing outside of Maryland, with approximately 17.4% of the bank's deposits
being obtained from depositors residing in Northern Virginia.
The following table shows the amounts of Chevy Chase's deposits by type of
account at the dates indicated.
Deposit Analysis
(Dollars in thousands)
September 30,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
- ------------------------------ ---------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- --------
Demand and NOW accounts $1,606,169 27.9% $1,329,839 27.2% $1,120,375 22.9% $1,007,902 24.2% $ 950,118 22.8%
Money market deposit accounts 1,125,405 19.5 1,019,569 20.9 983,016 20.1 1,002,688 24.1 984,257 23.7
Statement savings accounts 888,212 15.4 913,467 18.7 907,141 18.5 881,285 21.2 872,366 21.0
Jumbo certificate accounts 486,245 8.4 358,913 7.3 358,737 7.3 125,847 3.0 219,304 5.3
Brokered certificate accounts 532,588 9.3 -- -- 315,142 6.4 -- -- -- --
Other certificate accounts 1,016,118 17.6 1,168,746 23.9 1,130,274 23.2 1,077,828 25.9 1,072,196 25.8
Other deposit accounts 108,749 1.9 97,696 2.0 79,071 1.6 68,487 1.6 61,011 1.4
----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- -------
Total deposits $5,763,486 100.0% $4,888,230 100.0% $4,893,756 100.0% $4,164,037 100.0% $4,159,252 100.0%
=========== ======= =========== ======= =========== ======= =========== ======= =========== =======
Average Cost of Deposits
Year Ended September 30,
------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Demand and NOW accounts 1.04% 1.99% 2.47%
Money market accounts 3.36% 3.90% 3.90%
Statement savings and
other deposit accounts 2.07% 3.02% 3.39%
Certificate accounts 4.88% 5.41% 5.29%
Total deposit accounts 3.04% 3.84% 3.95%
===== ===== =====
The range of deposit account products offered by the bank through its extensive
branch and ATM network allows the bank to be competitive in obtaining funds from
its local retail deposit market. At the same time, however, as customers have
become increasingly responsive to changes in interest rates, the bank has
experienced some fluctuations in deposit flows. Chevy Chase's ability to attract
and maintain deposits and its cost of funds will continue to be significantly
affected by market conditions and its pricing strategy.
The following table sets forth Chevy Chase's deposit flows during the periods
indicated.
Deposit Flows
Year Ended September 30,
-----------------------------------------------------------------------
(in thousands)
1999 1998 1997
------------------- ------------------- --------------------
Deposits to accounts............................... $ 40,084,375 $ 24,799,407 $ 18,915,801
Withdrawals from
accounts........................................ (39,355,464) (24,984,251) (18,354,989)
------------------- ------------------- --------------------
Net cash to (from)
accounts........................................ 728,911 (184,844) 560,812
Interest credited to
accounts........................................ 146,345 179,318 168,907
------------------- ------------------- --------------------
Net increase (decrease) in deposit
balances........................................ $ 875,256 $ (5,526) $ 729,719
=================== =================== ====================
Deposit growth may be moderated by the bank from time to time either to take
advantage of lower cost funding alternatives or in response to more modest
expectations for loan and other asset growth.
The following table sets forth, by weighted average interest rates, the types
and amounts of deposits as of September 30, 1999 which will mature during the
fiscal years indicated.
Weighted Average Interest Rates of Deposits
As of September 30, 1999
(Dollars in thousands)
Demand, NOW
and Money Market Statement Passbook and Other Certificate
Deposit Accounts Savings Accounts Core Accounts Accounts Total
---------------------- ---------------------- --------------------- ---------------------- ----------------------
Maturing During Weighted Weighted Weighted Weighted Weighted
Year Ending Average Average Average Average Average
September 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ---------------- ----------- ---------- ----------- ---------- ----------- --------- ----------- ---------- ----------- ----------
2000 $2,731,574 1.77% $ 888,212 1.92% $ 108,749 1.70% $1,825,748 5.03% $5,554,283 2.86%
2001 - - - - - - 123,753 4.67 123,753 4.67
2002 - - - - - - 41,758 5.30 41,758 5.30
2003 - - - - - - 31,776 5.73 31,776 5.73
2004 - - - - - - 11,916 4.43 11,916 4.43
----------- ----------- ----------- ----------- -----------
Total $2,731,574 1.77% $ 888,212 1.92% $ 108,749 1.70% $2,034,951 5.02% $5,763,486 2.94%
=========== =========== =========== =========== ===========
The following table summarizes maturities of certificate accounts in amounts of
$100,000 or greater as of September 30, 1999. Included in the $1.0 billion of
certificates of deposits maturing in fiscal year 2000 is $532.6 million of
brokered deposits.
Year Ending September 30, Amount Weighted Average Rate
---------------------------- ----------------- ---------------------
(Dollars in thousands)
2000........................ $ 991,634 5.40%
2001........................ 8,708 5.11%
2002........................ 3,833 5.50%
2003........................ 3,506 5.76%
2004........................ 1,577 4.43%
----------------- ----------
Total.................... $ 1,009,258 5.40%
================= ==========
The following table represents the amounts of deposits by various interest rate
categories as of September 30, 1999 maturing during the fiscal years indicated.
Maturities of Deposits by Interest Rates
As of September 30, 1999
(In thousands)
Accounts Maturing During Year Ending September 30,
------------------------------------------------------------------------------------------
Interest Rate 2000 2001 2002 2003 2004 Total
- ---------------------- -------------- -------------- ------------- ------------- -------------- --------------
Demand deposits (0%) $ 432,114 $ - $ - $ - $ - $ 432,114
0.01% to 1.99% 2,144,233 - - - - 2,144,233
2.00% to 2.99% 26,639 - - - - 26,639
3.00% to 3.99% 1,293,847 - - - - 1,293,847
4.00% to 4.99% 657,906 80,667 13,290 1,017 11,658 764,538
5.00% to 5.99% 899,521 41,566 14,994 25,480 258 981,819
6.00% to 7.99% 100,023 1,520 13,474 5,279 - 120,296
-------------- -------------- ------------- ------------- -------------- --------------
Total $ 5,554,283 $ 123,753 41,758 $ 31,776 $ 11,916 $ 5,763,486
============== ============== ============= ============= ============== ==============
Borrowings. The FHLB system functions as a central reserve bank providing credit
for member institutions. As a member of the FHLB of Atlanta, Chevy Chase is
required to own capital stock in the FHLB of Atlanta and is authorized to apply
for advances on the security of such stock and certain of its mortgages and
other assets, principally securities which are obligations of, or guaranteed by,
the United States or its agencies, provided certain standards related to
creditworthiness have been met.
Under the credit policies of the FHLB of Atlanta, credit may be extended to
creditworthy institutions based upon their financial condition, and the adequacy
of collateral pledged to secure the extension of credit. Such extensions of
credit may be obtained pursuant to several different credit programs, each of
which has its own rate and range of maturities. Advances from the FHLB of
Atlanta must be secured by certain types of collateral with a value, as
determined by the FHLB of Atlanta, at least equal to 100% of the borrower's
outstanding advances. The bank had outstanding FHLB advances of $1.7 billion at
September 30, 1999.
From time to time the bank enters into repurchase agreements, which are treated
as financings. The bank sells securities, which are usually mortgage-backed
securities, to a dealer and agrees to buy back the same securities at a
specified time which is generally within seven to 90 days. The bank pays a
stated interest rate for the use of the funds for the specified time period to
the dealer. The obligation to repurchase the securities sold is reflected as a
liability and the securities underlying the agreements are included in assets in
the Consolidated Balance Sheets in this prospectus. These arrangements are, in
effect, borrowings by the bank secured by the securities sold. The bank had
outstanding repurchase agreements of $526.6 million at September 30, 1999.
The following table sets forth a summary of the repurchase agreements of the
bank as of the dates and for the years indicated.
September 30,
---------------------------------------------------------
1999 1998
-------------------- --------------------
(Dollars in thousands)
Securities sold under repurchase agreements:
Balance at year-end.......................................... $ 526,571 $ 387,305
Average amount outstanding during
the year.................................................. 371,660 302,564
Maximum amount outstanding at any
month-end................................................. 526,571 806,393
Weighted average interest rate during
the year.................................................. 5.22% 5.68%
Weighted average interest rate
on year-end balances...................................... 5.78% 5.63%
On November 23, 1993, the bank sold $150 million principal amount of its 9 1/4%
Subordinated Debentures due 2005. Interest on the 1993 Debentures is payable
semiannually on December 1 and June 1 of each year. The OTS approved the
inclusion of the principal amount of the 1993 Debentures in the bank's
supplementary capital for regulatory capital purposes. Since December 1, 1998,
the 1993 Debentures have been redeemable, in whole or in part, at any time at
the option of the bank.
On December 3, 1996, the bank sold $100 million principal amount of its 9 1/4%
Subordinated Debentures due 2008. Interest on the 1996 Debentures is payable
semiannually on December 1 and June 1 of each year. The OTS approved the
inclusion of the principal amount of the 1996 Debentures in the bank's
supplementary capital for regulatory capital purposes. On or after December 1,
2001, the 1996 Debentures will be redeemable, in whole or in part, at any time
at the option of the bank.
Under the OTS capital regulations, redemption of the 1993 Debentures or the 1996
Debentures prior to their stated maturity requires prior approval of the OTS
unless the debentures are redeemed with the proceeds of, or replaced by, a like
amount of "a similar or higher quality" capital instrument.
Subsidiaries
OTS regulations generally permit the bank to make investments in service
corporation subsidiaries in an amount not to exceed 3.0% of the bank's assets,
provided that any investment in excess of 2.0% of assets serves primarily
community, inner city or community development purposes. These regulations also
permit the bank to make "conforming loans" to such subsidiaries and joint
ventures in an amount not to exceed 50% of the bank's regulatory capital. At
September 30, 1999, 2.0% and 3.0% of the bank's assets was equal to $183.5
million and $275.2 million, and the bank had $8.7 million invested in its
service corporation subsidiaries, $5.0 million of which was in the form of
conforming loans.
The bank may establish operating subsidiaries to engage in any activities in
which the bank may engage directly. There are no regulatory limits on the amount
the bank can invest in operating subsidiaries. The bank is required to provide
30 days advance notice to the OTS and to the FDIC before establishing a new
subsidiary or conducting a new activity in an existing subsidiary. The bank
engages in a variety of other activities through its subsidiaries, including
those described below.
Real Estate Development Activities. Manor Investment Company was engaged in
certain real estate development activities commenced prior to the enactment of
FIRREA and continues to manage the two remaining properties it holds. As a
result of the stringent capital requirements that FIRREA applies to investments
in subsidiaries, such as Manor, that engage in activities impermissible for
national banks, Manor has not entered, and does not intend to enter, into any
new real estate development arrangements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
Asset Quality."
Securities Brokerage Services. Chevy Chase Securities, Inc., is a wholly-owned
subsidiary of Chevy Chase Financial Services Corporation, a wholly-owned direct
subsidiary of Chevy Chase. Chevy Chase Securities is a licensed broker-dealer,
which sells securities on a retail basis to the general public, including
customers and depositors of the bank.
Insurance Services. Chevy Chase Insurance Agency, Inc., a wholly-owned
subsidiary of CCFS, is a licensed insurance broker offering a variety of
"personal line" property and casualty and life insurance programs to the general
public, including customers and depositors of the bank. The Company's primary
programs consist of home owner and automobile insurance in the property and
casualty sector and mortgage and credit card life and disability insurance in
the life insurance sector.
Special Purpose Subsidiaries. At September 30, 1999, Chevy Chase Real Estate
Corporation, a wholly-owned subsidiary of Chevy Chase, held 100% of the common
stock of 23 subsidiaries, 11 of which are active, a majority of which were
formed for the sole purpose of acquiring title to various real estate projects
pursuant to foreclosure or deed-in-lieu of foreclosure. The bank's investment in
the subsidiaries was $105.3 million at September 30, 1999. The bank's investment
in CCRC is not subject to the 3.0% service corporation investment limit
discussed above.
Operating Subsidiaries. Chevy Chase engages in significant mortgage lending
activities through B. F. Saul Mortgage Company. See "Lending Activities."
Consumer Finance Corporation was formed as an operating subsidiary in December
1994 to engage in automobile lending. Chevy Chase Preferred Capital Corporation
was formed in August 1996 as an operating subsidiary to invest in real estate
assets.
On November 12, 1997, a newly formed operating subsidiary of the bank acquired
ASB Capital Management, Inc. through which the bank offers investment,
management and fiduciary services to primarily institutional customers.
Employees
The bank and its subsidiaries had 2,953 full-time and 504 part-time employees at
September 30, 1999. The bank provides its employees with a comprehensive range
of employee benefit programs, including group health benefits, life insurance,
disability insurance, paid sick leave and an employee loan program. The bank
offers home mortgage loans to employees at prevailing market rates, but waives
up to one point of any loan origination fees on home mortgage loans, and
provides a yearly rebate equal to 0.5% of the outstanding loan balance of home
mortgage loans at calendar year-end. The bank also offers employees a one
percent discount on the interest rate on overdraft lines of credit. See
"Executive Compensation" for a discussion of certain compensation programs
available to the bank's executive officers. None of the bank's employees is
represented by a collective bargaining agent. The bank believes that its
employee relations are good.
Competition
Chevy Chase encounters strong competition both in attracting deposits and making
real estate and other loans in its markets. The bank's most direct competition
for deposits has come from other thrifts, commercial banks and credit unions, as
well as from money market funds and corporate and government securities. In
addition to offering competitive interest rates, Chevy Chase offers a variety of
services, convenient ATM locations and convenient office locations and hours to
attract deposits. Competition for real estate and other loans comes principally
from other thrifts, banks, mortgage banking companies, insurance companies and
other institutional lenders. Chevy Chase competes for loans through interest
rates, loan fees and the variety and quality of services provided to borrowers
and brokers.
The bank's major competition comes from local depository institutions, and, as a
result of deregulation of the financial services industry and changing market
demands over recent years, regional, national and international financial
institutions and other providers of financial services.
The bank estimates that it competes principally with approximately thirteen
depository institutions in its deposit-taking activities in the Washington, DC
metropolitan area. The bank also competes with such institutions in the
origination of single-family residential mortgage loans and home equity credit
line loans. According to the most recently published industry statistics, Chevy
Chase had the largest market share with approximately 22%, of deposits in
Montgomery County, Maryland, and ranked third in market share with approximately
10% of deposits, in Prince George's County, Maryland at June 30, 1998. Based on
publicly available information, Chevy Chase estimates that, in the Washington,
DC metropolitan area, it maintains the leading market share of single-family
residential mortgage and home equity credit line loans.
PROPERTIES
Real Estate
A list of the investment properties of the Real Estate Trust is set forth under
"Business - Real- Estate - Real Estate Investments."
The Trust conducts its principal business from its executive offices at 8401
Connecticut Avenue, Chevy Chase, Maryland. The Trust sells its unsecured notes
due one year to ten years from date of issue from a sales office located at 7200
Wisconsin Avenue, Suite 903, Bethesda, Maryland. B.F. Saul Company leases both
office facilities on behalf of the Trust.
Banking
At September 30, 1999, the bank conducted its business from its home office at
7926 Jones Branch Drive, McLean, Virginia and its executive offices at 8401
Connecticut Avenue, Chevy Chase, Maryland; its operations centers at 6151 and
6200 Chevy Chase Drive, Laurel, Maryland; its office facilities at 7700 and 7735
Old Georgetown Road, Bethesda, Maryland, and 1101 Pennsylvania Avenue, NW,
Washington, DC; and 161 full-service offices located in Maryland, Virginia,
Delaware and the District of Columbia. On that date, the bank owned the building
and land for 29 of its branch offices and leased its remaining 132 branch
offices. Chevy Chase leases the office facilities at 8401 Connecticut Avenue,
6200 Chevy Chase Drive, 7735 Old Georgetown Road, 1101 Pennsylvania Avenue, NW
and the land at 7700 Old Georgetown Road. Chevy Chase owns the building at 7700
Old Georgetown Road. In addition, the bank leases office space in which its
subsidiaries are housed. The office facility leases have various terms expiring
from fiscal 2000 to 2019 and the ground leases have terms expiring from fiscal
2029 to 2080. The bank also owns the building and land at 5202 President's
Court, Frederick, Maryland. In connection with the sale of the credit card
portfolio and related operations on September 30, 1998, the bank entered into a
lease agreement with FUSA for this facility. See Note 18 to the Consolidated
Financial Statements in this prospectus for lease expense and commitments.
As of November 1999, the bank has OTS approval to open twelve full-service
branch offices. The branches, seven in Virginia and five in Maryland, are
scheduled to open during fiscal 2000.
The following table sets forth the location of the bank's 161 full-service
branch offices at September 30, 1999.
1 Catoctin Circle 8201 Greensboro Drive
Leesburg, VA 20176 McLean, VA 22102
1100 W. Broad Street 234 Maple Avenue East
Falls Church, VA 22046 McLean, VA 22180
3941 Pickett Road 8436 Old Keene Mill Road
Fairfax, VA 22031 Springfield, VA 22152
1439 Chain Bridge Road 75 West Lee Highway
McLean, VA 22101 Warrenton, VA 20186
8120 Sudley Road 6367 Seven Corners Center
Manassas, VA 20109 Falls Church, VA 22044
1100 S. Hayes Street 13344-A Franklin Farms Road
Arlington, VA 22202 Herndon, VA 20171
2952-H Chain Bridge Road 20970 Southbanks Street
Oakton, VA 22124 Potomac Falls, VA 20165
1201 Elden Street 21800 Towncenter Plaza
Herndon, VA 20170 Sterling, VA 20164
5613 Stone Road 7030 Little River Turnpike
Centreville, VA 20120 Annandale, VA 22003
44151 Ashburn Village Way 3095 Nutley Street
Ashburn, VA 20147 Fairfax, VA 22031
3690-A King Street 4700 Lee Highway
Alexandria, VA 22302 Arlington, VA 22207
6609 Springfield Mall 5851 Crossroads Center Way
Springfield, VA 22150 Falls Church, VA 22041
500 South Washington Street 13813 Foulger's Square
Alexandria, VA 22314 Woodbridge, VA 22192
10100 Dumfries Road 6800 Richmond Highway
Manassas, VA 22110 Alexandria, VA 22306
5870 Kingstowne Boulevard 6335 Multiplex Drive
Alexandria, VA 22310 Centreville, VA 22022
43761 Parkhurst Plaza 6025-A Burke Town Center Pkway
Ashburn, VA 22011 Burke, VA 22015
3499 S. Jefferson Street 7935 L Tysons Corner Center
Baileys Crossroads, VA 22041 McLean, VA 22102
3046 Gatehouse Plaza 11874 Spectrum Center
Falls Church, VA 22042 Reston, VA 20190
1621 B Crystal Square Arcade 5230-A Port Royal Road
Arlington, VA 22202 Springfield, VA 22151
1100 Wilson Boulevard 8628 Richmond Highway
Arlington, VA 22209 Alexandria, VA 22309
4229 Merchant Plaza 46160 Potomac Run Plaza
Woodbridge, VA 22192 Sterling, VA 20164
14125 St. Germain Drive 5740 Union Mills Road
Centreville, VA 20121 Clifton, VA 20124
3532 Columbia Pike 21100 Dulles Town Circle
Arlington, VA 22204 Dulles, VA 20166
11200 Main Street 7575 Newlinton Hall Road
Fairfax, VA 22030 Gainesville, VA 20155
13043 Lee Jackson Memorial Highway 12445 Hedges Run Drive
Fairfax, VA 22033 Lakeridge, VA 22192
2079 Daniel Stuart Square 7500 Old Georgetown Road
Woodbridge, VA 22191 Bethesda, MD 20814
11301 Rockville Pike 5370 Westbard Avenue
Kensington, MD 20895 Bethesda, MD 20816
26001 Ridge Road 7340 Westlake Terrace
Damascus, MD 20872 Bethesda, MD 20817
17831 Georgia Avenue 1327 Lamberton Drive
Olney, MD 20832 Silver Spring, MD 20902
11261 New Hampshire Avenue 2215 Bel Pre Road
Silver Spring, MD 20904 Wheaton, MD 20906
101 Halpine Road 8401 Connecticut Avenue
Rockville, MD 20852 Chevy Chase, MD 20815
6107 Greenbelt Road 5424 Western Avenue
Berwyn Heights, MD 20740 Chevy Chase, MD 20815
4 Bureau Drive 13641 Connecticut Avenue
Gaithersburg, MD 20878 Wheaton, MD 20906
19610 Club House Road 8315 Georgia Avenue
Gaithersburg, MD 20886 Silver Spring, MD 20910
812 Muddy Branch Road 4701 Sangamore Road
Gaithersburg, MD 20886 Bethesda, MD 20816
10211 River Road Landover Mall
Potomac, MD 20854 Landover, MD 20785
11413 Baltimore Avenue 6200 Annapolis Road
Laurel, MD 20707 Landover Hills, MD 20784
7290-A Cradlerock Way 33 West Franklin Street
Columbia, MD 21045 Hagerstown, MD 21740
1151 Maryland Route 3 North 6400 Belcrest Road
Gambrills, MD 21054 Hyattsville, MD 20782
12228 Viers Mill Road 8740 Arliss Street
Silver Spring, MD 20906 Silver Spring, MD 20901
317 Kentlands Boulevard 2409 Wooton Parkway
Gaithersburg, MD 20878 Rockville, MD 20850
215 N. Washington Street 8889 Woodyard Road
Rockville, MD 20850 Clinton, MD 20735
1336 Crain Highway South 1181 University Boulevard
Mitchellville, MD 20716 Langley Park, MD 20783
543 Ritchie Highway 12921 Wisteria Drive
Severna Park, MD 21146 Germantown, MD 20874
4745 Dorsey Hall Drive 1009 West Patrick Street
Ellicott City, MD 21042 Frederick, MD 21701
1130 Smallwood Drive 7937 Ritchie Highway
Waldorf, MD 20603 Glen Burnie, MD 21061
10800 Baltimore Avenue 19781-83 Frederick Road
Beltsville, MD 20705 Germantown, MD 20876
1040 Largo Center Drive 16827 Crabbs Branch Way
Landover, MD 20785 Rockville, MD 20855
6335 Marlboro Pike 2321-E Forest Drive
District Heights, MD 20747 Annapolis, MD 21401
7530 Annapolis Road 15460 Annapolis Road
Lanham, MD 20784 Bowie, MD 20715
11241 Georgia Avenue 20000 Goshen Road
Wheaton, MD 20902 Gaithersburg, MD 20879
13484 New Hampshire Avenue 12097 Rockville Pike
Silver Spring, MD 20904 Rockville, MD 20852
2401 Cleanleigh Drive 10159 New Hampshire Avenue
Baltimore, MD 21234 Hillandale, MD 20903
7101 Democracy Boulevard 6264 Central Avenue
Bethesda, MD 20817 Seat Pleasant, MD 20743
4825 Cordell Avenue 7700 Old Georgetown Road
Bethesda, MD 20814 Bethesda, MD 20814
7515 Greenbelt Road 2722 N. Salisbury Boulevard
Greenbelt, MD 20770 Salisbury, MD 21801
15777 Columbia Pike 18104 Town Center Drive
Burtonsville, MD 20866 Olney, MD 20832
509 N. Frederick Avenue 6197 Oxon Hill Road
Gaithersburg, MD 20877 Oxon Hill, MD 20745
504 Ridgeville Boulevard 10821 Connecticut Avenue
Mt. Airy, MD 21771 Kensington, MD 20895
5823 Eastern Avenue 18006 Mateny Road
Chillum, MD 20782 Germantown, MD 20874
3355 Corridor Market Place 7406 Baltimore Avenue
Laurel, MD 20724 College Park, MD 20740
10400 Old Georgetown Road 980 E. Swan Creek Road
Bethesda, MD 20814 Fort Washington, MD 20744
115 University Boulevard West 3828 International Drive
Silver Spring, MD 20901 Silver Spring, MD 20906
9707 Old Georgetown Road 3400 Crain Highway
Bethesda, MD 20814 Bowie, MD 20716
7941 Tuckerman Lane 2315 Randolph Road
Potomac, MD 20854 Silver Spring, MD 20906
Stamp Student Union 6020 Marshalee Drive
College Park, MD 20742 Elkridge, MD 21075
5400 Corporate Drive 2950 Donnell Drive
Frederick, MD 21703 Forestville, MD 20747
20944 Frederick Road 135 East Baltimore Street
Germantown, MD 20876 Baltimore, MD 21202
3601 St. Barnabas Road 2801 University Boulevard West
Silver Hill, MD 20746 Kensington, MD 20895
18331 Leaman Farm Road 4624 Edmondson Avenue
Germantown, MD 20876 Baltimore, MD 21229
1734 York Road 6000 Greenbelt Road
Lutherville, MD 21093 Greenbelt, MD 20704
11399 York Road 9730 Groffs Mill Drive
Cockeysville, MD 21030 Owings Mill, MD 21117
751 South Salisbury Boulevard 6340 York Road
Salisbury, MD 21801 Towson, MD 21212
5700 Southeast Crain Highway 4622 Wilkens Avenue
Upper Marlboro, MD 20772 Baltimore, MD 21229
4860 Massachusetts Avenue, NW 1850 K Street, NW
Washington, DC 20016 Washington, DC 20006
210 Michigan Avenue, NE 4000 Wisconsin Avenue, NW
Washington, DC 20017 Washington, DC 20016
4455 Connecticut Avenue, NW 1717 Pennsylvania Avenue, NW
Washington, DC 20008 Washington, DC 20006
2831 Alabama Avenue, SE 925 15th Street, NW
Washington, DC 20020 Washington, DC 20005
1800 M Street, NW 1299 Pennsylvania Avenue, NW
Washington, DC 20036 Washington, DC 20006
1545 Wisconsin Avenue, NW 5714 Connecticut Avenue, NW
Washington, DC 20007 Washington, DC 20015
22 Lighthouse Plaza
Rehoboth Beach, DE 19971
At September 30, 1999, the net book value of the bank's office facilities,
including leasehold improvements, was $133.7 million. See Note 17 to the
Consolidated Financial Statements in this prospectus.
During fiscal 1998, the bank entered into an agreement to lease approximately
3.5 acres of land located at 7501 Wisconsin Avenue, Bethesda, Maryland, on which
the bank is developing an office building to use as its new corporate
headquarters. At September 30, 1999, the bank had invested $19.8 million related
to this facility.
The bank owns additional assets, including furniture and data processing
equipment. At September 30, 1999, these other assets had a net book value of
$151.0 million. The bank also has operating leases, primarily for certain data
processing equipment and software. Such leases have month-to-month or
year-to-year terms.
LEGAL PROCEEDINGS
In the normal course of business, the Trust is involved in certain litigation,
including litigation arising out of the collection of loans, the enforcement or
defense of the priority of its security interests, the continued development and
marketing of certain of its real estate properties, and certain employment
claims. In the opinion of management, litigation which is currently pending will
not have a material adverse impact on the financial condition or future
operations of the Trust.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1999.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There currently is no established public trading market for the Trust's Common
Shares of Beneficial Interest, referred to in this prospectus as "Common
Shares." At December 6, 1999, there were nine corporate or individual holders of
record of Common Shares. All holders of Common Shares at such date were
affiliated with the Trust. The Trust did not pay any cash dividends on the
Common Shares during the past two fiscal years. See "Security Ownership of
Certain Beneficial Owners and Management."
SELECTED FINANCIAL DATA
The selected financial data of the Trust herein have been derived from the
Consolidated Financial Statements of the Trust. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements included
elsewhere in this prospectus.
SELECTED FINANCIAL DATA
=================================================================================================================================
Year Ended September 30
------------------------------------------------------------------
(In thousands, except per share amounts and other data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Real Estate:
Revenues $ 106,025 $ 98,592 $ 84,569 $ 76,839 $ 77,285
Operating expenses 121,676 118,636 108,601 104,321 109,971
Equity in earnings of partnership investments 5,360 1,918 4,150 3,374 3,681
Gain (loss) on sales of property -- (331) 895 (68) 1,664
------------------------------------------------------------------
Real estate operating loss (10,291) (18,457) (18,987) (24,176) (27,341)
------------------------------------------------------------------
Banking:
Interest income 519,493 437,404 454,352 388,196 365,439
Interest expense 245,507 238,410 239,815 188,836 189,114
------------------------------------------------------------------
Net interest income 273,986 198,994 214,537 199,360 176,325
Provision for loan losses (22,880) (150,829) (125,115) (115,740) (54,979)
------------------------------------------------------------------
Net interest income after provision for loan and lease losses 251,106 48,165 89,422 83,620 121,346
------------------------------------------------------------------
Other income:
Servicing and securitization income 31,670 231,674 303,216 284,964 195,744
Credit card fees -- 53,881 57,381 30,765 9,855
Deposit servicing fees 69,570 51,997 41,893 29,900 24,442
Gain (loss) on sales of trading securities, net 7,243 982 1,203 1,158 (600)
Net unrealized gains (losses) on trading securities 1,192 (1,258) -- -- --
Gain (loss) on real estate held for investment or sale, net 34,049 (16,539) (18,688) (24,413) (5,549)
Gain on sales of assets 4,152 290,434 1,527 1,732 1,289
Other 22,320 29,089 22,573 19,713 7,320
------------------------------------------------------------------
Total other income 170,196 640,260 409,105 343,819 232,501
------------------------------------------------------------------
Operating expenses 325,322 504,018 418,346 381,328 298,164
------------------------------------------------------------------
Banking operating income 95,980 184,407 80,181 46,111 55,683
------------------------------------------------------------------
Total Company:
Operating income 85,689 165,950 61,194 21,935 28,342
Provision for income taxes 29,302 42,869 12,810 8,301 2,021
------------------------------------------------------------------
Income before extraordinary items, cumulative
effect of change in accounting principle and
minority interest 56,387 123,081 48,384 13,634 26,321
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (9,601) -- -- --
------------------------------------------------------------------
Income before minority interest 56,387 113,480 48,384 13,634 26,321
Minority interest held by affiliates (7,604) (22,043) (6,848) (3,962) (5,721)
Minority interest -- other (25,313) (25,313) (22,676) (9,750) (9,750)
------------------------------------------------------------------
Total company net income (loss) $ 23,470 $ 66,124 $ 18,860 $ (78) $ 10,850
==================================================================
Net income (loss) available to common shareholders $ 18,052 $ 60,706 $ 13,442 $ (5,498) $ 5,430
Net income (loss) per common share:
Income before extraordinary items, cumulative
effect of change in accounting principle and
minority interest $ 10.56 $ 24.38 $ 8.90 $ 1.70 $ 4.33
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (1.99) -- -- --
------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle and minority interest 10.56 22.39 8.90 1.70 4.33
Cumulative effect of change in accounting principle -- -- -- -- --
------------------------------------------------------------------
Income before minority interest 10.56 22.39 8.90 1.70 4.33
Minority interest held by affiliates (1.58) (4.57) (1.42) (0.82) (1.19)
Minority interest -- other (5.24) (5.24) (4.70) (2.02) (2.02)
------------------------------------------------------------------
Total company net income (loss) $ 3.74 $ 12.58 $ 2.78 $ (1.14) $ 1.12
==================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
SELECTED FINANCIAL DATA
(Continued)
=================================================================================================================================
Year Ended September 30
------------------------------------------------------------------
(In thousands, except per share amounts and other data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Assets:
Real estate assets $ 365,071 $ 323,432 $ 300,573 $ 294,503 $ 313,412
Income-producing properties, net 207,407 183,879 156,535 156,115 163,787
Land parcels 39,448 40,110 42,160 41,580 38,458
Banking assets 9,146,769 6,721,149 6,057,413 5,693,074 4,911,536
Total company assets 9,511,840 7,044,581 6,357,986 5,987,577 5,224,948
Liabilities:
Real estate liabilities 663,638 636,036 590,910 578,092 555,814
Mortgage notes payable 213,447 198,874 180,204 173,345 184,502
Notes payable - secured 216,000 200,000 175,000 177,500 175,500
Notes payable - unsecured 46,122 50,335 46,633 42,367 41,057
Banking liabilities 8,562,284 6,141,636 5,582,167 5,388,444 4,619,451
Minority interest held by affiliates 73,236 72,242 51,388 46,065 43,556
Minority interest - other 218,307 218,306 218,306 74,307 74,307
Total company liabilities 9,517,465 7,068,220 6,442,771 6,086,908 5,293,128
Shareholders' deficit (5,625) (23,639) (84,785) (99,331) (68,180)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA:
Net cash flows provided by (used in) operating activities:
Real estate $ 30,388 $ 14,738 $ 6,911 $ 9,782 $ 4,324
Banking (10,534) 2,211,589 2,368,287 1,747,887 2,088,022
------------------------------------------------------------------
Total Company 19,854 2,226,327 2,375,198 1,757,669 2,092,346
------------------------------------------------------------------
Net cash flows provided by (used in) investing activities:
Real estate (44,237) (45,115) (11,664) (4,907) (17,143)
Banking (2,995,105) (2,202,225) (2,276,165) (2,567,763) (2,261,803)
------------------------------------------------------------------
Total Company (3,039,342) (2,247,340) (2,287,829) (2,572,670) (2,278,946)
------------------------------------------------------------------
Net cash flows provided by (used in) financing activities:
Real estate 17,756 26,079 7,485 (6,714) (271)
Banking 2,379,329 555,201 293,344 727,019 160,966
------------------------------------------------------------------
Total Company 2,397,085 581,280 300,829 720,305 160,695
------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (622,403) 560,267 388,198 (94,696) (25,905)
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Hotels:
Number of hotels 15 12 10 9 10
Number of guest rooms 3,103 2,772 2,370 2,261 2,608
Average occupancy 68% 68% 70% 68% 67%
Average room rate $85.46 $81.01 $72.21 $68.79 $60.82
Office properties:
Number of properties 7 7 8 8 9
Leasable area (square feet) 1,277,243 1,270,087 1,308,000 1,308,000 1,368,000
Leasing percentages 95% 100% 99% 93% 84%
Land parcels:
Number of parcels 10 10 10 9 10
Total acreage 417 434 439 446 433
- ---------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B. F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B. F. Saul Real
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the bank and its subsidiaries
is identified by the term "Banking."
Financial Condition
Real Estate
The Real Estate Trust's investment portfolio at September 30, 1999 consisted
primarily of hotels, office and industrial projects, and land parcels. See
"Business - Real Estate - Real Estate Investments." In the first quarter of
fiscal 1998, the Real Estate Trust purchased a 308-room Holiday Inn in
Arlington, Virginia.
Office space in the Real Estate Trust's office property portfolio was 92% leased
at September 30, 1999, compared to a leasing rate of 100% at September 30, 1998.
At September 30, 1999, the Real Estate Trust's office property portfolio had a
total gross leasable area of approximately 1.3 million square feet, of which
137,919 square feet (10.8%) and 246,405 square feet (19.3%) are subject to
leases whose terms expire in fiscal 2000 and fiscal 2001.
Overall, the hotel portfolio experienced an average occupancy rate of 67.6% and
average room rate of $85.46 during the year ended September 30, 1999. For the
ten hotels owned by the Real Estate Trust throughout fiscal 1999 and fiscal
1998, the average occupancy rates were 69.2% and 69.6%, and the average room
rates were $83.87 and $79.18. Seven of these hotels registered improved
occupancies and nine registered higher average room rates in the current fiscal
year.
Banking
General. The bank embarked on a pattern of growth during fiscal 1999 with total
assets increasing to $9.1 billion, an increase of $2.4 billion from fiscal 1998.
Total loans and leases increased $3.8 billion during fiscal 1999, funded
primarily through increases in Federal Home Loan Bank advances and deposits,
including brokered deposits. The bank recorded operating income of $96.0 million
during fiscal 1999, compared to operating income of $184.4 million during fiscal
1998. Last year's results include the impact of the sale of the bank's credit
card portfolio and related operations on September 30, 1998. The decrease in
income for fiscal 1999 was primarily attributable to a $470.1 million decrease
in other (non-interest) income, largely resulting from the sale of the bank's
credit card portfolio which was partially offset by corresponding decreases of
$178.7 million and $127.9 million in operating (non-interest) expenses and
provision for loan and lease losses. See "Results of Operations."
Gain on sales of loans decreased during fiscal year 1999 to $4.2 million from
$290.4 million during fiscal 1998. The $286.3 million decrease resulted from the
sale of the bank's credit card portfolio and related operations on September 30,
1998. The credit card portfolio included approximately $4.8 billion of managed
credit card loans and 3.1 million Visa(R) and MasterCard(R) credit card
accounts. The bank recognized a net gain of $288.3 million on this sale during
fiscal 1998. See Note 8 to the Consolidated Financial Statements in this
prospectus.
Gain on real estate held for investment or sale increased during fiscal year
1999 to a gain of $34.1 million from a loss of $16.5 million during fiscal 1998.
The $50.6 million increase was primarily attributable to a $31.6 million gain on
sale of one of the communities in Loudoun County, Virginia and, to a lesser
extent, a decrease of $20.6 million in the provision for losses on such assets.
Servicing and securitization income decreased $200.0 million, or 86.3%, during
fiscal 1999 primarily as a result of decreased securitization activity and the
elimination of credit card servicing fees following the sale of the credit card
portfolio. The bank did not securitize and sell any loan receivables into new
trusts during fiscal 1999. During fiscal 1998, the bank securitized and sold
$1.9 billion of receivables, of which $1.0 billion, $298.8 million, $534.7
million and $45.9 million, related to securitizations and sales of credit card,
home equity, automobile and home loan receivables, and recognized gains of $81.6
million, $19.7 million, $23.1 million and $3.4 million on these transactions.
See Notes 1, 2 and 10 to the Consolidated Financial Statements in this
prospectus. See "Liquidity." The bank did not recognize any net unrealized
losses on interest-only strips during fiscal 1999 compared to net unrealized
losses of $42.9 million during fiscal 1998. In addition, amortization on
interest-only strips related to prior gains on sales of loans totaled $8.7
million during fiscal 1999 compared to $99.0 million during fiscal 1998.
Real estate owned, net of valuation allowances, declined 25.5%, from $65.4
million at September 30, 1998 compared to $48.8 million at September 30, 1999.
This reduction was primarily due to sales in the Communities and other
properties. See "Asset Quality - REO."
At September 30, 1999, the bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.94%, 5.94%, 8.33% and 13.04%. The
bank's capital ratios exceeded regulatory requirements as well as the standards
established for well-capitalized institutions under OTS prompt corrective action
regulations. See "Capital."
During fiscal 1999, the bank declared and paid, out of the retained earnings of
the bank, cash dividends on its Common Stock in the aggregate amount of $3,300
per share. Subsequent to September 30, 1999, the bank declared and paid, out of
the retained earnings of the bank, cash dividends on its Common Stock in the
amount of $400.
The bank's assets are subject to review and classification by the OTS upon
examination. The OTS concluded its most recent examination of the bank in March
1999.
The sale of the credit card portfolio improved the bank's regulatory capital
ratios and the overall credit quality of the bank's loan and lease portfolio,
and provided a basis for the bank's growth. In addition, the bank has
experienced a reduction in certain operating expenses as a result of the sale.
However, the credit card program historically had been a major source of
earnings for the bank. The bank believes it will be able to operate profitably
by relying on its core deposit franchise as a significant source of low-cost
funds and investing those funds in assets that, although offering lower yields
than credit cards, involve less credit risk and overhead costs. However,
achieving acceptable levels of profitability may continue to take some period of
time as the bank continues to restructure its operations.
Asset Quality. Non-Performing Assets. The bank's level of non-performing assets
continued to decline during fiscal 1999. The following table sets forth
information concerning the bank's non-performing assets at the dates indicated.
The figures shown are after charge-offs and, in the case of real estate acquired
in settlement of loans, after all valuation allowances.
Non-Performing Assets
(Dollars in thousands)
September 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Non-performing assets:
Non-accrual loans:
Residential $ 4,756 $ 8,106 $ 9,617 $ 8,200 $ 8,593
Commercial real estate and multifamily -- -- -- -- 194
----------- ----------- ----------- ----------- -----------
Total non-accrual real estate loans 4,756 8,106 9,617 8,200 8,787
Credit card (1) (2) -- -- 25,350 18,569
Commercial 269 -- -- -- --
Consumer 8,247 4,501 4,226 1,239 595
----------- ----------- ----------- ----------- -----------
Total non-accrual loans (3) 13,272 12,607 13,843 34,789 27,951
----------- ----------- ----------- ----------- -----------
Real estate acquired in settlement of loans 133,157 218,972 231,407 246,380 354,277
Allowance for losses on real estate acquired in settlement of loans (84,405) (153,564) (140,738) (126,519) (135,043)
----------- ----------- ----------- ----------- -----------
Real estate acquired in settlement of loans, net 48,752 65,408 90,669 119,861 219,234
----------- ----------- ----------- ----------- -----------
Total non-performing assets 62,024 78,015 104,512 154,650 247,185
Accruing loans past due 90 days -- -- 25,700 -- --
----------- ----------- ----------- ----------- -----------
Total non-performing assets and accruing loans past due 90 days $ 62,024 $ 78,015 $ 130,212 $ 154,650 $ 247,185
=========== =========== =========== =========== ===========
Troubled debt restructurings $ 11,714 $ 11,800 $ 11,861 $ 13,618 $ 17,344
=========== =========== =========== =========== ===========
Allowance for losses on loans $ 58,139 $ 60,157 $ 105,679 $ 95,523 $ 60,496
Allowance for losses on real estate held for investment 202 202 198 191 193
Allowance for losses on real estate acquired in settlement of loans 84,405 153,564 140,738 126,519 135,043
----------- ----------- ----------- ----------- -----------
Total allowances for losses $ 142,746 $ 213,923 $ 246,615 $ 222,233 $ 195,732
=========== =========== =========== =========== ===========
Interest income recorded
Non-accrual assets $ 17 $ 38 $ 441 $ 770 $ 846
=========== =========== =========== =========== ===========
Restructured loans $ 229 $ 367 $ 265 $ 507 $ 1,189
=========== =========== =========== =========== ===========
Interest income that would have been recorded had the loans been current
in accordance with their original terms
Non-accrual assets $ 1,769 $ 1,081 $ 5,692 $ 7,364 $ 4,853
=========== =========== =========== =========== ===========
Restructured loans $ 1,261 $ 1,244 $ 1,244 $ 1,693 $ 2,381
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The bank sold its credit card portfolio and related operations on September
30, 1998.
(2) Effective June 30, 1997, the bank stopped placing credit card loans on
non-accrual status.
(3) Before deduction of allowances for losses.
Non-Performing Assets (Continued)
September 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- ----------- ------------ -----------
Ratios:
Non-performing assets and accruing credit card loans past due 90 days,
net to total assets (1) 0.04% 0.26% 0.40% 1.04% 3.80%
Allowance for losses on real estate loans to non-accrual
real estate loans (2) 361.35% 204.18% 99.81% 134.44% 123.82%
Allowance for losses on consumer loans to
non-accrual consumer and other loans (2) 440.52% 758.08% 148.37% 370.86% 542.18%
Allowance for losses on loans to non-accrual loans (2) 438.06% 477.17% 763.41% 274.58% 216.44%
Allowance for losses on loans to total loans receivable (3) 0.90% 2.17% 4.14% 2.81% 2.05%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Non-performing assets is presented after all allowances for losses on loans
and real estate held for investment or sale.
(2) Before deduction of allowances for losses.
(3) Includes loans receivable and loans held for sale and/or securitization,
before deduction of allowance for losses.
Non-performing assets include non-accrual loans, non-accrual real estate held
for investment, and REO, acquired either through foreclosure or deed-in-lieu of
foreclosure, or pursuant to in-substance foreclosure. Non-accrual loans consist
of loans contractually past due 90 days or more or with respect to which other
factors indicate that full payment of principal and interest is unlikely.
Prior to the sale of its credit card portfolio and related operations and
effective June 30, 1997, the bank conformed its reporting practices for credit
card loans to those of most credit card issuers and excluded credit card loans
from non-accrual loans and non-performing assets. Credit card loans were not
placed on non-accrual status, but continued to accrue interest until the loan
was either paid-off or charged-off.
Non-performing assets totaled $62.0 million, after valuation allowances on REO
of $84.4 million, at September 30, 1999, compared to $78.0 million, after
valuation allowances on REO of $153.6 million, at September 30, 1998. The bank
also maintained valuation allowances of $58.1 and $60.2 million on its loan and
lease portfolio at September 30, 1999 and 1998. The $16.0 million decrease in
non-performing assets reflected a net decrease in REO of $16.7 million and an
increase in non-accrual loans of $0.7 million.
Non-accrual Loans. The bank's non-accrual loans totaled $13.3 million at
September 30, 1999, compared to $12.6 million at September 30, 1998. At
September 30, 1999, non-accrual loans consisted of $4.8 million of non-accrual
real estate loans and $8.5 million of non-accrual consumer and other loans
compared to non-accrual real estate loans of $8.1 million and non-accrual
consumer and other loans of $4.5 million at September 30, 1998.
REO. At September 30, 1999, the bank's REO totaled $48.8 million, after
valuation allowances on such assets of $84.4 million as set forth in the
following table:
Balance Balance
Number of Before All After Percent of
Properties Gross Charge- Valuation Valuation Valuation Total
Balance Offs Allowances Allowances Allowances
------------- ----------- ---------- -------------- -------------- --------------- -----------
(Dollars in thousands)
Communities 4 $151,414 $ 32,510 $ 118,903 $ 77,085 $ 41,819 85.8%
Residential ground 2 3,386 - 3,386 1,520 1,866 3.8%
Commercial ground 3 17,812 7,646 10,166 5,800 4,366 9.0%
Single-family
residential properties 5 741 40 701 - 701 1.4%
------------- ----------- ---------- -------------- -------------- --------------- -----------
Total REO 14 $173,353 $ 40,196 $ 133,156 $ 84,405 $ 48,752 100.0%
============= =========== ========== ============== ============== =============== ===========
During fiscal 1999, REO decreased $16.7 million, which was primarily
attributable to the sale of one community in the pre-development stage,
consisting of approximately 2,000 acres in Loudoun County, Virginia. Also
contributing to the decline were additional sales in the Communities and other
properties, partially offset by additional capitalized costs.
During fiscal 1999, the bank received revenues of $63.9 million of which $37.3
million was from the sale of the predevelopment stage community. Additional
revenues resulted from dispositions of 550 residential lots or units in the
Communities ($19.8 million), approximately 33.6 acres of commercial land in two
of the Communities and one commercial ground property ($2.4 million) and various
single-family residential properties ($4.4 million).
The bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in a manner which will best preserve the value of
the bank's assets. The bank's ability to achieve this objective will depend on a
number of factors, some of which are beyond its control, such as the general
economic conditions in the Washington, DC metropolitan area.
The principal component of REO consists of the four Communities, all of which
are under active development. At September 30, 1999, two of the active
Communities had 1,268 remaining residential lots, of which 986 lots, or 77.6%,
were under contract and pending settlement. The four active Communities had
approximately 227 remaining acres of land designated for commercial use, of
which 5 acres, or 2.2%, was under contract and pending settlement. In addition,
at September 30, 1999, the bank was engaged in discussions with potential
purchasers regarding the sale of additional residential units and retail land.
The following chart provides historical sales information regarding the four
remaining Communities:
Residential Lots Commercial Ground (Acres)
------------------------------------------------- ------------------------------------------------
Under Under
Property Location Total Sold Contract Total Sold Contract
- ------------------------------ --------------- --------------- ---------------- --------------- --------------- ---------------
Loudoun County, VA 4,997 3,904 827 198.04 23.30 5.00
Loudoun County, VA 2,042 2,042 -- 24.10 9.00 --
Montgomery County, MD 1,814 1,639 159 70.65 66.05 --
Loudoun County, VA 4,352 4,352 -- 118.45 85.73 --
--------------- --------------- ---------------- --------------- --------------- ---------------
Total 13,205 11,937 986 411.24 184.08 5.00
=============== =============== ================ =============== =============== ===============
The bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
During fiscal 1999, the bank capitalized interest in the amount of $3.4 million
relating to its four active Communities.
The bank will continue to monitor closely its major non-performing and potential
problem assets in light of current and anticipated market conditions. The bank's
asset workout group focuses its efforts in resolving these problem assets as
expeditiously as possible.
Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. At
September 30, 1999 and 1998, none of the bank's assets were deemed by management
to be potential problem assets.
Delinquent Loans. At September 30, 1999, delinquent loans totaled $53.7 million,
or 0.8% of loans, compared to $20.7 million, or 0.7% of loans, at September 30,
1998. The following table sets forth information regarding the bank's delinquent
loans at September 30, 1999.
Principal Balance
(Dollars in Thousands)
-------------------------------------------------------------------------------------
Subprime Other Consumer Total as a
Real Estate Automobile Loans Percentage
Loans Loans Total of Loans (1)
------------------ -------------------- ----------------- ---------------- ------------------
Loans delinquent for:
30-59 days...... $ 5,580 $ 33,113 $ 3,739 $42,432 0.6%
60-89 days...... 1,946 7,866 1,479 11,291 0.2%
------------------ -------------------- ----------------- ---------------- -----------------
Total............ $ 7,526 $ 40,979 $ 5,218 $53,723 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).
Real estate loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity loans. Total
delinquent real estate loans increased to $7.5 million at September 30, 1999,
from $5.1 million at September 30, 1998, as a result of growth in the mortgage
loan portfolio.
Total delinquent subprime automobile loans increased to $41.0 million at
September 30, 1999, from $13.1 million at September 30, 1998, primarily as a
result of growth in the subprime automobile portfolio.
Other consumer loans delinquent 30-89 days increased to $5.2 million at
September 30, 1999 from $2.6 million at September 30, 1998, as a result of
growth in the other consumer loan portfolio.
Troubled Debt Restructurings. A troubled debt restructuring occurs when the bank
agrees to modify significant terms of a loan in favor of a borrower experiencing
financial difficulties. Troubled debt restructurings totaled $11.7 million and
$11.8 million at September 30, 1999 and 1998.
At September 30, 1999, loans accounted for as troubled debt restructurings
consisted of one commercial permanent loan with a principal balance of $11.7
million. The $0.1 million decrease in loans accounted for as troubled debt
restructurings from September 30, 1998, resulted from the payoff of a
collateralized commercial loan previously accounted for as a troubled debt
restructuring. At September 30, 1999, the bank had commitments to lend $0.1
million of additional funds on the loan restructured.
Real Estate Held for Investment. At September 30, 1999 and 1998, real estate
held for investment consisted of two properties with an aggregate book value of
$3.6 million, net of valuation allowances of $0.2 million.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and leases and the
allowance for losses on real estate held for investment or sale. These tables
reflect charge-offs taken against assets during the years indicated and may
include charge-offs taken against assets which the bank disposed of during such
years.
Analysis of Allowance for and Charge-offs of Loans
(Dollars in thousands)
Year Ended September 30,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- ------------- -------------- --------------
Balance at beginning of year $ 60,269 $ 105,791 $ 95,635 $ 60,608 $ 50,317
-------------- -------------- ------------- -------------- --------------
Provision for loan losses 22,880 150,829 125,115 115,740 54,979
-------------- -------------- ------------- -------------- --------------
Increase due to acquisition of loans -- -- 118 -- --
-------------- -------------- ------------- -------------- --------------
Reduction due to sale of credit card portfolio -- (87,609) -- -- --
-------------- -------------- ------------- -------------- --------------
Charge-offs:
Single family residential and home equity (617) (1,629) (1,014) (867) (1,174)
Real estate construction and ground -- -- -- -- (1,768)
Credit card -- (108,289) (115,835) (84,805) (50,172)
Nonprime auto (21,169) (7,298) (3,309) (680) (32)
Other consumer (4,988) (5,436) (6,348) (5,695) (3,431)
-------------- -------------- ------------- -------------- --------------
Total charge-offs (26,774) (122,652) (126,506) (92,047) (56,577)
-------------- -------------- ------------- -------------- --------------
Recoveries:
Single family residential and home equity 85 49 34 32 20
Credit card -- 12,732 10,365 10,720 11,219
Nonprime auto 744 297 104 24 --
Other consumer 1,047 832 926 558 650
-------------- -------------- ------------- -------------- --------------
Total recoveries 1,876 13,910 11,429 11,334 11,889
-------------- -------------- ------------- -------------- --------------
Charge-offs, net of recoveries (24,898) (108,742) (115,077) (80,713) (44,688)
-------------- -------------- ------------- -------------- --------------
Balance at end of year $ 58,251 $ 60,269 $ 105,791 $ 95,635 $ 60,608
============== ============== ============= ============== ==============
Provision for loan losses to average loans (1) 0.48% 5.43% 3.50% 3.94% 1.85%
Net loan charge-offs to average loans (1) 0.52% 3.92% 3.22% 2.75% 1.51%
Ending allowance for losses on loans to total
loans (1) (2) 0.90% 2.17% 4.15% 2.81% 2.05%
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization.
(2) Before deduction of allowance for losses.
Components of Allowance for Losses on Loans and Leases by Type
(Dollars in thousands)
September 30,
----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- -------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
of of of of of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------- ------- ---------- ------- ----------- ------- ---------- ------- ---------- ------
Balance at end of year
allocated to:
Single family residential $ 3,187 63.4 % $ 1,822 65.7 % $ 661 33.2 % $ 925 47.2 % $ 929 47.3 %
Home equity 947 3.7 676 4.9 683 3.7 446 0.9 164 1.0
Commercial real estate and
multifamily 11,355 0.9 10,828 2.7 7,705 2.1 8,398 2.3 8,523 2.9
Real estate construction
and ground 1,697 3.5 3,225 3.9 550 2.2 1,255 1.9 1,264 1.1
Commercial 4,623 6.1 3,623 6.3 364 3.9 223 1.7 65 0.5
Credit card -- -- -- -- 89,446 42.3 79,681 33.0 46,325 34.4
Automobile 3,334 12.8 3,034 4.4 340 4.4 2,665 7.2 2,376 7.0
Subprime automobile 28,782 7.4 26,010 8.5 2,740 4.6 1,300 1.8 850 1.1
Home improvement and
related loans 3,523 1.7 3,403 2.4 2,415 2.2 229 2.9 -- 3.8
Overdraft lines of credit
and other consumer 691 0.5 1,674 1.2 775 1.4 401 1.1 -- 0.9
Unallocated -- -- 5,862 -- -- -- -- -- -- --
---------- ---------- ----------- ---------- ----------
Total $ 58,139 $ 60,157 $ 105,679 $ 95,523 $ 60,496
========== ========== =========== ========== ==========
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Year Ended September 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ------------ -----------
Balance at beginning of year:
Real estate held for investment $ 202 $ 198 $ 191 $ 193 $ 9,899
Real estate held for sale 153,564 140,738 126,519 135,043 109,074
------------ ------------ ----------- ------------ -----------
Total 153,766 140,936 126,710 135,236 118,973
------------ ------------ ----------- ------------ -----------
Provision for real estate losses:
Real estate held for investment -- 4 7 (2) (6,974)
Real estate held for sale -- 18,856 19,616 26,343 33,295
------------ ------------ ----------- ------------ -----------
Total -- 18,860 19,623 26,341 26,321
------------ ------------ ----------- ------------ -----------
Charge-offs:
Real estate held for investment:
Ground -- -- -- -- (2,732)
------------ ------------ ----------- ------------ -----------
Real estate held for sale:
Residential ground (1,703) -- -- -- --
Real estate construction -- -- -- -- (4,396)
Communities (67,456) -- -- -- --
Ground -- (6,030) (5,397) (34,867) (2,930)
------------ ------------ ----------- ------------ -----------
Total (69,159) (6,030) (5,397) (34,867) (7,326)
------------ ------------ ----------- ------------ -----------
Total charge-offs on real estate
held for investment or sale (69,159) (6,030) (5,397) (34,867) (10,058)
------------ ------------ ----------- ------------ -----------
Balance at end of year:
Real estate held for investment 202 202 198 191 193
Real estate held for sale 84,405 153,564 140,738 126,519 135,043
------------ ------------ ----------- ------------ -----------
Total $ 84,607 $ 153,766 $ 140,936 $ 126,710 $ 135,236
============ ============ =========== ============ ===========
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
September 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ----------- ------------
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 198 $ 191 $ 193
------------ ------------ ------------ ----------- ------------
Allowance for losses on real estate held for sale:
Single family residential and home equity -- -- -- 120 186
Residential ground 1,520 3,123 1,040 5,944 20,736
Commercial ground 5,800 5,800 6,793 5,894 5,464
Communities 77,085 144,641 132,905 114,561 108,657
------------ ------------ ------------ ----------- ------------
Total 84,405 153,564 140,738 126,519 135,043
------------ ------------ ------------ ----------- ------------
Total allowance for losses on real
estate held for investment or sale $ 84,607 $ 153,766 $ 140,936 $ 126,710 $ 135,236
============ ============ ============ =========== ============
The bank maintains valuation allowances for estimated losses on loans and leases
and real estate. The bank's total valuation allowances for losses on loans and
leases and real estate held for investment or sale decreased to $142.7 million
at September 30, 1999, from $213.9 million at September 30, 1998. The $71.2
million decrease was primarily attributable to a charge-off against the
allowance of $65.8 million upon the sale of the pre-development stage community.
Management reviews the adequacy of the valuation allowances on loans and leases
and real estate using a variety of measures and tools including historical loss
performance, delinquent status, current economic conditions, internal risk
ratings and current underwriting policies and procedures. Using this analysis,
management determines a range of acceptable valuation allowances. Although the
amount of delinquent and non-accrual consumer loans increased slightly during
fiscal 1999, the provision for loan losses approximated the amount of net
charge-offs for the year, reflecting management's determination that the overall
level of the allowance remained appropriate.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $101.8 million at September 30, 1999, which
constituted 73.8% of total non-performing real estate assets before valuation
allowances. This amount represented a $68.5 million decrease from the September
30, 1998 level of $170.3 million, or 75.0% of total non-performing real estate
assets before valuation allowances at that date. The decrease reflected the sale
of the pre-development stage community during fiscal 1999.
When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change,
it may be necessary to provide additional valuation allowances based on new
information. The allowance for losses on real estate held for sale at September
30, 1999 is in addition to approximately $40.2 million of cumulative charge-offs
previously taken against assets remaining in the bank's portfolio at September
30, 1999.
The bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans, including the Communities. As a result of such
updated appraisals, the bank could be required to increase its valuation
allowances. The bank may also increase its allowances for losses after
considering local market conditions, including the bank's efforts to sell
individual properties or portions of properties. In addition to ongoing sales of
lots, management periodically receives and reviews offers to purchase various
parcels of these Communities. If information is deemed credible and can be
supported with market comparables, additional allowances for losses may be
provided.
In accordance with bank regulatory requirements, the bank performs ongoing real
estate evaluations for all REO as a basis for substantiating the carrying values
in accordance with generally accepted accounting principles. As indicated, as of
September 30, 1999 the bank's REO consisted primarily of residential communities
under active development. While the overall strategy of the bank is the
expedient sale of the real estate assets, on an ongoing basis the bank is
actively funding, managing and overseeing substantive land development
activities in the Communities. As a part of its development activities, the bank
maintains and updates real estate project evaluations in accordance with
regulatory requirements which include analyses of lot and acreage sales, status
and budgets for development activities and consideration of project market
trends. These real estate evaluations are reviewed periodically as part of
management's review and evaluation of the carrying values of REO. Following a
review of the real estate assets and the related carrying values, management
reports its actions to the bank's Board of Directors.
The allowance for losses on consumer loans and leases, including automobile,
home improvement, overdraft lines of credit and other consumer loans, increased
to $36.3 million at September 30, 1999 from $34.1 million at September 30, 1998.
Net charge-offs of subprime automobile loans for fiscal 1999 were $20.4 million,
compared to $7.0 million for fiscal 1998 primarily due to adverse trends in
delinquencies coupled with growth in the portfolio. Management has taken steps
to mitigate losses in this portfolio, including expansion of collection efforts
and adjustment of underwriting criteria.
Asset and Liability Management. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mix, volume and maturity to stabilize the net
interest spread is referred to as asset and liability management. The objective
of asset and liability management is to maximize the net interest yield within
the constraints imposed by prudent lending and investing practices, liquidity
needs and capital planning.
The bank's assets and liabilities are inherently sensitive to changes in
interest rates. These movements can result in variations to the overall level of
income and market value of equity. Based on the characteristics of a specific
asset or liability (including maturity, repricing frequency and interest rate
caps) a change in interest rates can significantly affect the contribution to
net income and market value for the instrument. If, in the aggregate, the bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the bank is termed "asset sensitive" and will tend to experience
increased income and market value during periods of rising interest rates and
declining income and market value during periods of falling interest rates.
Conversely, if the bank's liabilities mature or reprice more quickly or to a
greater extent than its assets, the bank is termed "liability sensitive" and
will tend to experience decreased income and market value during periods of
rising interest rates and increased income and market value during periods of
falling interest rates.
The bank pursues an asset-liability management strategy designed both to control
risk from changes in market interest rates and to maximize interest income in
its loan and lease portfolio. To achieve this strategy, the bank emphasizes the
origination and retention of a mix of both adjustable-rate and fixed-rate loan
products. In addition to adjustable-rate mortgages and adjustable-rate home
equity credit line loans, fixed-rate mortgage loans were originated and retained
in the bank's portfolio during fiscal years 1999 and 1998 to a significantly
larger degree than in prior years. At September 30, 1999, adjustable-rate loans
accounted for 35.2% of total loans and leases compared to 36.0% at September 30,
1998.
Low interest rates throughout 1999 and 1998 contributed to an increased demand
for fixed-rate loan products. Due to this rising demand, the bank increased its
volume of fixed-rate mortgage originations as adjustable-rate loan demand fell.
The bank continuously monitors its sensitivity to changes in market interest
rates and attempts to minimize the impact of interest-rate changes on net
income. The bank's policy is generally to sell, or have the ability to sell,
some portion of its long-term fixed-rate mortgages in order to reduce its
exposure to market interest rate fluctuations typically associated with
long-term fixed-rate lending.
A traditional measure of interest-rate risk within the banking industry is the
interest sensitivity "gap," which is the sum of all interest-earning assets
minus all interest-bearing liabilities subject to repricing within the same
period. Gap analysis is a tool used by management to evaluate interest-rate risk
which results from the difference between repricing and maturity characteristics
of the bank's assets and those of the liabilities that fund them. By analyzing
these differences, management can attempt to estimate how changes in interest
rates affect the bank's future net interest income.
The bank views control over interest rate sensitivity as a key element in its
financial planning process and monitors interest rate sensitivity through its
forecasting system. The bank manages interest rate exposure and will narrow or
widen its gap depending on its perception of interest rate movements and the
composition of its balance sheet. For the reasons discussed above, the bank
might take action to narrow its gap if it believes that market interest rates
will experience a significant prolonged increase, and might widen its gap if it
believes that market interest rates will decline or remain relatively stable.
A number of asset and liability management strategies are available to the bank
in structuring its balance sheet. These include selling or retaining certain
portions of the bank's current residential mortgage loan production; altering
the bank's pricing on certain deposit products to emphasize or de-emphasize
particular maturity categories; altering the type and maturity of securities
acquired for the bank's investment portfolio when replacing securities following
normal portfolio maturation and turnover; lengthening or shortening the maturity
or repricing terms for any current period asset securitizations; and altering
the maturity or interest rate reset profile of borrowed funds, if any, including
funds borrowed from the FHLB of Atlanta.
The following table presents the interest rate sensitivity of the bank's
interest-earning assets and interest-bearing liabilities at September 30, 1999,
which reflects management's estimate of mortgage loan prepayments and
amortization and provisions for adjustable interest rates. Adjustable and
floating rate loans are included in the period in which their interest rates are
next scheduled to adjust, and prepayment rates are assumed for the bank's loans
based on recent actual experience. Statement savings and passbook accounts with
balances under $20,000 are classified based upon management's assumed attrition
rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW
accounts, are assumed to be subject to repricing within six months or less.
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
------------ ------------ ------------ ------------ ----------- -----------
As of September 30, 1999 Real estate loans:
Adjustable-rate $ 318,666 $ 113,910 $ 349,073 $ 459,496 $ 803,136 $2,044,281
Fixed-rate 99,047 83,161 292,861 242,974 1,473,047 2,191,090
Home equity credit lines and second mortgages 122,404 26,430 74,517 40,923 45,770 310,044
Commercial 266,930 12,557 41,612 30,393 41,564 393,056
Consumer and other 332,883 264,023 621,571 189,518 23,746 1,431,741
Loans held for sale 116,797 -- -- -- -- 116,797
Mortgage-backed securities 452,739 191,619 376,044 67,516 223,452 1,311,370
Trading securities 6,955 -- -- -- -- 6,955
Other investments 439,445 -- 44,400 -- -- 483,845
------------ ------------ ------------ ------------ ----------- -----------
Total interest-earning assets 2,155,866 691,700 1,800,078 1,030,820 2,610,715 8,289,179
Total non-interest earning assets -- -- -- -- 857,590 857,590
------------ ------------ ------------ ------------ ----------- -----------
Total assets $ 2,155,866 $ 691,700 $ 1,800,078 $ 1,030,820 $3,468,305 $9,146,769
============ ============ ============ ============ =========== ===========
Deposits:
Fixed maturity deposits $ 1,067,476 $ 768,018 $ 157,800 $ 41,656 $ -- $2,034,950
NOW, statement and passbook accounts 1,669,223 43,907 146,237 99,533 212,117 2,171,017
Money market deposit accounts 1,125,405 -- -- -- -- 1,125,405
Borrowings:
Capital notes - subordinated -- -- -- -- 250,000 250,000
Other 930,868 40,857 95,673 1,209,439 97,495 2,374,332
------------ ------------ ------------ ------------ ----------- -----------
Total interest-bearing liabilities 4,792,972 852,782 399,710 1,350,628 559,612 7,955,704
Total non-interest bearing liabilities -- -- -- -- 750,580 750,580
Stockholders' equity -- -- -- -- 440,485 440,485
------------ ------------ ------------ ------------ ----------- -----------
Total liabilities & stockholders' equity $ 4,792,972 $ 852,782 $ 399,710 $ 1,350,628 $1,750,677 $9,146,769
============ ============ ============ ============ =========== ===========
Gap $(2,637,106) $ (161,082) $ 1,400,368 $ (319,808) $2,051,103
Cumulative gap $(2,637,106) $(2,798,188) $(1,397,820) $(1,717,628) $ 333,475
Adjusted cumulative gap as a percentage
of total assets (28.8)% (30.6)% (15.3)% (18.8)% 3.6 %
The bank's one-year gap as a percentage of total assets was negative 30.5% at
September 30, 1999, compared to negative 16.5% at September 30, 1998. The
decline in the bank's one-year gap was attributable to the reinvestment of
proceeds from the sale of the bank's credit card portfolio into mortgage and
automobile loans with fixed interest rates and longer maturities. The bank's
increased use of brokered deposits as a funding source during fiscal 1999 also
contributed to the decline. Partially mitigating this decline were increases in
FHLB advances with maturities greater than one year. The bank continues to
consider a variety of strategies to manage its interest rate risk position.
In addition to gap measurements, the bank measures and manages interest-rate
risk with the extensive use of computer simulation. This simulation includes
calculations of Market Value of Portfolio Equity and Net Interest Margin as
promulgated by the OTS's Thrift Bulletin 13a. Under this regulation,
institutions are required to establish limits on the sensitivity of their net
interest income and net portfolio value, referred to in this prospectus as
"NPV," to parallel changes in interest rates. Such changes in interest rates are
defined as instantaneous and sustained movements of rates in 100 basis point
increments. In addition, the bank is required to calculate its NPV Ratio (3) for
each interest rate shock scenario. The following table shows the estimated
impact of parallel shifts in interest rates at September 30, 1999, calculated in
a manner consistent with the requirements of TB 13a.
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------
Changes in Change in
(Basis Points) Net Interest Net Portfolio
Change in Interest Income(1) Value(2) NPV
Rates Ratio
------------------------------------- --------------------------------------------
Percent Amount Percent Amount
- ---------------------- -------------- ------------------ ----------------- ---------------------- --------------
+ 200 (8.9)% $ (25,671) (9.4)% $ (56,478) 5.8%
+ 100 (4.1)% $ (11,989) (1.3)% $ (7,689) 6.2%
- - 100 12.3% $ 35,710 10.2% $ 61,089 6.7%
- - 200 9.8% $ 28,441 4.5% $ 27,064 6.3%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Represents the difference between net interest income for 12 months in a
stable interest rate environment and the various interest rate scenarios.
(2) Represents the difference between net portfolio value (NPV) of the bank's
equity in a stable interest rate environment and the NPV in the various rate
scenarios. The OTS defines NPV as the present value of expected net cash flows
from existing assets minus the present value of expected net cash flows from
existing liabilities plus the present value of expected net cashflows from
existing off-balance sheet contracts.
(3) Represents the NPV as a percentage of the present value of total assets.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain limitations are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable-rate
mortgage loans, generally have features which restrict changes in their interest
rates on a short-term basis and over the life of the asset. In the event of a
change in interest rates, loan prepayments and early deposit withdrawal levels
could deviate significantly from those assumed in making the calculations set
forth above. Additionally, credit risk may increase if an interest rate increase
adversely affects the ability of many borrowers to service their debt.
Inflation. The impact of inflation on the bank is different from the impact on
an industrial company because substantially all of the assets and liabilities of
the bank are monetary in nature. The most direct impact of an extended period of
inflation would be to increase interest rates and to place upward pressure on
the operating expenses of the bank. However, the actual effect of inflation on
the net interest income of the bank would depend on the extent to which the bank
was able to maintain a spread between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities, which would depend
to a significant extent on its asset-liability sensitivity. The effect of
inflation on the bank's results of operations for the past three fiscal years
has been minimal.
Deferred Tax Asset. At September 30, 1999, the bank recorded a net deferred tax
asset of $1.6 million, which generally represents the cumulative excess of the
bank's actual income tax liability over its income tax expense for financial
reporting purposes. See Note 32 to the Consolidated Financial Statements in this
prospectus.
Capital. At September 30, 1999, the bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for "well capitalized" institutions under OTS prompt
corrective action regulations.
The following table shows the bank's regulatory capital levels at September 30,
1999, in relation to the regulatory requirements in effect at that date. The
information below is based upon the bank's understanding of the regulations and
interpretations currently in effect and may be subject to change.
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
-------------- -------- -------------- -------- -------------- ---------
Stockholders' equity per financial
statements $ 466,679
Minority interest in REIT Subsidiary (1) 144,000
Net unrealized holding gains (2) (10)
--------------
610,669
Adjustments for tangible and core capital:
Intangible assets (56,887)
Non-allowable minority interest in
REIT Subsidiary (1) (8,725)
Non-includable subsidiaries (3) (3,957)
--------------
Total tangible capital 541,100 5.94% $ 136,686 1.50% $ 404,414 4.44%
-------------- ======== ============== ======== ============== =========
Total core capital (4) 541,100 5.94% $ 364,497 4.00% $ 176,603 1.94%
-------------- ======== ============== ======== ============== =========
Tier 1 risk-based capital (4) 541,100 8.33% $ 260,261 4.00% $ 280,839 4.33%
-------------- ======== ============== ======== ============== =========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan losses 51,392
--------------
Total supplementary capital 301,392
--------------
Total available capital 842,492
Equity investments (3) (6,542)
--------------
Total risk-based capital (4) $ 835,950 13.04% $ 520,522 8.00% $ 315,428 5.04%
============== ======== ============== ======== ============== =========
(1) Eligible for inclusion in core capital in an amount up to 25% of the bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(3) Reflects an aggregate offset of $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%.
OTS capital regulations provide a five-year holding period, or such longer
period as may be approved by the OTS, for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the bank is unable to dispose of any REO property,
whether through bulk sales or otherwise, prior to the end of its applicable
five-year holding period and is unable to obtain an extension of such five-year
holding period from the OTS, the bank could be required to deduct the
then-current book value of such REO property from total risk-based capital. In
May 1999, the bank received from the OTS an extension of the holding periods for
certain of its REO properties through May 14, 2000. The following table sets
forth the bank's REO at September 30, 1999, after valuation allowances of $84.4
million, by the fiscal year in which the property was acquired through
foreclosure.
Fiscal Year (In thousands)
----------- ----------------
1990 $ 14,137(1)(2)
1991 27,683(2)
1992 123(2)
1993 -
1994 -
1995 6,108
1996 -
1997 -
1998 62
1999 639
-----------------
Total REO $ 48,752
=================
- ----------------------
(1) Includes REO with an aggregate net book value of $6.5 million, which the
bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $35.4 million, for which
the bank received an extension of the holding periods through May 14, 2000.
Under the OTS prompt corrective action regulations, an institution is
categorized as well capitalized if it has a leverage or core capital ratio of at
least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total
risk-based capital ratio of at least 10.0% and is not subject to any written
agreement, order, capital directive or prompt corrective action directive to
meet and maintain a specific capital level. At September 30, 1999, the bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 5.94%,
8.33% and 13.04%, which exceeded the ratios established for well capitalized
institutions. The OTS has the discretion to reclassify an institution from one
category to the next lower category, for example from well capitalized to
adequately capitalized, if, after notice and an opportunity for a hearing, the
OTS determines that the institution is in an unsafe or unsound condition or has
received and has not corrected a less than satisfactory examination rating for
asset quality, management, earnings or liquidity.
Failure to obtain the REO extensions discussed above could adversely affect the
bank's regulatory capital ratios. The bank's ability to maintain or increase its
capital levels in future periods also will be subject to general economic
conditions, particularly in the bank's local markets. Adverse general economic
conditions or a downturn in local real estate markets could require further
additions to the bank's allowances for losses and further charge-offs. Any such
developments would adversely affect the bank's earnings and thus its regulatory
capital levels.
LIQUIDITY AND CAPITAL RESOURCES
General. The Real Estate Trust's primary cash requirements include operating
expenses, debt service, debt principal repayment and capital expenditures.
During fiscal 1999, 1998 and 1997, 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.
The bank's primary cash requirements include its commitment to fund maturing
savings certificates and deposit withdrawals, fund existing and continued loan
commitments, repay borrowings and meet operating expenses. The bank's primary
sources of liquidity historically have consisted of:
o principal and interest payments on loans and
mortgage-backed securities;
o savings deposits;
o sales of loans held for sale and trading securities;
o securitizations; and
o borrowed funds.
Management believes that these liquidity sources are adequate to fund the bank's
liquidity needs without the need to sell any securities classified as "held to
maturity."
Real Estate
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. This condition is currently the case and is
expected to continue to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes sold to the public, the payment of interest on its
senior secured notes, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financings, including the sale of unsecured
notes, refinancings of maturing mortgage debt, asset sales and tax sharing and
dividend payments from the bank. See the Consolidated Statements of Cash Flows
included in the Consolidated Financial Statements in this prospectus.
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in 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. See also the
discussion of potential limitations on the payment of dividends by the bank
contained in "Business - Banking - Regulation - Dividends and Other Capital
Distributions."
The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods should enhance prospects for the Real
Estate Trust to receive tax sharing payments and dividends from the bank. See
"Banking - Regulation - Regulatory Capital." During fiscal 1999, the bank made
tax sharing payments totalling $6.6 million and dividend payments totalling
$26.4 million to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. It is anticipated that the Trust's
consolidation of the bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the bank would otherwise owe. If in any future year, the
bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the bank for the greater of (1) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated federal income
tax returns or (2) the amount of the refund which the bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.
Through September 30, 1999, the Real Estate Trust has purchased either in the
open market or through dividend reinvestment 2,319,420 shares of common stock of
Saul Centers representing 17.6% of such company's outstanding common stock. As
of September 30, 1999, the market value of these shares was approximately $ 35.0
million. All these 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,
referred to in this prospectus as the "1994 Notes." See Note 4 to the
Consolidated Financial Statements in this prospectus.
In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of 9 3/4% Senior Secured Notes due 2008, referred to in this prospectus
as the "1998 Notes." After providing for the retirement of the 1994 Notes,
including a prepayment premium of $10.0 million and debt issuance costs of
approximately $5.9 million, the Real Estate Trust realized approximately $9.1
million in new funds. In addition, the Real Estate Trust received about $13.2
million in cash which had been held as additional collateral by the indenture
agent under the 1994 Notes. The 1998 Notes are secured by a first priority
perfected security interest in 8,000 shares, or 80%, of the issued and
outstanding common stock of the bank, which constitute all of the bank common
stock held by the Real Estate Trust. The 1998 Notes are nonrecourse obligations
of the Real Estate Trust.
The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, it will finance such
repayments from other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million revolving
credit line with an unrelated bank. This facility was for an initial two-year
period subject to extension for one or more additional one-year terms. In fiscal
1997, the facility was increased to $20.0 million and was renewed for an
additional two-year period. In September 1999, this facility was increased to
$50.0 million and its term was set at three years with provisions for extending
the term annually. The current maturity date for this line is September 29,
2002. This facility is secured by a portion of the Real Estate Trust's ownership
in Saul Holdings Partnership and Saul Centers. Interest is computed by reference
to a floating rate index. At September 30, 1999, the Real Estate Trust had
outstanding borrowings of $4.0 million under the facility and unrestricted
availability was $13.9 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, the line of credit was
increased to $10.0 million and was extended for a year. During fiscal 1998, the
line of credit was increased to $20.0 million and was extended for an additional
year. The current maturity date for this line is July 31, 2001. Interest is
computed by reference to a floating rate index. At September 30, 1999, the Real
Estate Trust had outstanding borrowings of $12.0 million and unrestricted
availability was $3.7 million.
During fiscal 1997, the Real Estate Trust refinanced two hotel and three office
properties with five-year floating rate debt. After payment of all financing
costs, the Real Estate Trust received net proceeds of approximately $11.0
million.
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1999 for fiscal years commencing October 1, 1999 is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
--------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable -- Payable --
Year Notes Secured Unsecured Total
------------- --------- ----------- ----------- --------------
2000 $13,652 $ -- $ 8,905 $ 22,557
2001 29,784 12,000 6,036 47,820
2002 15,046 4,000 7,745 26,791
2003 15,987 -- 9,190 25,177
2004 6,600 -- 9,321 15,921
Thereafter 132,378 200,000 4,925 337,303
--------- ----------- ----------- --------------
Total $213,447 $216,000 $ 46,122 $ 475,569
--------------------------------------------------------------
Of the $213.4 million of mortgage notes outstanding at September 30, 1999,
$165.2 million was nonrecourse to the Real Estate Trust.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Partnership, the Real Estate Trust shares
in cash distributions from operations and from capital transactions involving
the sale of properties. The partnership agreement of Saul Holdings Partnership
provides for quarterly cash distributions to the partners out of net cash flow.
See "Business - Real Estate - Investment in Saul Holdings Limited Partnership."
In fiscal 1999, the Real Estate Trust received total cash distributions $6.1
million from Saul Holdings Partnership. During the period of April 1998 through
July 1999, the Real Estate Trust reinvested its quarterly distributions and
obtained additional partnership units in Saul Holdings Partnership. The majority
of the Real Estate Trust's ownership interest in Saul Holdings Partnership has
been pledged as collateral with the Real Estate Trust's lines of credit banks.
Development and Capital Expenditures
During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland. The Real Estate Trust financed the project with a
construction/permanent loan. The building was substantially completed in January
1998 and was offered to Saul Holdings Partnership in accordance with the Real
Estate Trust's obligations under its right of first refusal agreement. An
independent appraisal of the project indicated a market value of $5,600,000. The
fully funded balance of the loan was $3,657,000, resulting in an equity position
of $1,943,000 for the Real Estate Trust. The Board of Directors of Saul Centers,
Inc., general partner of Saul Holdings Partnership, agreed to purchase the Real
Estate Trust's equity position through the issuance of additional limited
partnership units in Saul Holdings Partnership. Accordingly, on April 1,
1998, Saul Holdings Partnership issued 105,922 new limited partnership units and
a corresponding limited partnership interest to the Real Estate Trust in
exchange for the ownership of the new building and the assumption of its loan.
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 3 acre parcel located adjacent to its Hampton Inn and
Holiday Inn near the Washington Dulles International Airport in Sterling,
Virginia. The new hotel was franchised as a TownePlace Suites by Marriott and
opened for business in August 1998. Development costs were $5.8 million and were
largely financed by a construction loan of $4.5 million. The loan is for two
years with two extension options for two-year and one-year periods. The loan
covered all costs except for the land, fees to related parties, taxes and
insurance.
On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near the Reagan National Airport and the Real
Estate Trust's Howard Johnson hotel. The purchase price was $25.8 million. Also
on December 10, 1997, the Real Estate Trust refinanced five other hotels in its
portfolio. Funds for the two transactions were provided by a lender in the
amount of $52.5 million. The new loans have a 15 year term, a fixed interest
rate of 7.57%, and amortization based on a 25 year schedule.
During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels:
TownePlace Suites by Marriott containing 91 units located on a 2 acre site owned
by the Trust in Avenel Business Park in Gaithersburg, Maryland. This hotel
opened for business on June 24, 1999.
TownePlace Suites by Marriott containing 91 units located on part of a 9 acre
site owned by the Real Estate Trust in the Arvida Park of Commerce in Boca
Raton, Florida. This hotel opened for business on June 28, 1999.
SpringHill Suites by Marriott containing 146 units located on part of a 9 acre
site owned by the Real Estate Trust in the Arvida Park of Commerce in Boca
Raton, Florida. This hotel opened for business on July 9, 1999.
TownePlace Suites by Marriott containing 95 units located on a 3 acre site owned
by the Real Estate Trust in the Fort Lauderdale Commerce Center, Fort
Lauderdale, Florida. This hotel opened for business on October 25, 1999.
The costs for the four hotels aggregated $32 million and were largely funded by
the proceeds of a three-year bank loan in the amount of $25.9 million. The loan
has two one-year renewal options.
During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 78,000 square foot single-story office/research and development
building located on a 7 acre site owned by the Real Estate Trust in the Dulles
North Corporate Park, Sterling, Virginia. This project is adjacent to the Real
Estate Trust's Dulles North office building and near three of the Real Estate
Trust's hotel properties. The development cost is $7.3 million with bank
financing of $6.5 million for a five-year term and an option for a two-year
extension. The project is 100% leased and became operational October 1, 1999.
During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia, near
Reagan National Airport. The 308-room Holiday Inn has been converted into a
Crowne Plaza, while the 279-room Howard Johnson 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 have been funded by the
Real Estate Trust in part from its internal resources and in part from its lines
of credit.
During the quarter ended June 30, 1999, the Real Estate Trust commenced the
development of an 11-story 229-room hotel on a site adjacent to its Tyson Corner
Holiday Inn in McLean, Virginia. The new hotel will be franchised as a Courtyard
by Marriott and will cost approximately $30.0 million. Financing of $25.0
million has been obtained for an initial period of three years with options for
two one-year extensions. Completion is projected for December 2000.
Also during the quarter ended June 30, 1999, the Real Estate Trust began
development of an 80,000 square foot single-story office/research and
development building located on a 6.5 acre site owned by the Real Estate Trust
in Dulles North Corporate Park, Sterling, Virginia. The development cost is $4.5
million, with estimated bank financing of $4.1 million for a three-year term.
The project is 100% leased to a single tenant and is projected to become
operational in March 2000.
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 fiscal years.
Subsequent Event
On December 13, 1999, the Real Estate Trust purchased Tysons Park Place, an
office building owned by Chevy Chase Bank. The building is located in Tysons
Corner, McLean, Virginia and contains approximately 250,000 square feet of
leasable area, which was 99% leased as of December 1, 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%.
Year 2000 Statement - Pursuant to The Year 2000 Information And Readiness
Disclosure Act
The Real Estate Trust has reviewed all of its financial and accounting systems,
as well as physical systems with embedded microprocessors, for the purpose of
assessing the impact of Year 2000 on both internally developed and externally
provided systems. The Real Estate Trust currently uses an IBM AS/400, which has
been certified by the manufacturer to be Year 2000 compliant. All software
purchased over the past five years has been certified by the various
manufacturers to be Year 2000 compliant. All internally developed software has
been modified to make it Year 2000 compliant. Property management systems for
shopping centers, office buildings, hotels, and construction and development
have been certified as Year 2000 compliant by applicable vendors. The Real
Estate Trust has no information which would suggest that its financial systems
would not continue to function effectively after the turn of the century.
Using the Building Owners and Manager Association's guidelines to identify
building systems, including physical systems with embedded microprocessors, and
critical services that might be vulnerable to the Year 2000 software problem,
the Real Estate Trust has contacted the manufacturer, supplier, or the vendor
supporting the system and requested information regarding Year 2000 compliance.
The majority of the replies have indicated that the systems or services are Year
2000 compliant. The Real Estate Trust is presently assessing whether any of the
internal systems should be tested or whether further investigation is necessary.
The Real Estate Trust has no information, which would suggest that any system
would not continue to function effectively after the turn of the century. Except
with regard to internally developed software, all information regarding Year
2000 compliance is based on a republication as defined in The Year 2000
Information and Readiness Disclosure Act of Year 2000 statements or disclosures
made by others.
The Real Estate Trust believes that there is risk that its operations may be
affected by vendors and tenants who are unable to perform as contracted due to
their own Year 2000 exposure. It is very difficult to identify the most
reasonably likely worst case scenario at this time. Although the Real Estate
Trust's potential exposure is widespread, there is no known major direct
exposure. The Real Estate Trust's commercial leases contain provisions
empowering it to take certain actions to enforce its right to the timely payment
of rent regardless of the tenants's Year 2000 exposure. While it is not possible
at this time to determine the likely impact of these potential problems, the
Real Estate Trust will continue to evaluate these areas and development
contingency plans as appropriate. The Real Estate Trust estimates that its
incremental costs to meet Year 2000 compliance is less than $250,000.
Banking
The standard measure of liquidity in the savings industry is the
ratio of cash and short-term U.S. Government and other specified securities to
net withdrawable accounts and borrowings payable in one year or less.
The OTS has established a minimum liquidity requirement, which may vary from
time to time depending upon economic conditions and deposit flows. The required
liquidity level under OTS regulations in effect at September 30, 1999 was 4.0%.
The bank's liquidity ratio for the quarter ended September 30, 1999 was 10.5%,
compared to 10.4% for the quarter ended September 30, 1998. The bank met the
liquidity level requirements for each quarter of fiscal 1999. See "Business -
Regulation - Liquidity Requirements."
The bank's primary sources of funds historically have consisted of:
o principal and interest payments on loans and mortgage-backed securities;
o savings deposits;
o sales of loans and trading securities;
o securitizations and sales of loans; and
o borrowed funds including funds borrowed from the FHLB of Atlanta.
The bank's holdings of readily marketable securities constitute another
important source of liquidity. At September 30, 1999, the bank's portfolio
included mortgage loans, U.S. Government securities and mortgage-backed
securities with outstanding principal balances of $3.0 billion, $44.0 million
and $1.3 billion. The estimated borrowing capacity against these assets that are
available to be pledged to the FHLB of Atlanta and various securities dealers
totaled $3.5 billion at September 30, 1999, after market-value and other
adjustments.
In the past Chevy Chase has accessed the capital markets as an additional means
of funding its operations and managing its capital ratios and asset growth.
Specifically, the bank has securitized financial assets, including credit card,
home equity, home loan and automobile loan receivables, as well as single-family
residential loans, because such securitizations provide the bank with a source
of financing at competitive rates and assist the bank in maintaining compliance
with regulatory capital requirements. Additionally, the securitizations have
permitted the bank to limit the credit risk associated with these assets while
continuing to earn servicing fees and other income associated with the
securitized assets.
Since 1988, the bank has securitized approximately $13.0 billion of credit card,
home equity, automobile and home loan receivables. These transactions depended
on sophisticated back-office systems to service complex securitization
structures and on personnel with the experience to design, install and manage
those systems. At September 30, 1999, the bank continues to service $193.1
million, $556.2 million and $111.2 million of securitized home equity,
automobile and home loan receivables. Chevy Chase derives fee-based income from
servicing these securitized portfolios. However, such fee-based income has been
adversely affected in prior periods by increases in delinquencies and
charge-offs related to the receivables placed in these securitized pools.
Following the sale of its credit card portfolio and related operations on
September 30, 1998, the bank has decreased its reliance on these transactions as
a means of funding its operations and managing its capital ratio and growth.
The bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust which holds the receivables and issues the
asset-backed certificates and ultimately the risk of repayment is transferred to
the holders of those certificates. The bank retains risk with respect to the
assets transferred to the trust only to the extent that it retains recourse
based on the performance of the assets or holds certificates issued by the trust
such as a seller certificate. In its securitizations, the bank typically retains
a limited amount of recourse through one or more means, most often, through the
establishment of spread accounts. Occasionally other structures, such as
overcollateralization of receivables or subordinated asset-backed certificates,
are used. Spread accounts are funded by initial deposits, if required, and by
amounts generated by the securitized assets over and above the amount required
to pay interest, defaults and other charges and fees on the investors' interest
in the securitization transaction. Because amounts on deposit in the spread
accounts are at risk depending upon performance of the securitized receivables,
those amounts represent recourse to the bank.
Pursuant to OTS's low level recourse rule, which sets capital requirements for
assets sold with recourse at the lower of the applicable capital requirement or
the amount of recourse retained, the bank maintains dollar-for-dollar capital
against the securitized assets in the amount of the recourse retained up to the
otherwise applicable capital requirement. Even if defaults on outstanding
receivables significantly exceed projected and historical levels so that a pay
out event is triggered, the immediate consequence is that investors will begin
receiving payments of principal from the securitized assets earlier than
originally scheduled. Even if payments are insufficient to repay investors in
full, the bank's assets are not exposed to risk of loss beyond the relevant
amount of recourse retained, including amounts outstanding in the spread
accounts and the amount of any overcollateralization of receivables or
subordinated interest, which, as noted above, constitute a dollar-for-dollar
capital requirement for the bank. The bank also retains risk through the bank's
interest in any seller certificate. Seller certificates share collections on the
securitized assets on an unsubordinated basis with the investor certificates
unless and to the extent recourse is retained through an express subordination
and are on-balance sheet assets against which the bank must maintain capital.
Prior to fiscal year 1999, the proceeds from the securitization and sale of
credit card, home equity, automobile and home loan receivables had been
significant sources of liquidity for the bank. The bank did not securitize and
sell any loan receivables into new trusts during fiscal 1999. The bank
securitized and sold $1.0 billion of credit card receivables, $534.7 million of
automobile loan receivables, $298.8 million of home equity receivables and $45.9
million of home loan receivables during fiscal 1998. Additionally, during fiscal
1998, the bank securitized and sold $36.0 million of amounts on deposit in
certain spread accounts established in connection with certain of the bank's
credit card securitizations. At September 30, 1999, the bank was not planning
the securitization and sale of any automobile, home equity, or home loan
receivables.
In connection with the sale of the bank's credit card portfolio and related
operations on September 30, 1998, the bank transferred all of its rights,
interests, liabilities and obligations, including recourse obligations, relating
to its credit card securitizations to FUSA.
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. However,
management did not rely on securitizations as a source of liquidity in fiscal
1999 because, among other things, changes in the composition of the bank's loan
and lease portfolio following the sale of its credit card business as well as
changes in market and other conditions made other sources of liquidity, such as
Federal Home Loan Bank advances and brokered deposits, relatively more
attractive sources of funding.
The bank uses its liquidity primarily to meet its commitments to fund maturing
savings certificates and deposit withdrawals, fund existing and continuing loan
commitments, repay borrowings and meet operating expenses. During fiscal 1999,
the bank used the cash provided by operating, investing and financing activities
primarily to meet its commitments to fund maturing savings certificates and
deposit withdrawals of $39.2 billion, repay borrowings of $30.7 billion, fund
existing and continuing loan commitments, including real estate held for
investment or sale, of $3.1 billion, purchase investments and loans of $2.3
billion and meet operating expenses, before depreciation and amortization, of
$288.9 million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $40.1 billion,
proceeds from borrowings of $32.3 billion, proceeds from sales of loans, trading
securities and real estate of $1.0 billion, and principal and interest collected
on investments, loans, and securities of $1.9 billion.
The bank is obligated under various recourse provisions, primarily related to
credit losses, related to the securitization and sale of receivables. As a
result of these recourse provisions, the bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $67.0 million and
$12.3 million at September 30, 1999, and $110.2 million and $12.5 million, at
September 30, 1998. In addition, the bank owned subordinated automobile
receivables-backed securities with carrying values of $7.0 million and $11.3
million at September 30, 1999 and 1998, which were classified as trading
securities in the Consolidated Statements of Financial Condition in this
prospectus.
The bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
bank. At September 30, 1999, recourse to the bank under these arrangements was
$13.6 million, consisting of restricted cash accounts amounting to $7.6 million
and overcollateralization of receivables of $6.0 million.
The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At September 30, 1999, recourse to
the bank under this arrangement totaled $0.8 million.
The bank's commitments to extend credit at September 30, 1999 are set forth in
the following table:
(In thousands)
Commitments to originate loans................ $ 169,127
--------------------
Loans in process (collateralized loans):
Home equity................................. 537,466
Real estate construction and ground......... 190,747
Commercial real estate and multifamily...... 3,556
Commercial.................................. 126,730
--------------------
858,499
--------------------
Loans in process (unsecured loans):
Overdraft lines............................. 99,595
Commercial.................................. 58,795
--------------------
158,390
--------------------
Total commitments to extend credit............ $ 1,186,016
====================
Based on historical experience, the bank expects to fund substantially less than
the total amount of its outstanding overdraft line and home equity credit line
commitments, which together accounted for 53.7% of commitments to extend credit
at September 30, 1999.
At September 30, 1999, repayments of borrowed money scheduled to occur during
the next 12 months were $971.7 million. Certificates of deposit maturing during
the next 12 months amounted to $1.8 billion including $532.6 million of brokered
deposits. The bank expects that a significant portion of these maturing
certificates of deposit will remain with the bank. In the event that deposit
withdrawals are greater than anticipated, particularly among the more volatile
brokered deposits, the bank may have to increase deposit interest rates or rely
on alternative and potentially higher cost sources of funds in order to meet its
liquidity needs.
There were no material commitments for capital expenditures at September 30,
1999. During fiscal 1998, the bank leased 3.5 acres of land at 7501 Wisconsin
Avenue in Bethesda, Maryland, on which the bank is developing an office building
to use as its new corporate headquarters. Construction on this project began in
April 1999.
The bank's liquidity requirements in years subsequent to fiscal 1999 will
continue to be affected both by the asset size of the bank, the growth of which
may be constrained by capital requirements, and the composition of the asset
portfolio. Management believes that the bank's primary sources of funds,
described above, will be sufficient to meet the bank's foreseeable liquidity
needs. The mix of funding sources utilized from time to time will be determined
by a number of factors, including capital planning objectives, lending and
investment strategies and market conditions.
YEAR 2000 ISSUES
The "Year 2000 problem" is caused by deficiencies in computer systems that are
designed to assume that the first two digits of a particular year are always
"19" and therefore these systems may have difficulty accurately processing
transactions using dates later than December 31, 1999. These deficiencies, if
not properly identified and remediated, could lead to internal and industry-wide
malfunctions and cause substantial business disruptions.
Under the direction of the bank's management, a corporate-wide Year 2000 program
was launched to prepare its internal computer systems, applications and
infrastructure to correctly process dates up through and after December 31,
1999, and to mitigate external risks to the bank. The program is supported by a
working group that organizes and conducts specific Year 2000 projects, including
projects dealing with the bank's facilities, counterparties and critical vendors
and service providers.
The program, which is based on the FFIEC's guidelines, consists of five
components relating to mission-critical technology:
1. The awareness phase, which raised internal awareness of
the Program;
2. The inventory/assessment phase, during which the bank
completed a corporate-wide inventory of information
technology and non-IT applications, identified key
relationships with outside parties and developed plans and
target dates for the program;
3. The renovation/replacement phase, in which the bank
identified components in need of replacement or repair and
made hardware and software upgrades, code enhancements,
system replacements and other changes;
4. The validation phase, in which the bank conducted tests of
system-wide applications and evaluated user acceptance; and
5. The implementation phase, in which the bank converted its
systems to year 2000-tested applications and products.
All phases of the program have been completed. To be sure that the bank remains
ready for the Year 2000, ongoing validation is planned.
Year 2000 test results indicate that remediation efforts have been successful.
The bank has nonetheless planned for the possibility that Year 2000 failures may
occur. The bank has developed contingency plans to address problems which may be
created by external parties who may not be Year 2000 compliant. As part of this
effort, the bank has assessed significant services provided by third parties to
determine risks from inadequate Year 2000 preparations which may affect the
bank, and has taken necessary actions to mitigate those risks by developing
contingency plans in response to those risks.
The bank is working to mitigate external risks through a variety of projects.
The bank has assessed, and will continue to assess, the Year 2000 readiness of
key counterparties and of customers. In addition, the bank has assessed the Year
2000 readiness of critical vendors and service providers, including
telecommunications, hardware and software, office equipment and financial
services' providers.
Many activities are planned for the weeks before January 1, 2000, the
date-change weekend, and the weeks immediately thereafter. To manage these
efforts, the bank has developed a coordinated management strategy to facilitate
detection and resolution of Year 2000 disruptions, and to ensure efficient
communications with the bank's management, staff, customers, and third parties.
The bank does not expect to incur a material loss as a result of the Year 2000
problem. However, because the bank ultimately has no control over the
remediation of systems of third parties with whom the bank has relationships,
there can be no assurance that the bank's program, including its contingency
plans, will fully mitigate the effects of third-party failures.
As part of the program, the bank charged $3.2 million and $2.3 million to
expense during the years ended September 30, 1999 and 1998 and expects that an
additional $3.0 million will be charged to expense during fiscal 2000. The
bank's cost estimates are based on variables and assumptions that could cause
actual results to differ from these projections.
RESULTS OF OPERATIONS
The Real Estate Trust's ability to generate revenues from property ownership and
development is significantly influenced by a number of factors, including
national and local economic conditions, the level of mortgage interest rates,
governmental actions, such as changes in real estate tax rates, and the type,
location, size and stage of development of the Real Estate Trust's properties.
Debt service payments and most of the operating expenses associated with
income-producing properties are not decreased by reductions in occupancy or
rental income. Therefore, the ability of the Real Estate Trust to produce net
income in any year from its income-producing properties is highly dependent on
the Real Estate Trust's ability to maintain or increase the properties' levels
of gross income. The relative illiquidity of real estate investments tends to
limit the ability of the Real Estate Trust to vary its portfolio promptly in
response to changes in economic, demographic, social, financial and investment
conditions.
The bank's operating results historically have depended primarily on its "net
interest spread," which is the difference between the rates of interest earned
on its loans and securities investments and the rates of interest paid on its
deposits and borrowings. In the last three fiscal years, non-interest income
from securitizations of credit card (prior to fiscal 1999) and home equity
credit line receivables and income from gains on sales of credit card accounts,
loans and mortgage-backed securities have had a significant effect on net
income. In addition to interest paid on its interest-bearing liabilities, the
bank's principal expenses are operating expenses.
Fiscal 1999 Compared to Fiscal 1998
Real Estate
The Real Estate Trust recorded income before depreciation and amortization of
debt expense of $2.5 million and an operating loss of $10.3 million for fiscal
1999, compared to a loss before depreciation and amortization of debt expense of
$6.9 million and an operating loss of $18.5 million for fiscal 1998. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office and industrial properties, increased equity in
the earnings of unconsolidated entities, and lower net interest expense.
Income after direct operating expenses from hotels increased $2,967,000, or
11.5%, in fiscal 1999 over the level achieved in fiscal 1998. $987,000 of this
increase reflected improved results from ten hotels owned throughout both
periods, and $1,980,000 reflected results from five acquired or newly
constructed properties. The increase in total revenue of $7,490,000, or 10.5%,
exceeded the increase of $4,523,000, or 9.9%, in direct operating expenses. Room
sales for fiscal 1999 increased $6,684,000, or 12.6%, over fiscal 1998, while
food and beverage sales increased $714,000, or 4.9%, over the prior year. For
the ten hotels owned throughout both periods, the increase in total revenue was
$2,886,000, or 4.5%, and the increase in direct operating expense was
$1,899,000, or 4.6%. The revenue increase was attributable to market conditions
which permitted the Real Estate Trust to raise average room rates without
adversely affecting occupancy levels at a majority of the hotels.
Income after direct operating expenses from office and industrial properties
increased $966,000, or 6.3%, in fiscal 1999 compared to such income in fiscal
1998. Gross income increased $1,406,000, or 6.1%, in fiscal 1999, while expenses
increased $440,000, or 5.8%. The improvement was the direct result of higher
rents received during the year and the historically high level of occupancy in
all of the Real Estate Trust's properties.
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, declined by $1,463,000, or 34.1%, in
fiscal 1999, primarily due to lower cash balances on which interest was earned.
Land parcels and other expenses decreased $726,000, or 45.2%, in fiscal 1999 as
the result of the transfer of some portions of land parcels to development.
Interest expense decreased $2,406,000, or 5.6%, in fiscal 1999, primarily
because of decreases in interest costs on senior secured debt and unsecured
debt. The average balance of outstanding borrowings increased to $444.3 million
for fiscal 1999 from $433.2 million for the prior year. The change in average
borrowings occurred as a result of mortgage loan refinancings and unsecured note
sales. The average cost of borrowings was 9.26% in fiscal 1999 and 10.05% in
fiscal 1998.
Capitalized interest increased $753,000, or 362.0%, during fiscal 1999 due to
the higher level of development activity in the current year.
Amortization of debt expense decreased $73,000, or 19.6%, primarily due to the
lower costs experienced in the refinancing of senior secured debt.
Depreciation increased $1,338,000, or 12.0%, in fiscal 1999 as a result of new
tenant improvements, capital replacements, and the additions of new
income-producing properties.
Advisory, management and leasing fees paid to related parties increased
$689,000, or 7.9%, in fiscal 1999. The advisory fee in fiscal 1999 was
approximately $337,000 per month compared to approximately $317,000 per month
for fiscal 1998, which resulted in an aggregate increase of approximately
$235,000, or 6.2%. Management and leasing fees were higher by $454,000, or 9.2%,
in fiscal 1999 as a result of increased gross income on which fees are based.
General and administrative expense increased $9,000, or 0.8%, in fiscal 1999, as
a result of higher administrative costs.
Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1999, the Real
Estate Trust recorded earnings of $5,360,000 from such investments compared to
earnings of $1,918,000 in the prior year. The improvement of $3,442,000 largely
reflected a positive change in rental operations between the two years and a
reduction in earnings in fiscal 1998 due to the losses on the sale of interest
rate protection agreements and the write-off of unamortized loan costs when a
portion of the loan portfolio was refinanced.
There was no gain or loss on sale of property in fiscal 1999. The loss on sale
of property in fiscal 1998 reflected the termination of the Real Estate
Trust's lease on a property located in Oxon Hill, Maryland.
Banking
The bank's operating results historically have depended primarily on its net
interest spread, which is the difference between the rates of interest earned on
its loans and securities and the rates of interest paid on its deposits and
borrowings. Prior to fiscal 1999, servicing and securitization income from
credit card, home equity, automobile and home loan receivables had a significant
effect on net income. In addition to interest paid on its interest-bearing
liabilities, the bank's principal expenses are operating expenses.
On September 30, 1998, the bank sold its credit card portfolio and related
operations to First USA Bank, N.A. The credit card portfolio included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa(R)
and MasterCard(R) credit card accounts. The credit card program had historically
been a significant source of earnings for the bank. The bank believes it will be
able to maintain profitability by relying on its core deposit franchise as a
significant source of low-cost funds, and investing those funds in assets that,
although offering lower yields than credit cards, involve less credit risk and
overhead costs. Nevertheless, implementation of this strategy continues to be a
gradual process and the bank's short-term profitability has been adversely
affected by the fact that the immediate loss of earnings from the credit card
program has not been fully offset by corresponding reductions in operating
expenses.
Overview. The bank recorded operating income of $96.0 million for the year ended
September 30, 1999, compared to operating income of $184.4 million for the year
ended September 30, 1998. Last year's results include the impact of the sale of
the bank's credit card portfolio and related operations on September 30, 1998.
The decrease in income for fiscal 1999 was primarily attributable to a $470.1
million decrease in other (non-interest) income resulting primarily from the
$288.3 million gain on sale of the bank's credit card portfolio and related
operations on September 30, 1998. The elimination of credit card interest income
of $102.8 million and credit card fees of $53.9 million during fiscal 1999 were
offset by corresponding reductions in operating expenses of $178.7 million and
provision for loan and lease losses of $127.9 million. The bank also recognized
a gain of $31.6 million from the sale of one of its REO properties during fiscal
1999.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $75.0 million, or 37.7%, during fiscal 1999. Included in
interest income during fiscal year 1999 was $0.2 million recorded on non-accrual
asset and restructured loans. The bank would have recorded an additional $2.8
million in interest income in fiscal 1999 if non-accrual assets and restructured
loans had been current in accordance with their original terms. The bank's net
interest income in future periods will continue to be adversely affected by the
bank's non-performing assets. See "Financial Condition - 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.
Net Interest Margin Analysis
(Dollars in thousands)
Year Ended September 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997
September 30,-------------------------------- ------------------------------- ------------------------------
1999 Average Yield/ Average Yield/ Average Yield/
Yield/Rate Balances Interest Rate Balances Interest Rate Balances Interest Rate
------------ ---------- ---------- ---------- ---------- ---------- --------- ----------- --------- --------
Assets:
Interest-earning
assets:
Loans receivable,
net (1) 8.32 % $4,791,302 $402,263 8.40 % $2,776,040 $299,566 10.79 % $3,578,639 $360,842 10.08 %
Mortgage-backed
securities 6.12 1,631,711 96,589 5.92 1,990,123 113,441 5.70 1,204,839 72,209 5.99
Federal funds sold
and securities
purchased under
agreements to
resell 5.47 58,234 2,953 5.07 140,004 7,892 5.64 128,268 7,066 5.51
Trading securities 8.67 50,759 3,553 7.00 25,159 2,005 7.97 15,436 1,530 9.91
Investment
securities 5.56 44,473 2,466 5.54 37,866 2,138 5.65 8,346 481 5.76
Other interest-
earning assets 5.81 204,548 11,669 5.70 196,646 12,362 6.29 196,444 12,224 6.22
---------- ---------- ---------- ---------- ----------- ---------
Total 7.84 6,781,027 519,493 7.66 5,165,838 437,404 8.47 5,131,972 454,352 8.85
------------ ---------- ---------- ---------- --------- --------- --------
Non-interest
earning assets:
Cash 234,320 217,929 191,626
Real estate held
for investment
or sale 60,346 86,348 115,948
Property and
equipment, net 292,322 287,352 249,104
Cost in excess
of net assets
acquired, net 23,741 21,518 1,728
Other assets 252,316 609,115 399,365
---------- ---------- -----------
Total assets $7,644,072 $6,388,100 $6,089,743
========== ========== ===========
Liabilities and
stockholders'
equity:
Interest-bearing
liabilities:
Deposit accounts:
Demand deposits 0.65 $1,121,970 11,648 1.04 $ 998,256 19,877 1.99 $ 890,204 21,977 2.47
Savings deposits 1.89 1,023,744 21,218 2.07 1,017,755 30,727 3.02 975,264 33,106 3.39
Time deposits 5.02 1,578,571 77,084 4.88 1,663,772 89,958 5.41 1,420,613 75,180 5.29
Money market
deposits 3.38 1,084,273 36,395 3.36 994,590 38,756 3.90 992,066 38,644 3.90
---------- ---------- ---------- ---------- ----------- ---------
Total deposits 2.94 4,808,558 146,345 3.04 4,674,373 179,318 3.84 4,278,147 168,907 3.95
Borrowings 5.87 1,718,721 99,162 5.77 888,473 59,092 6.65 1,134,754 70,908 6.25
---------- ---------- ---------- ---------- ----------- ---------
Total liabilities 3.86 6,527,279 245,507 3.76 5,562,846 238,410 4.29 5,412,901 239,815 4.43
------------ ---------- ---------- ---------- --------- --------- --------
Non interest-bearing
items:
Non-interest
bearing deposits 457,832 266,711 196,620
Other liabilities 78,322 79,655 53,037
Minority interest 144,000 144,000 119,376
Stockholders'
equity 436,639 334,888 307,809
---------- ---------- -----------
Total liabilities
and stockholders'
equity $7,644,072 $6,388,100 $6,089,743
========== ========== ===========
Net interest income $273,986 $198,994 $214,537
========== ========== =========
Net interest spread (2) 3.90 % 4.18 % 4.42 %
========== ========= ========
Net yield on
interest-earning
assets (3) 4.04 % 3.85 % 4.18 %
========== ========= ========
Interest-earning
assets to interest
-bearing liabilities 103.89 % 92.86 % 94.81 %
========== ========= ========
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the consolidated
statements of operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans. Includes $4,196, ($3,078), and ($8,329) of amortized loan fees, premiums
and discounts in interest income for the years ended September 30, 1999, 1998
and 1997.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals net interest income divided by the average balances of total
interest-earning assets.
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, based on
change in volume multiplied by old rate; changes in rate, change in rate
multiplied by old volume; and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(In thousands)
Year Ended September 30, 1999 Year Ended September 30, 1998
Compared to Compared to
Year Ended September 30, 1998 Year Ended September 30, 1997
Increase (Decrease) Increase (Decrease)
Due to Change in (1) Due to Change in (1)
------------------------------------------------ ----------------------------------------
Total Total
Volume Rate Change Volume Rate Change
----------------- ------------- -------------- ------------ ------------- -------------
Interest income:
Loans (2) $ 180,648 $ (77,951) $ 102,697 $ (85,559) $ 24,283 $ (61,276)
Mortgage-backed securities (21,089) 4,237 (16,852) 44,886 (3,654) 41,232
Federal funds sold and securities
purchased under agreements to resell (4,210) (729) (4,939) 657 169 826
Trading securities 1,819 (271) 1,548 819 (344) 475
Investment securities 370 (42) 328 1,666 (9) 1,657
Other interest-earning assets 488 (1,181) (693) 11 127 138
----------------- ------------- -------------- ------------ ------------- -------------
Total interest income 158,026 (75,937) 82,089 (37,520) 20,572 (16,948)
----------------- ------------- -------------- ------------ ------------- -------------
Interest expense:
Deposit accounts 5,064 (38,037) (32,973) 15,240 (4,829) 10,411
Borrowings 48,797 (8,727) 40,070 (16,136) 4,320 (11,816)
----------------- ------------- -------------- ------------ ------------- -------------
Total interest expense 53,861 (46,764) 7,097 (896) (509) (1,405)
----------------- ------------- -------------- ------------ ------------- -------------
Increase (decrease) in net interest income $ 104,165 $ (29,173) $ 74,992 $ (36,624) $ 21,081 $ (15,543)
================= ============= ============== ============ ============= =============
- ----------------------------------------------------------------------------------------------------------------------------------
(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.
Interest income in fiscal 1999 increased $82.1 million, or 18.8%, from the level
in fiscal 1998 as a result of higher average balances of loans and leases
receivable, which was offset by lower average yields on loan and lease
receivables. Higher average balances of real estate loans, automobile loans and
leases and commercial loans more than offset the elimination of $1.0 billion in
average credit card loans.
The bank's net yield on interest-earning assets increased to 4.04% in fiscal
1999 from 3.85% in fiscal 1998. The increase in the net yield primarily
reflected an increase in the average balances of earning assets which were
funded with proceeds received from the sale of the credit card portfolio and
related operations as well as advances from the Federal Home Loan Bank.
Partially offsetting this increase was the decline in the yield on loans
resulting from the elimination of higher yielding credit card loans. Average
interest-earning assets as a percentage of average interest-bearing liabilities
increased to 103.9% in fiscal 1999 from 92.9% in fiscal 1998.
Interest income on loans and leases, the largest category of interest-earning
assets, increased by $102.7 million, or 34.3%, from fiscal 1998 primarily
because of higher average balances. The bank did not securitize and sell any
receivables into new trusts during fiscal 1999, which contributed to the higher
average balances. Lower average yields earned on the loan and lease portfolio
due to the effect of the sale of the credit card portfolio partially offset the
positive effect of the higher average balances.
Higher average balances of the bank's single-family residential loans, which
increased $2.1 billion, or 191.7%, resulted in a $144.2 million, or 173.8%,
increase in income from such loans. Lower average yields on single-family
residential loans partially offset the effects of the higher average balances.
Average balances of automobile loans and leases, commercial loans and real
estate construction loans increased $527.7 million, $135.2 million and $103.6
million and contributed to a $60.2 million, $8.9 million and $7.6 million
increase in interest income from such loans. Lower average yields on those loans
partially offset the effects of the higher average balances.
The average yield on the loan and lease portfolio in fiscal 1999 decreased 239
basis points, to 8.40% from 10.79%, from the average yield in fiscal 1998. The
decline in the average yield in fiscal 1999 resulted from the sale of the credit
card portfolio on September 30, 1998. During fiscal 1998, average credit card
loans totaled $1.0 billion with an average yield of 12.86%.
Interest income on mortgage-backed securities decreased $16.9 million, or 14.9%,
primarily because of lower average balances. The effect of the $358.4 million
decrease in average balances more than offset an increase in the average
interest rates on these securities from 5.70% to 5.92%.
Interest expense on deposits decreased $33.0 million, or 18.4%, during fiscal
1999 due to decreased average rates. The 80 basis point reduction in the average
rate on deposits, from 3.84% to 3.04%, resulted primarily from market conditions
during the last quarter of fiscal 1998, which led the bank to reduce the rates
it pays on deposits.
The decrease in interest expense on deposits was more than offset by an increase
in interest expense on borrowings. Higher average balances of Federal Home Loan
bank advances of $736.8 million and repurchase agreement transactions of $68.4
million primarily resulted in a $40.1 million, or 67.8%, increase in interest
expense on borrowings. This amount was partially offset by an 88 basis point
reduction in the average rate on borrowings, to 5.77% from 6.65%.
Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses decreased to $22.9 million in fiscal 1999 from $150.8 million in fiscal
1998. The $127.9 million decrease was primarily due to the elimination of
provisions for losses on credit card loans resulting from the sale of the credit
card portfolio. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other (non-interest) income decreased to $170.2 million in fiscal
1999 from $640.3 million in fiscal 1998. The $470.1 million, or 73.4%, decrease
was primarily attributable to the September 30, 1998 recognition of the gain on
sale of the credit card portfolio and the corresponding elimination of credit
card fees during fiscal 1999. Also contributing to the decrease in other income
was a decrease in servicing and securitization income. Partially offsetting
these decreases were increases in deposit servicing fees and gain on real estate
held for investment or sale.
Servicing and securitization income decreased $200.0 million, or 86.3%, during
fiscal 1999 primarily as a result of decreased securitization activity and the
elimination of credit card loan servicing fees. The bank did not securitize and
sell any loan receivables into new trusts during fiscal 1999. During fiscal
1998, the bank securitized and sold $1.0 billion, $298.8 million, $534.7 million
and $45.9 million of credit card, home equity, automobile and home loan
receivables and recognized gains of $81.6 million, $19.7 million, $23.1 million
and $3.4 million on these transactions. In addition, credit card loan servicing
fees amounting to $139.3 million for fiscal 1998 were eliminated as a result of
the September 30, 1998 sale of the bank's credit card portfolio.
The $50.6 million increase in gain on real estate held for investment or sale
was primarily attributable to the $31.6 million gain on sale of one of the
communities located in Loudoun County, Virginia and, to a lesser extent, a
decrease of $20.6 million in the provision for losses on such assets. See
"Financial Condition - Asset Quality - Allowances for Losses."
Deposit servicing fees increased $17.6 million, or 33.8%, during fiscal 1999
primarily due to an increase in fees generated from the expansion of the bank's
branch and ATM network.
Operating Expenses. Operating expenses during fiscal 1999 decreased $178.7
million, or 35.5%, from the level in fiscal 1998. Primarily as a result of the
sale of the bank's credit card operations during fiscal 1999, marketing expenses
decreased $67.0 million, loan expenses decreased $40.9 million and data
processing expenses decreased $27.2 millions and salaries and employee benefits
decreased $24.4 million. Additions of staff to the bank's consumer lending
department and branch operations partially offset the decrease of salaries and
employee benefits resulting from the sale.
Fiscal 1998 Compared to Fiscal 1997
Real Estate
The Real Estate Trust recorded a loss before depreciation and amortization of
debt expense of $6.9 million and an operating loss of $18.5 million for fiscal
1998, compared to a loss before depreciation and amortization of debt expense of
$7.8 million and an operating loss of $19.0 million for fiscal 1997. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office and industrial properties and higher other
income, reduced by increased corporate expenses, a reduction in equity in
earnings of unconsolidated entities, and a loss on the sale of a property in
fiscal 1998 as compared to a gain in fiscal 1997.
Income after direct operating expenses from hotel properties increased
$4,967,000, or 23.7%, in fiscal 1998 over the level achieved in fiscal 1997.
$2,208,000, or 11.0%, of this increase reflected improved results from nine
hotels owned throughout both fiscal years, and $2,759,000 reflected results from
acquisition properties. The increase in total revenue of $11,960,000, or 20.1%,
exceeded the increase of $6,993,000, or 18.2%, in direct operating expenses. For
the nine hotels owned throughout both fiscal years, the increase in total
revenue was $4,677,000, or 8.1%, and the increase in direct operating expenses
was $2,469,000, or 6.6%,. The revenue increase was attributable to improved
market conditions which permitted the Real Estate Trust to raise average room
rates at eight of the nine hotels. Average occupancy percentages declined
slightly from those of the previous year.
Income after direct operating expenses from office and industrial properties
increased $1,921,000, or 14.4%, in fiscal 1998 compared to such income in fiscal
1997. Gross income increased $1,786,000, or 8.5%, in fiscal 1998, while expenses
decreased $135,000, or 1.7%, due to refunds of property taxes. The improvement
in gross income was due to higher rents obtained upon releasing space.
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, increased $277,000, or 6.9%, in fiscal
1998 due to higher interest income.
Land parcels and other expenses decreased $76,000, or 4.5%, in fiscal 1998 as
the result of lower real estate taxes and the disposition of a property in the
current year.
Interest expense increased $2,472,000, or 6.2%, in fiscal 1998, primarily
because of the higher level of borrowings. The average balance of outstanding
borrowings increased to $433.2 million for fiscal 1998 from $400.3 million for
the prior year. The increase in average borrowings occurred as a result of a new
issue of $200.0 million of Senior Secured Notes due 2008 and the retirement of
$175.0 million of Senior Secured Notes due 2002, new mortgage loan financings
and sales of new Unsecured Notes in excess of maturing Notes. The average cost
of borrowings was 10.05% in fiscal 1998 and 10.30% in fiscal 1997.
Capitalized interest increased $182,000, or 700.0%, during fiscal 1998 due to
the higher level of development activity.
Amortization of debt expense decreased $292,000, or 44.0%, in fiscal 1998,
primarily due to lower costs experienced in the new Senior Secured Note
financing and in the renewal of lines of credit.
Depreciation increased $627,000, or 5.9%, in fiscal 1998 as a result of the
addition of two new income-producing properties as well as new tenant
improvements and capital replacements.
Advisory, management and leasing fees paid to related parties increased
$747,000, or 9.3%, in fiscal 1998. The advisory fee in fiscal 1998 was
approximately $317,000 per month compared to approximately $311,000 per month
for fiscal 1997, which resulted in an aggregate increase of approximately
$75,000, or 2.0%,. Management and leasing fees were higher by $672,000, or
15.8%, in fiscal 1998 as a result of increased gross income on which fees are
based.
General and administrative expense decreased $119,000, or 9.4%, in fiscal 1998
as a result of lower legal and insurance costs.
Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1998, the Real
Estate Trust recorded earnings of $1,918,000 from such investments compared to
earnings of $4,150,000 in the prior year. The reduction of earnings in fiscal
1998 was due to the losses on the sale of interest rate protection agreements
and the write-off of unamortized loan costs when a portion of the loan portfolio
was refinanced.
Loss on sale of property in fiscal 1998 reflected the termination of the Real
Estate Trust's lease on a property located in Oxon Hill, Maryland. Gain on sale
of property in fiscal 1997 represents the gain on the sale of a
purchase-leaseback investment located in Casper, Wyoming and the gain on the
condemnation of a portion of a land parcel located in Atlanta, Georgia.
Banking
Overview. The bank recorded operating income of $184.4 million for the year
ended September 30, 1998, compared to operating income of $80.2 million for the
year ended September 30, 1997. The increase in income for fiscal 1998 was
primarily attributable to a $231.2 million increase in other (non-interest)
income resulting primarily from a $288.3 million gain on sale of the bank's
credit card portfolio and related operations on September 30, 1998. Offsetting
this amount was an $85.7 million, or 20.5%, increase in operating (non-interest)
expenses caused primarily by increased salaries and employee benefits and loan
expenses.
Net Interest Income. Net interest income, before the provision for loan losses,
decreased $15.5 million, or 7.2%, during fiscal 1998. Interest income of $0.4
million was actually recorded on non-accrual assets and restructured loans
during fiscal 1998. The bank would have recorded additional interest income of
$1.9 million in fiscal 1998 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."
Interest income in fiscal 1998 decreased $16.9 million, or 3.7%, from the level
in fiscal 1997 as a result of lower average balances of loans receivable, and,
to a lesser extent, lower average yields on mortgage-backed securities. Higher
average yields on loans receivable and higher average balances of
mortgage-backed securities partially offset the negative effect on interest
income of the lower average loan balances and lower average yields on
mortgage-backed securities.
The bank's net yield on interest-earning assets decreased to 3.85% in fiscal
1998 from 4.18% in fiscal 1997. The decrease in the net yield primarily
reflected lower yields resulting from a shift in the composition of
interest-earning assets from loans receivable to lower yielding mortgage-backed
securities, as well as higher average balances of deposits. The increase in
average deposits was primarily due to brokered time deposits accepted in fiscal
1997 which matured during fiscal 1998. Average demand deposits also increased
during fiscal 1998 as a result of the continued expansion of the bank's branch
network. The bank does not currently anticipate significant reliance on brokered
deposits as a key source of funding in the future.
Interest income on loans, the largest category of interest-earning assets,
decreased by $61.3 million, or 17.0%, from fiscal 1997 primarily because of
lower average balances. Higher average yields earned on the loan portfolio
partially offset the negative effect of the lower average balances.
Lower average balances of the bank's single-family residential loans, which
decreased $654.3 million, or 37.1%, resulted primarily from the $1.1 billion,
$560.2 million and $598.3 million exchange of single-family residential loans
held in its portfolio for mortgage-backed securities, which the bank retained
for its own portfolio, in September 1997, March 1998, and June 1998. The
decrease was primarily responsible for a $34.5 million, or 29.4%, decrease in
interest income from single-family residential loans. Average balances of home
improvement and related loans decreased $41.8 million, largely because of
securitization activity during fiscal 1998. Securitizations of credit card loans
and automobile loans were the primary reasons for the $122.3 million and $35.6
million decline, or 10.5% and 14.4%, in average balances of credit card loans
and automobile loans.
The average yield on the loan portfolio in fiscal 1998 increased 71 basis
points, to 10.79% from 10.08%, from the average yield in fiscal 1997.
Contributing to the higher net yield was an increase in the average yield on
automobile loans which was largely responsible for a $6.4 million increase in
interest income from such loans. In addition, an increase in the average yield
on single-family residential loans, from 6.65% to 7.47%, resulted from the
September 1997, March 1998, and June 1998 exchange of single-family residential
loans for mortgage-backed securities discussed above. Prior to the exchange,
these loans had a weighted average interest rate of 6.89%, 6.99%, and 6.84%.
Offsetting these amounts was a decrease in the average yield on credit card
loans, which, when coupled with the decreased average balance on such loans,
resulted in a $29.7 million decline in interest income from such loans for
fiscal 1998. During fiscal 1998, the bank continued to reprice its credit card
portfolio as a result of ongoing competitive pressures in the credit card
industry.
Interest income on mortgage-backed securities increased $41.2 million, or 57.1%,
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1998 period reflected the $1.1 billion, $560.2
million and $598.3 million exchange of single-family residential loans for
mortgage-backed securities in September 1997, March 1998 and June 1998. The
positive effect of the higher average balances was partially offset by a decline
in the average interest rates on these securities from 5.99% to 5.70%.
Interest expense decreased $1.4 million, or 0.6%, for fiscal 1998 primarily
because of a $179.8 million decline in the average balances of repurchase
agreement transactions and a $111.0 million decline in the average balances of
Federal Home Loan Bank advances which resulted in an $11.8 million decrease in
interest expense on borrowings during fiscal 1998. Excess funds generated from
securitization activity during the year and additional deposits facilitated the
paydown of such borrowings.
The decrease in interest expense on borrowings was offset by an increase of
$10.4 million, or 6.2%, in interest expense on deposits, resulting from an
increase in average deposit balances of $396.2 million, or 9.3%, which was
partially offset by a decrease in the average rates on deposits, to 3.84% from
3.95%.
Provision for Loan Losses. The bank's provision for loan losses increased to
$150.8 million in fiscal 1998 from $125.1 million in fiscal 1997. The $25.7
million increase was primarily due to a $32.2 million increase in the provision
for losses on consumer and other loans. The increase in the provision for loan
losses was primarily due to adverse trends in delinquencies and losses in the
subprime segment of the automobile portfolio. See "Financial Condition - Asset
Quality - Allowances for Losses."
Other Income. Other (non-interest) income increased to $640.3 million in fiscal
1998 period from $409.1 million in fiscal 1997. The $231.2 million increase in
such income was primarily attributable to an increase in gain on sales of loans
which included the $288.3 million gain on the sale of the bank's credit card
portfolio and related operations on September 30, 1998. Also contributing to the
increase in other income was a $10.1 million increase in deposit servicing fees.
Partially offsetting these increases was a $71.5 million decrease in servicing
and securitization income.
Servicing and securitization income decreased $71.5 million to $231.7 million
from $303.2 million, primarily due to increases in the amortization of and
unrealized losses on interest-only strips. The bank recognized net unrealized
losses on its automobile, home equity and home loan interest-only strips of
$42.9 million during fiscal 1998 compared to net unrealized gains on the
valuation of the bank's credit card interest-only strips of $7.0 million during
1997. In addition, amortization of $99.0 million on interest-only strips related
to prior gains on sales of loans was recorded in fiscal 1998 compared to $24.8
million in fiscal 1997. Offsetting these amounts were gains of $81.6 million,
$23.1 million, $19.7 million and $3.4 million recognized on the securitization
and sale of credit card loans, automobile loans, home equity and home loan
receivables.
The $2.1 million, or 11.5%, decrease in loss on real estate held for investment
or sale was primarily attributable to an increase of $1.5 million in the gain
recorded on sales of the bank's real estate held for sale coupled with a $0.8
million decrease in the provision for losses on such assets. See "Financial
Condition - Asset Quality - Allowances for Losses."
Deposit servicing fees increased $10.1 million, or 24.1%, during fiscal 1998
primarily due to an increase in fees generated through the bank's ATM network in
addition to increases in other deposit servicing fees resulting from the
expansion of the bank's branch network.
Credit card fees, consisting of annual fees, late charges, cash advance charges,
interchange income, net of rebate expenses, and overlimit fees decreased to
$53.9 million in fiscal 1998 from $57.4 million in fiscal 1997. The $3.5
million, or 6.1%, decrease was primarily attributable to an $8.8 million
increase in rebate expenses, the effects of which were due principally to the
introduction of additional programs and products designed to encourage greater
usage of the bank's credit cards. Partially offsetting the increase in rebate
expenses were increases in certain fees resulting from changes to the fee
structure for the bank's credit card programs which were implemented in fiscal
1997.
Operating Expenses. Operating expenses for fiscal 1998 increased $85.7 million,
or 20.5%, from the level in fiscal 1997. The primary component of the higher
operating expenses was a $38.6 million increase in salaries and employee
benefits resulting primarily from the addition of staff to the bank's consumer
lending and branch operations. The $24.2 million increase in loan expenses was
primarily attributable to increased credit card collection and retention costs
and to increases in the valuation allowances on servicing assets. Also
contributing to the increase in operating expenses was an increase of $5.1
million in marketing expenses, primarily credit card marketing expenses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market risk
is included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Trust and its consolidated subsidiaries are
included in this prospectus on the pages indicated and are incorporated herein
by reference:
(a) Report of Independent Public Accountants.
(b) Consolidated Balance Sheets - As of September 30,
1999 and 1998.
(c) Consolidated Statements of Operations - For the
years ended September 30, 1999, 1998 and 1997.
(d) Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Deficit - For the
years ended September 30, 1999, 1998 and 1997.
(e) Consolidated Statements of Cash Flows - For the
years ended September 30, 1999, 1998 and 1997.
(f) Notes to Consolidated Financial Statements.
The selected quarterly financial data included in Note 34 of Notes to
Consolidated Financial Statements referred to above are incorporated herein by
reference.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust
We have audited the accompanying consolidated balance sheets of B.F. Saul Real
Estate Investment Trust (the "Trust") and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations, comprehensive
income and changes in shareholders' deficit, and cash flows for each of the
three years in the period ended September 30, 1999. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of B.F. Saul Real Estate
Investment Trust and subsidiaries as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Vienna, Virginia
December 1, 1999
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
September 30
-----------------------------
(In thousands) 1999 1998
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ASSETS
Real Estate
Income-producing properties
Hotel $ 197,075 $ 165,805
Office and industrial 111,183 110,257
Other 3,923 3,889
-------------- --------------
312,181 279,951
Accumulated depreciation (104,774) (96,072)
-------------- --------------
207,407 183,879
Land parcels 39,448 40,110
Construction in progress 20,498 8,694
Cash and cash equivalents 17,857 13,950
Other assets 79,861 76,799
-------------- --------------
Total real estate assets 365,071 323,432
- ---------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks 326,758 336,858
Interest-bearing deposits 69,388 499,598
Federal funds sold and securities purchased under agreements to resell 194,000 380,000
Loans held for sale 116,797 56,287
Loans held for securitization and sale -- 125,000
Investment securities (market value $44,434 and $44,528, respectively) 44,400 43,999
Trading securities 6,955 11,319
Mortgage-backed securities (market value $1,285,442 and $2,014,819, respectively) 1,311,370 2,025,817
Loans and leases receivable (net of allowance for losses of $58,139 and $60,157, respectively) 6,312,073 2,533,957
Federal Home Loan Bank stock 87,183 49,036
Real estate held for investment or sale (net of allowance for losses of $84,607 and
$153,766, respectively) 52,369 69,025
Property and equipment, net 304,533 285,916
Goodwill and other intangible assets, net 27,902 30,879
Interest only strips, net 7,626 13,508
Servicing assets, net 30,479 27,156
Other assets 254,936 232,794
-------------- --------------
Total banking assets 9,146,769 6,721,149
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,511,840 $ 7,044,581
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable $ 213,447 $ 198,874
Notes payable - secured 216,000 200,000
Notes payable - unsecured 46,122 50,335
Deferred gains - real estate 112,834 112,883
Accrued dividends payable - preferred shares of beneficial interest 32,967 34,049
Other liabilities and accrued expenses 42,268 39,895
-------------- --------------
Total real estate liabilities 663,638 636,036
- ---------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 5,763,486 4,888,230
Securities sold under repurchase agreements and other short-term borrowings 630,771 491,754
Notes payable 373 430
Federal Home Loan Bank advances 1,743,188 352,027
Custodial accounts 22,628 5,926
Amounts due to banks 42,718 40,601
Other liabilities 109,120 112,668
Capital notes -- subordinated 250,000 250,000
-------------- --------------
Total banking liabilities 8,562,284 6,141,636
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 73,236 72,242
Minority interest -- other 218,307 218,306
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,517,465 7,068,220
- ---------------------------------------------------------------------------------------------------------------------------------
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 (63,884) (81,936)
Net unrealized holding loss 6 44
-------------- --------------
36,223 18,209
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
-------------- --------------
TOTAL SHAREHOLDERS' DEFICIT (5,625) (23,639)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 9,511,840 $ 7,044,581
- ---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands, except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE
Income
Hotels $ 78,914 $ 71,424 $ 59,464
Office and industrial properties 24,289 22,883 21,097
Other 2,822 4,285 4,008
-------------- -------------- --------------
Total income 106,025 98,592 84,569
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
Hotels 50,039 45,516 38,523
Office and industrial properties 8,071 7,631 7,766
Land parcels and other 880 1,607 1,683
Interest expense 40,247 42,653 40,181
Capitalized interest (961) (208) (26)
Amortization of debt expense 299 372 664
Depreciation 12,508 11,170 10,543
Advisory, management and leasing fees - related parties 9,431 8,742 7,995
General and administrative 1,162 1,153 1,272
-------------- -------------- --------------
Total expenses 121,676 118,636 108,601
- ---------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities 5,360 1,918 4,150
Gain (loss) on sale of property -- (331) 895
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $ (10,291) $ (18,457) $ (18,987)
- ---------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans $ 402,263 $ 299,566 $ 360,842
Mortgage-backed securities 96,589 113,441 72,209
Trading securities 3,553 2,005 1,530
Investment securities 2,466 2,138 481
Other 14,622 20,254 19,290
-------------- -------------- --------------
Total interest income 519,493 437,404 454,352
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 146,345 179,318 168,907
Short-term borrowings 38,446 33,294 47,378
Long-term borrowings 60,716 25,798 23,530
-------------- -------------- --------------
Total interest expense 245,507 238,410 239,815
-------------- -------------- --------------
Net interest income 273,986 198,994 214,537
Provision for loan and lease losses (22,880) (150,829) (125,115)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 251,106 48,165 89,422
- ---------------------------------------------------------------------------------------------------------------------------------
Other income
Servicing and securitization income 31,670 231,674 303,216
Credit card fees -- 53,881 57,381
Deposit servicing fees 69,570 51,997 41,893
Gain on sales of trading securities, net 7,243 982 1,203
Net unrealized loss trading securities 1,192 (1,258) --
Gain (loss) on real estate held for investment or sale, net 34,049 (16,539) (18,688)
Gain on sales of loans, net 4,152 290,434 1,527
Other 22,320 29,089 22,573
-------------- -------------- --------------
Total other income 170,196 640,260 409,105
- ---------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands, except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 175,149 $ 199,557 $ 160,949
Loan 13,292 54,147 29,943
Property and equipment 26,089 28,114 24,397
Marketing 12,664 79,642 74,504
Data processing 18,247 45,419 48,138
Depreciation and amortization 33,362 33,989 28,708
Deposit insurance premiums 4,431 4,859 5,033
Amortization of goodwill and other intangible assets 3,083 5,862 2,615
Other 39,005 52,429 44,059
-------------- -------------- --------------
Total operating expenses 325,322 504,018 418,346
- ---------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME $ 95,980 $ 184,407 $ 80,181
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
Operating income $ 85,689 $ 165,950 $ 61,194
Income tax provision 29,302 42,869 12,810
-------------- -------------- --------------
Income before extraordinary item and minority interest 56,387 123,081 48,384
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (9,601) --
-------------- -------------- --------------
Income before minority interest 56,387 113,480 48,384
Minority interest held by affiliates (7,604) (22,043) (6,848)
Minority interest -- other (25,313) (25,313) (22,676)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME (LOSS) $ 23,470 $ 66,124 $ 18,860
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 18,052 $ 60,706 $ 13,442
NET INCOME PER COMMON SHARE
Income before extraordinary item and minority interest $ 10.56 $ 24.38 $ 8.90
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (1.99) --
-------------- -------------- --------------
Income before minority interest 10.56 22.39 8.90
Minority interest held by affiliates (1.58) (4.57) (1.42)
Minority interest -- other (5.24) (5.24) (4.70)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 3.74 $ 12.58 $ 2.78
- ---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Consolidated Statements of Comprehensive Income and Changes in Shareholders' Deficit
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $ 23,470 $ 66,124 $ 18,860
Other comprehensive income:
Net unrealized holding gains (losses) (38) 440 1,104
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 23,432 $ 66,564 $ 19,964
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGES IN SHAREHOLDERS' DEFICIT
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516 $ 516
-------------- -------------- --------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642
-------------- -------------- --------------
PAID-IN SURPLUS
Beginning and end of period 92,943 92,943 92,943
-------------- -------------- --------------
DEFICIT
Beginning of period (81,936) (142,642) (156,084)
Net income 23,470 66,124 18,860
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (5,418) (5,418) (5,418)
-------------- -------------- --------------
End of period (63,884) (81,936) (142,642)
-------------- -------------- --------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period 44 (396) (1,500)
Net unrealized holding gains (losses) (38) 440 1,104
-------------- -------------- --------------
End of period 6 44 (396)
-------------- -------------- --------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT $ (5,625) $ (23,639) $ (84,785)
- ---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (6,946) $ (22,048) $ (8,531)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 12,481 11,170 10,543
(Gain) loss on sale of property -- 331 (895)
Early extinguishment of debt, net of taxes -- 9,601 --
(Increase) decrease in accounts receivable and accrued income (1,546) (1,229) 17
(Increase) decrease in deferred tax asset (803) 954 (3,252)
Increase in accounts payable and accrued expenses 3,346 2,708 1,058
(Increase) decrease in tax sharing receivable 3,794 (6,545) 2,492
Amortization of debt expense 1,270 372 664
Equity in earnings of unconsolidated entities (5,360) (1,918) (4,150)
Other 24,152 21,342 8,965
-------------- -------------- --------------
30,388 14,738 6,911
-------------- -------------- --------------
Banking
Net income 30,416 88,172 27,391
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of premiums, discounts and net deferred loan fees 1,578 8,727 7,130
Depreciation and amortization 33,362 33,989 28,708
Provision for loan and lease losses 22,880 150,829 125,115
Capitalized interest on real estate under development (3,392) (1,954) (2,212)
Proceeds from sales of trading securities 933,596 320,942 430,938
Net fundings of loans held for sale and/or securitization (1,035,602) (366,915) (697,593)
Proceeds from sales of loans held for sale and/or securitization 57,337 2,005,143 2,511,163
Proceeds from sales of spread accounts -- 36,000 144,200
Gain on sale of credit card relationships (3,500) (288,332) --
Gain on sales of real estate held for sale (30,791) (2,609) (1,156)
Provision for losses on real estate held for investment or sale -- 18,860 19,623
Gain on sales of trading securities, net (7,243) (982) (1,203)
(Increase) decrease in interest-only strips 5,882 73,503 (87,011)
Decrease in excess spread assets -- -- 42,602
(Increase) decrease in servicing assets (3,336) 14,550 (8,948)
(Increase) decrease in goodwill and other intangible assets 2,990 (22,017) (6,430)
(Increase) decrease in other assets (14,283) 147,079 (207,883)
Increase (decrease) in other liabilities (5,335) (11,982) 21,741
Increase (decrease) in tax sharing payable (3,794) 6,545 (2,492)
Minority interest held by affiliates 7,604 22,043 6,848
Minority interest - other 9,750 9,750 9,750
Other (8,653) (29,752) 8,006
-------------- -------------- --------------
(10,534) 2,211,589 2,368,287
-------------- -------------- --------------
Net cash provided by operating activities 19,854 2,226,327 2,375,198
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (46,987) (19,815) (10,120)
Property acquisitions -- (26,650) (4,709)
Property sales -- -- 1,399
Equity investment in unconsolidated entities 2,748 1,348 1,723
Other 2 2 43
-------------- -------------- --------------
(44,237) (45,115) (11,664)
-------------- -------------- --------------
Banking
Net proceeds from maturities of investment securities -- 5,000 5,000
Net proceeds from redemption of Federal Home Loan Bank stock 24,165 2,504 9,482
Net proceeds from sales of real estate 36,479 25,305 23,624
Net proceeds from the sale of credit card receivables 3,500 1,337,678 --
Net fundings of loans receivable (1,361,713) (2,983,595) (1,779,711)
Principal collected on mortgage-backed securities 710,426 1,180,995 771,095
Purchases of Federal Home Loan Bank stock (62,311) (18,370) (10,712)
Purchases of investment securities (394) (44,001) --
Purchases of mortgage-backed securities -- -- (311,554)
Purchases of loans receivable (2,278,834) (1,645,458) (892,367)
Purchases of property and equipment (52,766) (58,106) (77,859)
Disbursements for real estate held for investment or sale (6,911) (14,814) (14,199)
Other (6,746) 10,637 1,036
-------------- -------------- --------------
(2,995,105) (2,202,225) (2,276,165)
-------------- -------------- --------------
Net cash used in investing activities (3,039,342) (2,247,340) (2,287,829)
- ---------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
=================================================================================================================================
For the Year Ended September 30
---------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 25,562 $ 60,929 $ 27,072
Principal curtailments and repayments of mortgages (10,989) (38,602) (19,977)
Proceeds from secured note financing 16,000 224,075 --
Repayments of secured notes -- (199,075) (2,500)
Proceeds from sales of unsecured notes 5,355 5,802 5,822
Repayments of unsecured notes (9,568) (2,100) (1,556)
Costs of obtaining financings (2,104) (7,295) (626)
Loan prepayment fees -- (10,055) --
Dividends paid - preferred shares of beneficial interest (6,500) (7,600) (750)
-------------- -------------- --------------
17,756 26,079 7,485
-------------- -------------- --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 40,084,375 24,799,407 18,915,801
Customer withdrawals of deposits and payments for maturing certificates of deposit (39,209,119) (24,804,933) (18,186,082)
Net increase (decrease) in securities sold under repurchase agreements 139,267 384,699 (574,217)
Advances from the Federal Home Loan Bank 2,926,366 1,759,817 877,483
Repayments of advances from the Federal Home Loan Bank (1,535,205) (1,596,301) (958,037)
Proceeds from other borrowings 27,650,302 16,559,882 6,271,193
Repayments of other borrowings (27,650,609) (16,534,237) (6,259,554)
Cash dividends paid on preferred stock (9,750) (9,750) (9,750)
Cash dividends paid on common stock (33,000) (6,500) (9,000)
Repayment of capital notes - subordinated -- -- (10,000)
Net proceeds received from capital notes - subordinated -- -- 96,112
Net proceeds from issuance of preferred stock -- -- 144,000
Other 16,702 3,117 (4,605)
-------------- -------------- --------------
2,379,329 555,201 293,344
-------------- -------------- --------------
Net cash provided by financing activities 2,397,085 581,280 300,829
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (622,403) 560,267 388,198
Cash and cash equivalents at beginning of year 1,230,406 670,139 281,941
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 608,003 $ 1,230,406 $ 670,139
- ---------------------------------------------------------------------------------------------------------------------------------
Components of cash and cash equivalents at end of year as presented in the
consolidated balance sheets:
Real Estate
Cash and cash equivalents $ 17,857 $ 13,950 $ 18,248
Banking
Cash and due from banks 326,758 336,858 238,169
Interest-bearing deposits 69,388 499,598 48,722
Federal funds sold and securities purchased under agreements to resell 194,000 380,000 365,000
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 608,003 $ 1,230,406 $ 670,139
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) 261,664 $ 276,817 $ 267,758
Income taxes paid (refunded) 95,417 7,454 (2,552)
Shares of Saul Centers, Inc. common stock 3,393 4,806 6,111
Limited partnership units of Saul Holdings Limited Partnership 6,120 2,893 --
Cash received during the year from:
Dividends on shares of Saul Centers, Inc. common stock 3,393 3,014 2,539
Distributions from Saul Holdings Limited Partnership 6,120 5,567 5,453
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 6,581 5,510 4,195
Loans held for sale exchanged for trading securities 924,710 320,695 430,786
Loans receivable transferred to (from) loans held for sale and/or securitization (125,000) 1,788,831 2,026,478
Loans made in connection with the sale of real estate 31,615 7,274 7,769
Loans receivable transferred to real estate acquired in settlement of loans 1,909 4,938 4,706
Loans receivable exchanged for mortgage-backed securities held-to-maturity 1,792 1,225,279 1,136,180
- ---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
B.F. Saul Real Estate Investment Trust and its wholly owned subsidiaries
(collectively, the "Real Estate Trust") operate as a Maryland real estate
investment trust. The principal business activity of the Real Estate Trust is
the ownership and development of income-producing properties. The properties
owned by the Real Estate Trust are located predominantly in the Mid-Atlantic and
Southeastern regions of the United States and consist principally of hotels,
office projects, and various undeveloped land parcels.
B.F. Saul Real Estate Investment Trust also owns 80% of the outstanding common
stock of Chevy Chase Bank, F.S.B. and its subsidiaries (collectively the "bank"
or the "Corporations"), whose assets accounted for approximately 96% of the
consolidated assets of the B.F. Saul Real Estate Investment Trust and its
consolidated subsidiaries (the "Trust") at September 30, 1999. The bank is a
federally chartered and federally insured stock savings bank. The B. F. Saul
Real Estate Investment Trust is a thrift holding company by virtue of its
ownership of a majority interest in the bank and is subject to regulation by the
Office of Thrift Supervision ("OTS"). The accounting and reporting practices of
the Trust conform to generally accepted accounting principles and, as
appropriate, predominant practices within the real estate and banking
industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Real Estate
Trust and its subsidiaries. Accordingly, the accompanying financial statements
reflect the assets, liabilities, operating results, and cash flows for two
business segments: Real Estate and Banking. Entities in which the Trust holds a
non-controlling interest (generally 50% or less) are accounted for on the equity
method. See Note 2.
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the balance sheet and revenues and expenses for
the reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, the Trust recognizes an impairment loss.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that the Trust expects to hold and use is based on the fair value of
the asset. Long-lived assets and certain identifiable intangibles to be disposed
of are generally reported at the lower of carrying amount or fair value less the
cost to sell.
INCOME TAXES
The Trust files a consolidated federal income tax return which includes
operations of all 80% or more owned subsidiaries. It voluntarily terminated its
qualification as a real estate investment trust under the Internal Revenue Code
during fiscal 1978.
The Trust uses an asset and liability approach in accounting for income taxes.
Deferred income taxes are recorded using currently enacted tax laws and rates.
To the extent that realization of deferred tax assets is more likely than not,
such assets are recognized.
NET INCOME PER COMMON SHARE
Net income per common share is determined by dividing net income, after
deducting preferred share dividend requirements, by the weighted average number
of common shares outstanding during the year. For fiscal years 1999, 1998 and
1997, the weighted average number of shares used in the calculation was
4,826,910.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 1998 and 1997 to conform with the
presentation used for the year ended September 30, 1999.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - REAL ESTATE TRUST
CASH EQUIVALENTS
The Real Estate Trust considers all highly liquid, temporary investments with an
original maturity of three months or less to be cash equivalents.
PROPERTIES
Income-producing properties are stated at the lower of depreciated cost (except
those which were acquired through foreclosure or equivalent proceedings, the
carrying amounts of which are based on the lower of cost or fair value at the
time of acquisition) or net realizable value.
Interest, real estate taxes and other carrying costs are capitalized on projects
under construction. Once construction is completed and the assets are placed in
service, rental income, direct operating expenses, and depreciation associated
with such properties are included in current operations. The Real Estate Trust
considers a project to be substantially complete and held available for
occupancy upon completion of tenant improvements, but no later than one year
from the cessation of major construction activity. Substantially completed
portions of a project are accounted for as separate projects. Expenditures for
repairs and maintenance are charged to operations as incurred.
Depreciation is calculated using the straight-line method and estimated useful
lives of 31.5 to 47 years for buildings and up to 20 years for certain other
improvements. Tenant improvements are amortized over the lesser of their
estimated useful lives or the lives of the related leases using the
straight-line method.
INCOME RECOGNITION
The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. The Real Estate Trust derives rental income under
noncancelable long-term leases from tenants at its commercial properties.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term maturity
of these instruments.
Liabilities
The carrying amount of mortgage notes payable and notes payable - secured
approximates their fair value since most of the debt has been financed in recent
periods at prevailing market interest rates. The fair value of Notes payable -
unsecured is based on the rates currently offered by the Real Estate Trust for
similar notes. At September 30, 1999 and 1998, the fair value of Notes payable -
unsecured was $47.3 and $51.6 million.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK
Chevy Chase Bank, F.S.B. is a federally chartered and federally insured stock
savings bank and, as such, is subject to comprehensive regulation, examination
and supervision by the Office of Thrift Supervision ("OTS") and by the Federal
Deposit Insurance Corporation ("FDIC"). The bank is principally engaged in the
business of attracting deposits from the public and using such deposits,
together with borrowings and other funds, to make loans secured by real estate,
primarily residential mortgage loans, and various types of consumer loans and
commercial loans. The bank's principal deposit market is the Washington, D.C.
metropolitan area.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
Regulation D pursuant to the Federal Reserve Act requires the bank to maintain
reserves in the form of cash and deposits at the Federal Reserve Bank. The total
average reserve balances maintained by the bank, which consisted primarily of
cash, were $161.1, $146.5 and $114.6 million during the years ended September
30, 1999, 1998, and 1997.
LOANS HELD FOR SALE
The bank engages in mortgage banking activities. At September 30, 1999 and 1998,
loans held for sale are composed of single-family residential loans and home
improvement and related loans originated or purchased for sale in the secondary
market and are carried at the lower of aggregate cost or aggregate market value.
Included in other income for fiscal 1999 in the Consolidated Statement of
Operations is $373,000 of unrealized losses on loans held for sale as of
September 30, 1999. Single-family residential loans held for sale will either be
sold or will be exchanged for mortgage-backed securities and then sold. Gains
and losses on sales of whole loans held for sale are determined using the
specific identification method. See "Trading Securities."
LOANS HELD FOR SECURITIZATION AND SALE
The bank periodically securitizes and sells certain pools of loan receivables in
the public and private markets. These securitizations are recorded as sales.
Gains on the sale of loans are limited to amounts related to loans existing at
the date of sale and do not include amounts related to loans expected to be sold
during any future reinvestment period.
Loans held for securitization and sale are the lesser of loans eligible for
securitization or loans that management contemplates to securitize within six
months. Such loans held for securitization and sale are reported at the lower of
aggregate cost or aggregate market value for each asset type.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. Investment and mortgage-backed securities classified as
"held-to-maturity" are reported at amortized cost. Investment and
mortgage-backed securities classified as "available-for-sale" are reported at
fair value, with unrealized gains and losses, net of the related tax effect,
reported as a separate component of stockholders' equity. Investment and
mortgage-backed securities classified as "trading" are reported at fair value,
with unrealized gains and losses included in earnings. All investment securities
and mortgage-backed securities are classified as held-to-maturity at September
30, 1999 and 1998. Premiums and discounts on investment securities and
mortgage-backed securities are amortized or accreted using the level-yield
method. Realized gains and losses are determined using the specific
identification method.
Net unrealized holding gains, net of the related income tax effect, amounted to
$10,000 and $58,000 as of September 30, 1999 and 1998, and resulted from the
transfer of investment securities and mortgage-backed securities previously
classified as available-for-sale to held-to-maturity, are reported as a separate
component of stockholders' equity and are being accreted over the remaining
lives of the securities using the level-yield method.
TRADING SECURITIES
As part of its mortgage banking activities, the bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $933.6,
$320.9 and $430.9 million during the years ended September 30, 1999, 1998 and
1997. The bank realized net gains of $7.2, $1.0 and $1.2 million on the sales of
trading securities for the years ended September 30, 1999, 1998 and 1997. Gains
and losses on sales of trading securities are determined using the specific
identification method. There were no mortgage-backed securities classified as
trading securities at September 30, 1999 and 1998.
At September 30, 1999 and 1998, the bank held automobile receivables-backed
securities with carrying amounts of $7.0 and $11.3 million, which were
classified as trading securities. These securities were established in
conjunction with two automobile loan securitization transactions and represent
subordinate classes of certificates retained by the bank. The bank recognized
net unrealized holding gains on these securities of $1.2 million during fiscal
1999. During fiscal 1998, the bank recognized net unrealized holding losses on
these securities of $1.3 million. See Note 16.
LOAN ORIGINATION AND COMMITMENT FEES
Nonrefundable loan fees, such as origination and commitment fees, and
incremental loan origination costs relating to loans originated or purchased are
deferred. Net deferred fees (costs) related to loans held for investment are
amortized over the life of the loan using the level-yield or straight-line
method. Net fees (costs) related to loans held for sale are deferred until such
time as the loan is sold, at which time the net deferred fees (costs) become a
component of the gain or loss on sale.
CREDIT CARD FEES AND COSTS
Prior to the sale of the credit card portfolio on September 30, 1998, credit
card membership fees were deferred and recognized as income on a straight-line
basis over the period the fee entitled the cardholder to use the card, which was
one year. Credit card origination costs were deferred and recognized as a
reduction of income on a straight-line basis over the privilege period which was
generally one year. See Note 8.
IMPAIRED LOANS
A loan is considered impaired when, based on all current information and events,
it is probable that the bank will be unable to collect all amounts due according
to the contractual terms of the agreement, including all scheduled principal and
interest payments. Loans reviewed by the bank for impairment include real estate
and commercial loans and loans modified in a troubled debt restructuring. Large
groups of smaller-balance homogeneous loans that have not been modified in a
troubled debt restructuring are collectively evaluated for impairment, which for
the bank include residential mortgage loans and consumer loans. Impaired loans
are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or, as a practical expedient,
impairment may be measured based on the loan's observable market price, or, if
the loan is collateral-dependent, the fair value of the collateral. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. Loans for which
foreclosure is probable continue to be accounted for as loans. Prior to the sale
of the credit card portfolio on September 30, 1998, certain credit card loans
for which customers had agreed to modified payment terms were also classified as
impaired loans. See Note 8.
Each impaired real estate or commercial loan is evaluated individually to
determine the income recognition policy. Generally, payments received are
applied in accordance with the contractual terms of the note or as a reduction
of principal. Interest income on impaired credit card loans was recognized using
the interest rate of the loan and the accrual method. Interest income continued
to accrue on delinquent credit card loans until such loan was either paid or
charged off.
At September 30, 1999, the bank had three impaired commercial loans with an
aggregate book balance of $268,000. At September 30, 1998, the bank had one
impaired real estate loan with a book value of $86,000. The average recorded
investment in impaired commercial and real estate loans for the year ended
September 30, 1999 was $65,000. The average recorded investment in impaired
loans, consisting of credit card and real estate loans, for the years ended
September 30, 1998 and 1997 was $113.2 and $99.0 million. The bank did not
recognize any interest income on its impaired loans for the year ended September
30, 1999. The bank recognized interest income of $14.4 and $13.1 million on its
impaired loans (primarily credit card) for the years ended September 30, 1998
and 1997.
ALLOWANCES FOR LOSSES
Management reviews the loan, real estate held for investment and real estate
held for sale portfolios to establish allowances for estimated losses. The
allowances for losses are reviewed periodically, and allowances are provided
after consideration of the borrower's financial condition and/or the estimated
value of collateral or real estate, including estimated selling and holding
costs. Allowances are also provided by management after considering such factors
as the economy in lending areas, delinquency statistics and past loss
experience.
The allowances for losses are based on estimates and ultimate losses may vary
from current estimates. As adjustments to the allowances become necessary,
provisions for losses are reported in operations in the periods they are
determined to be necessary.
ACCRUED INTEREST RECEIVABLE ON LOANS
Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management, the full collection of principal or interest has
become unlikely. Uncollectible accrued interest receivable on non-accrual loans
is charged against current period interest income.
REAL ESTATE HELD FOR INVESTMENT OR SALE
Real Estate Held for Investment
At September 30, 1999 and 1998, real estate held for investment consists of
developed land owned by one of the bank's subsidiaries. Real estate held for
investment is carried at the lower of cost or net realizable value. See Note 14.
Real Estate Held for Sale
Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value (less estimated
selling costs). Costs relating to the development and improvement of property,
including interest, are capitalized, whereas costs relating to the holding of
property are expensed. Capitalized interest amounted to $3.4, $2.0 and $2.2
million for the years ended September 30, 1999, 1998 and 1997.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method which allocates the cost of the applicable assets over their estimated
useful lives. Major improvements and alterations to office premises and
leaseholds are capitalized. Leasehold improvements are amortized over the
shorter of the terms of the respective leases (including renewal options that
are expected to be exercised) or 20 years. Maintenance and repairs are charged
to operating expenses as incurred. Capitalized interest amounted to $376,000,
$95,000 and $658,000 during the years ended September 30, 1999, 1998 and 1997.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is stated net of accumulated amortization and is being amortized using
the straight-line method over 15 years. At September 30, 1999 and 1998, goodwill
totaled $23.1 and $24.4 million. On November 12, 1997, the bank purchased ASB
Capital Management Inc. ("ASB"), one of the largest SEC-registered investment
managers headquartered in the Washington, D.C. metropolitan area, for $27.2
million in cash. In connection with the purchase, the bank recorded $25.3
million of goodwill. The acquisition was accounted for using the purchase method
and the operating results of ASB have been included in the Consolidated
Statements of Operations since the date of acquisition.
During fiscal 1999 and 1998, the bank purchased approximately $135.1 and $53.2
million of home equity loans. The premium attributable to the value of the home
equity relationships, amounting to $4.8 and $6.5 million at September 30, 1999
and 1998, is included in goodwill and other intangible assets in the
Consolidated Balance Sheets. This premium is being amortized over the estimated
term of the underlying relationships. Accumulated amortization of goodwill and
other intangible assets was $46.7 and $43.6 million at September 30, 1999 and
1998.
SERVICING ASSETS
Servicing assets, which are stated net of accumulated amortization, are
amortized in proportion to the remaining net servicing revenues estimated to be
generated by the underlying loans. Amortization of these assets amounted to
$12.3, $10.8 and $9.0 million for the years ended September 30, 1999, 1998 and
1997. Accumulated amortization was $80.0 and $67.7 million at September 30, 1999
and 1998. During fiscal 1999, 1998 and 1997, the bank recorded $14.8, $8.6 and
$15.8 million, of servicing assets related to the sale and/or securitization of
loans.
The bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets at
September 30, 1999 and 1998 was $30.3 and $35.3 million.
Activity in the valuation allowance for servicing assets is summarized as
follows.
Year Ended September 30,
----------------------------------------------
(In thousands) 1999 1998 1997
- -------------------------------- -------------- -------------- --------------
Balance at beginning of year $ 13,498 $ 1,129 $ 3,142
Additions charged / (reductions)
credited to loan expenses (3,774) 12,369 (2,013)
-------------- -------------- --------------
Balance at end of year $ 9,724 $ 13,498 $ 1,129
============== ============== ==============
There were no sales of rights to service mortgage loans during fiscal 1999, 1998
and 1997. Servicing fees are included in servicing and securitization income in
the Consolidated Statements of Operations.
INTEREST-ONLY STRIPS
As a result of the adoption of SFAS 125 effective January 1, 1997, the bank
recognized gains of $33.1 million during fiscal 1997 upon the securitization and
sale of credit card receivables based upon the estimated fair value of the
expected cash flows to be generated by the underlying receivables. Under SFAS
125, the bank recorded a gain on the securitization and sale of credit card
receivables based on the estimated fair value of assets transferred, retained,
or obtained and liabilities incurred in the sale. The gain recognized at the
time of the sale principally represented the estimated fair value of the
interest-only strips, which represent the present value of finance charges and
other ancillary income received by the trust over the sum of the return paid to
certificateholders, contractual servicing fees, credit losses and other expenses
of the trust. During the revolving period of each transaction, gains were
recorded on the sale of new receivables to the trusts to replenish the
investors' interest in trust receivables. See Note 16.
Prior to January 1, 1997, no gain or loss was recorded on the securitization and
sale of credit card receivables; rather, loan servicing fees were recognized
over the life of the transaction when earned.
Upon the bank's adoption of SFAS 125, effective January 1, 1997, previously
recognized excess spread assets were reclassified as interest-only strips.
Interest-only strips capitalized in the year ended September 30, 1999 amounted
to $2.7 million and were primarily related to the sale of new home equity
receivables into existing trusts. Interest-only strips capitalized in the year
ended September 30, 1998 and in the nine months ended September 30, 1997
amounted to $124.0 and $68.2 million, and were related to the securitization and
sale of credit card, home equity, automobile and home loan receivables. See Note
16.
Prior to January 1, 1997, when loans (other than credit card) were sold with the
residual cash flow retained by the bank, the net present value of such residual
cash flow was recorded as an adjustment to the sales price of the loans.
Estimated future losses were deducted in the computation of such residual cash
flows. Excess spread assets capitalized in the three months ended December 31,
1996 of $9.5 million were the result of the residual cash flow retained upon the
securitization and sale of home equity credit line, automobile and home loan
receivables.
Interest-only strips (excess spread assets prior to January 1, 1997) are
amortized using the effective yield method over the estimated lives of the
underlying loans. Amortization amounted to $8.7, $99.0 and $24.8 million for the
years ended September 30, 1999, 1998 and 1997, and is included in servicing and
securitization income in the Consolidated Statements of Operations. The bank
uses certain assumptions to calculate amortization of the interest-only strips
(excess spread assets prior to January 1, 1997), mainly estimates of prepayment
speeds and credit losses. To the extent actual results differ from the
assumptions, additional amortization is recorded.
Effective January 1, 1997, the bank accounts for its interest-only strips as
trading securities and, accordingly, carries them at fair value. The bank
estimates the fair value of the interest-only strips on a discounted cashflow
basis using appropriate discount and prepayment rates. There were no fair value
adjustments during fiscal year 1999. Fair value adjustments, included in
servicing and securitization income, amounted to a net loss of $42.9 million in
fiscal 1998 and a net gain of $7.0 million in fiscal 1997. Certain assumptions
inherent in the determination of the amortization and fair value of
interest-only strips are influenced by factors outside the bank's control, and
actual performance could materially differ from such assumptions.
DERIVATIVE FINANCIAL INSTRUMENTS
The bank uses various strategies to minimize interest-rate risk, including
interest-rate cap agreements and forward sale or purchase commitments. Premiums
paid for interest-rate cap agreements are included in other assets in the
Consolidated Balance Sheets and are amortized to expense over the terms of the
interest-rate caps on a straight-line basis. Funds payable to the bank are
recognized as income in the month such funds are earned. There were no
unamortized premiums at September 30, 1999 and 1998. Gains and losses on forward
sale or purchase commitments are deferred and recorded as a component of the
gain on sales of loans at the time the forward sale or purchase commitment
matures. See Note 28. The bank does not hold any derivative financial
instruments for trading purposes.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The bank adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130")
during the year ended September 30, 1999. SFAS 130 establishes accounting
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 also requires an enterprise to classify items of other
comprehensive income by their nature in a financial statement and to display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Because SFAS 130 addresses only disclosure related issues,
its adoption did not have an impact on the bank's financial condition or its
results of operations.
The bank also adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), during the year ended September 30, 1999.
SFAS 131 establishes accounting standards for the way an enterprise reports
information about operating segments in annual and interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131
requires that an enterprise report financial and descriptive information,
including profit or loss, certain specific revenue and expense items, and
segment assets, about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. Based on this
definition, the bank has two segments, retail banking and other nonbanking
services. Retail banking consists of traditional banking services, which include
offering lending and deposit products to retail, corporate and commercial
customers. Substantially all of the bank's assets, revenue and income are
derived from this segment. The other nonbanking segment does not meet the
materiality threshold as required by SFAS 131 for separate disclosure.
The bank also adopted SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, an amendment of FASB Statement No. 65" ("SFAS 134"), during
the year ended September 30, 1999. SFAS 134 amends SFAS 65 "Accounting for
Certain Mortgage Banking Activities" to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. SFAS 134
conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. The bank classifies such
securities as trading securities both before and after adoption of SFAS 134 and
therefore, SFAS 134 did not have an impact on the bank's financial condition or
its results of operations.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
("SFAS 133") was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 137 (an amendment of SFAS 133) postpones for one year the mandatory
effective date of SFAS 133 to the first quarter of fiscal years beginning after
June 15, 2000. The impact of SFAS 133 on the bank's financial statements has not
yet been determined.
1. LIQUIDITY AND CAPITAL RESOURCES - REAL ESTATE TRUST
Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. This condition is currently the case and is
expected to continue to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes sold to the public, the payment of interest on its
senior secured notes, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financings, including the sale of unsecured
notes, refinancings of maturing mortgage debt, asset sales and tax sharing
payments from the bank.
The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in 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, as well as the bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the bank. During fiscal 1999, 1998 and 1997, the
bank made tax sharing payments totaling $6.6, $5.6 and $9.8 million to the Real
Estate Trust. During fiscal 1999, 1998 and 1997, the bank made dividend payments
totaling $26.4, $5.2 and $7.2 million to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating
losses while the bank has reported net income. It is anticipated that the
Trust's consolidation of the bank's operations into the Trust's federal
income tax return will result in the use of the Trust's net operating losses
to reduce the federal income taxes the bank would otherwise owe. If in any
future year, the bank has taxable losses or unused credits, the Trust would
be obligated to reimburse the bank for the greater of (i) the tax benefit to
the group using such tax losses or unused tax credits in the group's
consolidated federal income tax returns or (ii) the amount of the refund
which the bank would otherwise have been able to claim if it were not being
included in the consolidated federal income tax return of the group.
Through September 30, 1999, the Real Estate Trust has purchased either in the
open market or through dividend reinvestment 2,319,420 shares of common stock of
Saul Centers, Inc. (representing 17.6% of such company's outstanding common
stock). As of September 30, 1999, the market value of these shares was
approximately $35.0 million. As of September 30, 1999, all these shares have
been pledged as collateral with the Real Estate Trust's credit line banks. See
Note 3.
In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of 9 3/4% Senior Secured Notes due 2008, referred to as the "1998 Notes."
After providing for the retirement of $175.0 million aggregate principal amount
of 11 5/8% Senior Secured Notes issued in 1994, including a prepayment premium
of $10.0 million and debt issuance costs of approximately $5.9 million, the Real
Estate Trust realized approximately $9.1 million in 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 for this line is
September 29, 2002. This facility is secured by a portion of the Real Estate
Trust's ownership in Saul Holdings Partnership and Saul Centers. Interest is
computed by reference to a floating rate index. At September 30, 1999, the Real
Estate Trust had outstanding borrowings of $4.0 million under the facility and
unrestricted availability was $13.9 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, the line of credit was
increased to $10.0 million and was extended for a year. During fiscal 1998, the
line of credit was increased to $20.0 million and was extended for an additional
year. The current maturity date for this line is July 31, 2001. Interest is
computed by reference to a floating rate index. At September 30, 1999, the Real
Estate Trust had outstanding borrowings of $12.0 million and unrestricted
availability was $3.7 million.
During fiscal 1997, the Real Estate Trust refinanced two hotel and three office
properties with five-year floating rate debt. After payment of all financing
costs, the Real Estate Trust received net proceeds of approximately $11.0
million.
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.
In fiscal 1999, the Real Estate Trust received total cash distributions of $6.1
million from Saul Holdings Partnership. During the period from 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.
During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland. The Real Estate Trust financed the project with a
construction/permanent loan. The building was substantially completed in January
1998 and was offered to Saul Holdings Partnership in accordance with the Real
Estate Trust's obligations under its right of first refusal agreement. An
independent appraisal of the project indicated a market value of $5,600,000. The
fully funded balance of the loan was $3,657,000, resulting in an equity position
of $1,943,000 for the Real Estate Trust. The Board of Directors of Saul Centers,
Inc., general partner of Saul Holdings Partnership, agreed to purchase the Real
Estate Trust's equity position through the issuance of additional limited
partnership units in Saul Holdings Partnership. Accordingly, as of April 1,
1998, Saul Holdings Partnership issued 105,922 new limited partnership units and
a corresponding limited partnership interest to the Real Estate Trust in
exchange for the ownership of the new building and the assumption of its loan.
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 3 acre parcel located adjacent to its Hampton Inn and
Holiday Inn near Washington Dulles International Airport in Sterling, Virginia.
The new hotel was franchised as a TownePlace Suites by Marriott and opened for
business in August 1998. Development costs were $5.8 million and were largely
financed by a construction loan of $4.5 million. The loan is for two years with
two extension options for two year and one year periods. The loan covered all
costs except for the land, fees to related parties, taxes and insurance.
On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near the Reagan National Airport and the Real
Estate Trust's Howard Johnson hotel. The purchase price was $25.8 million. Also
on December 10, 1997, the Real Estate Trust refinanced five other hotels in its
portfolio. Funds for the two transactions were provided by a lender in the
amount of $52.5 million. The new loans have a 15 year term, a fixed interest
rate of 7.57%, and amortization based on a 25 year schedule.
During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels:
TownePlace Suites by Marriott containing 91 units located on a 2 acre site
owned by the Trust in Avenel Business Park in Gaithersburg,
Maryland. This hotel opened for business on June 24, 1999.
TownePlace Suites by Marriott containing 91 units located on part of a 9
acre site owned by the Real Estate Trust in the Arvida Park of
Commerce in Boca Raton, Florida. This hotel opened for business on
June 28, 1999.
SpringHill Suites by Marriott containing 146 units located on part of a 9
acre site owned by the Real Estate Trust in the Arvida Park of
Commerce in Boca Raton, Florida. This hotel opened for business on
July 9, 1999.
TownePlace Suites by Marriott containing 95 units located on a 3 acre site
owned by the Real Estate Trust in the Fort Lauderdale Commerce Center,
Fort Lauderdale, Florida. This hotel opened for business on October 25,
1999.
The costs for the four hotels aggregated $32 million and were largely funded by
the proceeds of a three-year bank loan in the amount of $25.9 million. The loan
has two one-year renewal options.
During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 78,000 square foot single-story office/research and development
building located on a 7 acre site owned by the Real Estate Trust in the Dulles
North Corporate Park, Sterling, Virginia. This project is adjacent to the Real
Estate Trust's Dulles North office building and near three of the Real Estate
Trust's hotel properties. The development cost was $7.3 million with bank
financing of $6.5 million for a five-year term and an option for a two-year
extension. The project is 100% leased and became operational October 1, 1999.
During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia, near
Reagan National Airport. The 308-room Holiday Inn has been converted into a
Crowne Plaza, while the 279-room Howard Johnson 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 have been funded by the
Real Estate Trust in part from its internal resources and in part from its lines
of credit.
During the quarter ended June 30, 1999, the Real Estate Trust commenced the
development of an 11-story 229-room hotel on a site adjacent to its Tyson Corner
Holiday Inn in McLean, Virginia. The new hotel will be franchised as a Courtyard
by Marriott and will cost approximately $30.0 million. Financing of $25.0
million has been obtained for an initial period of three years with options for
two one-year extensions. Completion is projected for December 2000.
Also during the quarter ended June 30, 1999, the Real Estate Trust began
development of an 80,000 square foot single-story office/research and
development building located on a 6.5 acre site owned by the Real Estate Trust
in Dulles North Corporate Park, Sterling, Virginia. The development cost is $4.5
million, with estimated bank financing of $4.1 million for a three-year term.
The project is 100% leased to a single tenant and is expected to be operational
in March 2000.
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 fiscal years.
2. SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST
In fiscal 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The Real
Estate Trust transferred its 22 shopping centers and one of its office
properties together with the debt associated with such properties to a newly
formed partnership, Saul Holdings Limited Partnership ("Saul Holdings"), in
which the Real Estate Trust owns (directly or through one of its wholly owned
subsidiaries) a 22.8% interest, other entities affiliated with the Real Estate
Trust own a 5.4% interest, and Saul Centers owns a 71.8% interest. B. Francis
Saul II, Chairman of the Board of Trustees of the Trust, is also Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers, which is the
sole general partner of Saul Holdings.
In connection with the transfer of its properties to Saul Holdings, the Real
Estate Trust was relieved of approximately $196 million in mortgage debt and
deferred interest. Pursuant to a reimbursement agreement among the partners of
Saul Holdings and its subsidiary limited partnerships (collectively, the
"Partnerships"), the Real Estate Trust and its subsidiaries that are partners in
the Partnerships have agreed to reimburse Saul Centers and the other partners in
the event the Partnerships fail to make payments with respect to certain
portions of the Partnerships' debt obligations and Saul Centers or any such
other partners personally make payments with respect to such debt obligations.
At September 30, 1999, the maximum potential obligations of the Real Estate
Trust and its subsidiaries under this agreement totaled approximately $115.5
million.
The fair market value of each of the properties contributed to the Partnerships
by the Real Estate Trust at the date of transfer (the FMV of each such property)
exceeded the tax basis of such property (with respect to each property, such
excess is referred to as the FMV-Tax Difference). In the event Saul Centers, as
general partner of the Partnerships, causes the Partnerships to dispose of one
or more of such properties, a disproportionately large share of the total gain
for federal income tax purposes would be allocated to the Real Estate Trust or
its subsidiaries. In general, if the gain recognized by the Partnerships on a
property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of
depreciation deductions to the partners), a gain equal to the FMV-Tax Difference
(as adjusted) will be allocated to the Real Estate Trust. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all the
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of gain allocated to the Real Estate Trust in the event of
such a property disposition is likely to exceed, perhaps substantially, the
amount of cash, if any, distributable to the Real Estate Trust as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, or any release of the guarantees of such debt by the Real
Estate Trust, could cause the Real Estate Trust to have taxable constructive
distributions without the receipt of any corresponding amounts of cash.
Currently, management does not intend to seek a release of or a reduction in the
guarantees or to convert its limited partner units in Saul Holdings into shares
of Saul Centers common stock.
At the date of transfer of the Real Estate Trust properties to Saul Holdings,
liabilities exceeded assets transferred by approximately $104.3 million on an
historical cost basis. The assets and liabilities were recorded by Saul Holdings
and Saul Centers at their historical cost rather than market value because of
affiliated ownership and common management and because the assets and
liabilities were the subject of the business combination between Saul Centers
and Saul Holdings, newly formed entities with no prior operations.
Immediately subsequent to the business combination and initial public offering
of common stock by Saul Centers, Saul Centers had total owners' equity of
approximately $16.4 million of which approximately $3.5 million related to the
Real Estate Trust's original 21.5% ownership interest. Recognition by the Real
Estate Trust of the change in its investment in the properties of approximately
$107.8 million has been deferred due to the Real Estate Trust's guarantee of
$115.5 million under the Saul Centers reimbursement agreement. The deferred gain
of $107.8 million is included in "Deferred gains - real estate" in the financial
statements. The gain will be recognized in future periods to the extent the Real
Estate Trust's obligations are terminated under the reimbursement agreement.
The management of Saul Centers has adopted a strategy of maintaining a ratio of
total debt to total asset value, as estimated by management, of fifty percent or
less. The management of Saul Centers has concluded at September 30, 1999, that
the total debt of Saul Centers remains below fifty percent of total asset value.
As a result, the management of the Real Estate Trust has concluded that fundings
under the reimbursement agreement are remote.
In addition to the deferred gains, as of September 30, 1999, the Real Estate
Trust's investment in the consolidated entities of Saul Centers, which is
accounted for under the equity method, consisted of the following.
(In thousands)
-------------------------------------------------------------------
Saul Holdings:
Acquisition of partnership units $ 9,011
Distributions in excess of allocated net income (12,118)
Saul Centers:
Acquisition of common shares 37,229
Distributions in excess of allocated net income (7,789)
-------------
Total $ 26,333
=============
The $26.3 million balance is included in "Other assets" in the financial
statements.
As of September 30, 1999, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of common shares of Saul Centers,
effectively owns 35.4% of the consolidated entities of Saul Centers. Some of
these shares and/or units have been deposited as collateral for the Trust's
revolving lines of credit. See Note 4.
The unaudited Condensed Consolidated Balance Sheet as of September 30, 1999 and
1998, and the unaudited Condensed Consolidated Statements of Operations for the
twelve-month periods ended September 30, 1999, 1998 and 1997 of Saul Centers
follow.
Saul Centers, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
September 30,
-------------------------------------------------
(In thousands) 1999 1998
------------------------ ------------------------
Assets
Real estate investments $ 355,465 $ 342,865
Accumulated depreciation (109,838) (100,320)
Other assets 45,632 26,133
------------------------ ------------------------
Total assets $ 291,259 $ 268,678
======================== ========================
Liabilities and stockholders' deficit
Notes payable $ 302,511 $ 288,812
Other liabilities 21,353 17,321
------------------------ ------------------------
Total liabilities 323,864 306,133
Total stockholders' deficit (32,605) (37,455)
------------------------ ------------------------
Total liabilities and stockholders' deficit $ 291,259 $ 268,678
======================== ========================
Saul Centers, Inc.
Condensed Consolidated Statements of Operations
(Unaudited) For the Twelve Months Ended September 30
---------------------------------------------------------------------------
(In thousands) 1999 1998 1997
------------------------ ------------------------ ------------------------
Revenue
Base rent $57,789 $54,724 $51,157
Other revenue 14,704 15,145 15,613
------------------------ ------------------------ ------------------------
Total revenue 72,493 69,869 66,770
------------------------ ------------------------ ------------------------
Expenses
Operating expenses 14,363 14,423 14,624
Interest expense 22,389 22,669 19,404
Amortization of deferred debt expense 416 416 2,286
Depreciation and amortization 12,883 11,299 10,839
General and administrative 3,551 3,492 3,250
------------------------ ------------------------ ------------------------
Total expenses 53,602 52,299 50,403
------------------------ ------------------------ ------------------------
Operating income 18,891 17,570 16,367
Non-operating item
Sales of interest rate protection
agreements -- (4,392) (972)
------------------------ ------------------------ ------------------------
Net income before extraordinary item,
cumulative effect of change in
accounting method and minority
interest 18,891 13,178 15,395
Cumulative effect of change in
accounting method -- (771) --
Extraordinary item - loss on early
extinguishment of debt -- (2,878) (956)
------------------------ ------------------------ ------------------------
Net income before minority interest 18,891 9,529 14,439
Minority interest (7,779) (7,080) (6,854)
------------------------ ------------------------ ------------------------
Net income $11,112 $ 2,449 $ 7,585
======================== ======================== ========================
3. INVESTMENT PROPERTIES - REAL ESTATE TRUST
The following table summarizes the cost basis of income-producing properties and
land parcels together with their related debt.
(Dollars in Buildings and Related
thousands) No. Land Improvements Total Debt
- ----------------------------------- ------ --------- --------------- ---------- ----------
September 30, 1999
Income-producing properties:
Hotels 15 $16,635 $180,440 $197,075 $126,820
Office & industrial 7 4,555 106,628 111,183 74,447
Other 5 3,075 848 3,923 4,790
------ --------- --------------- ---------- ----------
27 $24,265 $287,916 $312,181 $206,057
====== ========= =============== ========== ==========
Land Parcels 10 $39,448 $ -- $ 39,448 $ 312
====== ========= =============== ========== ==========
September 30, 1998
Income-producing properties:
Hotels 12 $15,291 $150,514 $165,805 $111,917
Office & industrial 7 4,555 105,702 110,257 77,103
Other 5 3,075 814 3,889 --
------ --------- --------------- ---------- ----------
24 $22,921 $257,030 $279,951 $189,020
====== ========= =============== ========== ==========
Land Parcels 10 $40,110 $ -- $ 40,110 $ 10,513
====== ========= =============== ========== ==========
4. DEBT - REAL ESTATE TRUST
Mortgage notes payable are secured by various income-producing properties and
land parcels. Almost all mortgage notes are payable in monthly installments,
have maturity dates ranging to 2012 and accrue interest at annual rates from
7.6% to 10.0%. Certain mortgages contain a number of restrictions, including
cross default provisions.
Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization, but are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates at
September 30, 1999 and 1998 were 10.1% and 10.3%. During fiscal 1999 and 1998,
the Real Estate Trust sold notes amounting to approximately $11.9 and $11.3
million.
In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of the 1998 Notes. After providing for the retirement of $175.0 million
aggregate principal amount of 11 5/8% Senior Secured Notes issued in 1994,
including a prepayment premium of $10.0 million and debt issuance costs of
approximately $5.9 million, the Real Estate Trust realized approximately $9.1
million in net proceeds. In addition, the Real Estate Trust received about $13.2
million in cash which had been held as additional collateral by the indenture
agent under the 1994 Notes. The 1998 Notes are secured by a first priority
perfected security interest in 8,000 shares (80%) of the issued and outstanding
common stock of the bank, which constitute all of the bank common stock held by
the Real Estate Trust. The 1998 Notes are nonrecourse obligations of the Real
Estate Trust.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. In September 1999, this facility was increased
to $50.0 million and its term was set at three years with provisions for
extending the term annually. The current maturity date for this line is
September 29, 2002. This facility is secured by a portion of the Real Estate
Trust's ownership in Saul Holdings Partnership and Saul Centers. Interest is
computed by reference to a floating rate index. At September 30, 1999, the Real
Estate Trust had outstanding borrowings of $4.0 million under the facility and
unrestricted availability was $13.9 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, the line of credit was
increased to $10.0 million and was extended for a year. During fiscal 1998, the
line of credit was increased to $20.0 million and was extended for an additional
year. The current maturity date for this line is July 31, 2001. Interest is
computed by reference to a floating rate index. At September 30, 1999, the Real
Estate Trust had outstanding borrowings of $12.0 million and unrestricted
availability was $3.7 million.
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1999 for the fiscal years commencing October 1, 1999 is set forth in the
following table.
Debt Maturity Schedule
(In thousands)
--------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable -- Payable --
Year Notes Secured Unsecured Total
------------- --------- ----------- ----------- --------------
2000 $13,652 $ -- $ 8,905 $ 22,557
2001 29,784 12,000 6,036 47,820
2002 15,046 4,000 7,745 26,791
2003 15,987 -- 9,190 25,177
2004 6,600 -- 9,321 15,921
Thereafter 132,378 200,000 4,925 337,303
--------- ----------- ----------- --------------
Total $213,447 $216,000 $ 46,122 $ 475,569
--------------------------------------------------------------
Of the $213.4 million of mortgage notes outstanding at September 30, 1999,
$165.2 million was nonrecourse to the Real Estate Trust.
5. LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST
The Real Estate Trust has no minimum future rental commitments. The Real Estate
Trust had one long-term lease which terminated in 1998. The Real Estate Trust
paid minimum ground rent expense of $69,000 and $101,000 in fiscal 1998 and
1997.
6. INCOME FROM COMMERCIAL PROPERTIES - REAL ESTATE TRUST
Income from commercial properties consists of minimum rent arising from
noncancelable commercial leases. Minimum rent for fiscal years 1999, 1998, and
1997 amounted to $23.2, $21.5 and $19.7 million. Future minimum
rentals as of September 30, 1999 under noncancelable leases are as follows:
Fiscal Year (In thousands)
------------------------------------------------------------
2000 $ 22,804
2001 19,583
2002 14,872
2003 11,746
2004 7,965
Thereafter 12,528
-----------
Total $ 89,498
------------------------------------------------------------
7. TRANSACTIONS WITH RELATED PARTIES - REAL ESTATE TRUST
TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES
The Real Estate Trust is managed by B. F. Saul Advisory Company (the "Advisor"),
a wholly-owned subsidiary of B. F. Saul Company ("Saul Co."). All of the Real
Estate Trust officers and three Trustees of the Trust are also officers and/or
directors of Saul Co. The Advisor is paid a fixed monthly fee which is subject
to annual review by the Trustees. The monthly fee was $311,000 during fiscal
1997, $317,000 during fiscal 1998, and $337,000 during fiscal 1999. The advisory
contract has been extended until September 30, 2000, and will continue
thereafter unless canceled by either party at the end of any contract year.
Certain loan agreements prohibit termination of this contract.
Saul Co. and Franklin Property Company ("Franklin"), a wholly-owned subsidiary
of Saul Co., provide services to the Real Estate Trust through commercial
property management and leasing, hotel management, development and construction
management, and acquisitions, sales and financings of real property. Fees paid
to Saul Co. and Franklin amounted to $5.7, $5.2 and $5.1 million in fiscal 1999,
1998 and 1997.
The Real Estate Trust reimburses the Advisor and Franklin for costs and expenses
incurred on behalf of the Real Estate Trust, in-house legal expenses, and for
all travel expenses incurred in connection with the affairs of the Real Estate
Trust.
The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of the unsecured notes as they are issued to offset its costs of administering
the program. These payments amounted to $120,000, $113,000 and $102,000 in
fiscal 1999, 1998 and 1997.
A subsidiary of Saul Co. is a general insurance agency which receives
commissions and countersignature fees in connection with the Real Estate Trust's
insurance program. Such commissions and fees amounted to approximately $167,000,
$157,000 and $158,000 in fiscal 1999, 1998 and 1997.
In fiscal 1994, the Real Estate Trust made an unsecured loan to the Saul Co. of
$15.0 million at a floating interest rate and due on demand. In fiscal 1995, the
loan balance was curtailed by $2.3 million. In fiscal 1996, the Real Estate
Trust made additional loans aggregating $3.5 million to the Saul Co. During
fiscal 1997, 1998 and 1999, curtails of $750,000, $141,000 and $1,500,000 were
paid by the Saul Co. At September 30, 1999, the total due the Real Estate Trust
was $13.8 million in principal and $1.7 million in deferred interest. Interest
accrued on these loans amounted to $1.1, $1.3 and $1.4 million during fiscal
1999, 1998 and 1997.
REMUNERATION OF TRUSTEES AND OFFICERS
For fiscal years 1999, 1998, and 1997, the Real Estate Trust paid the Trustees
approximately $94,000, $94,000 and $89,000 for their services. No compensation
was paid to the officers of the Real Estate Trust for acting as such; however,
one Trustee was paid by the bank for his services as Chairman and Chief
Executive Officer of the bank, and four received payments for their services as
directors of the bank. Four of the Trustees and all of the officers of the Real
Estate Trust receive compensation from Saul Co. as directors and/or officers.
LEGAL SERVICES
The law firm in which one of the Trustees is a partner received $530,000,
$792,000 and $293,000 during fiscal 1999, 1998, and 1997 for legal services to
the Real Estate Trust and its wholly-owned subsidiaries.
SAUL HOLDINGS LIMITED PARTNERSHIP
The Real Estate Trust accounts for this investment under the equity method. The
Real Estate Trust's share of earnings for fiscal 1999, 1998 and 1997 were $4.2,
$2.0 and $3.0 million. See Note 2.
OTHER TRANSACTIONS
The Real Estate Trust leases space to the bank and Franklin at two of its
income-producing properties. Minimum rents and expense recoveries paid by these
affiliates amounted to approximately $265,000, $251,000 and $239,000 in fiscal
1999, 1998 and 1997.
SUBSEQUENT EVENT
On December 13, 1999, the Real Estate Trust purchased Tysons Park Place, an
office building owned by Chevy Chase Bank. The building is located in Tysons
Corner, McLean, Virginia and contains approximately 250,000 square feet of
leasable area, which was 99% leased as of December 1, 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%.
8. DISPOSITION OF ASSETS - THE BANK
Pursuant to the terms of a purchase agreement, dated as of September 2, 1998 and
as amended on September 30, 1998, by and between the bank and CCB Holding
Corporation (a wholly-owned subsidiary of the bank) ("CCBH"), and First USA
Bank, NA, ("FUSA"), the bank and CCBH sold their credit card portfolio and the
bank sold its credit card operations to FUSA. This transaction was consummated
on September 30, 1998. The credit card portfolio purchased by FUSA included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa and
MasterCard credit card accounts. The bank recognized a net gain on this sale of
$288.3 and $3.5 million during the year ended September 30, 1998 and 1999, which
is included in gain on sale of loans, net in the Consolidated Statements of
Operations.
All significant assets and liabilities used in or related directly to the credit
card business, including those associated with credit card securitization
activities, were sold to or assumed by FUSA, with the exception of the bank's
operations center which housed the majority of credit card operations (other
than origination activities). Concurrently with the transaction, the bank and
FUSA entered into a lease agreement for that facility which expires September
30, 2001.
9. LOANS HELD FOR SALE - THE BANK
Loans held for sale are composed of the following:
September 30,
----------------------------
(In thousands) 1999 1998
- ------------------------------------------ ---------- ----------
Single-family residential $ 112,434 $ 49,502
Home improvement and related loans 4,363 6,785
---------- ----------
Total $ 116,797 $ 56,287
========== ==========
10. LOANS HELD FOR SECURITIZATION AND SALE - THE BANK
At September 30, 1998, loans held for securitization and sale totaled $125.0
million and was composed of automobile loans. At September 30, 1999, there were
no loans held for securitization and sale.
11. INVESTMENT SECURITIES - THE BANK
At September 30, 1999 and 1998, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the bank's
investment securities at September 30, 1999 and 1998 are as follows:
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- ---------------------------- --------- ----------- ----------- ----------
September 30, 1999
U.S. Government securities:
Maturing after one year,
but within five years $ 44,400 $ 34 $ -- $ 44,434
========= =========== =========== ==========
September 30, 1998
U.S. Government securities:
Maturing after one year,
but within five years $ 43,999 $ 529 $ -- $ 44,528
========= =========== =========== ==========
There were no sales of investment securities during the years ended September
30, 1999, 1998 and 1997.
12. MORTGAGE-BACKED SECURITIES - THE BANK
At September 30, 1999 and 1998, all mortgage-backed securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the bank's
mortgage-backed securities at September 30, 1999 and 1998 are as follows:
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------- ---------- ----------- ----------- ----------
September 30, 1999
FNMA $ 384,069 $ 96 $ (19,417) $ 364,748
FHLMC 236,809 650 (2,209) 235,250
Private label, AAA-rated 680,436 9,951 (15,016) 675,371
Private label, AA-rated 10,056 17 -- 10,073
---------- ----------- ----------- ----------
Total $1,311,370 $ 10,714 $ (36,642) $1,285,442
========== =========== =========== ==========
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------- ---------- ----------- ----------- ----------
September 30, 1998
FNMA $ 471,617 $ 3,114 $ (1,927) $ 472,804
FHLMC 408,274 1,558 (982) 408,850
Private label, AAA-rated 1,117,017 -- (12,797) 1,104,220
Private label, AA-rated 28,909 51 (15) 28,945
---------- ----------- ----------- ----------
Total $2,025,817 $ 4,723 $ (15,721) $2,014,819
========== =========== =========== ==========
There were no sales of mortgage-backed securities from the held-to-maturity
portfolio during the years ended September 30, 1999, 1998 and 1997. See Summary
of Significant Accounting Policies - The Bank - "Trading Securities."
Accrued interest receivable on mortgage-backed securities totaled $7.5 and $12.2
million at September 30, 1999 and 1998, and is included in other assets in the
Consolidated Balance Sheets.
13. LOANS RECEIVABLE - THE BANK
Loans receivable is composed of the following:
September 30,
--------------------------------
(In thousands) 1999 1998
- ----------------------------------------- -------------- --------------
Single-family residential $ 3,986,212 $ 1,772,784
Home equity 239,673 135,122
Real estate construction and ground 419,211 209,247
Commercial real estate and multifamily 60,607 75,877
Commercial 579,668 279,416
Automobile 1,307,969 232,826
Home improvement and related loans 102,483 60,570
Overdraft lines of credit and
other consumer 31,646 33,484
-------------- ---------------
6,727,469 2,799,326
Less:
Undisbursed portion of loans 379,829 207,921
Unearned discounts and net
deferred loan origination costs (22,572) (2,709)
Allowance for losses on loans 58,139 60,157
-------------- ---------------
415,396 265,369
-------------- ---------------
Total $ 6,312,073 $ 2,533,957
============== ===============
The bank serviced loans owned by others amounting to $4,323.1 and $5,681.2
million at September 30, 1999 and 1998.
Accrued interest receivable on loans totaled $33.6 and $15.2 million at
September 30, 1999 and 1998, and is included in other assets in the Consolidated
Balance Sheets.
14. REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK
Real estate held for investment or sale is composed of the following:
September 30,
--------------------------------
(In thousands) 1999 1998
- ---------------------------------------------- -------------- --------------
Real estate held for investment $ 3,819 $ 3,819
Real estate held for sale 133,157 218,972
-------------- --------------
Sub-total 136,976 222,791
-------------- --------------
Less:
Allowance for losses on real estate held
for investment 202 202
Allowance for losses on real estate held
for sale 84,405 153,564
-------------- --------------
84,607 153,766
-------------- --------------
Total real estate held for investment or sale $ 52,369 $ 69,025
============== ==============
Loss on real estate held for investment or sale is composed of the following:
September 30,
----------------------------------------------
(In thousands) 1999 1998 1997
- ------------------------------ -------------- -------------- --------------
Provision for losses $ -- $ (18,860) $ (19,623)
Net gain (loss) from operating
properties 1,519 (288) (221)
Net gain on sales 32,530 2,609 1,156
-------------- -------------- --------------
Total $ 34,049 $ (16,539) $ (18,688)
============== ============== ==============
15. ALLOWANCES FOR LOSSES - THE BANK
Activity in the allowances for losses on loans receivable and real estate held
for investment or sale is summarized as follows:
Real Estate
Held for
Loans Investment
(In thousands) Receivable or Sale
- ------------------------------------------------ ---------- -------------
Balance, September 30, 1996 $ 95,523 $ 126,710
Provision for losses 125,115 19,623
Increase due to acquisition of loans 118 --
Charge-offs (126,506) (5,397)
Recoveries 11,429 --
---------- ------------
Balance, September 30, 1997 105,679 140,936
Provision for losses 150,829 18,860
Reduction due to sale of credit card portfolio (87,609) --
Charge-offs (122,652) (6,030)
Recoveries 13,910 --
---------- ------------
Balance, September 30, 1998 60,157 153,766
Provision for losses 22,880 --
Charge-offs (26,774) (69,159)
Recoveries 1,876 --
---------- ------------
Balance, September 30, 1999 $ 58,139 $ 84,607
========== ============
The allowances for losses at September 30, 1999 are based on management's
estimates of the amount of allowances required to reflect the losses incurred in
the loan and real estate portfolios based on circumstances and conditions known
at the time. As adjustments to the allowances become necessary, provisions for
losses are reported in operations in the periods they are determined to be
necessary.
16. ASSET-BACKED TRANSACTIONS - THE BANK
The bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.
The bank sold credit card receivables and received gross proceeds of $1,000.5
and $1,084.5 million during the years ended September 30, 1998 and 1997. The
bank recognized gains of $83.4 million on credit card securitization
transactions during fiscal 1998, including gains on sales of new receivables
into existing trusts. During fiscal 1997, the bank recognized gains of $33.1
million on credit card securitization transactions, including sales of new
receivables into existing trusts. At September 30, 1997, outstanding trust
certificate balances related to these and previous securitizations were $4,015.2
million and the related receivable balances contained in the trusts were
$4,659.7 million. On September 30, 1998, the bank sold its credit card portfolio
and related operations, including its rights to the excess cash flows generated
from such credit card securitizations. See Note 8.
The bank sold amounts on deposit in certain spread accounts associated with
certain outstanding credit card securitizations and received gross proceeds of
$36.0 and $144.2 million during fiscal 1998 and 1997. Losses of $1.8 and $7.2
million were recognized for the year ended September 30, 1998 and 1997, and are
included in servicing and securitization income in the Consolidated Statements
of Operations. Outstanding trust certificate balances related to the
securitizations were $225.9 million at September 30, 1997. On September 30,
1998, the bank sold its credit card portfolio and related operations, including
its obligations associated with such spread account securitizations. See Summary
of Significant Accounting Policies - The Bank.
The bank did not sell any automobile loan receivables during the year ended
September 30, 1999. The bank sold automobile loan receivables and received gross
proceeds of $534.7 and $938.9 million during the years ended September 30, 1998
and 1997. Gains recognized on these transactions were $23.1 and $26.9 million,
for the years ended September 30, 1998 and 1997. The outstanding trust
certificate balances and the related receivable balances contained in the trusts
were $556.2 million at September 30, 1999, $7.0 million of which represents
subordinate classes of certificates retained by the bank. The outstanding trust
certificate balances and the related receivable balances contained in the trusts
were $1,055.7 million at September 30, 1998, $12.6 million of which represents a
subordinate class of certificates retained by the bank. These retained
certificates were classified as trading securities at September 30, 1999 and
1998 and had carrying values of $7.0 and $11.3 million. See Summary of
Significant Accounting Policies - The Bank. The bank continues to service the
underlying loans and is contingently liable under various credit enhancement
facilities related to these transactions. See Note 28.
The bank did not sell any home equity credit line receivables into new trusts
during the year ended September 30, 1999. The bank sold home equity credit line
receivables of $79.4 million into existing trusts and recognized a gain of $2.9
million during the year ended September 30, 1999. The bank sold home equity
credit line receivables and received gross proceeds of $181.4 and $24.0 million
during the years ended September 30, 1998 and 1997, and recognized gains of
$13.8 and $3.4 million during the years ended September 30, 1998 and 1997. The
outstanding trust certificate balances and the related receivable balances
contained in the trusts were $193.1 million at September 30, 1999 and $305.7
million at September 30, 1998. The bank continues to service the underlying
loans and is contingently liable under various credit enhancement facilities
related to these transactions. See Note 28.
The bank did not sell any home loan and home equity receivables during the year
ended September 30, 1999. During the years ended September 30, 1998 and 1997,
the bank sold home loan and home equity receivables in asset-backed transactions
to investors representing interests in the trusts. The gross proceeds received
on these sales were $163.3 and $216.2 million for the years ended September 30,
1998 and 1997. The gains recognized on these transactions were $8.8 and $11.2
million for the years ended September 30, 1998 and 1997. During the year ended
September 30, 1999, the bank purchased, at auction, the remaining home loan and
home equity receivables sold during the year ended September 30, 1998, and
placed these receivables back in the bank's loan portfolio. At September 30,
1998, the outstanding trust certificate balances and the related receivable
balances contained in the trust were $148.0 million. See Note 28.
The bank did not sell any home loan receivables into new trusts during the year
ended September 30, 1999. The bank sold home loan receivables of $1.8 million
into an existing trust and did not recognize a gain during the year ended
September 30, 1999. The bank sold home loan receivables and received gross
proceeds of $4.0 and $154.4 million for the years ended September 30, 1998 and
1997. Gains recognized on these transactions were $0.4 and $7.2 million for the
years ended September 30, 1998 and 1997. The outstanding trust certificate
balances and the related receivable balances contained in the trusts were $111.2
million at September 30, 1999 and $168.7 million at September 30, 1998. The bank
continues to service the underlying loans and is contingently liable under
credit enhancement facilities related to these transactions. See Note 28.
17. PROPERTY AND EQUIPMENT - THE BANK
Property and equipment is composed of the following:
Estimated September 30,
Useful --------------------------------
(In thousands) Lives 1999 1998
- -------------------------- ---------------- -------------- ---------------
Land -- $ 52,391 $ 51,044
Construction in progress -- 22,029 8,830
Buildings and improvements 10-45 years 138,275 129,716
Leasehold improvements 5-20 years 98,900 90,967
Furniture and equipment 5-10 years 173,069 188,705
Automobiles 3-5 years 2,557 2,336
-------------- ---------------
487,221 471,598
Less:
Accumulated depreciation and amortization 182,688 185,682
-------------- ---------------
Total $ 304,533 $ 285,916
============== ===============
Depreciation and amortization expense amounted to $33.4, $34.0 and $28.7 million
for the years ended September 30, 1999, 1998 and 1997.
18. LEASES - THE BANK
The bank has noncancelable, long-term leases for office premises and retail
space which have a variety of terms expiring from fiscal 2000 to 2019 and ground
leases which have terms expiring from fiscal 2029 to 2080. These leases are
accounted for as operating leases. Some of the leases are subject to rent
adjustments in the future based upon changes in the Consumer Price Index and
some also contain renewal options. The following is a schedule by years of
future minimum lease payments required at September 30, 1999:
Year Ending
September 30, (In thousands)
------------- -------------
2000 $ 16,386
2001 15,201
2002 13,479
2003 11,882
2004 10,682
Thereafter 73,472
-------------
Total $ 141,102
=============
Rent expense totaled $17.9, $16.6 and $16.1 million for the years ended
September 30, 1999, 1998 and 1997.
19. DEPOSIT ACCOUNTS - THE BANK
An analysis of deposit accounts and the related weighted average effective
interest rates at year-end are as follows:
September 30,
--------------------------------------------------
1999 1998
------------------------ ------------------------
Weighted Weighted
Average Average
(Dollars in thousands) Amount Rate Amount Rate
- --------------------------- ------------ ---------- ------------ ----------
Demand accounts $ 432,114 -- $ 302,529 --
NOW accounts 1,174,055 0.89% 1,027,310 1.32%
Money market deposit
accounts 1,125,405 3.38% 1,019,569 3.62%
Statement savings accounts 888,212 1.92% 913,467 2.41%
Other deposit accounts 108,749 1.70% 97,696 2.10%
Certificate accounts, less
than $100 1,025,693 4.65% 1,157,603 5.20%
Certificate accounts, $100
or more 1,009,258 5.40% 370,056 5.69%
------------ ------------
Total $ 5,763,486 2.94% $ 4,888,230 3.19%
============ ============
Interest expense on deposit accounts is composed of the following:
Year Ended September 30,
----------------------------------------
(In thousands) 1999 1998 1997
- --------------------------------- ------------ ------------ ------------
NOW accounts $ 11,598 $ 19,796 $ 21,882
Money market deposit accounts 36,395 38,756 38,644
Statement savings accounts 19,226 28,419 30,927
Certificate accounts 77,084 89,958 75,180
Other deposit accounts 2,042 2,389 2,274
------------ ------------ ------------
Total $ 146,345 $ 179,318 $ 168,907
============ ============ ============
Outstanding certificate accounts at September 30, 1999 mature in the years
indicated as follows:
Year Ending
September 30, (In thousands)
------------- --------------
2000 $ 1,825,748
2001 123,753
2002 41,758
2003 31,776
2004 11,916
--------------
Total $ 2,034,951
==============
At September 30, 1999, certificate accounts of $100,000 or more have contractual
maturities as indicated below:
(In thousands)
-----------
Three months or less $ 275,819
Over three months through six months 139,972
Over six months through 12 months 575,843
Over 12 months 17,624
-----------
Total $ 1,009,258
===========
20. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
SHORT-TERM BORROWINGS - THE BANK
Short-term borrowings are summarized as follows:
September 30,
-----------------------------
(In thousands) 1999 1998 1997
- ------------------------------------------------ --------- --------- ---------
Securities sold under repurchase agreements:
Balance at year-end $ 526,571 $ 387,305 $ 2,606
Average amount outstanding during the year 371,660 302,564 483,076
Maximum amount outstanding at any month-end 526,571 806,393 946,090
Amount maturing within 30 days 526,571 387,305 2,606
Weighted average interest rate during the year 5.22% 5.68% 5.48%
Weighted average interest rate on year-end
balances 5.78% 5.63% 5.35%
Other short-term borrowings:
Balance at year-end $ 104,200 $ 104,449 $ 72,215
Average amount outstanding during the year 99,593 72,826 39,126
Maximum amount outstanding at any month-end 134,313 107,845 72,241
Amount maturing within 30 days 104,200 104,449 72,215
Weighted average interest rate during the year 4.46% 5.08% 5.11%
Weighted average interest rate on year-end
balances 4.62% 5.19% 5.34%
The investment and mortgage-backed securities underlying the repurchase
agreements were delivered to the dealers who arranged the transactions. The
dealers may have loaned such securities to other parties in the normal course of
their operations and agreed to resell to the bank the identical securities at
the maturities of the agreements.
At September 30, 1999, the bank had pledged mortgage-backed securities with a
book value of $133.0 million to secure certain other short-term borrowings.
21. FEDERAL HOME LOAN BANK ADVANCES - THE BANK
At September 30, 1999, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $1,743.2 million. The advances bear interest at a weighted
average interest rate of 5.49%, which is fixed for the term of the advances, and
mature over varying periods between January 2000 and February 2014.
Under a Specific Collateral Agreement with the FHLB, advances are secured by the
bank's FHLB stock, qualifying first mortgage loans with a total principal
balance of $2,419.9 million and certain mortgage-backed securities with a book
value of $170.2 million. The FHLB requires that members maintain qualifying
collateral at least equal to 100% of the member's outstanding advances at all
times. The collateral held by the FHLB in excess of the September 30, 1999
advances is available to secure additional advances from the FHLB, subject to
its collateralization guidelines.
22. CAPITAL NOTES - SUBORDINATED - THE BANK
Capital notes, which are subordinated to the interest of deposit account holders
and other senior debt are composed of the following:
September 30,
Issue ------------------- Interest
(Dollars in thousands) Date 1999 1998 Rate
- -------------------------------- ----------------- --------- --------- -------
Subordinated debentures due 2005 November 23, 1993 $ 150,000 $ 150,000 9 1/4%
Subordinated debentures due 2008 December 3, 1996 100,000 100,000 9 1/4%
--------- ---------
Total $ 250,000 $ 250,000
========= =========
The 9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures") are subject
to redemption at any time on or after December 1, 1998, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:
If redeemed during the 12-month period Redemption
beginning December 1, Price
- --------------------------------------------- --------------
1998 $ 104.625
1999 $ 103.700
2000 $ 102.775
2001 $ 101.850
2002 $ 100.925
2003 and thereafter $ 100.000
The 9 1/4% Subordinated Debentures due 2008 (the "1996 Debentures") are subject
to redemption at any time on or after December 1, 2001, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:
If redeemed during the 12-month period Redemption
beginning December 1, Price
- --------------------------------------------- --------------
2001 $ 104.625
2002 $ 103.700
2003 $ 102.775
2004 $ 101.850
2005 $ 100.925
2006 and thereafter $ 100.000
The indenture pursuant to which the 1993 Debentures were sold (the "Indenture")
provides that the bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be
continuing and the bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15.0 million, (ii) 662/3% of the bank's consolidated net income
(as defined in the Indenture) accrued on a cumulative basis commencing on
October 1, 1993 and (iii) the aggregate net cash proceeds received by the bank
after October 1, 1993 from the sale of qualified capital stock or certain debt
securities, minus the aggregate amount of any restricted payments made by the
bank. Notwithstanding the above restrictions on dividends, provided no event of
default has occurred or is continuing, the Indenture does not restrict the
payment of dividends on the 13% Preferred Stock (as defined below) or any
payment-in-kind preferred stock issued in lieu of cash dividends on the
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 23.
The bank received OTS approval to include the principal amount of the 1996
Debentures and the 1993 Debentures in the bank's supplementary capital for
regulatory capital purposes.
Deferred debt issuance costs, net of accumulated amortization, amounted to $7.9
and $8.6 million at September 30, 1999 and 1998, and are included in other
assets in the Consolidated Balance Sheets.
23. REAL ESTATE INVESTMENT TRUST SUBSIDIARY - THE BANK
On December 3, 1996, a new real estate investment trust subsidiary of the bank
(the "REIT Subsidiary") sold $150.0 million of its Noncumulative Exchangeable
Preferred Stock, Series A, par value $5.00 per share (the "REIT Preferred
Stock"), and received net cash proceeds of $144.0 million. Cash dividends on the
REIT Preferred Stock are payable quarterly in arrears at an annual rate of 10
3/8%. The liquidation value of each share of REIT Preferred Stock is $50
plus accrued and unpaid dividends. Except under certain limited circumstances,
the holders of the REIT Preferred Stock have no voting rights. The REIT
Preferred Stock is automatically exchangeable for a new series of Preferred
Stock of the bank upon the occurrence of certain events.
The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at
any time on or after January 15, 2007, in whole or in part, at the following per
share redemption prices plus accrued and unpaid dividends:
If redeemed during the 12-month period Redemption
beginning January 15, Price
- --------------------------------------- --------------
2007 $ 52.594
2008 $ 52.075
2009 $ 51.556
2010 $ 51.038
2011 $ 50.519
2012 and thereafter $ 50.000
The bank received OTS approval to include the proceeds from the sale of the REIT
Preferred Stock in the core capital of the bank for regulatory capital purposes
in an amount up to 25% of the bank's core capital. The net cash proceeds from
the sale of the REIT Preferred Stock is reflected in minority interest - other
in the Trust's Consolidated Balance Sheets. Dividends on the REIT Preferred
Stock are presented as a reduction of net income in the Consolidated Statements
of Operations.
24. PREFERRED STOCK - THE BANK
Cash dividends on the bank's Noncumulative Perpetual Preferred Stock, Series A
(the "Preferred Stock") are payable quarterly in arrears at an annual rate of
13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the bank.
The OTS has approved the inclusion of the Preferred Stock as core capital and
has approved the payment of dividends on the Preferred Stock, provided certain
conditions are met. The holders of the Preferred Stock have no voting rights,
except in certain limited circumstances.
Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25 per share, plus accrued and unpaid
dividends for the then-current dividend period in the event of any voluntary
liquidation of the bank, after payment of the deposit accounts and other
liabilities of the bank, and out of the assets available for distribution to
shareholders. The Preferred Stock ranks superior and prior to the issued and
outstanding common stock of the bank with respect to dividend and liquidation
rights.
The Preferred Stock is redeemable by the bank at its option at any time on and
after May 1, 2003, in whole or in part, at the following per share redemption
prices in cash, plus, in each case, an amount in cash equal to accrued and
unpaid dividends for the then-current dividend period:
If redeemed during the 12-month period Redemption
beginning May 1, Price
- --------------------------------------- --------------
2003 $ 27.250
2004 $ 27.025
2005 $ 26.800
2006 $ 26.575
2007 $ 26.350
2008 $ 26.125
2009 $ 25.900
2010 $ 25.675
2011 $ 25.450
2012 $ 25.225
2013 and thereafter $ 25.000
25. RETIREMENT PLAN - THE BANK
The bank participates in a defined contribution profit sharing retirement plan
(the "Plan") which covers those full-time employees who meet the requirements as
specified in the Plan. The Plan, which can be modified or discontinued at any
time, requires participating employees to contribute 2.0% of their compensation.
Corporate contributions, at the discretionary amount of three times the employee
contribution, were $7.2, $7.3 and $5.6 million for the years ended September 30,
1999, 1998 and 1997. There are no past service costs associated with the Plan
and the bank has no liability under the Plan other than its current
contributions. The Plan owns 4.0% of the bank's common stock.
26. REGULATORY MATTERS - THE BANK
The bank's regulatory capital requirements at September 30, 1999 were a 1.5%
tangible capital requirement, a 4.0% core capital requirement and an 8.0% total
risk-based capital requirement. Under the OTS "prompt corrective action"
regulations, the bank must maintain minimum leverage, tier 1 risk-based and
total risk-based capital ratios of 4.0%, 4.0% and 8.0%, to meet the ratios
established for "adequately capitalized" institutions. At September 30, 1999,
the bank was in compliance with its tangible, core and total risk-based
regulatory capital requirements and exceeded the capital standards established
for "well capitalized" institutions under the "prompt corrective action"
regulations. The information below is based upon the bank's understanding of the
applicable regulations and related interpretations.
SEPTEMBER 30, 1999
------------------------------------------------------------------
MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
---------------------- ---------------------- --------------------
As a % of As a % of As a % of
(Dollars in thousands) Amount Assets(4) Amount Assets Amount Assets
- -------------------------------- ---------- ---------- ---------- ----------- --------- ----------
Capital per financial statements $ 466,679
Minority interest in REIT
Subsidiary(1) 144,000
Net unrealized holding gains(2) (10)
----------
Adjusted capital 610,669
Adjustments for tangible and
core capital:
Intangible assets (56,887)
Non-allowable minority interest
in REIT Subsidiary(1) (8,725)
Non-includable subsidiaries(3) (3,957)
----------
Total tangible capital 541,100 5.94% $ 136,686 1.50% $ 404,414 4.44%
---------- ========== ========== =========== ========= ==========
Total core capital(4) 541,100 5.94% $ 364,497 4.00% $ 176,603 1.94%
---------- ========== ========== =========== ========= ==========
Tier 1 risk-based capital(4) 541,100 8.33% $ 260,261 4.00% $ 280,839 4.33%
---------- ========== ========== =========== ========= ==========
Adjustments for total risk-based
capital:
Subordinated capital debentures 250,000
Allowance for general loan
losses 51,392
----------
Total supplementary capital 301,392
----------
Total available capital 842,492
Equity investments(3) (6,542)
----------
Total risk-based capital(4) $ 835,950 13.04 % $ 520,522 8.00% $ 315,428 5.04%
========== ========== ========== =========== ========= ==========
(1) Eligible for inclusion in core capital in an amount up to 25% of the
bank's core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
from regulatory capital.
(3) Reflects an aggregate offset of $663,000 representing the allowance for
general loan losses maintained against the bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available
as a credit against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
and a total risk-based capital ratio of at least 10.0%.
At September 30, 1998, the bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "well capitalized" institutions under the "prompt
corrective action" regulations. The information below is based upon the bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
SEPTEMBER 30, 1998
------------------------------------------------------------------
MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
---------------------- ---------------------- --------------------
As a % of As a % of As a % of
(Dollars in thousands) Amount Assets(4) Amount Assets Amount Assets
- -------------------------------- ---------- ---------- ---------- ----------- --------- ----------
Capital per financial statements $ 464,757
Minority interest in REIT
Subsidiary(1) 144,000
Net unrealized holding gains(2) (58)
Adjusted capital 608,699
Adjustments for tangible and
core capital:
Intangible assets (63,144)
Non-allowable minority interest
in REIT Subsidiary(1) (11,433)
Non-includable subsidiaries(3) (3,852)
Total tangible capital 530,270 7.93% $ 100,253 1.50% $ 430,017 6.43%
---------- ========== ========== =========== ========= ==========
Total core capital(4) 530,270 7.93% $ 267,342 4.00% $ 262,928 3.93%
---------- ========== ========== =========== ========= ==========
Tier 1 risk-based capital(4) 530,270 12.93% $ 172,572 4.00% $ 357,698 8.93%
---------- ========== ========== =========== ========= ==========
Adjustments for total risk-based
capital:
Subordinated capital debentures 250,000
Allowance for general loan
losses 53,036
Total supplementary capital 303,036
Total available capital 833,306
Equity investments(3) (11,133)
----------
Total risk-based capital(4) $ 822,173 20.70 % $ 345,143 8.00% $ 477,030 12.70%
========== ========== ========== =========== ========= ==========
(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 $788,000 representing the allowance for
general loan losses maintained against the bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available
as a credit against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
and a total risk-based capital ratio of at least 10.0%.
At September 30, 1999 and 1998, the bank had $4.2 and $4.1 million, in loans to
and investments in subsidiaries engaged in activities impermissible for national
banks ("non-includable subsidiaries") which were fully deducted from all three
capital requirements. At September 30, 1999 and 1998, the bank also had two
equity investments with aggregate balances, after subsequent valuation
allowances, of $7.0 and $11.7 million, which were fully deducted from total
risk-based capital.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In May 1999, the bank
received from the OTS an extension of the holding periods for certain of its REO
properties through May 14, 2000. The following table sets forth the bank's REO
at September 30, 1999, after valuation allowances of $84.4 million, by the
fiscal year in which the property was acquired through foreclosure.
Fiscal Year (In thousands)
----------- --------------
1990 $ 14,137(1)(2)
1991 27,683(2)
1992 123(2)
1993 --
1994 --
1995 6,108
1996 --
1997 --
1998 62
1999 639
---------
Total REO $ 48,752
=========
(1) Includes REO with an aggregate net book value of $6.5 million, which the
bank treats as equity investments for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $35.4 million, for which
the bank received an extension of the holding periods through May 14, 2000.
At the request of the OTS, the Board of Directors of the bank adopted a
resolution in March 1996 which, among other things, permits the bank: (i) to
make tax sharing payments without OTS approval to the Trust of up to $15.0
million relating to any single fiscal year; and (ii) to declare dividends on its
stock in any quarterly period up to the lesser of (a) 50% of its after tax net
income for the immediately preceding quarter or (b) 50% of the average quarterly
after tax net income for the immediately preceding four quarter period, minus
(in either case) dividends declared on the bank's preferred stock during that
quarterly period. The resolution also provides that the bank will present a plan
annually to the OTS detailing anticipated consumer loan securitization activity.
Effective May 18, 1999, the bank's Board of Directors rescinded this resolution
reflecting the improvement in the bank's overall condition since adoption of the
March 1996 resolution.
27. TRANSACTIONS WITH RELATED PARTIES - THE BANK
Loans Receivable
From time to time, in the normal course of business, the bank may make loans to
executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same terms
as similar loans with unrelated parties. An analysis of activity with respect to
these loans for the year ended September 30, 1999 is as follows:
(In thousands)
---------------
Balance, September 30, 1998 $ 3,395
Additions 823
Reductions (273)
---------------
Balance, September 30, 1999 $ 3,945
================
Services
B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the bank. These services include property
management, insurance brokerage and leasing. Fees for these services were
$35,000, $24,000 and $42,000 for the years ended September 30, 1999, 1998 and
1997.
The law firm in which one director of the bank is a partner received $4.7, $4.6
and $4.9 million for legal services rendered to the bank during the years ended
September 30, 1999, 1998 and 1997.
For the years ended September 30, 1999, 1998 and 1997, one of the directors of
the bank was paid $50,000, $75,000 and $50,000, for consulting services rendered
to the bank. Another director of the bank was paid total fees of $100,000 for
each of the years ended September 30, 1999, 1998 and 1997, for consulting
services. A third director of the bank was paid $100,000, $50,000 and $17,000
for consulting services rendered to the bank for the years ended September 30,
1999, 1998 and 1997.
Tax Sharing Agreement
The bank and the other companies in the Trust's affiliated group are parties to
a tax sharing agreement dated June 28, 1990 (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides for payments to be made by members of the Trust's
affiliated group to the Trust based on their separate company tax liabilities.
The Tax Sharing Agreement also provides that, to the extent net operating losses
or tax credits of a particular member are used to reduce the overall tax
liability of the Trust's affiliated group, such member will be reimbursed by the
other members of the affiliated group that have taxable income in an amount
equal to such tax reduction. The bank paid $6.6, $5.6 and $9.8 million to the
Trust during fiscal 1999, 1998 and 1997, under the Tax Sharing Agreement. OTS
approval of the tax sharing payments during fiscal 1999, 1998 and 1997 was
conditioned on a pledge by the Trust of certain assets to secure certain of its
obligations under the Tax Sharing Agreement. At September 30, 1999 and 1998, the
estimated tax sharing payment payable to the Trust by the bank was $3.6 and $6.6
million.
Other
The bank paid $5.0, $5.0 and $4.9 million for office space leased from or
managed by companies affiliated with the bank or its directors during the years
ended September 30, 1999, 1998 and 1997.
The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and Van
Ness Square Corporation, affiliates of the bank, from time to time maintain
interest-bearing deposit accounts with the bank. Those accounts totaled $31.0
and $28.0 million at September 30, 1999 and 1998. The bank paid interest on the
accounts amounting to $716,000, $870,000 and $599,000 during fiscal years 1999,
1998 and 1997.
28. FINANCIAL INSTRUMENTS - THE BANK
The bank, in the normal course of business, is a party to financial instruments
with off-balance-sheet risk and other derivative financial instruments to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit at both fixed and variable rates, letters of credit,
interest-rate cap agreements and assets sold with limited recourse. All such
financial instruments are held or issued for purposes other than trading.
These instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the Consolidated
Balance Sheets.
The contractual or notional amount of these instruments reflect the extent of
involvement the bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to Extend Credit
The bank had approximately $1.2 billion of commitments to extend credit at
September 30, 1999. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments are subject to
the bank's normal underwriting and credit evaluation policies and procedures.
Standby Letters of Credit
Standby letters of credit are conditional commitments issued by the bank to
guarantee the performance of a customer to a third party. At September 30, 1999,
the bank had written standby letters of credit in the amount of $34.7 million,
which were issued to guarantee the performance of and irrevocably assure payment
by customers under construction projects.
Of the total, $21.1 million will expire in fiscal 2000 and the remainder will
expire over time through fiscal 2004. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan commitments to customers. Mortgage-backed securities with a book value of
$2.7 million were pledged as collateral for certain of these letters of credit
at September 30, 1999.
Recourse Arrangements
The bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $67.0 and $12.3
million at September 30, 1999, and $110.2 and $12.5 million at September 30,
1998, both of which are included in other assets in the Consolidated Balance
Sheets. In addition, the bank owned subordinated automobile receivables-backed
securities with carrying values of $7.0 and $11.3 million at September 30, 1999
and 1998, which were classified as trading securities in the Consolidated
Balance Sheets.
The bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
bank. At September 30, 1999, recourse to the bank under these arrangements was
$13.6 million, consisting of restricted cash accounts amounting to $7.6 million
and overcollateralization of receivables of $6.0 million.
The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At September 30, 1999, recourse to
the bank under this arrangement totaled $752,000.
Derivative Financial Instruments
Interest-rate cap agreements may be used to limit the bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 1999, the bank was not a party to
any interest-rate cap agreements.
To manage the potentially adverse impact of interest rate movements on its held
for sale fixed-rate mortgage loan pipeline, the bank hedges its pipeline by
entering into whole loan and mortgage-backed security forward sale commitments
and mortgage-backed security forward purchase commitments.
Forward sale commitments are used to sell specific financial instruments (whole
loans or mortgage-backed securities) at a future date for a specified price.
Forward purchase commitments are used to purchase specific financial instruments
(whole loans or mortgage-backed securities) at a future date for a specified
price.
At September 30, 1999, the bank had mortgage-backed security forward sale
commitments of $86.5 million and mortgage-backed security forward purchase
commitments of $26.5 million related to its hedging activities. In addition, the
bank did not have any whole loan forward sale commitments at September 30, 1999.
Forward commitments generally settle within 90 days. Gains and losses are
deferred and recorded as a component of the gain on sales of loans at the time
the forward commitment matures.
Concentrations of Credit
The bank's principal real estate lending market is the metropolitan Washington,
D.C. area. In addition, a significant portion of the bank's consumer loan
portfolio was generated by customers residing in the metropolitan Washington,
D.C. area. Service industries and federal, state and local governments employ a
significant portion of the Washington, D.C. area labor force. Adverse changes in
economic conditions could have a direct impact on the timing and amount of
payments by borrowers.
29. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - THE BANK
The majority of the bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting in a
great degree of subjectivity inherent in the indicated fair value amounts.
Because the fair value is estimated as of the balance sheet date, the amount
which will actually be realized or paid upon settlement or maturity could be
significantly different. Comparability among financial institutions may be
difficult due to the wide range of permitted valuation techniques and the
numerous estimates and assumptions which must be made. The estimated fair values
of the bank's financial instruments at September 30, 1999 and 1998 are as
follows:
September 30,
-----------------------------------------------------------
1999 1998
------------------------ -------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------- ---------- ------------ -------------- ---------------
Financial assets:
Cash, due from banks,
interest-bearing deposits, federal
funds sold and securities purchased
under agreements to resell $ 590,146 $ 590,146 $ 1,216,456 $ 1,216,456
Loans held for sale 116,797 116,825 56,287 56,991
Loans held for securitization and sale -- -- 125,000 125,000
Trading securities 6,955 6,955 11,319 11,319
Investment securities 44,400 44,434 43,999 44,528
Mortgage-backed securities 1,311,370 1,285,442 2,025,817 2,014,819
Loans receivable, net 6,312,073 6,243,689 2,533,957 2,597,497
Other financial assets 325,207 326,257 272,997 274,719
Financial liabilities:
Deposit accounts with
no stated maturities 3,728,535 3,728,535 3,360,571 3,360,571
Deposit accounts with
stated maturities 2,034,951 2,081,821 1,527,659 1,521,752
Securities sold under repurchase
agreements and other short-term
borrowings, notes payable and
Federal Home Loan Bank advances 2,374,332 2,406,806 844,211 842,155
Capital notes-subordinated 242,123(1) 250,000 241,417(1) 243,750
Other financial liabilities 131,939 131,939 98,354 98,354
- --------------------------------------------------------------------------------------------------
(1) Net of deferred debt issuance costs which are included in other assets in
the Consolidated Balance Sheets.
The following methods and assumptions were used to estimate the fair value
amounts at September 30, 1999 and 1998:
Cash, due from banks, interest-bearing deposits, federal funds sold and
securities purchased under agreements to resell: Carrying amount approximates
fair value.
Loans held for sale: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.
Loans held for securitization and sale: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.
Trading securities: Fair value is equal to carrying value.
Investment securities: Fair value is based on quoted market prices.
Mortgage-backed securities: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.
Loans and leases receivable, net: Fair value of certain homogeneous groups of
loans (e.g. single-family residential, automobile loans, home improvement loans
and fixed-rate commercial and multifamily loans) is estimated using discounted
cash flow analyses based on contractual repayment schedules. The discount rates
used in these analyses are based on either the interest rates paid on U.S.
Treasury securities of comparable maturities adjusted for credit risk and
non-interest operating costs, or the interest rates currently offered by the
bank for loans with similar terms to borrowers of similar credit quality. For
loans which reprice frequently at market rates (e.g. home equity, variable-rate
commercial and multifamily, real estate construction and ground loans), the
carrying amount approximates fair value. The fair value of the bank's loan
portfolio as presented above does not include the value of established credit
line customer relationships, or the value relating to estimated cash flows from
future receivables and the associated fees generated from existing customers.
Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips are carried at fair value. The fair value of one of
the bank's investments is based on quoted market prices.
Deposit accounts with no stated maturities: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
bank's established deposit customer relationships.
Deposit accounts with stated maturities: Fair value of fixed-rate certificates
of deposit is estimated based on discounted cash flow analyses using the
remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.
Borrowings: These instruments consist of securities sold under repurchase
agreements and other short-term borrowings, notes payable and Federal Home Loan
Bank advances. For borrowings which either reprice frequently to market interest
rates or are short-term in duration, the carrying amount approximates fair
value. Fair value of the remaining amounts borrowed is estimated based on
discounted cash flow analyses using interest rates currently charged by the
lender for comparable borrowings with similar remaining maturities.
Capital notes-subordinated: Fair value of the 1993 Debentures and the 1996
Debentures is based on quoted market prices.
Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable and other short-term payables
approximates fair value.
Off-balance sheet instruments: The difference between the original fees charged
by the bank for commitments to extend credit and letters of credit and the
current fees charged to enter into similar agreements is immaterial. Fair value
of forward commitments is based on the estimated amount that the bank would pay
to terminate the arrangements at the reporting date, taking into account the
remaining terms of the arrangements and the counterparties' credit standing,
where applicable, which is immaterial.
30. LITIGATION - THE BANK
During the normal course of business, the bank is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the bank is a defendant may be material, the bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the bank.
31. COMMITMENTS AND CONTINGENCIES - THE TRUST
The Trust is involved in a number of lawsuits arising from the normal course of
its business. On the basis of consultations with counsel, management does not
believe that any material loss will result from the resolution of these matters.
32. INCOME TAXES - THE TRUST
The Trust voluntarily terminated its qualification as a real estate investment
trust under the Internal Revenue Code during fiscal 1978.
The provisions for income taxes for the years ended September 30, 1999, 1998 and
1997, consist of the following:
Year Ended September 30,
--------------------------------------------
(In thousands) 1999 1998 1997
- ----------------------------------------------------------- ------------- ------------- -------------
Current provision (benefit):
Federal $ (50,552) $ 94,828 $ (1,800)
State 619 2,948 1,658
------------- ------------- -------------
(49,933) 97,776 (142)
------------- ------------- -------------
Deferred provision (benefit):
Federal 73,415 (35,291) 16,113
State 5,820 (19,616) (3,159)
------------- ------------- -------------
79,235 (54,907) 12,954
------------- ------------- -------------
Subtotal 29,302 42,869 12,812
Tax effect of other items:
Tax effect of extraordinary item -- (5,169) --
Tax effect of net unrealized holding gains
(losses) reported in stockholders' equity (26) 361 904
------------- ------------- -------------
Total $ 29,276 $ 38,061 $ 13,716
============= ============= =============
The Trust's effective income tax rate varies from the statutory Federal income
tax rate as a result of the following factors:
Year Ended September 30,
--------------------------------------------
(In thousands) 1999 1998 1997
- ----------------------------------------------------------- ------------- ------------- -------------
Computed tax at statutory Federal income tax rate $ 29,990 $ 58,077 $ 21,418
Increase (reduction) in taxes resulting from:
Minority interest (5,447) (5,447) (4,524)
Goodwill and other purchase accounting adjustments 189 389 699
Change in valuation allowance for deferred
tax asset allocated to income tax expense 366 (7,074) 7,066
State income taxes 3,952 (4,397) (7,953)
Other 252 1,321 (3,894)
------------- ------------- -------------
$ 29,302 $ 42,869 $ 12,812
============= ============= =============
The components of the net deferred tax asset were as follows:
September 30,
-----------------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------------- ------------- -------------
Deferred tax assets:
Provision for losses in excess of tax deductions $ -- $ 25,103
Intangible assets and goodwill, net 6,236 5,736
Deferred compensation 5,678 4,371
Deferred income -- 3,416
Unrealized losses on servicing assets 4,483 4,483
Asset securitizations, net 1,965 26,184
State net operating loss carry forwards 41,562 30,021
Partnership investments 345 1,360
Forgiveness of debt 3,037 3,483
Mortgage servicing rights -- 2,203
Unrealized losses on property, net 8,691 8,139
Depreciation 2,868 2,670
Other 9,054 4,047
------------- -------------
Gross deferred tax assets 83,919 121,216
------------- -------------
Deferred tax liabilities:
Net unrealized holding losses (30,930) (1,294)
Mortgage servicing rights (2,897) --
Saul Holdings (4,509) (4,509)
Lease financing (6,645) --
Depreciation (2,303) (712)
FHLB stock dividends (1,883) (3,288)
Other (4,674) (2,491)
------------- -------------
Gross deferred tax liabilities (53,841) (12,294)
------------- -------------
Valuation allowance (17,989) (17,623)
------------- -------------
Net deferred tax asset $ 12,089 $ 91,299
============= =============
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. As of September 30,
1999, management has maintained a valuation allowance in part to reduce the net
deferred tax asset for net operating loss carryforwards related to state taxes.
Historically, the bank has generated taxable income while the Real Estate Trust
has generated taxable losses. The net operating loss carryforwards are not
expected to be realizable for state tax purposes. For federal tax purposes,
there are no net operating loss carryforwards.
Management believes the existing net deductible temporary differences will
reverse during periods in which the bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive
consolidated earnings will continue as a result of the bank's earnings.
TAX SHARING AGREEMENT
The Trust's affiliated group, including the bank, entered into a tax sharing
agreement dated June 28, 1990. This agreement provides that payments be made by
members of the affiliated group to the Trust based on their respective allocable
shares of the overall federal income tax liability of the affiliated group for
taxable years and partial taxable years beginning on or after that date.
Allocable shares of the overall tax liability are prorated among the members
with taxable income calculated on a separate return basis. The agreement also
provides that, to the extent net operating losses or tax credits of a particular
member are used to reduce overall tax liability of the Trust's affiliated group,
such member will be reimbursed on a dollar-for-dollar basis by the other members
of the affiliated group that have taxable income in an amount equal to such tax
reduction. Under the tax sharing agreement, the bank paid $6.6, $5.6 and $9.8
million, to the Trust during fiscal 1999, 1998 and 1997.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. It is anticipated that the Trust's
consolidation of the bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the bank would otherwise owe. If in any future year, the
bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated Federal income
tax returns or (ii) the amount of tax refund which the bank would otherwise have
been able to claim if it were not being included in the consolidated Federal
income tax return of the group.
As of September 30, 1999, there was no alternative minimum tax carryforward.
33. SHAREHOLDERS' EQUITY - THE TRUST
In June 1990, the Trust acquired from affiliated companies an additional equity
interest in the bank, which raised the Trust's ownership share of the bank to
80%. In exchange for the interest acquired, the Trust issued 450,000 shares of a
new class of $10.50 cumulative preferred shares of beneficial interest with a
par value of $1 (the "preferred shares"). The transaction has been accounted for
at historical cost in a manner similar to the pooling of interests method
because the entities are considered to be under common control. In addition, the
Trust acquired two real estate properties from an affiliate in exchange for
66,000 preferred shares.
At September 30, 1999, 1998, and 1997, the amount of dividends in arrears on the
preferred shares was $33.0 million ($63.88 per share), $34.0 million ($65.98 per
share) and $36.2 million ($70.21 per share). Based on the dividends paid on the
preferred shares during fiscal 1996, the Trust recorded a liability at September
30, 1996, equal to the total dividends in arrears on that date. The Trust paid
preferred dividends of $6.5 million, $7.6 million and $750,000 in fiscal 1999,
1998 and 1997.
34. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST
Year Ended September 30, 1999
--------------------------------------
(In thousands, except per share amounts) December March June September
- ---------------------------------------- --------- -------- --------- ---------
Real Estate Trust:
Total income $ 24,690 $24,522 $ 29,392 $ 27,421
Operating income (loss) (3,532) (2,625) 181 (4,315)
The Bank:
Interest income 110,405 124,271 134,537 150,280
Interest expense 52,102 57,597 62,560 73,248
Provision for loan losses (3,773) (6,616) (5,727) (6,764)
Other income 29,517 67,648 36,612 36,419
Operating income 7,317 49,671 19,973 19,019
Total Company:
Operating income 3,785 47,046 20,154 14,704
Income before minority interest 3,779 31,100 12,543 8,965
Net income (loss) (2,505) 19,534 4,923 1,518
Net income (loss) per common share (0.80) 3.77 0.74 0.03
- -------------------------------------------------------------------------------
Year Ended September 30, 1998
--------------------------------------
(In thousands, except per share amounts) December March June September
- ---------------------------------------- --------- -------- --------- ---------
Real Estate Trust:
Total income $ 21,749 $22,167 $ 28,833 $ 25,843
Operating income (loss) (7,430) (5,542) (1,975) (3,510)
The Bank:
Interest income 106,395 106,774 109,795 112,843
Interest expense 58,292 55,180 61,606 63,332
Provision for loan losses (35,062) (16,612) (28,298) (70,857)
Other income (loss) 129,369 95,820 87,530 329,138
Operating income (loss) 29,433 12,474 (17,624) 160,124
Total Company:
Operating income (loss) 22,003 6,932 (19,599) 156,614
Income (loss) before minority interest 16,156 (3,086) (9,528) 109,938
Net income (loss) 6,856 (10,153) (13,299) 82,720
Net income (loss) per common share 1.14 (2.38) (3.04) 16.86
- -------------------------------------------------------------------------------
35. INDUSTRY SEGMENT INFORMATION - THE TRUST
Industry segment information with regard to the Real Estate Trust is presented
below. For information regarding the bank, please refer to the "Banking"
sections of the accompanying financial statements.
Year Ended September 30
-------------------------------
(In thousands) 1999 1998 1997
- ----------------------------------------------- --------- --------- ---------
INCOME
Hotels $ 78,914 $ 71,424 $ 59,464
Office and industrial properties 24,289 22,883 21,097
Other 2,822 4,285 4,008
--------- --------- ---------
$106,025 $ 98,592 $ 84,569
========= ========= =========
OPERATING PROFIT (LOSS)
Hotels $ 21,167 $ 19,175 $ 14,755
Office and industrial properties 11,465 10,865 9,020
Other 7,255 4,546 6,429
--------- --------- ---------
39,887 34,586 30,204
Gain (loss) on sales of property -- (331) 895
Interest and debt expense (39,585) (42,817) (40,819)
Advisory fee, management and leasing
fees - related parties (9,431) (8,742) (7,995)
General and administrative (1,162) (1,153) (1,272)
--------- --------- ---------
Operating loss $(10,291) $(18,457) $(18,987)
========= ========= =========
IDENTIFIABLE ASSETS (AT YEAR END)
Hotels $146,585 $119,258 $ 86,815
Office and industrial properties 73,613 75,332 78,063
Other 144,873 128,842 135,695
--------- --------- ---------
$365,071 $323,432 $300,573
========= ========= =========
DEPRECIATION
Hotels $ 7,708 $ 6,733 $ 6,186
Office and industrial properties 4,753 4,387 4,311
Other 47 50 46
--------- --------- ---------
$ 12,508 $ 11,170 $ 10,543
========= ========= =========
CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS
Hotels $ 40,803 $ 39,539 $ 8,462
Office and industrial properties 5,249 6,389 5,288
Other 935 537 1,079
--------- --------- ---------
$ 46,987 $ 46,465 $ 14,829
========= ========= =========
36. CONDENSED FINANCIAL STATEMENTS - THE TRUST
These condensed financial statements reflect the Real Estate Trust and all its
consolidated subsidiaries except for the bank which has been reflected on the
equity method.
CONDENSED BALANCE SHEETS
September 30
------------------------------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------- --------------------- --------------------
ASSETS
Income-producing properties $ 312,181 $ 279,951
Accumulated depreciation (104,774) (96,072)
--------------------- --------------------
207,407 183,879
Land parcels 39,448 40,110
Construction in progress 20,498 8,694
Equity investment in bank 292,942 288,965
Cash and cash equivalents 17,857 13,950
Other assets 79,861 76,799
--------------------- --------------------
TOTAL ASSETS $ 658,013 $ 612,397
===================== ====================
LIABILITIES
Mortgage notes payable $ 213,447 $ 198,874
Notes payable - secured 216,000 200,000
Notes payable - unsecured 46,122 50,335
Deferred gains - real estate 112,834 112,883
Accrued dividends payable - preferred shares of beneficial interest 32,967 34,049
Other liabilities and accrued expenses 42,268 39,895
--------------------- --------------------
Total liabilities 663,638 636,036
--------------------- --------------------
TOTAL SHAREHOLDERS' DEFICIT* (5,625) (23,639)
--------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 658,013 $ 612,397
===================== ====================
* See Consolidated Statements of Shareholders' Deficit
CONDENSED STATEMENTS OF OPERATIONS
For the Year Ended September 30
---------------------------------------------------------------
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------- -------------------- --------------------- --------------------
Total income $ 106,025 $ 98,592 $ 84,569
Total expenses (121,676) (118,636) (108,601)
Equity in earnings of unconsolidated entities 5,360 1,918 4,150
Gain (loss) on sale of property -- (331) 895
-------------------- --------------------- --------------------
Real estate operating loss (10,291) (18,457) (18,987)
Equity in earnings of bank 30,416 88,172 27,391
-------------------- --------------------- --------------------
Total company operating income 20,125 69,715 8,404
Income tax benefit (3,345) (6,010) (10,456)
-------------------- --------------------- --------------------
Income before extraordinary item 23,470 75,725 18,860
Extraordinary item: loss on early extinguishment of debt -- (9,601) --
-------------------- --------------------- --------------------
TOTAL COMPANY NET INCOME $ 23,470 $ 66,124 $ 18,860
==================== ===================== ====================
CONDENSED STATEMENTS OF CASH FLOWS
For the Year Ended September 30
---------------------------------------------------------------
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------- -------------------- --------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,470 $ 66,124 $ 18,860
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 12,481 11,170 10,543
(Gain) loss on sale of property -- 331 (895)
Early extinguishment of debt, net of taxes -- 9,601 --
Equity in earnings of bank (30,416) (88,172) (27,391)
(Increase) decrease in deferred tax asset (803) 954 (3,252)
(Increase) decrease in accounts receivable and accrued income (1,546) (1,229) 17
Increase in accounts payable and accrued expenses 3,346 2,708 1,058
(Increase) decrease in tax sharing receivable 3,794 (6,545) 2,492
Other 20,062 19,796 5,479
-------------------- --------------------- --------------------
Net cash provided by operating activities 30,388 14,738 6,911
-------------------- --------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - properties (46,987) (19,815) (10,120)
Property acquisitions -- (26,650) (4,709)
Property sales -- -- 1,399
Equity investment in unconsolidated entities 2,748 1,348 1,723
Other 2 2 43
-------------------- --------------------- --------------------
Net cash used in investing activities (44,237) (45,115) (11,664)
-------------------- --------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 53,498 296,316 32,894
Repayments of long-term debt (27,138) (245,287) (24,033)
Costs of obtaining financings (2,104) (7,295) (626)
Loan prepayment fees -- (10,055) --
Dividends paid - preferred shares of beneficial interest (6,500) (7,600) (750)
-------------------- --------------------- --------------------
Net cash provided by financing activities 17,756 26,079 7,485
-------------------- --------------------- --------------------
Net increase (decrease) in cash and cash equivalents 3,907 (4,298) 2,732
Cash and cash equivalents at beginning of year 13,950 18,248 15,516
-------------------- --------------------- --------------------
Cash and cash equivalents at end of year $ 17,857 $ 13,950 $ 18,248
==================== ===================== ====================
MANAGEMENT'S STATEMENT ON RESPONSIBILITY
The Consolidated Financial Statements and related financial information in this
report have been prepared by the Advisor in accordance with generally
accepted accounting principles appropriate in the circumstances, based on best
estimates and judgments, with consideration given to materiality.
The Trust maintains a system of internal accounting control supported by
documentation to provide reasonable assurance that the books and records reflect
authorized transactions of the Trust, and that the assets of the Trust are
safeguarded.
The Board of Trustees exercises its responsibility for the Trust's financial
statements through its Audit Committee, which is composed of two outside
Trustees who meet periodically with the Trust's independent accountants and
management. The committee considers the audit scope, discusses financial and
reporting subjects, and reviews management actions on these matters. The
independent accountants have full access to the Audit Committee.
The independent accountants are recommended by the Audit Committee and confirmed
by the Board of Trustees. They provide an objective assessment of the fairness
and accuracy of the financial statements, consider the adequacy of the system of
internal accounting controls, and perform such tests and other procedures as
they deem necessary to express an opinion on the fairness of the financial
statements. Management believes that the policies and procedures it has
established provide reasonable assurance that its operations are conducted in
conformity with law and a high standard of business conduct.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The Declaration of Trust provides that there shall be no fewer than three nor
more than twelve trustees, as determined from time to time by the trustees in
office. The Board of Trustees has fixed its permanent membership at six trustees
divided into three classes with overlapping three-year terms. The term of each
class expires at the Annual Meeting of Shareholders, which is usually held on
the last Friday of January.
The following list sets forth the name, age, position with the Trust, present
principal occupation or employment and material occupations, positions, offices
or employments during the past five years of each trustee and executive officer
of the Trust. Unless otherwise indicated, each individual has held an office
with the Trust for at least the past five years.
Class One Trustees -- Terms End at 2000 Annual Meeting
Gilbert M. Grosvenor, age 68, has served as a Trustee since 1971. Mr. Grosvenor
also serves as Chairman of the Board of Trustees of the National Geographic
Society and as a Director of the Bank, Saul Centers, Inc., Marriott
International Corp., and Ethyl Corporation.
B. Francis Saul II, age 67, has served as Chairman and Chief Executive Officer
of the Trust since 1969 and as a Trustee since 1964. Mr. Saul also serves as
President and Chairman of the Board of Directors of B. F. Saul Company, B. F.
Saul Advisory Company, Chevy Chase Property Company, Westminster Investing
Corporation, and Chevy Chase Lake Corporation, as Chairman of the Board and
Chief Executive Officer of the bank and Saul Centers, Inc., and as a Trustee of
the National Geographic Society and the Brookings Institute. Mr. Saul is the
father of B. Francis Saul III.
Class Two Trustees -- Terms End at 2001 Annual Meeting
George M. Rogers, Jr., age 66, has served as a Trustee since 1969. Mr. Rogers's
professional corporation is a partner in the law firm of Shaw Pittman,
Washington, D.C., which serves as counsel to the Trust and the bank. Mr. Rogers
serves as a Director of the bank, B. F. Saul Company, Chevy Chase Property
Company, Westminster Investing Corporation, and Chevy Chase Lake Corporation.
B. Francis Saul III, age 37, has served as Trustee and Vice President of the
Trust since 1997. Mr. Saul also serves as a Director and/or Officer of the bank,
B. F. Saul Company, B. F. Saul Advisory Company, Franklin Property Company,
Chevy Chase Property Company, Westminster Investing Corporation, and Saul
Centers, Inc. He is also a Director of the Greater Washington Boys and Girls
Club and The Heights School. Mr. Saul is the son of B. Francis Saul II.
Class Three Trustees -- Terms End at 2002 Annual Meeting
Garland J. Bloom, Jr., age 68, has served as a Trustee since 1964. He is
currently a real estate consultant. Mr. Bloom was formerly Executive Vice
President and Principal of GMB Associates, Inc. (a real state finance and
management firm) from 1988 to 1990 and Vice Chairman and Chief Operating Officer
of Smithy-Braedon Company (a real estate finance and management firm) from 1985
to 1987.
John R. Whitmore, age 66, has served as a Trustee since 1984. He also has served
as Senior Advisor to The Bessemer Group, Incorporated (a financial management
and banking firm) and its Bessemer Trust Company subsidiaries since 1998. Mr.
Whitmore is a director of Chevy Chase Property Company, B. F. Saul Company and
Saul Centers, Inc. During the period 1975-1998, Mr. Whitmore was President and
Chief Executive Officer of Bessemer Securities Corporation.
Executive Officers of the Trust Who Are Not Directors
Philip D. Caraci, age 61, serves as Senior Vice President and Secretary of the
Trust, Executive Vice President of B.F. Saul Company, Senior Vice President of
B. F. Saul Advisory Company, Chairman of the Board of Franklin Property Company,
and a Director and President of Saul Centers, Inc.
Stephen R. Halpin, Jr., age 44, serves as Vice President and Chief Financial
Officer of the Trust. He also serves as Executive Vice President and Chief
Financial Officer of the bank.
Ross E. Heasley, age 60, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company, Franklin Property Company and Saul
Centers, Inc.
Henry Ravenel, Jr., age 65, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company and Saul Centers, Inc.
William K. Albright, age 68, serves as Vice President and Treasurer of the
Trust, B. F. Saul Company, Franklin Property Company and B. F. Saul Advisory
Company, and as Vice President of Saul Centers, Inc.
Committees of the Board of Trustees
The Board of Trustees met four times during fiscal 1999. Each member of the
board attended at least 75% of the aggregate number of meetings of the board and
of the committees of the board on which he served.
The Board of Trustees has three standing committees: the Audit Committee, the
Executive Committee and the Nominating Committee.
The Audit Committee is composed of Messrs. Bloom and Grosvenor. Its duties
include nominating the Trust's independent auditors, discussing with them the
scope of their examination of the Trust, reviewing with them the Trust's
financial statements and accompanying report, and reviewing their
recommendations regarding internal controls and related matters. This committee
met four times during fiscal 1999.
The Executive Committee is composed of Messrs. Rogers, Saul II and Whitmore. It
is empowered to oversee day-to-day actions of the Advisor and Franklin Property
Company in connection with the operations of the Trust, including the
acquisition, administration, sale or disposition of investments. This committee
did not meet during fiscal 1999.
The Nominating Committee is composed of Messrs. Rogers and Whitmore. Its
function is to screen and make recommendations to the Board of Trustees
regarding potential candidates for membership on the board and to perform such
other duties as may be assigned to it from time to time. This committee did not
meet during fiscal 1999.
Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee
of $600 for each board or committee meeting attended. Trustees from outside the
Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul II is not paid for
attending Executive Committee meetings. For the fiscal year ended September 30,
1999, the Real Estate Trust paid total fees of $94,000 to the trustees,
including $15,000 to Mr. Saul II.
EXECUTIVE COMPENSATION
The Trust pays no compensation to its executive officers for their services in
such capacity. Mr. Saul II receives compensation from the bank for his services
as the bank's Chairman of the Board of Directors and Chief Executive Officer,
and Mr. Halpin receives compensation from the bank for his services as
Executive Vice President and Chief Financial Officer. No other executive
officers of the Trust received any compensation from the Trust or its
subsidiaries with respect to any of the fiscal years ended September 30, 1999,
1998 or 1997.
Summary of Cash and Certain Other Compensation
The following table sets forth the cash compensation paid by the bank to
Mr. Saul II and Mr. Halpin for or with respect to the fiscal years ended
September 30, 1999, 1998 and 1997 for all capacities in which they served during
such fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Long-Term All
Name and Principal Annual Compensation Other Compensation
Position Year Salary Bonus Compensation Payouts
- ------------------------------ ------ --------------- -------------- ---------------- -------------------- ---------------------
B. Francis Saul II, 1999 $1,426,944 $1,500,000 $ - $ 303,710 $ 339,860(1)
Chairman and Chief 1998 1,350,024 700,000 - 216,936 725,873(2)
Executive Officer 1997 1,230,440 600,000 - 180,780 292,807(3)
Stephen R. Halpin, Jr., 1999 $ 419,240 $ 160,000 $ - $ 65,081 $ 68,405(1)
Executive Vice President 1998 400,010 60,000 - 36,156 159,073(2)
and Chief Financial Officer 1997 375,402 54,000 - - 69,167(3)
- ---------------------------
(1) The total amounts shown in the "All Other Compensation" column for fiscal
1999 consist of the following:
o contributions made by the bank to the bank's Supplemental Executive Retirement
Plan on behalf of Mr. Saul ($193,839) and Mr. Halpin ($29,059);
o the taxable benefit of premiums paid by the bank for group term insurance on
behalf of Mr. Saul ($23,940) and Mr. Halpin ($2,157);
o contributions to the B. F. Saul Company Employees Profit Sharing Retirement
Plan (the Retirement Plan), a defined contribution plan, on behalf of
Mr. Halpin ($9,600); and
o accrued earnings on awards previously made under the bank's Deferred
Compensation Plan on behalf of Mr. Saul ($122,081) and Mr. Halpin ($27,589).
(2) The total amounts shown in the "All Other Compensation" column for fiscal
1998 consist of the following:
o contributions made by the bank to the bank's Supplemental Executive Retirement
Plan on behalf of Mr. Saul ($136,018) and Mr. Halpin ($20,170);
o the taxable benefit of premiums paid by the bank for group term insurance on
behalf of Mr. Saul ($14,724) and Mr. Halpin ($2,621);
o contributions to the B. F. Saul Company Employees Profit Sharing Retirement
Plan (the Retirement Plan), a defined contribution plan, on behalf of
Mr. Halpin ($9,600); and
o accrued earnings on awards previously made under the bank's Deferred
Compensation Plan on behalf of Mr. Saul ($575,131) and Mr. Halpin ($126,682).
(3) The total amounts shown in the "All Other Compensation" column for fiscal
1997 consist of the following:
o contributions made by the bank to the bank's Supplemental Executive Retirement
Plan on behalf of Mr. Saul ($109,616) and Mr. Halpin ($16,164);
o the taxable benefit of premiums paid by the bank for group term insurance on
behalf of Mr. Halpin ($2,325);
o contributions to the Retirement Plan on behalf of Mr. Halpin ($9,600); and
o accrued earnings on awards previously made under the bank's Deferred
Compensation Plan on behalf of Mr. Saul ($183,191) and Mr. Halpin ($41,078).
Long-Term Incentive Plan Awards. The following table sets forth certain
information concerning the principal contributions (the "Principal
Contributions") credited by the bank to the accounts (the "Accounts") of the
executive officers of the bank named above for fiscal 1998 under the bank's
Deferred Compensation Plan (the "Plan").
LONG-TERM INCENTIVE PROGRAM - AWARDS IN LAST FISCAL YEAR
Performance or Other Estimated Future Payouts (1)
Period Under Non-Stock Price-Based Plans
-----------------------------------------------------------
Until Maturation
Name or Payout Threshold Target(2) Maximum
- ------------------------ ---------------------- ----------------- ----------------- ----------------
B. Francis Saul II (3) 2002 $ 600,000 $ 1,074,508 $ 3,715,042
1999 (4) 440,496 440,496 440,496
1999 (4) 440,496 440,496 440,496
1999 (4) 440,496 440,496 440,496
Stephen R. Halpin, Jr. 2009 $ 130,000 $ 232,810 $ 804,926
2002 (4) 88,099 104,927 152,235
2001 (4) 88,099 98,988 126,863
2000 (4) 88,099 93,385 105,719
- ---------------------
(1) The estimated future payouts shown in the table are based on assumed
performance rates for the bank during each year in the ten-year performance
period. The actual payouts under the Plan may vary substantially from the
payouts shown in the table, depending upon the bank's actual rate of return
on average assets for each fiscal year in the ten-year performance period
ending September 30, 2009.
(2) The Plan does not establish any target performance levels. The payout
amounts shown in this column have been calculated assuming that the bank's
rate of return on average assets during each of the years in the performance
period are the same as the bank's rate of return during the fiscal year
ended September 30, 1999.
(3) The payout amounts shown for all participants are the estimated amounts that
would be payable to such participants if their employment continued with the
bank for the entire ten-year performance period of the Plan. Mr. Saul will
attain the age of 70 in 2002 at which time he will become fully vested in
the account maintained for his benefit under the Plan. Under the Plan, if
Mr. Saul were to retire after that date, he could elect to have the bank pay
out the Net Contribution (as defined) in his account prior to the year 2009.
(4) Awards related to prior fiscal years were granted to certain employees
during fiscal 1999. It was determined by the bank's Board of Directors that
these employees contributed substantially to the bank's present success and
therefore warranted the reinstatement of awards for fiscal 1992, 1991 and
1990. The awards are structured to create an account that will begin with an
amount equal to the amount that would have existed in such account if the
awards had been granted for fiscal 1992, 1991 and 1990.
The original Principal Contribution for fiscal 1992 made on behalf of Mr. Saul
($250,000) and Mr. Halpin ($50,000) earned interest based on the bank's rate of
return on average assets (as computed under the Plan) for all subsequent fiscal
years. The plan participants become fully vested under the Plan, provided that
they remain continuously employed by the bank during the vesting period, upon
the earliest to occur of the following: (i) September 30, 2002; (ii) attainment
of age 60; (iii) death; (iv) total and permanent disability; or (v) a change in
control of the bank (as defined in the Plan).
The original Principal Contribution for fiscal 1991 made on behalf of Mr. Saul
($250,000) and Mr. Halpin ($50,000) earned interest based on the bank's rate of
return on average assets (as computed under the Plan) for all subsequent fiscal
years. The plan participants become fully vested under the Plan, provided that
they remain continuously employed by the bank during the vesting period, upon
the earliest to occur of the following: (i) September 30, 2001; (ii) attainment
of age 60; (iii) death; (iv) total and permanent disability; or (v) a change in
control of the bank (as defined in the Plan).
The original Principal Contribution for fiscal 1990 made on behalf of Mr. Saul
($250,000) and Mr. Halpin ($50,000) earned interest based on the bank's rate of
return on average assets (as computed under the Plan) for all subsequent fiscal
years. The plan participants become fully vested under the Plan, provided that
they remain continuously employed by the bank during the vesting period, upon
the earliest to occur of the following: (i) September 30, 2000; (ii) attainment
of age 60; (iii) death; (iv) total and permanent disability; or (v) a change in
control of the bank (as defined in the Plan).
Certain of the awards credited by the bank to the Account maintained for the
benefit of Mr. Saul under the Plan vested at the time Mr. Saul attained age 60
in 1992. Certain other awards credited by the bank to the Account maintained for
the benefit of Mr. Saul will vest upon the earlier of:
o five years after the date of the award,
o his attainment of the age of 70 in 2002,
o his death,
o his total or permanent disability, or a change in control of the bank (as
defined in the Plan).
Accordingly, as of September 30, 1999, Mr. Saul was partially vested in the
Account maintained for his benefit under the Plan. As of that date, the vested
Account balance maintained for Mr. Saul's benefit under the Plan was $1,825,768.
As of September 30, 1999, the following individuals have vested Accounts that
are payable within 120 days after September 30, 1999: Mr. Saul ($1,825,768); Mr.
Halpin ($100,856).
The Plan provides that, as of the end of each fiscal year in the ten-year period
ending September 30, 2009 (or the executive officer's earlier termination of
employment with the bank), the bank will add to or deduct from each executive
officer's Account a contribution or deduction, as the case may be, which
represents the hypothetical interest (which may be positive or negative) earned
on the Principal Contribution, based on the bank's rate of return on average
assets (as computed under the Plan) for the fiscal year then ended. (The
Principal Contribution, plus or minus any interest credited or deducted, is
referred to as the "Net Contribution.")
Executive officers are entitled to receive the Net Contribution in their
respective Account only upon full or partial vesting. Plan participants become
fully vested in their Account under the Plan, provided that they remain
continuously employed by the bank during the vesting period, upon the earliest
to occur of any of the following:
o September 30, 2009;
o attainment of age 60;
o death;
o total and permanent disability; or
o a change in control of the bank (as defined in the Plan). Plan participants
become partially vested, to the extent of 50% of the Net Contribution in the
Account, upon the termination of their employment by the bank without cause
(as defined in the Plan) after September 30, 2004.
Payouts are made under the Plan within 120 days after September 30, 2009, or the
earlier termination of the executive officer's employment with the bank,
provided that vesting or partial vesting has occurred under the Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 6, 1999,
concerning beneficial ownership of Common Shares and Preferred Shares of
beneficial interest by: (a) each person known by the Trust to be the beneficial
owner of more than 5% of the Common Shares and the Preferred Shares, (b) each
member of the Board of Trustees; (c) each executive officer of the Trust named
in the Summary Compensation Table under "Executive Compensation"; and (d) all
Trustees and executive officers of the Trust as a group.
Aggregate Number of Percent
Name of Shares of
Beneficial Owner Beneficially Owned (1) Class (1)
- ----------------------- ---------------------- ------------------
B. Francis Saul II Preferred:
516,000 (2) 100.00%
Common:
4,807,510 (3) 99.60%
Philip D. Caraci Common:
19,400 (4) 0.40%
All Trustees and Preferred:
executive officers 516,000 (2) 100.00%
as a group (10 persons) Common:
4,826,910 100.00%
- -----------------------
(1) Beneficial owner and percent of class are calculated pursuant to rule 13d-3
under the Securities Exchange Act of 1934.
(2) Consists of Preferred Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer, director and/or more than 10%
shareholder, comprising 270,000 Preferred Shares owned by B. F. Saul Company,
90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000
Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares
owned by Westminster Investing Corporation. The address of each person listed in
this footnote is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815. Pursuant
to Rule 13d-3, the Preferred Shares described above are considered to be
beneficially owned by Mr. Saul because he has or may be deemed to have sole or
shared voting and/or investment power in respect thereof.
(3) Consists of Common Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer and director and/or more than 10%
shareholder, comprising 1,125,739 Common Shares owned by Westminster Investing
Corporation, 43,673 Common Shares owned by Derwood Investment Corporation, a
subsidiary of Westminster Investing Corporation, 34,400 Common Shares owned by
Somerset Investment Company, Inc., a subsidiary of Westminster Investing
Corporation, 2,545,362 Common Shares owned by B. F. Saul Company, 206,300 Common
Shares owned by Columbia Credit Company, a subsidiary of B. F. Saul Company,
283,400 Common Shares owned by Columbia Securities Company of Washington, D. C.,
172,918 Common Shares owned by Franklin Development Company, Inc., and 395,718
Common Shares owned by The Klingle Corporation. The address of each person
listed in this footnote is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
Pursuant to Rule 13d-3, the Common Shares described above are considered to be
beneficially owned by Mr. Saul because he has or may be deemed to have sole or
shared voting and/or investment power in respect thereof.
(4) Mr. Caraci has entered into an agreement with the Trust under which he is
required to sell all Common Shares he then owns to the Trust when his employment
by B. F. Saul Company and any of its affiliates ceases for any reason, including
retirement, termination, death or disability. The price Mr. Caraci will receive
for his Common Shares will be the greater of $28.00 per Share or the price the
Trust determines at the time is the fair market value thereof.
The Preferred Shares were issued in June 1990 in connection with the transaction
in which the Trust increased its equity interest in the bank from 60% to 80%.
The dividend rate on the Preferred Shares is $10.50 per share per annum.
Dividends are cumulative and are payable annually or at such other times as the
Trustees may determine, as and when declared by the Trustees out of any assets
legally available therefor. The Preferred Shares have a liquidation preference
of $100 per share. Subject to limits in certain of the Trust's loan agreements,
the Preferred Shares are subject to redemption at the option of the Trust at a
redemption price equal to their liquidation preference. Except as otherwise
required by applicable law, the holders of Preferred Shares are entitled to vote
only in certain limited situations, such as the merger of the Trust or a sale of
all or substantially all of the assets of the Trust.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Real Estate
Transactions with B. F. Saul Company and its Subsidiaries. The Real Estate Trust
is managed by the Advisor, a wholly owned subsidiary of B.F. Saul Company. All
of the officers of the Trust and B. Francis Saul II, George M. Rogers, Jr., B.
Francis Saul III and John R. Whitmore, each of whom is a trustee of the Trust,
are also officers and/or directors of B.F. Saul Company and/or its subsidiary
corporations. The Advisor is paid a fixed monthly fee subject to annual review
by the trustees. The monthly fee was $311,000 for the period October 1996
through September 1997, $317,000 for the period October 1997 through September
1998, and $337,000 for the period October 1998 through September 1999. The
advisory contract has been extended until September 30, 2000, will continue
thereafter unless cancelled by either party at the end of any contract year.
Certain loan agreements prohibit termination of this contract.
B. F. Saul Company and Franklin Property Company, a wholly owned subsidiary of
B. F. Saul Company, provide services to the Real Estate Trust in the areas of
commercial property management and leasing, hotel management, development and
construction management, and acquisitions, sales and financings of real
property. The fee schedules of B.F. Saul Company and Franklin Property Company
are reviewed and approved by the trustees. Fees to the two companies amounted to
$5.7 million in fiscal 1999.
The Real Estate Trust reimburses the Advisor and Franklin Property Company for
costs and expenses incurred in connection with the acquisition and development
of real property on behalf of the Real Estate Trust, in-house legal expenses,
and all travel expenses incurred in connection with the affairs of the Real
Estate Trust.
The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of publicly offered Unsecured Notes as they are issued to offset the Advisor's
costs of administering the program. The Advisor received $120,000 in such fees
in fiscal 1999.
B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of B.F. Saul
Company, is a general insurance agency that receives commissions and
counter-signature fees in connection with the Real Estate Trust's insurance
program. Such commissions and fees amounted to approximately $167,000 in fiscal
1999.
In fiscal 1994 the Real Estate Trust made an unsecured loan to B.F. Saul Company
of $15.0 million at a floating interest rate and due on demand. In fiscal 1995,
the loan was curtailed by $2.3 million. In fiscal 1996 the Real Estate Trust
made loans aggregating $3.5 million to B.F. Saul Company. During fiscal 1997,
1998 and 1999, curtails of $750,000, $141,000, and $1,500,000, were paid by B.
F. Saul Company. At September 30, 1999, the total due the Real Estate Trust was
$13.8 million in principal and $1.7 million in deferred interest. Interest
accrued on these loans amounted to $1.1 million in fiscal 1999.
Remuneration of Trustees and Officers. For fiscal 1999, the Real Estate Trust
paid the trustees $94,000 in fees for their services. See "Trustees and
Executive Officers of the Trust." No compensation was paid to the officers of
the Real Estate Trust for acting as such; however, Mr. Saul II was paid by the
bank for his services as the bank's Chairman and Chief Executive Officer and Mr.
Halpin was paid by the bank for his services as Executive Vice President and
Chief Financial Officer. See "Executive Compensation." Messrs. Grosvenor,
Rogers, Saul II and Saul III receive compensation for their services as
directors of the bank and Messrs. Rogers, Saul II, Saul III and Whitmore and
all of the officers of the Real Estate Trust receive compensation from B.F. Saul
Company and/or its affiliated corporations as directors or officers thereof.
Legal Services. For legal services to the Real Estate Trust and its
subsidiaries, the law firm in which the professional corporation of George M.
Rogers, Jr., a trustee of the Trust, is a partner received approximately
$500,000 in fiscal 1999, excluding expense reimbursements.
Other Transactions. The Real Estate Trust leases space to the bank and Franklin
at one of its income-producing properties. Amounts paid under these leases
amounted to approximately $265,000 in fiscal 1999.
EXPERTS
The Trust's Consolidated Financial Statements and related schedules included in
this prospectus and elsewhere in this registration statement as of September 30,
1999 and 1998 and for each of the three years in the period ended September 30,
1999, have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
LEGAL MATTERS
The legality of the securities offered by this prospectus has been passed upon
for the Trust by the firm of Shaw Pittman, Washington, D.C., a partnership
including professional corporations. George M. Rogers, Jr., a member of that
firm, is a trustee of the Trust and a director of B. F. Saul Company and of
Chevy Chase Bank.
AVAILABLE INFORMATION
The Trust has filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 pursuant to the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder, covering the notes being
offered hereby. This prospectus does not contain all the information set forth
in the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, and to which reference is
hereby made. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the registration statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Commission. Information as of particular dates
concerning the Trust's Trustees, officers and principal holders of securities
and any material interest of such persons in transactions with the Trust is set
forth in annual reports on Form 10-K filed with the Commission. Such reports and
other information filed by the Trust is set forth in annual reports on Form 10-K
with the Commission. Such reports and other information filed by the Trust with
the Commission may be inspected and copied at the public reference facilities of
the Commission, located at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of this material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, certain
of these materials are publicly available through the Commission's web site
located at http://www.sec.gov.
NOTE ORDER FORM
B.F. SAUL REAL ESTATE INVESTMENT TRUST
7200 Wisconsin Avenue, Suite 903
Bethesda, Maryland 20814
PLEASE ISSUE A NOTE EXACTLY AS INDICATED BELOW AT THE INTEREST RATE SHOWN
ON YOUR CURRENT PROSPECTUS OR SUPPLEMENT THERETO. MY CHECK FOR 100% OF THE
PRINCIPAL AMOUNT IS ENCLOSED. I UNDERSTAND THAT MY NOTE WILL BE ISSUED AS OF THE
DATE THIS ORDER IS RECEIVED (IF RECEIVED BY NOON) AND THAT YOUR OFFER MAY BE
WITHDRAWN WITHOUT NOTICE.
Owner's Name:
-----------------------------------------------------------------
Address:
-----------------------------------------------------------------
-----------------------------------------------------------------
Taxpayer Identification
(Social Security) Number:
-----------------------------------------------------
Principal Amount of Note Maturity from date of issue
(Minimum $5,000): (circle one): 1 2 3 4 5 6 7 8 9 10 year(s)
--------
If the maturity date falls on a Saturday, Sunday, or holiday, it will be changed
to the nearest business day. This change will not alter the interest rate.
Under penalties of perjury, I certify (1) that the number shown on this form is
my correct taxpayer identification number, and (2) that I am not subject to
backup withholding because (a) I have not been notified that I am subject to
backup withholding as a result of a failure to report all interest or dividends,
or (b) the Internal Revenue Service has notified me that I am no longer subject
to backup withholding; or all of the account owners are neither citizens nor
residents of the United States and therefore exempt from withholding.
Note: Strike out the language certifying that you are not subject to backup
withholding due to notified payee underreporting if the Internal Revenue Service
has notified you that you are subject to backup withholding and you have not
received notice from the Internal Revenue Service advising that backup
withholding has terminated.
- -------------- -------------------------------------------------
Date Signature
For office use only:
- -------------------- -------------------------------------------------
Date rec'd Print Name
---------
-------------------------------------------------
Issue date Address (if different from above)
---------
-------------------------------------------------
Interest rate City, State & Zip Code
------
-------------------------------------------------
(Area Code) Telephone Number
B.F. SAUL REAL ESTATE INVESTMENT TRUST
7200 Wisconsin Avenue, Suite 903
Bethesda, Maryland 20814
Gentlemen:
I (We) hold a Note,
number
------------------------------
For the principal amount of $
------------------------------
which matures on
------------------------------
CHECK ONE OF THE FOLLOWING BOXES:
1. I (We) wish to receive a check for the principal amount -
if so, please send note to U.S. Bank Trust National
Association
2. I (We) wish to reinvest the principal amount in a new Note as follows:
Principal Amount of Note Maturity from date of issue
(Minimum $5,000): (circle one): 1 2 3 4 5 6 7 8 9 10 year(s)
--------
The principal amount of the new note may be either increased or decreased in
increments of $1,000. In no can case the new principal be less than $5,000. If
increased, please send a check payable to B.F. Saul Real Estate Investment Trust
for the amount of the increase.
PLEASE ENCLOSE THE MATURING NOTE AND RETURN TO US
IF THE NEW NOTE TO BE ISSUED IS TO BE REGISTERED IN A NAME
OTHER THAN THAT OF THE PRESENT HOLDER(S), OR IF ANY OTHER
ALTERATIONS IN THE FORM OF THE
REGISTRATION ARE REQUIRED, PLEASE PRINT OR TYPE IN THE NEW
INFORMATION BELOW.
Name of Owner(s)
--------------------------------------------
Print Name
--------------------------------------------
Print Name
Address:
--------------------------------------------
No. Street Apt.
--------------------------------------------
City State Zip Code
Telephone Number
--------------------------------------------
Area Code
Federal Identification or
Social Security
--------------------------------------------
- ----------------------------------- ---------------
Signature Date
ACKNOWLEDGEMENT
B.F. SAUL REAL ESTATE INVESTMENT TRUST
7200 Wisconsin Avenue, Suite 903
Bethesda, MD 20814
Gentlemen:
I understand and acknowledge that (1) the Note I am purchasing is not a
savings account or a deposit and (2) the Note is not insured or guaranteed any
federal government agency, including the Federal Deposit Insurance Corporation,
or by any state governmental agency.
- -------------------- --------------------------------------
Date Signature
--------------------------------------
Print Name
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
It is estimated that the expenses in connection with the issuance and
distribution of the securities are as follows:
Registration fee.................................. $ 16,680
Cost of printing and engraving.................... 18,500
Indenture Trustee & Registrar's Fees.............. 80,000
Legal fees of counsel for registrant.............. 400,000
Accountants' fees................................. 25,000
Payment to B. F. Saul Advisory Company for
Administering Note Program................... 600,000
Miscellaneous and Advertising..................... 367,000
-----------
Total........................................ $1,507,180
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Declaration of Trust (Article III) provides that no Trustee or officer of
the Trust shall be liable for any action or failure to act except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties, and, except as stated, Trustees and officers are entitled to be
reimbursed and indemnified for all loss, expenses, and outlays which they may
suffer because they are Trustees or officers of the Trust.
ITEM 16.
(a) EXHIBITS.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
3. (a) Amended and Restated Declaration of Trust filed with the
Maryland State Department of Assessments and Taxation on June 22,
1990 as filed as Exhibit 3(a) to Registration Statement No.
33-34930 is hereby
incorporated by reference.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
(b) Amendment to Amended and Restated Declaration of Trust reflected
in Secretary Certificate filed with the Maryland State Department
of Assessments and Taxation on June 26, 1990 as filed as Exhibit
3(b) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(c) Amended and Restated By-Laws of the Trust dated as of February 28,
1991 as filed as Exhibit T3B to the Trust's Form T-3 Application
for Qualification of Indentures under the Trust Indenture Act of
1939 (File No. 22-20838) is hereby incorporated by
reference.
4. (a) Indenture dated as of September 1, 1992 with respect to the
Trust's Notes due from One to Ten Years from Date of Issue filed
as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(b) First Supplemental Indenture dated as of January 16, 1997 with
respect to the Trust's Notes due from One to Ten Years from Date
of Issue filed as Exhibit 4(b) to Registration Statement No.
33-34930 is hereby incorporated by reference.
(c) Indenture with respect to the Trust's Senior Notes Due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
Registration Statement No. 33-19909 is hereby incorporated by
reference.
(d) First Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit T-3C to the Trust's Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939
(File No. 22-20838) is hereby incorporated by reference.
(e) Indenture with respect to the Trust's Senior Notes due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
Registration Statement No. 33-9336 is hereby incorporated by
reference.
(f) Fourth Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby
incorporated by reference.
(g) Third Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby
incorporated by reference.
(h) Second Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby
incorporated by reference.
(i) Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue as filed as
Exhibit 4(a) to Registration Statement No. 2-68652 is hereby
incorporated by reference.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
(j) Indenture with respect to the Trust's Senior Notes due from One
Year to Five Years from Date of Issue as filed as Exhibit T-3C to
the Trust's Form T-3 Application for Qualification of Indentures
under the Trust Indenture Act of 1939 (File No. 22-10206) is
hereby incorporated by reference.
(k) Indenture dated as of March 25, 1998 between the Trust and Norwest
Bank Minnesota, National Association, as Trustee, with respect to
the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as
filed as Exhibit 4(a) to Registration Statement No. 333-49937 is
hereby incorporated by reference.
** (l) Second Supplemental Indenture dated as of January 13, 1999 with
respect to the Trust's Notes due from One to Ten Years from Date
of Issuance.
**5. Opinion of Shaw Pittman Potts & Trowbridge with respect to
legality of the Notes.
10. (a) Advisory Contract with B.F. Saul Advisory Company effective
October 1, 1982 filed as Exhibit 10(a) to Registration Statement
No. 2-80831 is hereby incorporated by reference.
(b) Commercial Property Leasing and Management Agreement effective
October 1, 1982 between the Trust and Franklin Property Company as
filed as Exhibit 10(b) to Registration Statement No. 2-80831 is
hereby incorporated by reference.
(c) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy
Chase Savings Bank F.S.B. and certain of their subsidiaries filed
as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company,
Franklin Development Co., Inc., The Klingle Corporation and
Westminster Investing Corporation relating to the transfer of
certain shares of Chevy Chase Savings Bank, F.S.B. and certain
real property to the Trust in exchange for preferred shares of
beneficial interest of the Trust subsidiaries filed as Exhibit
10(d) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17,
1988 among B.F. Saul Company, the Trust and the Federal Savings
and Loan Insurance Corporation as filed as Exhibit 10(e) to the
Trust's Annual Report on Form 10-K (File No. 1-7184) for the
fiscal year ended September 30, 1991 is hereby incorporated by
reference
(f) Amendment to Commercial Property Leasing and Management Agreement
between the Trust and Franklin Property Company dated as of
December 31, 1992 (Amendment No. 5), July 1, 1989 (Amendment No.
4), October 1, 1986 (Amendment No. 3), January 1, 1985 (Amendment
No. 2) and July 1, 1984 (Amendment No. 1) subsidiaries filed as
Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
(g) Advisory Contract between B.F. Saul Advisory Company and Dearborn
Corporation dated as of December 31, 1992 filed as Exhibit 10(p)
to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(h) Commercial Property Leasing and Management Agreement between
Dearborn Corporation and Franklin Property Company dated as of
December 31, 1992 filed as Exhibit 10(q) to Registration Statement
No. 33-34930 is hereby incorporated by reference.
(i) Registration Rights and Lock-Up Agreement dated August 26, 1993 by
and among Saul Centers, Inc. and the Trust, Westminster Investing
Corporation, Van Ness Square Corporation, Dearborn Corporation,
Franklin Property Company and Avenel Executive Park Phase II, Inc.
as filed as Exhibit 10.6 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(j) Exclusivity and Right of First Refusal Agreement dated August 26,
1993 among Saul Centers, Inc., the Trust, B. F. Saul Company,
Westminster Investing Corporation, Franklin Property Company, Van
Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as
filed as Exhibit 10.7 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(k) First Amended and Restated Reimbursement Agreement dated as of
August 1, 1994 by and among Saul Centers, Inc., Saul Holdings
Limited Partnership, Saul Subsidiary I Limited Partnership, Saul
Subsidiary II Limited Partnership, Avenel Executive Park Phase II,
Inc., Franklin Property Company, Westminster Investing
Corporation, Van Ness Square Corporation, Dearborn Corporation and
the Trust as filed as Exhibit 10(l) to the Trust's Annual Report
on Form 10-K (File No. 1-7184) for the fiscal year ended September
30, 1995 is hereby incorporated by reference.
(1) Registration Rights Agreement dated as of March 25, 1998 among the
Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner Smith
Incorporated and Friedman, Billings, Ramsey & Co., Inc. as filed
as Exhibit 4(c) to Registration Statement No. 333-49937 is hereby
incorporated by reference.
(m) Bank Stock Registration Rights Agreement dated as of March 25,
1998 between the Trust and Norwest Bank Minnesota, National
Association, as Trustee, filed as Exhibit 4(d) to Registration
Statement No. 333-49937 is hereby incorporated by reference.
(n) Written Agreement dated September 30, 1991 between the Office of
Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as
Exhibit 10(f) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
(o) Amendment to Written Agreement dated October 29, 1993 between the
Office of Thrift Supervision and Chevy Chase Savings Bank, F.S.B.
filed as Exhibit 10(u) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
*12. Statement re: Computation of Ratio of Earnings to Fixed Charges.
*12.1 Statement re: Computation of Ratio of Consolidated Earnings to
Fixed Charges.
*21. List of Subsidiaries of the Trust.
*23. (a) Consent of Arthur Andersen LLP.
** (b) Consent of Shaw Pittman Potts & Trowbridge.
**25. Statement of Eligibility on Form T-1 of U.S. Bank
Trust National Association.
- -------------------
* Filed herewith.
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
The following Financial Statement Schedules are submitted under Item 16(b):
Schedule I Condensed Financial Information
Schedule III Consolidated Schedule of Investment Properties - Real
Estate Trust
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as Indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provision, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Chevy Chase,
Maryland on this the 12th day of January 2000.
B.F. SAUL REAL ESTATE INVESTMENT TRUST
By: B. FRANCIS SAUL II
----------------------------
B. Francis Saul II
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
below on this 12th day of January 2000.
Signature Capacity
- --------------------------- --------------------------------------
B. Francis Saul II
- --------------------------- Trustee, Chairman of the Board
B. Francis Saul II and Principal Executive Officer
Stephen R. Halpin, Jr.
- --------------------------- Vice President and Chief
Stephen R. Halpin, Jr. Financial Officer (Principal
Financial Officer)
Ross E. Heasley
- --------------------------- Vice President
Ross E. Heasley (Principal Accounting Officer)
Garland J. Bloom, Jr.*
- --------------------------- Trustee
Garland J. Bloom, Jr.
Gilbert M. Grosvenor*
- --------------------------- Trustee
Gilbert M. Grosvenor
George M. Rogers, Jr.*
- -------------------------- Trustee
George M. Rogers, Jr.
B. Francis Saul III*
- --------------------------- Trustee
B. Francis Saul III
John R. Whitmore*
- --------------------------- Trustee
John R. Whitmore
*Signed by Ross E. Heasley as power of attorney
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust
We have audited the consolidated financial statements of B.F. Saul Real Estate
Investment Trust (the "Trust") as of September 30, 1999 and 1998 and for each of
the three years in the period ended September 30, 1999, in accordance with
generally accepted auditing standards, and have issued our report thereon dated
December 1, 1999. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedules listed in Item 14
are the responsibility of the Trust's management and are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects as to the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Vienna, Virginia
December 1, 1999
B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION SCHEDULE I
(a) Required condensed financial information on the Trust is disclosed in
the audited consolidated financial statements included herewith.
(b) Amounts of cash dividends paid to the Trust by consolidated subsidiaries
were as follows:
Year Ended September 30
----------------------------------------
1999 1998 1997
$26,400,000 $5,200,000 $7,200,000
Consolidated Schedule of Investment Properties - Real Estate Trust Schedule III
September 30, 1999
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
--------------------------------------------------
Initial Subsequent Buildings
Basis to to and
Hotels Trust Acquisition Land Improvements Total
- ---------------------------------------------------- ------------- ------------------------- -------------- ---------------------
Crowne Plaza -- National Airport, Arlington VA $ 26,979 $ 3,528 $ 4,229 $ 26,278 $ 30,507
Hampton Inn -- Dulles Airport, Sterling VA -- 6,590 290 6,300 6,590
Holiday Inn, Cincinnati OH 6,859 3,230 245 9,844 10,089
Holiday Inn -- Dulles Airport, Sterling VA 6,950 20,429 862 26,517 27,379
Holiday Inn, Gaithersburg MD 3,849 15,344 1,781 17,412 19,193
Holiday Inn -- National Airport, Arlington VA 10,187 6,294 1,183 15,298 16,481
Holiday Inn, Pueblo CO 3,458 2,242 564 5,136 5,700
Holiday Inn -- Rochester Airport, Rochester NY 3,340 9,389 605 12,124 12,729
Holiday Inn -- Tysons Corner, McLean VA 6,976 13,275 2,265 17,986 20,251
Holiday Inn Express, Herndon VA 5,259 260 1,178 4,341 5,519
Holiday Inn Select, Auburn Hills MI 10,450 1,314 1,031 10,733 11,764
SpringHill Suites, Boca Raton FL 10,942 -- 1,220 9,722 10,942
TownePlace Suites, Boca Raton FL 7,527 -- 869 6,658 7,527
TownePlace Suites -- Dulles Airport, Sterling VA 5,849 173 219 5,803 6,022
TownePlace Suites, Gaithersburg MD 6,382 -- 94 6,288 6,382
------------- ------------------------- -------------- ---------------------
Subtotal - Hotels $ 115,007 $ 82,068 $ 16,635 $ 180,440 $ 197,075
------------- ------------------------- -------------- ---------------------
Commercial
- ----------------------------------------------------
900 Circle 75 Pkway, Atlanta GA $ 33,434 $ 1,743 $ 563 $ 34,614 $ 35,177
1000 Circle 75 Pkway, Atlanta GA 2,820 1,021 248 3,593 3,841
1100 Circle 75 Pkway, Atlanta GA 22,746 2,450 419 24,777 25,196
8201 Greensboro, Tysons Corner, McLean VA 28,890 3,652 1,633 30,909 32,542
Commerce Ctr-Ph II, Ft Lauderdale FL 4,266 800 782 4,284 5,066
Dulles North, Sterling VA -- 5,882 507 5,375 5,882
Metairie Tower, Metairie LA 2,729 750 403 3,076 3,479
------------- ------------------------- -------------- ---------------------
Subtotal - Commercial $ 94,885 $ 16,298 $ 4,555 $ 106,628 $ 111,183
------------- ------------------------- -------------- ---------------------
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued) Schedule III-Continued
September 30, 1999
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
--------------------------------------------------
Initial Subsequent Buildings
Basis to to and
Purchase-Leasebacks Trust Acquisition Land Improvements Total
- ---------------------------------------------------- ------------- ------------------------- -------------- ---------------------
Chateau di Jon, Metairie, LA $ 1,125 $ -- $ 1,125 $ -- $ 1,125
Country Club, Knoxville, TN 500 -- 500 -- 500
Houston Mall, Warner Robbins, GA 650 -- 650 -- 650
Old National, Atlanta, GA 550 -- 550 -- 550
------------- ------------------------- -------------- ---------------------
Subtotal - Purchase-Leasebacks $ 2,825 $ -- $ 2,825 $ -- $ 2,825
------------- ------------------------- -------------- ---------------------
Miscellaneous investment $ 250 $ 848 $ 250 $ 848 $ 1,098
------------- ------------------------- -------------- ---------------------
Total Income-Producing Properties $ 212,967 $ 99,214 $ 24,265 $ 287,916 $ 312,181
------------- ------------------------- -------------- ---------------------
Land Parcels
- ----------------------------------------------------
Arvida Park of Commerce,
Boca Raton, FL $ 7,378 (1,771) $ 5,607 $ -- $ 5,607
Avenel, Gaithersburg, MD 361 (64) 297 -- 297
Church Road, Loudoun Co., VA 2,586 2,481 5,067 -- 5,067
Circle 75, Atlanta, GA 12,927 4,507 17,434 -- 17,434
Flagship Centre, Rockville, MD 1,729 39 1,768 -- 1,768
Holiday Inn - Auburn Hills, Auburn Hills MI 656 368 1,024 -- 1,024
Holiday Inn - Rochester, Roch., NY 68 -- 68 -- 68
Overland Park, Overland Park, KA 3,771 398 4,169 -- 4,169
Prospect Indust. Pk, Ft. Laud., FL 2,203 (400) 1,803 -- 1,803
Sterling Blvd., Loudoun Co., VA 505 1,706 2,211 -- 2,211
------------- ------------------------- -------------- ---------------------
Subtotal $ 32,184 $ 7,264 $ 39,448 $ -- $ 39,448
------------- ------------------------- -------------- ---------------------
Total Investment Properties $ 245,151 $106,478 $ 63,713 $ 287,916 $ 351,629
============= ========================= ============== =====================
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued) Schedule III-Continued
September 30, 1999
(Dollars in Thousands)
Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Hotels Depreciation Debt Construction Acquired Lives (Years)
- ---------------------------------------------------- ------------- ------------------------- -------------- ---------------------
Crowne Plaza -- National Airport, Arlington VA $ 1,574 $ 17,525 1959 12/97 39
Hampton Inn -- Dulles Airport, Sterling VA 2,833 6,736 1987 4/87 31.5
Holiday Inn, Cincinnati OH 5,573 6,257 1975 2/76 40
Holiday Inn -- Dulles Airport, Sterling VA 13,789 11,194 1971 11/84 28
Holiday Inn, Gaithersburg MD 7,981 6,225 1972 6/75 45
Holiday Inn -- National Airport, Arlington VA 6,658 7,992 1973 11/83 30
Holiday Inn, Pueblo CO 2,673 4,662 1973 3/76 40
Holiday Inn -- Rochester Airport, Rochester NY 6,389 12,141 1975 3/76 40
Holiday Inn -- Tysons Corner, McLean VA 8,064 14,349 1971 6/75 47
Holiday Inn Express, Herndon VA 469 5,012 1987 10/96 40
Holiday Inn Select, Auburn Hills MI 2,031 12,379 1989 11/94 31.5
SpringHill Suites, Boca Raton FL 79 8,025 1999 9/99 40
TownePlace Suites, Boca Raton FL 54 5,076 1999 6/99 40
TownePlace Suites -- Dulles Airport, Sterling VA 225 4,582 1998 8/98 40
TownePlace Suites, Gaithersburg MD 50 4,665 1999 6/99 40
------------- ------------
Subtotal - Hotels $ 58,442 $126,820
------------- ------------
Commercial
- ----------------------------------------------------
900 Circle 75 Pkway, Atlanta GA $ 14,414 $ 19,582 1985 12/85 35
1000 Circle 75 Pkway, Atlanta GA 2,144 3,088 1974 4/76 40
1100 Circle 75 Pkway, Atlanta GA 12,751 13,788 1982 9/82 40
8201 Greensboro, Tysons Corner, McLean VA 11,869 32,457 1985 4/86 35
Commerce Ctr-Ph II, Ft Lauderdale FL 1,720 2,702 1986 1/87 35
Dulles North, Sterling VA 1,458 2,830 1990 10/90 31.5
Metairie Tower, Metairie LA 1,783 -- 1974 11/76 40
------------- ------------
Subtotal - Commercial $ 46,139 $ 74,447
------------- ------------
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued) Schedule III-Continued
September 30, 1999
(Dollars in Thousands)
Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Purchase-Leasebacks Depreciation Debt Construction Acquired Lives (Years)
- ---------------------------------------------------- ------------- ------------------------- -------------- ---------------------
Chateau di Jon, Metairie, LA $ -- $ 4,790 11/73
Country Club, Knoxville, TN -- -- 5/76
Houston Mall, Warner Robbins, GA -- -- 2/72
Old National, Atlanta, GA -- -- 8/71
------------- ------------
Subtotal - Purchase-Leasebacks $ -- $ 4,790
------------- ------------
Miscellaneous investment $ 193 $ --
------------- ------------
Total Income-Producing Properties $ 104,774 $206,057
------------- ------------
Land Parcels
- ----------------------------------------------------
Arvida Park of Commerce,
Boca Raton, FL $ -- $ -- 12/84 & 5/85
Avenel, Gaithersburg, MD -- -- 12/76
Church Road, Loudoun Co., VA -- -- 9/84 & 4/85
Circle 75, Atlanta, GA -- -- 2/77 & 1/84
Flagship Centre, Rockville, MD -- -- 8/85
Holiday Inn - Auburn Hills, Auburn Hills MI -- 312 7/97
Holiday Inn - Rochester, Roch., NY -- -- 9/86
Overland Park, Overland Park, KA -- -- 1/77 & 2/85
Prospect Indust. Pk, Ft. Laud., FL -- -- 10/83 & 8/84
Sterling Blvd., Loudoun Co., VA -- -- 4/84
------------- ------------
Subtotal $ -- $ 312
------------- ------------
Total Investment Properties $ 104,774 $206,369
============= ============
Schedule III (Continued)
CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES - REAL ESTATE TRUST
NOTES:
(1) See Summary of Significant Accounting Policies for basis of recording
investment properties and computing depreciation. Investment
properties are discussed in Note 3 to Consolidated Financial
Statements.
(2) A reconciliation of the basis of investment properties and accumulated
depreciation follows.
BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
(In thousands)
For The Year Ended September 30
------------------------------------------------------------
1999 1998 1997
------------------- -------------------- -------------------
Basis of investment properties
- ---------------------------------------------------------------
Balance at beginning of period $ 320,061 $ 284,610 $ 274,208
Additions (reductions) during the period:
Capital expenditures 15,476 34,079 12,069
Sales - nonaffiliates -- (415) (525)
Transferred from construction in progress, net 19,872 2,681 --
Other (3,780) (894) (1,142)
------------------- -------------------- -------------------
Balance at end of period $ 351,629 $ 320,061 $ 284,610
=================== ==================== ===================
Accumulated depreciation
- ---------------------------------------------------------------
Balance at beginning of period $ 96,072 $ 85,915 $ 76,513
Additions (reductions) during the period:
Depreciation expense 12,508 11,170 10,543
Sales - nonaffiliates -- (216) --
Other (3,806) (797) (1,141)
------------------- -------------------- -------------------
Balance at end of period $ 104,774 $ 96,072 $ 85,915
=================== ==================== ===================
EXHIBIT INDEX
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
3. (a) Amended and Restated Declaration of Trust filed with the
Maryland State Department of Assessments and Taxation on June 22,
1990 as filed as Exhibit 3(a) to Registration Statement No.
33-34930 is hereby
incorporated by reference.
(b) Amendment to Amended and Restated Declaration of Trust reflected
in Secretary Certificate filed with the Maryland State Department
of Assessments and Taxation on June 26, 1990 as filed as Exhibit
3(b) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(c) Amended and Restated By-Laws of the Trust dated as of February 28,
1991 as filed as Exhibit T3B to the Trust's Form T-3 Application
for Qualification of Indentures under the Trust Indenture Act of
1939 (File No. 22-20838) is hereby incorporated by
reference.
4. (a) Indenture dated as of September 1, 1992 with respect to the
Trust's Notes due from One to Ten Years from Date of Issue filed
as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(b) First Supplemental Indenture dated as of January 16, 1997 with
respect to the Trust's Notes due from One to Ten Years from Date
of Issue filed as Exhibit 4(b) to Registration Statement No.
33-34930 is hereby incorporated by reference.
(c) Indenture with respect to the Trust's Senior Notes Due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
Registration Statement No. 33-19909 is hereby incorporated by
reference.
(d) First Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit T-3C to the Trust's Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939
(File No. 22-20838) is hereby incorporated by reference.
(e) Indenture with respect to the Trust's Senior Notes due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
Registration Statement No. 33-9336 is hereby incorporated by
reference.
(f) Fourth Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby
incorporated by reference.
(g) Third Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby
incorporated by reference.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
(h) Second Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby
incorporated by reference.
(i) Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue as filed as
Exhibit 4(a) to Registration Statement No. 2-68652 is hereby
incorporated by reference.
(j) Indenture with respect to the Trust's Senior Notes due from One
Year to Five Years from Date of Issue as filed as Exhibit T-3C to
the Trust's Form T-3 Application for Qualification of Indentures
under the Trust Indenture Act of 1939 (File No. 22-10206) is
hereby incorporated by reference.
(k) Indenture dated as of March 25, 1998 between the Trust and Norwest
Bank Minnesota, National Association, as Trustee, with respect to
the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as
filed as Exhibit 4(a) to Registration Statement No. 333-49937 is
hereby incorporated by reference.
** (l) Second Supplemental Indenture dated as of January 13, 1999 with
respect to the Trust's Notes due from One to Ten Years from Date
of Issuance.
**5. Opinion of Shaw Pittman Potts & Trowbridge with respect to
legality of the Notes.
10. (a) Advisory Contract with B.F. Saul Advisory Company effective
October 1, 1982 filed as Exhibit 10(a) to Registration Statement
No. 2-80831 is hereby incorporated by reference.
(b) Commercial Property Leasing and Management Agreement effective
October 1, 1982 between the Trust and Franklin Property Company as
filed as Exhibit 10(b) to Registration Statement No. 2-80831 is
hereby incorporated by reference.
(c) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy
Chase Savings Bank F.S.B. and certain of their subsidiaries filed
as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company,
Franklin Development Co., Inc., The Klingle Corporation and
Westminster Investing Corporation relating to the transfer of
certain shares of Chevy Chase Savings Bank, F.S.B. and certain
real property to the Trust in exchange for preferred shares of
beneficial interest of the Trust subsidiaries filed as Exhibit
10(d) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17,
1988 among B.F. Saul Company, the Trust and the Federal Savings
and Loan Insurance Corporation as filed as Exhibit 10(e) to the
Trust's Annual Report on Form 10-K (File No. 1-7184) for the
fiscal year ended September 30, 1991 is hereby incorporated by
reference
(f) Amendment to Commercial Property Leasing and Management Agreement
between the Trust and Franklin Property Company dated as of
December 31, 1992 (Amendment No. 5), July 1, 1989 (Amendment No.
4), October 1, 1986 (Amendment No. 3), January 1, 1985 (Amendment
No. 2) and July 1, 1984 (Amendment No. 1) subsidiaries filed as
Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(g) Advisory Contract between B.F. Saul Advisory Company and Dearborn
Corporation dated as of December 31, 1992 filed as Exhibit 10(p)
to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(h) Commercial Property Leasing and Management Agreement between
Dearborn Corporation and Franklin Property Company dated as of
December 31, 1992 filed as Exhibit 10(q) to Registration Statement
No. 33-34930 is hereby incorporated by reference.
(i) Registration Rights and Lock-Up Agreement dated August 26, 1993 by
and among Saul Centers, Inc. and the Trust, Westminster Investing
Corporation, Van Ness Square Corporation, Dearborn Corporation,
Franklin Property Company and Avenel Executive Park Phase II, Inc.
as filed as Exhibit 10.6 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(j) Exclusivity and Right of First Refusal Agreement dated August 26,
1993 among Saul Centers, Inc., the Trust, B. F. Saul Company,
Westminster Investing Corporation, Franklin Property Company, Van
Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as
filed as Exhibit 10.7 to Registration Statement No. 33-64562 is
hereby incorporated by reference.
(k) First Amended and Restated Reimbursement Agreement dated as of
August 1, 1994 by and among Saul Centers, Inc., Saul Holdings
Limited Partnership, Saul Subsidiary I Limited Partnership, Saul
Subsidiary II Limited Partnership, Avenel Executive Park Phase II,
Inc., Franklin Property Company, Westminster Investing
Corporation, Van Ness Square Corporation, Dearborn Corporation and
the Trust as filed as Exhibit 10(l) to the Trust's Annual Report
on Form 10-K (File No. 1-7184) for the fiscal year ended September
30, 1995 is hereby incorporated by reference.
EXHIBITS DESCRIPTION
---------- ------------------------------------------------------------------
(1) Registration Rights Agreement dated as of March 25, 1998 among the
Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner Smith
Incorporated and Friedman, Billings, Ramsey & Co., Inc. as filed
as Exhibit 4(c) to Registration Statement No. 333-49937 is hereby
incorporated by reference.
(m) Bank Stock Registration Rights Agreement dated as of March 25,
1998 between the Trust and Norwest Bank Minnesota, National
Association, as Trustee, filed as Exhibit 4(d) to Registration
Statement No. 333-49937 is hereby incorporated by reference.
(n) Written Agreement dated September 30, 1991 between the Office of
Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as
Exhibit 10(f) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(o) Amendment to Written Agreement dated October 29, 1993 between the
Office of Thrift Supervision and Chevy Chase Savings Bank, F.S.B.
filed as Exhibit 10(u) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
*12. Statement re: Computation of Ratio of Earnings to Fixed Charges.
*12.1 Statement re: Computation of Ratio of Consolidated Earnings to
Fixed Charges.
*21. List of Subsidiaries of the Trust.
*23. (a) Consent of Arthur Andersen LLP.
** (b) Consent of Shaw Pittman Potts & Trowbridge.
**25. Statement of Eligibility on Form T-1 of U.S. Bank
Trust National Association.
- -------------------
* Filed herewith.
** Previously filed.