UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 ----------------------------------------------- OR - ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ---------------------- Commission file number: 1-7184 B. F. SAUL REAL ESTATE INVESTMENT TRUST - ------------------------------------------------------------------------------- (Exact name of registrant as specified in the charter) Maryland 52-6053341 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 Connecticut Avenue, Chevy Chase, Maryland 20815 - ------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) (301) 986-6000 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- --- The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as of May 14, 2001, was 4,826,910. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): (a) Consolidated Balance Sheets at March 31, 2001 and September 30, 2000 (b) Consolidated Statements of Operations for the three-month and six-month periods ended March 31, 2001 and 2000 (c) Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity (Deficit) for the three-month and six-month periods ended March 31, 2001 and 2000 (d) Consolidated Statements of Cash Flows for the six-month periods ended March 31, 2001 and 2000 (e) Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: (a) Financial Condition Real Estate Banking (b) Liquidity and Capital Resources Real Estate Banking (c) Results of Operations Three months ended March 31, 2001 compared to three months ended March 31, 2000 Six months ended March 31, 2001 compared to three months ended March 31, 2000 Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports On Form 8-K Consolidated Balance Sheets B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) ==================================================================================================================================== March 31 September 30 (In thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Real Estate Income-producing properties Hotel $ 254,513 $ 209,861 Office and industrial 163,551 148,581 Other 2,825 3,991 --------------- --------------- 420,889 362,433 Accumulated depreciation (131,988) (124,184) --------------- --------------- 288,901 238,249 Land parcels 44,064 39,716 Construction in progress 13,758 49,096 Cash and cash equivalents 9,870 18,129 Other assets 87,234 85,674 --------------- --------------- Total real estate assets 443,827 430,864 - ------------------------------------------------------------------------------------------------------------------------------------ Banking Cash and other deposits 352,960 388,233 Federal funds sold and securities purchased under agreements to resell 133,000 40,000 Loans held for sale 250,884 126,108 Loans held for secruitization and sale 65,000 70,000 Investment securities (market value $46,263 and $45,559, respectively) 45,696 45,648 Trading securities 12,057 3,380 Mortgage-backed securities (market value $875,833 and $1,025,540, respectively) 879,613 1,046,809 Loans and leases receivable (net of allowance for losses of $57,018 and $54,018, respectively) 8,334,286 8,105,031 Federal Home Loan Bank stock 105,764 97,676 Real estate held for investment or sale (net of allowance for losses of $83,013 and $80,954, respectively) 45,252 49,386 Property and equipment, net 394,085 362,469 Goodwill and other intangible assets, net 28,276 25,270 Interest only strips, net 34,900 16,763 Servicing assets, net -- 75,045 Other assets 292,116 233,176 --------------- --------------- Total banking assets 10,973,889 10,684,994 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 11,417,716 $ 11,115,858 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Real Estate Mortgage notes payable $ 315,817 $ 307,214 Notes payable - secured 207,500 200,000 Notes payable - unsecured 50,090 47,463 Deferred gains - real estate 113,045 112,834 Accrued dividends payable - preferred shares of beneficial interest 22,594 25,885 Other liabilities and accrued expenses 38,599 44,971 --------------- --------------- Total real estate liabilities 747,645 738,367 - ------------------------------------------------------------------------------------------------------------------------------------ Banking Deposit accounts 7,217,603 7,037,789 Borrowings 397,043 540,349 Federal Home Loan Bank advances 2,095,272 1,946,971 Other liabilities 384,590 296,436 Capital notes -- subordinated 250,000 250,000 --------------- --------------- Total banking liabilities 10,344,508 10,071,545 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies Minority interest held by affiliates 82,215 79,028 Minority interest -- other 218,307 218,307 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 11,392,675 11,107,247 - ------------------------------------------------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY 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 (31,597) (49,642) Accumulated other comprehensive loss (1,615) -- --------------- --------------- 66,889 50,459 Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848) --------------- --------------- TOTAL SHAREHOLDERS' EQUITY 25,041 8,611 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,417,716 $ 11,115,858 - ------------------------------------------------------------------------------------------------------------------------------------ The Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Statements of Operations B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) ==================================================================================================================================== For the Three Months Ended For the Six Months Ended March 31 March 31 ----------------------------------- -------------------------------- (In thousands, except per share amounts) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ REAL ESTATE Income Hotels $ 25,509 $ 22,594 $ 48,846 $ 43,315 Office and industrial (including $812, $820, $1,637 and $1,033 of rental income from banking segment, respectively) 10,463 8,717 20,434 15,740 Other 489 936 1,220 1,626 ------------------- --------------- --------------- --------------- Total income 36,461 32,247 70,500 60,681 - ------------------------------------------------------------------------------------------------------------------------------------ Expenses Direct operating expenses: Hotels 15,945 14,101 31,053 27,691 Office and industrial properties 2,744 2,426 5,297 4,419 Land parcels and other 276 331 643 634 Interest expense 12,731 11,615 25,037 22,551 Capitalized interest (101) (242) (421) (467) Amortization of debt expense 225 162 416 318 Depreciation 4,165 4,044 8,063 7,498 Advisory, management and leasing fees - related parties 2,991 2,717 5,824 5,194 General and administrative 403 854 1,104 2,767 ------------------- --------------- --------------- --------------- Total expenses 39,379 36,008 77,016 70,605 - ------------------------------------------------------------------------------------------------------------------------------------ Equity in earnings of unconsolidated entities 2,114 1,875 3,998 3,978 Gain on sale of property -- -- 2,545 -- - ------------------------------------------------------------------------------------------------------------------------------------ REAL ESTATE OPERATING INCOME (LOSS) $ (804) $ (1,886) $ 27 $ (5,946) - ------------------------------------------------------------------------------------------------------------------------------------ BANKING Interest income Loans and leases $ 181,001 $ 152,454 $ 358,031 $ 291,958 Mortgage-backed securities 14,944 18,877 31,498 38,846 Trading securities 372 354 661 737 Investment securities 683 655 1,378 1,297 Other 4,031 5,948 8,045 14,201 ------------------- --------------- --------------- --------------- Total interest income 201,031 178,288 399,613 347,039 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense Deposit accounts 64,742 51,276 132,367 97,037 Borrowings 45,057 40,890 90,450 82,503 ------------------- --------------- --------------- --------------- Total interest expense 109,799 92,166 222,817 179,540 ------------------- --------------- --------------- --------------- Net interest income 91,232 86,122 176,796 167,499 Provision for loan and lease losses (18,016) (12,774) (33,939) (23,762) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 73,216 73,348 142,857 143,737 - ------------------------------------------------------------------------------------------------------------------------------------ Other income Servicing and securitization income 26,004 7,629 40,503 13,452 Deposit servicing fees 24,130 19,503 49,108 40,397 Gain on trading securities, net 7,093 80 5,293 358 Loss on real estate held for investment or sale, net (729) (1,370) (1,609) (1,486) Gain (loss) on sales of loans, net 3,721 (405) 6,967 (1,317) Other 7,915 5,103 14,588 11,306 ------------------- --------------- --------------- --------------- Total other income 68,134 30,540 114,850 62,710 - ------------------------------------------------------------------------------------------------------------------------------------ Continued on following page. Consolidated Statements of Operations (Continued) B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) ==================================================================================================================================== For the Three Months Ended For the Six Months Ended March 31 March 31 ----------------------------------- -------------------------------- (In thousands, except per share amounts) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ BANKING (Continued) Operating expenses Salaries and employee benefits $ 48,616 $ 49,094 $ 99,433 $ 95,996 Loan 15,531 1,755 22,020 2,829 Property and equipment (including $812, $820, $1,637 and $1,033 of rental expense paid to real estate segment, respectively) 8,781 8,373 17,207 15,308 Marketing 2,066 2,826 5,689 5,009 Data processing 6,835 6,437 13,079 12,528 Depreciation and amortization 8,450 7,983 16,856 15,979 Deposit insurance premiums 363 301 709 1,474 Amortization of goodwill and other intangible assets 575 670 1,173 1,386 Other 13,361 13,097 26,116 25,828 ------------------- --------------- --------------- --------------- Total operating expenses 104,578 90,536 202,282 176,337 - ------------------------------------------------------------------------------------------------------------------------------------ BANKING OPERATING INCOME $ 36,772 $ 13,352 $ 55,425 $ 30,110 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL COMPANY Operating income $ 35,968 $ 11,466 $ 55,452 $ 24,164 Income tax provision 12,162 3,102 16,853 6,719 ------------------- --------------- --------------- --------------- Income before minority interest 23,806 8,364 38,599 17,445 Minority interest held by affiliates (3,736) (669) (5,190) (1,742) Minority interest -- other (6,327) (6,327) (12,656) (12,656) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL COMPANY NET INCOME $ 13,743 $ 1,368 $ 20,753 $ 3,047 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 12,389 $ 14 $ 18,045 $ 339 NET INCOME PER COMMON SHARE Income before minority interest $ 4.65 $ 1.45 $ 7.44 $ 3.05 Minority interest held by affiliates (0.77) (0.14) (1.08) (0.36) Minority interest -- other (1.31) (1.31) (2.62) (2.62) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER COMMON SHARE $ 2.57 $ -- $ 3.74 $ 0.07 - ------------------------------------------------------------------------------------------------------------------------------------ The Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity (Deficit) B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) =================================================================================================================================== For the Three Months Ended For the Six Months Ended March 31 March 31 ----------------------------------- -------------------------------- (Dollars in thousands) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME Net income $ 13,743 $ 1,368 $ 20,753 $ 3,047 Other comprehensive income: Net unrealized holding losses (1,198) (6) (1,615) (9) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME $ 12,545 $ 1,362 $ 19,138 $ 3,038 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) PREFERRED SHARES OF BENEFICIAL INTEREST Beginning and end of period (516,000 shares) $ 516 $ 516 $ 516 $ 516 ------------------- --------------- --------------- --------------- COMMON SHARES OF BENEFICIAL INTEREST Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642 6,642 ------------------- --------------- --------------- --------------- PAID-IN SURPLUS Beginning and end of period 92,943 92,943 92,943 92,943 ------------------- --------------- --------------- --------------- DEFICIT Beginning of period (43,986) (66,256) (49,642) (63,884) Net income 13,743 1,368 20,753 3,047 Minority interest in capital contribution -- -- -- (2,697) Dividends: Real Estate Trust preferred shares of beneficial interest: Distributions payable (1,354) (1,354) (2,708) (2,708) ------------------- --------------- --------------- --------------- End of period (31,597) (66,242) (31,597) (66,242) ------------------- --------------- --------------- --------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Beginning of period (417) 3 -- 6 Net unrealized holding gains (losses) (1,198) (6) (1,615) (9) ------------------- --------------- --------------- --------------- End of period (1,615) (3) (1,615) (3) ------------------- --------------- --------------- --------------- TREASURY SHARES Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848) (41,848) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ 25,041 $ (7,992) $ 25,041 $ (7,992) - ----------------------------------------------------------------------------------------------------------------------------------- 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 (Unaudited) ==================================================================================================================================== For the Six Months Ended March 31 -------------------------------- (In thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Real Estate Net income (loss) $ (7) $ (3,919) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 8,063 7,498 Gain on sale of property (2,545) -- Decrease in accounts receivable and accrued income 1,330 707 Increase in deferred tax asset (4) (2,112) Increase (decrease) in accounts payable and accrued expenses (5,938) 25 Amortization of debt expense 890 793 Equity in earnings of unconsolidated entities (3,998) (3,978) Other 4,944 7,718 --------------- --------------- 2,735 6,732 --------------- --------------- Banking Net income 20,760 6,966 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization (accretion) of premiums, discounts and net deferred loan fees 2,241 (2,199) Depreciation and amortization 16,856 15,979 Provision for loan and lease losses 33,939 23,762 Capitalized interest on real estate under development (1,683) (1,815) Proceeds from sales of trading securities 187,894 180,142 Net fundings of loans held for sale and/or securitization (546,546) (423,386) Proceeds from sales of loans held for sale and/or securitization 637,976 248,936 (Gain) loss on sales of real estate held for sale 248 (959) Provision for losses on real estate held for investment or sale 2,100 -- Gain on trading securities, net (5,293) (358) Increase in interest-only strips (18,137) (93) (Increase) decrease in servicing assets 10,218 (34,316) (Increase) decrease in goodwill and other intangible assets (3,000) 1,393 Decrease in other assets 3,506 7,722 Increase in other liabilities 26,187 30,180 Minority interest held by affiliates 5,190 1,742 Minority interest - other 4,875 4,875 Other 39,641 38,717 --------------- --------------- 416,972 97,288 --------------- --------------- Net cash provided by operating activities 419,706 104,020 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Real Estate Capital expenditures - properties (17,067) (24,867) Property acquisitions (15,159) (18,441) Property sales 7,287 832 Equity investment in unconsolidated entities 1,467 3,263 Other 2 (22,456) --------------- --------------- (23,470) (61,669) --------------- --------------- Banking Net proceeds from redemption of Federal Home Loan Bank stock 13,157 6,575 Net proceeds from maturities of investment securities -- 34,000 Net proceeds from sales of real estate 9,758 9,061 Net fundings of loans and leases receivable (143,072) (474,430) Principal collected on mortgage-backed securities 165,779 124,386 Purchases of Federal Home Loan Bank stock (21,244) (12,709) Purchases of investment securities (31) (35,061) Purchases of loans receivable (564,327) (909,493) Purchases of property and equipment (48,533) (25,495) Other (4,634) 548 --------------- --------------- (593,147) (1,282,618) --------------- --------------- Net cash used in investing activities (616,617) (1,344,287) - ------------------------------------------------------------------------------------------------------------------------------------ Continued on following page. Consolidated Statements of Cash Flows (Continued) B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) ==================================================================================================================================== For the Six Months Ended March 31 -------------------------------- (In thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Real Estate Proceeds from mortgage financing $ 14,160 $ 48,258 Principal curtailments and repayments of mortgages (5,557) (4,162) Proceeds from secured note financings 13,000 20,200 Repayments of secured note financings (5,500) -- Proceeds from sales of unsecured notes 5,385 4,764 Repayments of unsecured notes (2,758) (5,054) Costs of obtaining financings (254) (1,848) Dividends paid - preferred shares of beneficial interest (6,000) (7,500) --------------- --------------- 12,476 54,658 --------------- --------------- Banking Proceeds from customer deposits and sales of certificates of deposit 20,919,769 18,024,942 Customer withdrawals of deposits and payments for maturing certificates of deposit (20,739,955) (17,244,836) Net increase in securities sold under repurchase agreements (138,464) (37,130) Advances from the Federal Home Loan Bank 3,800,748 947,471 Repayments of advances from the Federal Home Loan Bank (3,652,447) (795,703) Net increase (decrease) in other borrowings (4,842) 42,109 Cash dividends paid on preferred stock (4,875) (4,875) Cash dividends paid on common stock (8,000) (8,000) Other 61,968 28,046 --------------- --------------- 233,902 952,024 --------------- --------------- Net cash provided by financing activities 246,378 1,006,682 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 49,468 (233,585) Cash and cash equivalents at beginning of period 446,362 608,003 --------------- --------------- Cash and cash equivalents at end of period $ 495,830 $ 374,418 - ------------------------------------------------------------------------------------------------------------------------------------ Components of cash and cash equivalents at end of period as presented in the consolidated balance sheets: Real Estate Cash and cash equivalents $ 9,870 $ 17,578 Banking Cash and other deposits 352,960 276,840 Federal funds sold and securities purchased under agreements to resell 133,000 80,000 --------------- --------------- Cash and cash equivalents at end of period $ 495,830 $ 374,418 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) 241,567 $ 186,691 Income taxes paid (refunded) 109 (66,810) Shares of Saul Centers, Inc. common stock 3,852 1,835 Transfer of Tysons Park Place to real estate segment from banking segment -- 37,000 Cash received during the year from: Dividends on shares of Saul Centers, Inc. common stock 2,055 1,835 Distributions from Saul Holdings Limited Partnership 3,263 3,263 Supplemental disclosures of noncash activities: Rollovers of notes payable - unsecured 2,079 2,732 Loans held for sale exchanged for trading securities 192,045 179,649 Loans receivable transferred to loans held for securitization and sale 396,529 275,000 Loans made in connection with the sale of real estate -- 569 Loans receivable transferred to real estate acquired in settlement of loans 376 412 - ------------------------------------------------------------------------------------------------------------------------------------ The Notes to Consolidated Financial Statements are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. In the opinion of management, the consolidated financial statements reflect all adjustments necessary for a fair presentation of the Trust's financial position and results of operations. All such adjustments are of a normal recurring nature. These financial statements and the accompanying notes should be read in conjunction with the Trust's audited consolidated financial statements included in its Form 10-K for the fiscal year ended September 30, 2000. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. 2. The accompanying financial statements include the accounts of B.F.Saul Real Estate Investment Trust and its wholly owned subsidiaries (the "Real Estate Trust"), which are involved in the ownership and development of income-producing properties. The accounts of the Trust's 80%-owned banking subsidiary, Chevy Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase" or the "Bank") have also been consolidated. Accordingly, the accompanying financial statements reflect the assets, liabilities, operating results, and cash flows for two business segments: Real Estate and Banking. All significant intercompany balances and transactions have been eliminated. 3. The Trust voluntarily terminated its qualification as a real estate investment trust under the Internal Revenue code during fiscal 1978. As a result of the Trust's acquisition of an additional 20% equity interest in the Bank in June 1990, the Bank became a member of the Trust's affiliated group filing consolidated federal income tax returns. The current effect of the Trust's consolidation of the Bank's operations into its federal income tax return results in the use of the Trust's net operating losses and net operating loss carryforwards to reduce the federal income taxes the Bank would otherwise owe. 4. Adoption of Recently Issued Accounting Standards The Bank adopted Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 138) and Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") concurrently on October 1, 2000. SFAS 138 amends SFAS 133 and addresses several issues causing implementation difficulties for companies required to apply SFAS 133. Under SFAS 138 and SFAS 133, all derivative instruments are recognized as either assets or liabilities in the statement of financial position and measured at fair value, with any change in the fair value of derivative instruments included in either current income or other comprehensive income. At March 31, 2001, the Bank had an unrealized loss of $2.0 million, net of related taxes, which is included in other comprehensive income and relates to the changes in the fair value of derivative instruments designated as cash flow hedges. 5. BANKING: LOANS HELD FOR SALE: Loans held for sale is composed of the following: March 31, September 30, 2001 2000 --------------- --------------- (In thousands) Single-family residential $ 245,337 $ 116,480 Home improvement and related loans 5,547 9,628 --------------- --------------- Total $ 250,884 $ 126,108 =============== =============== LOAN HELD FOR SECURITIZATION AND SALE: At March 31, 2001 and September 30, 2000, loans held for securitization and sale totaled $65.0 and $70.0 million, respectively, were composed of automobile loans. LOANS AND LEASES RECEIVABLE: Loans and leases receivable is composed of the following: March 31, September 30, 2001 2000 ---------------- ---------------- (In thousands) Single-family residential $ 5,016,933 $ 4,896,439 Home equity 306,518 274,355 Real estate construction and ground 485,178 507,461 Commercial real estate and multifamily 31,554 39,917 Commercial 1,129,414 1,015,146 Automobile 644,686 719,276 Subprime automobile 528,510 620,588 Leasing 742,294 568,091 Home improvement and related loans 86,379 77,345 Overdraft lines of credit and other consumer 31,716 31,608 ---------------- ---------------- 9,003,182 8,750,226 ---------------- ---------------- Less: Undisbursed portion of loans 653,819 630,205 Unearned discounts and net deferred loan origination costs (41,941) (39,028) Allowance for loan losses 57,018 54,018 ---------------- ---------------- 668,896 645,195 ---------------- ---------------- Total $ 8,334,286 $ 8,105,031 ================ ================ REAL ESTATE HELD FOR INVESTMENT OR SALE: The Bank's real estate held for investment is carried at the lower of aggregate cost or net realizable value. The Bank's real estate acquired in settlement of loans or real estate owned ("REO") is considered to be held for sale and is carried at the lower of cost or fair value (less estimated selling costs). Real estate held for investment or sale is composed of the following: March 31, September 30, 2001 2000 --------------- --------------- (In thousands) Real estate held for investment (net of allowance for losses of $202 for both periods) $ 925 $ 925 Real estate held for sale (net of allowance for losses of $82,352 and $80,752, respectively) 44,327 48,461 --------------- --------------- Total real estate held for investment or sale $ 45,252 $ 49,386 =============== =============== ITEM 2. 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 Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's subsidiaries. The operations conducted by the Real Estate Trust are designated as "Real Estate," while the business conducted by the Bank and its subsidiaries is identified by the term "Banking." FINANCIAL CONDITION REAL ESTATE The Real Estate Trust's investment portfolio at March 31, 2001, consisted primarily of hotels, office projects and land parcels. At March 31, 2001 the hotel portfolio included 18 properties containing 3,578 available rooms and the office portfolio consisted of 12 properties containing 1,888,000 square feet of gross leasable area. Overall, the hotel portfolio experienced an average occupancy rate of 63.8% and an average room rate of $96.14 during the six-month period ended March 31, 2001. The 15 hotel properties owned by the Real Estate Trust throughout the first six-month periods of both fiscal 2001 and 2000 experienced average occupancy rates of 64.2% and 64.8%, respectively, and average room rates of $95.60 and $87.58 respectively. Seven of these hotels registered improved occupancies and eleven registered higher average room rates in the current period. Office space in the Real Estate Trust's office property portfolio was 96% leased at March 31, 2001, compared to leasing rates of 98% and 96% at September 30, 2000 and at March 31, 2000, respectively. At March 31, 2001, the office portfolio consisted of 12 properties and had a total gross leasable area of approximately 1.9 million square feet, of which 206,000 square feet (10.9%) and 214,000 square feet (11.3%), are subject to leases whose terms expire in the balance of fiscal 2001 and in fiscal 2002, respectively. BANKING General. At March 31, 2001, the Bank's assets were unchanged from the last quarter at $11.0 billion. Total loans and leases decreased $25.5 million during the quarter to $8.7 billion at March 31, 2001. This decrease was primarily due to the securitization and sale of $401.5 million of automobile loan receivables, which was partially offset by increases in residential and home equity loans. The Bank recorded operating income of $36.8 million during the quarter ended March 31, 2001, compared to operating income $13.4 million in the prior corresponding quarter. The results from the current quarter included a pre-tax gain of $9.4 million from the sale of the Bank's interest in Star Systems, Inc., an ATM network in which the Bank was a member, as well as a gain of $14.1 million on the aforementioned securitization and sale of automobile loan receivables. Also contributing to the increased income were increased interest income on single-family and automobile loans which was partially offset by a decrease in interest income on mortgage-backed securities and increases in interest expense, provision for loan and lease losses and operating expenses. At March 31, 2001, the Bank's tangible, core, tier 1 risk-based and total risk-based regulatory capital ratios were 5.43%, 5.43%, 6.92% and 10.67%, respectively. The Bank's regulatory capital ratios exceeded the requirements under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") as well as the standards established for "well-capitalized" institutions under the prompt corrective action regulations issued pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). See "Capital." During the quarter ended March 31, 2001, the Bank declared and paid out of the retained earnings a cash dividend on its Common Stock in the amount of $400 per share. Asset Quality. Non-Performing Assets. The following table sets forth information concerning the Bank's non-performing assets. The figures shown are after charge-offs and, in the case of REO, after all valuation allowances. Non-Performing Assets (Dollars in thousands) March 31, December 31, September 30, 2001 2000 2000 -------------------- --------------------- --------------------- Non-performing assets: Non-accrual loans: Residential $ 6,409 $ 5,464 $ 5,171 Real estate construction and ground - - 70 Subprime automobile 12,367 13,043 12,026 Other consumer 6,667 6,246 5,399 -------------------- --------------------- --------------------- Total non-accrual loans (1) 25,443 24,753 22,666 -------------------- --------------------- --------------------- Real estate owned 127,137 134,077 129,213 Allowance for losses on real estate owned (82,811) (81,789) (80,752) -------------------- --------------------- --------------------- Real estate owned, net 44,326 52,288 48,461 -------------------- --------------------- --------------------- Total non-performing assets $ 69,769 $ 77,041 $ 71,127 ==================== ===================== ===================== Allowance for losses on loans and leases $ 57,018 $ 54,518 $ 54,018 Allowance for losses on real estate held for investment 202 202 202 Allowance for losses on real estate owned 82,811 81,789 80,752 -------------------- --------------------- --------------------- Total allowances for losses $ 140,031 $ 136,509 $ 134,972 ==================== ===================== ===================== Ratios: Non-performing assets, net to total assets (2) 0.11% 0.20% 0.16% Allowance for losses on real estate loans to non-accrual real estate loans (1) 145.25% 149.96% 167.58% Allowance for losses on consumer loans and leases to non-accrual consumer loans (1)(3) 206.62% 190.93% 219.97% Allowance for losses on loans and leases to non-accrual loans (1) 224.10% 220.25% 238.32% Allowance for losses on loans and leases to total loans and leases receivable (4) 0.65% 0.62% 0.65% (1) Before deduction of allowances for losses. (2) Non-performing assets, net are presented after all allowances for losses on loans and leases and real estate held for investment or sale. (3) Includes subprime automobile loans. (4) Includes loans and leases receivable and loans held for sale and/or securitization, before deduction of allowance for losses. Non-performing assets totaled $69.8 million, after valuation allowances on REO of $82.8 million, at March 31, 2001, compared to $77.0 million, after valuation allowances on REO of $81.8 million, at December 31, 2000. In addition to the valuation allowances on REO, the Bank maintained $57.0 million and $54.5 million of valuation allowances on its loan and lease portfolio at March 31, 2001 and December 31, 2000, respectively. The $7.2 million decrease in non-performing assets for the current quarter was attributable to a net decrease in REO of $7.9 million and an increase in non-accrual loans of $0.7 million. See "Non-accrual Loans" and "REO." Non-accrual Loans. The Bank's non-accrual loans totaled $25.4 million at March 31, 2001, as compared to $24.8 million at December 31, 2000. At March 31, 2001, non-accrual loans consisted of $6.4 million of non-accrual real estate loans and $19.0 million of non-accrual consumer and other loans compared to non-accrual real estate loans of $5.5 million and non-accrual consumer and other loans of $19.3 million at December 31, 2000. REO. At March 31, 2001, the Bank's REO totaled $44.3 million, after valuation allowances on such assets of $82.8 million as set forth in the following table. The principal component of REO consists of four planned unit developments (the "Communities"), all of which are under active development. Only commercial ground properties remain in two of the four Communities. Balance Balance Number Before After Percent of Gross Charge- Valuation Valuation Valuation of Properties Balance Offs Allowances Allowances Allowances Total ---------------------------------------------------------------------------- (Dollars in thousands) ---------------------------------------------------------------------------- Communities 4 $ 144,316 $ 32,509 $ 111,807 $ 77,491 $ 34,316 77.4% Residential ground 2 3,549 - 3,549 1,689 1,860 4.2% Commercial permanent 1 3,169 - 3,169 - 3,169 7.1% Commercial ground 2 10,961 2,732 8,229 3,631 4,598 10.4% Single-family residential properties 3 384 - 384 - 384 0.9% ---------------------------------------------------------------------------- Total REO 12 $ 162,379 $ 35,241 $ 127,138 $ 82,811 $ 44,327 100.0% ============================================================================ During the three months ended March 31, 2001, REO decreased $8.0 million, which was primarily a result of increased sales in the Communities. During the three months ended March 31, 2001, the Bank received revenues of $10.8 million from the disposition of 146 residential lots or units in the Communities ($10.7 million) and various single-family residential properties ($0.1 million). Delinquent Loans. At March 31, 2001, delinquent loans totaled $101.3 million, or 1.2% of loans, compared to $124.9 million, or 1.4% of loans, at December 31, 2000. The following table sets forth information regarding the Bank's delinquent loans at March 31, 2001. Principal Balance (Dollars in Thousands) ------------------------------------------------------------ Subprime Other Total as a Real Estate Automobile Consumer Percentage Loans Loans Loans Total of Loans (1) ------------- ------------- ----------- ----------- ----------- Loans delinquent for: 30-59 days...... $ 4,884 $ 61,130 $ 15,387 $ 81,401 1.0% 60-89 days...... 496 13,955 5,401 19,852 0.2% ------------- ------------- ----------- ----------- ----------- Total............ $ 5,380 $ 75,085 $ 20,788 $ 101,253 1.2% ============= ============= =========== =========== =========== - -------------------------- (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 decreased to $5.4 million at March 31, 2001, from $7.4 million at December 31, 2000. Total delinquent subprime automobile loans decreased to $75.1 million at March 31, 2001, from $94.7 million at December 31, 2000, primarily as a result of declining delinquency rates from December's traditional seasonal high. Effective November 9, 2000, the Bank stopped the origination of subprime automobile loans. The Bank will continue its collection efforts on the existing portfolio. Other consumer loans delinquent 30-89 days decreased to $20.8 million at March 31, 2001, from $22.8 million at December 31, 2000, as a result of declining delinquency rates from December's seasonal high. Troubled Debt Restructurings. At March 31, 2001 and December 31, 2000, the Bank had no troubled debt restructurings. Real Estate Held for Investment. At March 31, 2001 and December 31, 2000, real estate held for investment consisted of one property with book value of $1.1 million, net of valuation allowances of $0.2 million. Allowances for Losses. The following tables show loss experience by asset type and the components of the allowance for losses on loans and leases and the allowance for losses on real estate held for investment or sale. These tables reflect charge-offs taken against assets during the periods indicated and may include charge-offs taken against assets which the Bank disposed of during such periods. Analysis of Allowance for and Charge-offs of Loans and Leases (Dollars in thousands) Three Months Six Months Ended Ended March 31, March 31, ------------------------------------------ 2001 2000 2001 --------------------- -------------------- --------------------- Balance at beginning of period $ 54,018 $ 58,139 $ 54,518 --------------------- -------------------- --------------------- Provision for loan and lease losses 33,939 23,762 18,016 --------------------- -------------------- --------------------- Charge-offs: Single-family residential and home equity (381) (485) (211) Subprime automobile (26,555) (20,010) (13,213) Other (8,191) (4,657) (4,472) --------------------- -------------------- --------------------- Total charge-offs (35,127) (25,152) (17,896) --------------------- -------------------- --------------------- Recoveries: Single-family residential and home equity 38 68 35 Subprime automobile 3,127 616 1,723 Other 1,023 706 622 --------------------- -------------------- --------------------- Total recoveries 4,188 1,390 2,380 --------------------- -------------------- --------------------- Charge-offs, net of recoveries (30,939) (23,762) (15,516) --------------------- -------------------- --------------------- Balance at end of period $ 57,018 $ 58,139 $ 57,018 ===================== ==================== ===================== Provision for loan losses to average loans and leases (1) (2) 0.79% 0.68% 0.82% Net loan charge-offs to average loans and leases (1) (2) 0.72% 0.68% 0.71% Ending allowance for losses on loans and leases to total loans and leases (2) (3) 0.65% 0.74% 0.65% (1) Annualized. (2) Includes loans held for sale and/or securitization. (3) Before deduction of allowance for losses. Components of Allowance for Losses on Loans and Leases by Type (Dollars in thousands) March 31, ----------------------------------------------------------- 2001 2000 September 30, 2000 ----------------------------- ----------------------------- ------------------------------ Percent of Percent of Percent of Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans -------------- -------------- -------------- -------------- -------------- --------------- Balance at end of period allocated to: Single-family residential $ 2,686 60.7 % $ 3,578 58.5 % $ 2,686 60.3 % Home equity 447 3.5 556 3.3 448 3.3 Commercial real estate and multifamily 1,394 0.4 9,189 0.9 893 0.5 Real estate construction and ground 4,141 4.9 3,820 3.3 4,757 3.6 Commercial 9,021 6.2 4,666 6.3 6,904 7.2 Automobile 11,534 16.6 3,334 18.7 7,534 16.3 Subprime automobile 25,782 6.2 28,782 7.4 28,782 7.4 Home improvement and related loans 1,523 1.1 3,523 1.4 1,523 1.0 Overdraft lines of credit and other consumer 490 0.4 691 0.4 491 0.4 -------------- -------------- -------------- Total $ 57,018 $ 58,139 $ 54,018 ============== ============== ============== Real Estate Held for Investment or Sale (Dollars in thousands) Activity in Allowance for Losses Three Months Six Months Ended Ended March 31, March 31, -------------------------------------------------- 2001 2000 2001 ------------------------ ------------------------ ------------------------ Balance at beginning of period: Real estate held for investment $ 202 $ 202 $ 202 Real estate held for sale 80,752 84,405 81,789 ------------------------ ------------------------ ------------------------ Total 80,954 84,607 81,991 ------------------------ ------------------------ ------------------------ Provision for real estate losses: Real estate held for sale 2,100 - 1,050 ------------------------ ------------------------ ------------------------ Total 2,100 - 1,050 ------------------------ ------------------------ ------------------------ Charge-offs: Real estate held for sale: Residential ground - (64) - Commercial ground - (111) - Communities (41) (881) (28) ------------------------ ------------------------ ------------------------ Total (41) (1,056) (28) ------------------------ ------------------------ ------------------------ Balance at end of period: Real estate held for investment 202 202 202 Real estate held for sale 82,811 83,349 82,811 ------------------------ ------------------------ ------------------------ Total $ 83,013 $ 83,551 $ 83,013 ======================== ======================== ======================== Components of Allowance for Losses March 31, December 31, September 30, 2001 2000 2000 ------------------------ ------------------------ ------------------------ Allowance for losses on real estate held for investment $ 202 $ 202 $ 202 ------------------------ ------------------------ ------------------------ Allowance for losses on real estate held for sale: Residential ground 1,689 1,689 1,689 Commercial ground 3,631 3,631 3,631 Communities 77,491 76,469 75,432 ------------------------ ------------------------ ------------------------ Total 82,811 81,789 80,752 ------------------------ ------------------------ ------------------------ Total allowance for losses on real estate held for investment or sale $ 83,013 $ 81,991 $ 80,954 ======================== ======================== ======================== At March 31, 2001, the Bank's total valuation allowances for losses on loans and leases and real estate held for investment or sale increased to $140.0 million, from $136.5 million at December 31, 2000. Management reviews the adequacy of the valuation allowances on loans and leases and real estate using a variety of measures and tools including historical loss performance, delinquency status, internal risk ratings, current economic conditions and current underwriting policies and procedures. Using this analysis, management determines a range of acceptable valuation allowances. The allowance for losses on loans secured by real estate and real estate held for investment or sale totaled $91.7 million at March 31, 2001, which constituted 68.7% of total non-performing real estate assets, before valuation allowances. During the three months ended March 31, 2001, the Bank recorded net charge-offs of $0.4 million on these assets. The allowance for losses on real estate held for sale at March 31, 2001, is in addition to approximately $35.2 million of cumulative charge-offs previously taken against assets remaining in the Bank's portfolio at March 31, 2001. At March 31, 2001 and December 31, 2000, the combined allowance for losses on consumer loans and leases, including automobile, subprime automobile, home improvement and related loans, overdraft lines of credit and other consumer loans was $39.3 million and $36.8 million, respectively. The increase is primarily due to growth in the portfolio of consumer loans as well as increases in loss rates on that portfolio for fiscal 2001. The ratios of the allowance for losses on consumer loans to non-performing consumer loans and to outstanding consumer loans increased to 206.6% and 1.9%, respectively, at March 31, 2001, compared to 190.9% and 1.6%, respectively, at December 31, 2000. Asset and Liability Management. The following table presents the interest rate sensitivity of the Bank's interest-earning assets and interest-bearing liabilities at March 31, 2001, which reflects loan amortization and management's estimate of loan prepayments. Variable rate loans are assumed to mature in the period in which their interest rates are next scheduled to adjust. Prepayment rates for the Bank's loans are based on recent actual and market experience. Statement savings and passbook accounts with balances under $20,000 are classified based upon management's assumed attrition rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW accounts, are assumed to be subject to repricing within six months or less. 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 March 31, 2001 Real estate loans: Adjustable-rate $ 1,458,504 $ 262,979 $ 920,721 $ 484,723 $ 206,450 $ 3,333,377 Fixed-rate 160,061 169,262 532,299 367,812 759,618 1,989,052 Home equity credit lines and second mortgages 238,392 15,132 49,751 33,206 57,179 393,660 Commercial 508,764 17,920 56,817 38,239 21,603 643,343 Consumer and other 426,187 339,410 1,020,155 224,725 21,395 2,031,872 Loans held for sale 250,884 - - - - 250,884 Loans held for securitization and sale 65,000 - - - - 65,000 Mortgage-backed securities 310,808 159,042 211,972 83,296 114,495 879,613 Trading securities 12,057 - - - - 12,057 Other investments 317,175 - 45,696 - - 362,871 ------------- -------------- -------------- -------------- ------------- --------------- Total interest-earning assets 3,747,832 963,745 2,837,411 1,232,001 1,180,740 9,961,729 Total non-interest earning assets - - - - 1,012,160 1,012,160 ------------- -------------- -------------- -------------- ------------- --------------- Total assets $ 3,747,832 $ 963,745 $ 2,837,411 $ 1,232,001 $ 2,192,900 $ 10,973,889 ============= ============== ============== ============== ============= =============== Deposits: Fixed maturity deposits $ 1,515,243 $ 697,687 $ 654,525 $ 53,518 $ - $ 2,920,973 NOW, statement and passbook accounts 1,908,202 32,691 108,881 74,107 157,931 2,281,812 Money market deposit accounts 1,415,533 - - - - 1,415,533 Borrowings: Capital notes - subordinated - - - 150,000 100,000 250,000 Other 866,098 146,937 630,847 796,540 51,894 2,492,316 ------------- -------------- -------------- -------------- ------------- --------------- Total interest-bearing liabilities 5,705,076 877,315 1,394,253 1,074,165 309,825 9,360,634 Minority interest - - - - 144,000 144,000 Total non-interest bearing liabilities - - - - 983,874 983,874 Stockholders' equity - - - - 485,381 485,381 ------------- -------------- -------------- -------------- ------------- --------------- Total liabilities and stockholders' equity $ 5,705,076 $ 877,315 $ 1,394,253 $ 1,074,165 $ 1,923,080 $ 10,973,889 ============= ============== ============== ============== ============= =============== Gap $ (1,957,244) $ 86,430 $ 1,443,158 $ 157,836 $ 870,915 Cumulative gap $ (1,957,244) $ (1,870,814) $ (427,656) $ (269,820) $ 601,095 Adjusted cumulative gap as a percentage of total assets (17.8)% (17.0)% (3.9)% (2.5)% 5.5 % The interest sensitivity "gap" shown in the table represents the sum of all interest-earning assets minus all interest-bearing liabilities subject to repricing within the same period. The one-year gap, as a percentage of total assets, was a negative 17.0% at March 31, 2001, compared to a negative 18.1% at December 31, 2000. The modest improvement in the Bank's one-year gap during this period reflects an increase in production of adjustable rate mortgage loans with repricing terms of less than one-year, partially offset by an increase in NOW, statement savings and money market deposit accounts and short-term borrowings with maturities of one year or less. The Bank continues to consider a variety of strategies to manage its interest rate risk position. Capital. At March 31, 2001, the Bank was in compliance with all of its regulatory capital requirements under FIRREA, and its capital ratios exceeded the ratios established for "well-capitalized" institutions under OTS prompt corrective action regulations. The following table shows the Bank's regulatory capital levels at March 31, 2001, 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 $ 506,644 Minority interest in REIT Subsidiary (1) 144,000 Accumulated other comprehensive income (2) 2,018 --------------- 652,662 Adjustments for tangible and core capital: Intangible assets (52,005) Non-includable subsidiaries (3) (1,413) Non-qualifying purchased/originated loan servicing rights (5,217) --------------- Total tangible capital 594,027 5.43% $ 164,084 1.50% $ 429,943 3.93% --------------- ========== =============== ========== ============== ========== Total core capital (4) 594,027 5.43% $ 437,558 4.00% $ 156,469 1.43% --------------- ========== =============== ========== ============== ========== Tier 1 risk-based capital (4) 594,027 6.92% $ 343,173 4.00% $ 251,669 2.94% --------------- ========== =============== ========== ============== ========== Adjustments for total risk-based capital: Subordinated capital debentures 250,000 Allowance for general loan and lease losses 57,018 --------------- Total supplementary capital 307,018 --------------- Total available capital 901,045 Equity investments (3) (4,888) --------------- Total risk-based capital (4) $ 896,157 10.67% $ 686,346 8.00% $ 211,440 2.69% =============== ========== =============== ========== ============== ========== (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) Under OTS policy, accumulated other comprehensive income is excluded from regulatory capital. (3) Reflects an aggregate offset of $0.2 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. The following table sets forth the Bank's REO at March 31, 2001, after valuation allowances of $82.8 million, by the fiscal year in which the property was acquired through foreclosure. Fiscal Year (In thousands) ---------------- ----------------- 1990 $ 10,340 (1)(2) 1991 23,977 (2) 1992 - 1993 - 1994 - 1995 4,872 (2) 1996 - 1997 - 1998 - 1999 - 2000 5,075 2001 63 ------------------ Total REO $ 44,327 ================= - ----------------------- (1) Includes REO, with an aggregate net book value of $4.9 million, which the Bank treats as equity investments for regulatory capital purposes. (2) Includes REO, with an aggregate net book value of $34.3 million, for which the Bank received an extension of the holding periods through August 4, 2001. Although the bank stopped originating new subprime auto loans effective November 9, 2000, the Bank's subprime automobile lending portfolio at March 31, 2001 continued to exceed 25% of its Tier 1 capital. As a result, the Bank remains potentially subject to the recently issued supplemental guidance for subprime lending, including increased capital requirements of 1 1/2 to 3 times the amount required for non-subprime assets of the same type. LIQUIDITY AND CAPITAL RESOURCES General. The Real Estate Trust's cash requirements include operating expenses, debt service, debt principal repayment and development and capital expenditures. During fiscal 2000, 1999 and 1998, the Real Estate Trust generated positive cash flow from operating activities 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 development and capital expenditures. These cash needs have historically been funded through external sources including additional borrowings and refinancings and proceeds from asset sales. The Real Estate Trust's other uses for cash include certain discretionary items such as dividends on its preferred shares, investments in Saul Centers, Inc., and other investment opportunities. During fiscal 2000 these discretionary items totaled approximately $17.4 million. The Real Estate Trust's ability to make such discretionary expenditures depends in part on the receipt of dividends and tax sharing payments from Chevy Chase Bank. Historically, the Real Estate Trust's total cash requirements have exceeded the cash generated by its operations and the receipt of dividends and tax sharing payments from Chevy Chase Bank. 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 development and capital improvement costs. In the past, the Real Estate Trust funded such cash requirements through a combination of external funding sources, primarily new financings (including the sale of unsecured notes), refinancings of maturing mortgage debt, asset sales and tax sharing payments from the Bank. See the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements in this report. Liquidity. For fiscal 2001, the Real Estate Trust's cash requirements for operating expenses and interest are expected to be met by its revenues from income-producing properties. Debt maturities, including maturities of unsecured notes are expected to be funded by new financings and the sales of new unsecured notes. Development and capital expenditures are expected to be funded in part from construction financing. To the extent that there are any periodic shortfalls, the Real Estate Trust will rely on its lines of credit. The Real Estate Trust has a $50.0 million secured revolving credit line with an unrelated bank. The current maturity date is September 29, 2002, and it may be extended annually. This facility is secured by a portion of the Real Estate Trust's ownership in Saul Holdings Partnership and Saul Centers. Interest is computed by reference to a floating rate index. At March 31, 2001, the Real Estate Trust had outstanding borrowings of $2.0 million and unrestricted availability of $34.5 million. The Real Estate Trust has an additional $20.0 million revolving credit line with another unrelated bank. The current maturity date for this line is November 15, 2002. Interest is computed by reference to a floating rate index. At March 31, 2001, the Real Estate Trust had outstanding borrowings of $5.5 million and unrestricted availability of $16.4 million. Through March 31, 2001, the Trust has purchased either in the open market or through dividend reinvestment approximately 2,805,000 shares of common stock of Saul Centers, Inc.(representing 20.0% of such company's outstanding common stock). As of March 31, 2001, the market value of these shares was approximately $51.3 million. Substantially all shares have been pledged as collateral with the Real Estate Trust's two revolving credit line banks. As the owner, directly and through two wholly-owned subsidiaries, of a limited partnership interest in Saul Holdings Limited Partnership ("Saul Holdings Partnership"), the Real Estate Trust shares in cash distributions from operations and from capital transactions involving the sale of properties. The partnership agreement of Saul Holdings Partnership provides for quarterly cash distributions to the partners out of net cash flow. During the six-month period ended March 31, 2001, the Real Estate Trust received total cash distributions of $3.3 million from Saul Holdings. Substantially all of the Real Estate Trust's ownership interest in Saul Holdings Partnership has been pledged as collateral with the Real Estate Trust's two revolving credit line banks. The maturity schedule for the Real Estate Trust's outstanding debt at March 31, 2001 for the balance of fiscal 2001 and subsequent years is set forth in the following table: Debt Maturity Schedule (In thousands) - ------------------------------------------------------------------- Fiscal Mortgage Notes Payable- Notes Payable- Year Notes Secured Unsecured Total - ------------------------------------------------------------------- 2001(1) $ 24,010 $ --- $ 3,298 $ 27,308 2002 31,141 --- 7,972 39,113 2003 26,845 7,500 11,636 45,981 2004 8,435 --- 10,260 18,695 2005 12,441 --- 8,088 20,529 Thereafter 212,945 200,000 8,836 421,781 - ------------------------------------------------------------------- Total $315,817 $207,500 $ 50,090 $573,407 =================================================================== (1) April 1, 2001 - September 30, 2001 Of the $315.8 million of mortgage debt outstanding at March 31, 2001, $212.0 million was nonrecourse to the Real Estate Trust. DEVELOPMENT AND CAPITAL EXPENDITURES. 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 is franchised as a Courtyard by Marriott and is projected to cost approximately $30.0 million. Financing of $25.0 million was obtained for an initial period of three years with options for two one-year extensions. This hotel opened for business on December 15, 2000. On December 16, 1999, the Real Estate Trust purchased a 4.6 acre site located in the Cascades Town Center in Sterling, Virginia for the purpose of constructing a 152- room Hampton Inn. The purchase price was $1.1 million and the seller was Chevy Chase Bank. Development costs for the hotel are projected to be $11.3 million. The hotel is being financed with the proceeds of a $9.15 million mortgage loan, which has a 3-year term, a floating interest rate and two one-year renewal options. This hotel opened for business on November 27, 2000. During the quarter ended March 31, 2000, the Real Estate Trust began the development of a 30,000 square foot office/flex building located on a 2.2 acre site in the Avenel Business Park in Gaithersburg, Maryland. The development cost $3.2 million, which the Real Estate Trust financed with its bank lines. The project is 100% leased to a single tenant. In July 2000, the Real Estate Trust agreed to sell its interest in this project to Saul Centers at a price of $4.2 million, as determined by an independent appraisal. The sale was completed on October 2, 2000 and the Trust recognized a gain of $383,000 and recorded a deferred gain of $211,000 on this transaction. On June 29, 2000, the Real Estate Trust purchased a 6.17 acre site in the Loudoun Tech Center, a 246-acre business park located in Loudoun County, Virginia, for $1.1 million. The site was purchased for the purpose of developing an 81,000 square foot office/flex building known as Loudoun Tech Phase I. The cost of development is projected to be $8.4 million and will be financed by a $7.4 million construction loan, which has a five-year term, a floating interest rate and one two-year renewal option. Construction of the base building was completed during the quarter and the building is expected to be operational by November 2001. During the quarter ended September 30, 2000, the Real Estate Trust began the development of a 100,000 square foot office/flex building located on an 8.3 acre site in Dulles North Corporate Park near other Real Estate Trust projects. The new building known as Dulles North Building Four. Development costs are projected to be $10.8 million and will be financed with the proceeds of a $9.5 million construction loan, which has a three-year term, a floating interest rate and two one-year renewal options. Construction of the base building is expected to be completed during the third quarter and the building is expected to be operational by March 2002. On November 15, 2000, the Real Estate Trust purchased a 19.1 acre land parcel in Laurel, Maryland, which contained a 150,000 square foot office/warehouse building. The purchase price was $12.3 million and was financed from the Real Estate Trust's bank lines. The entire building has been leased to Chevy Chase under a long-term agreement. On December 18, 2000, the Real Estate Trust sold its 124-unit San Simeon Apartment project in Dallas, Texas. The sales price was $2.8 million and the Trust recognized a gain of $2.1 million on the transaction. The proceeds of the sale were used to acquire a 10.7 acre parcel of land in Loudoun County , Virginia, for $2.8 million. The Real Estate Trust believes that the capital improvement costs for its income-producing properties will be in the range of $9.0 to $11.0 million per year for the next several years. BANKING Liquidity. On March 15, 2001, the OTS amended its regulations to repeal the minimum liquidity ratio of 4% and adopted an interim rule that requires thrifts to maintain sufficient liquidity to ensure their safe and sound operation. The Bank's average liquidity ratio for the quarter ended March 31, 2001, was 6.7%, compared to 7.7% for the quarter ended December 31, 2000. The Bank securitized and sold $401.5 million of automobile receivables during the three months ended March 31, 2001. At March 31, 2001, the Bank is considering the securitization and sale of approximately $300.0 million of automobile loan receivables, including $65.0 million of receivables outstanding at March 31, 2001 and $235.0 million of receivables which the Bank expects to become available through additional fundings during the six months ending September 30, 2001. As part of its operating strategy, the Bank continues to explore opportunities to sell assets, to securitize and sell home equity, automobile and home loan receivables and exchange mortgage loans for MBS to meet liquidity and other balance sheet objectives. The Bank is obligated under various recourse provisions (primarily related to credit losses) related to the securitization and sale of receivables. As a result of these recourse provisions, the Bank maintained restricted cash accounts and overcollateralization of receivables amounting to $31.0 million and $25.9 million, respectively, at March 31, 2001, and $40.2 million and $22.3 million, respectively, at December 31, 2000, both of which are included in other assets in the Consolidated Balance Sheets. In addition, the Bank owned subordinated automobile receivables-backed securities with carrying values of $2.2 million and $2.7 million at March 31, 2001 and December 31, 2000, respectively, which were classified as trading securities in the Consolidated Balance Sheets. The Bank is also obligated under various recourse provisions related to the swap of single family residential loans for mortgage-backed securities issued by the Bank. At March 31, 2001, recourse to the Bank under these arrangements was $8.8 million, consisting of restricted cash accounts of $6.3 million and overcollateralization of receivables of $2.5 million. At December 31, 2000, recourse to the Bank under these arrangements was $9.6 million, consisting of restricted cash accounts of $7.1 million and overcollateralization of receivables of $2.5 million. The Bank also is obligated under a recourse provision related to the servicing of certain of its residential mortgage loans. At March 31, 2001 and December 31, 2000, recourse to the Bank under this arrangement totaled $3.4 million. There were no material commitments for capital expenditures at March 31, 2001. The Bank is developing an office building in Bethesda, Maryland to use as its new corporate headquarters. The project is expected to be completed during the summer of 2001. The Bank's liquidity requirements in fiscal 2001, and for years subsequent to fiscal 2001, will continue to be affected both by the asset size of the Bank, the growth of which will be constrained by capital requirements, and the composition of the asset portfolio. Management believes that the Bank's primary sources of funds will be sufficient to meet the Bank's foreseeable long-term liquidity needs. The mix of funding sources utilized from time to time will be determined by a number of factors, including capital planning objectives, lending and investment strategies and market conditions. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 (the "2001 quarter") COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 (the "2000 quarter") REAL ESTATE The Real Estate Trust recorded income before depreciation and amortization of $3.6 million and an operating loss of $804,000 in the 2001 quarter compared to income before depreciation and amortization of $2.3 million and an operating loss of $1.9 million in the 2000 quarter. The decrease in the operating loss was largely attributable to improved results from income-producing properties. Income after direct operating expenses from hotel properties increased $1,070,000 (12.6%) in the 2001 quarter over the level achieved in the 2000 quarter. This increase was attributable to an increase of $1,484,000 from acquisition properties while results from 15 properties owned throughout both quarters decreased by $414,000 (5.1%). The increase in total revenue of $2,915,000 (12.9%)exceeded the increase of $1,844,000 (13.1%) in direct operating expenses. For the 15 hotels owned throughout both periods, the increase in total revenue was $130,000 (0.6%) and the increase in direct operating expenses was $544,000 (3.9%). Income after direct operating expenses from office and industrial properties increased $1,428,000 (22.7%) in the 2001 quarter compared to such income in the 2000 quarter. $413,000 (8.5%)of this increase reflected improved results from the eight properties owned throughout both quarters and $1,015,000 (14.2%) reflected results from acquisition properties. The increase in total revenue of $1,746,000 (20.0%)exceeded the increase of $318,000 (13.1%)in direct operating expenses. For the eight properties owned throughout both periods, the increase in total revenue was $725,000 (10.7%)and the increase in direct operating expenses was $218,000 (10.7%). Other income decreased $447,000 (47.8%)during the 2001 quarter due to lower interest income and lack of apartment income in the current period. Land parcels and other expense decreased $63,000 (19.1%) during the 2001 quarter due to lack of apartment expense in the current period. Interest expense increased $1,116,000 (9.6%)in the 2001 quarter, primarily because of higher mortgage interest and higher interest on bank lines of credit. The average balance of the Real Estate Trust's outstanding borrowings increased to $562.5 million for the 2001 quarter from $520.4 million for the 2000 quarter. The increase in average borrowings was the result of mortgage loan refinancings and lines of credit borrowings. The weighted average cost of borrowings was 9.4% in the 2001 quarter compared to 9.2% in the 2000 quarter. Capitalized interest decreased $141,000 (58.4%) during the 2001 quarter due to the lower level of development activity in the current period. Amortization of debt expense increased $63,000 (38.7%)in the 2001 quarter, primarily due to costs experienced in adding new debt. Depreciation increased $121,000 (3.0%) in the 2001 quarter as a result of the addition new properties and new assets placed in service in the past year. Advisory, management and leasing fees paid to related parties increased $274,000 (10.1%) in the 2001 quarter from their expense level in the 2000 quarter. The monthly advisory fee in the 2001 quarter was $363,000 compared to $349,000 in the 2000 quarter, which resulted in an aggregate increase of $42,000. Management fees increased $233,000 (13.9%) in the current quarter, reflecting both higher hotel sales and office rents on which the fees are based. General and administrative expense decreased $450,000 in the 2001 quarter, principally as a result of lower legal expense in the current period and the writeoff of abandoned development expenses in the 2000 quarter. Equity on earnings of unconsolidated entities reflected earnings of $2,114,000 in the 2001 quarter, an increase of $239,000 (12.8%) over the amount recorded in the 2000 quarter. The improvement was due to increased period-to-period earnings of Saul Centers, Inc. BANKING Overview. The Bank recorded operating income of $36.8 million in the 2001 quarter compared to operating income of $13.4 million in the 2000 quarter. The increase in income for the quarter was primarily attributable to an increase in other income of $37.6 million and interest income on loans and leases of $28.5 million. Partially offsetting the increase in income was an increase in interest expense of $17.6 million and other (non-interest) expense of $14.0 million. Net Interest Income. Net interest income, before the provision for loan and lease losses, increased $5.1 million (or 5.9%) in the 2001 quarter compared to the 2000 quarter. Included in interest income during the 2001 quarter was $0.1 million recorded on non-accrual assets and restructured loans. The Bank would have recorded additional interest income of $0.8 million for the 2001 quarter if non-accrual assets and restructured loans had been current in accordance with their original terms. The Bank's net interest income in future periods will continue to be adversely affected by the Bank's non-performing assets. See "Financial Condition - Asset Quality - Non-Performing Assets." The following table sets forth, for the periods indicated, information regarding the total amount of income from interest-earning assets and the resulting yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net yield on interest-earning assets Net Interest Margin Analysis (Dollars in thousands) Three Months Ended March 31, -------------------------------------------------------------------------------------------- 2001 2000 ---------------------------------------------- --------------------------------------------- Average Yield/ Average Yield/ Balances Interest Rate Balances Interest Rate ------------------ --------------- ----------- ----------------- --------------- ----------- Assets: Interest-earning assets: Loans and leases receivable, net (1) $ 8,781,294 $ 181,001 8.24 % $ 7,298,062 $ 152,454 8.36 % Mortgage-backed securities 925,616 14,944 6.46 1,220,651 18,877 6.19 Federal funds sold and securities purchased under agreements to resell 56,360 774 5.49 145,949 2,157 5.91 Trading securities 21,050 372 7.07 25,667 354 5.52 Investment securities 45,678 683 5.98 45,460 655 5.76 Other interest-earning assets 193,440 3,257 6.73 230,627 3,791 6.58 ------------------ --------------- ----------------- --------------- Total 10,023,438 201,031 8.02 8,966,416 178,288 7.95 --------------- ----------- --------------- ----------- Noninterest-earning assets: Cash 260,092 281,102 Real estate held for investment or sale 48,963 47,972 Property and equipment, net 383,291 305,904 Goodwill and other intangible assets, net 25,972 26,947 Other assets 298,144 221,293 ------------------ ----------------- Total assets $ 11,039,900 $ 9,849,634 ================== ================= Liabilities and stockholders' equity: Interest-bearing liabilities: Deposit accounts: Demand deposits $ 1,284,814 2,116 0.66 $ 1,207,797 2,630 0.87 Savings deposits 871,662 3,563 1.64 946,142 4,381 1.85 Time deposits 2,981,473 45,955 6.17 2,591,635 34,976 5.40 Money market deposits 1,337,221 13,108 3.92 1,091,708 9,289 3.40 ------------------ --------------- ----------------- --------------- Total deposits 6,475,170 64,742 4.00 5,837,282 51,276 3.51 Borrowings 3,057,580 45,057 5.89 2,765,613 40,890 5.91 ------------------ --------------- ----------------- --------------- Total liabilities 9,532,750 109,799 4.61 8,602,895 92,166 4.29 --------------- ----------- --------------- ----------- Noninterest-bearing items: Noninterest-bearing deposits 654,798 498,612 Other liabilities 231,955 138,257 Minority interest 144,000 144,000 Stockholders' equity 476,397 465,870 ------------------ ----------------- Total liabilities and stockholders' equity $ 11,039,900 $ 9,849,634 ================== ================= Net interest income $ 91,232 $ 86,122 =============== =============== Net interest spread (2) 3.42 % 3.67 % =========== =========== Net yield on interest-earning assets (3) 3.64 % 3.84 % =========== =========== Interest-earning assets to interest-bearing liabilities 105.15 % 104.23 % =========== =========== - ------------------------------------------------------------------------------------------------------------------------------------ (1) Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the extent reflected in the Consolidated Statements of Operations; however, the loan balance is included in the average amount outstanding until transferred to real estate acquired in settlement of loans. (2) Equals weighted average yield on total interest-earning assets less weighted average rate on total interest-bearing liabilities. (3) Equals annualized net interest income divided by the average balances of total interest-earning assets. The following table presents certain information regarding changes in interest income and interest expense of the Bank during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate); changes in rate (change in rate multiplied by old volume); and changes in rate and volume. Volume and Rate Changes in Net Interest Income (Dollars in thousands) Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 Increase (Decrease) Due to Change in (1) ---------------------------------------------------------------------------- Total Volume Rate Change --------------------- --------------------- --------------------- Interest income: Loans (2) $ 43,024 $ (14,477) $ 28,547 Mortgage-backed securities (8,916) 4,983 (3,933) Federal funds sold and securities purchased under agreements to resell (1,239) (144) (1,383) Trading securities (304) 322 18 Investment securities 4 24 28 Other interest-earning assets (1,074) 540 (534) --------------------- --------------------- --------------------- Total interest income 31,495 (8,752) 22,743 --------------------- --------------------- --------------------- Interest expense: Deposit accounts 5,913 7,553 13,466 Borrowings 5,109 (942) 4,167 --------------------- --------------------- --------------------- Total interest expense 11,022 6,611 17,633 --------------------- --------------------- --------------------- Increase in net interest income $ 20,473 $ (15,363) $ 5,110 ===================== ===================== ===================== - ----------------------------------------------------------------------------------------------------------------------------- (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 the 2001 quarter increased $22.7 million (or 12.8%) from the level in the 2000 quarter as a result of higher average balances and slightly higher average yields on loans and leases receivable. The Bank's net interest spread decreased to 3.42% in the 2001 quarter, from 3.67% in the 2000 quarter. The 25 basis point decrease primarily reflected an increase in the average cost of interest-bearing liabilities at a greater rate than the increase in the average yield of interest-earning assets. Partially offsetting this decline was an increase in the average balances of earning assets, which was funded primarily with higher cost Federal Home Loan Bank advances and brokered deposits. Average interest-earning assets as a percentage of average interest-bearing liabilities increased to 105.15% for the 2001 quarter, compared to 104.23% for the 2000 quarter. Interest income on loans and leases, the largest category of interest-earning assets, increased by $28.5 million (or 18.7%) from the 2000 quarter primarily because of higher average balances. Higher average balances of the Bank's single-family residential loans, which increased $794.3 million (or 18.1%), resulted in a $15.0 million (or 19.6%) increase in interest income from such loans. Average balances of automobile loans, commercial loans and home equity loans increased $437.1 million, $186.8 million and $49.6 million, respectively, and contributed to $8.3 million, $3.7 million and $1.3 million increases in interest income from such loans, respectively. Lower average yields on automobile loans partially offset the effects of the higher average balances. The average yield on the loan portfolio in the 2001 quarter decreased 12 basis points (from 8.36% to 8.24%) from the average yield in the 2000 quarter. Contributing to the lower average yield was a decrease in the yield on automobile loans, which resulted from management's decision to shift from higher yielding subprime loans, which have higher risks of default to lower yielding prime automobile loans and leases, with relatively lower risk of default. Average subprime automobile loans as a percentage of total automobile loans and leases declined to 25.4% during the 2001 quarter from 29.8% during the 2000 quarter. Partially offsetting the decrease in the average loan yield were increases in the average yield on home equity loans (from 8.60% to 8.88%) and home improvement loans (from 8.55% to 9.54%). Interest income on mortgage-backed securities decreased $3.9 million (or 20.8%) primarily because of lower average balances. The effect of the $295.0 million decrease in average balances was partially offset by an increase in the average interest rates on those securities from 6.19% to 6.46%. Interest expense on deposits increased $13.5 million (or 26.3%) during the 2001 quarter, due to increased average rates and average balances. The 49 basis point increase in the average rate on deposits (from 3.51% to 4.00%) resulted from a shift in the deposit mix towards higher cost certificates of deposit and money market deposits. The Bank continues to use brokered deposits as an alternative funding source. Interest expense on borrowings increased $4.2 million (or 10.2%) in the 2001 quarter over the 2000 quarter. A $274.8 million (or 14.1%) increase in average balances on Federal Home Loan Bank advances resulted in an increase of $3.6 million in interest expense from such borrowings. Provision for Loan and Lease Losses. The Bank's provision for loan and lease losses increased to $18.0 million in the 2001 quarter from $12.8 million in the 2000 quarter. The $5.2 million increase primarily reflected increased charge-offs as a result of the aging of the Bank's loan portfolio following recent growth. See "Financial Condition - Asset Quality - Allowances for Losses." Other Income. Other non-interest income increased to $68.1 million in the 2001 quarter from $30.5 million in the 2000 quarter. The $37.6 million (or 123.1%) increase was primarily attributable to an increase in servicing and securitization income of $18.4 million and an increase in gain on trading securities, net of $7.0 million. Also contributing to the increase in other income was an increase in deposit servicing fees of $4.6 million. Servicing and securitization income increased $18.4 million (or 240.9%) during the current quarter primarily as a result of a $14.1 million gain resulting from the securitization and sale of $401.5 million of automobile loan receivables in the 2001 quarter. The Bank did not securitize and sell any loan receivables during the 2000 quarter. Two securitizations of automobile loan receivables in the latter half of fiscal 2000 also contributed to increased servicing and securitization in the current quarter. Gain on trading securities, net increased $7.0 million over the 2000 quarter. The increase was primarily the result of a non-recurring, pre-tax gain of $9.4 million from the sale of the Bank's interest in Star Systems, Inc. to Concord EFS, Inc. during the current quarter. Deposit servicing fees increased $4.6 million (or 23.7%) during the 2001 quarter primarily due to fees generated from the continued expansion of the Bank's branch and ATM network. Operating Expenses. Operating expenses for the 2001 quarter increased $14.0 million (or 15.5%) from the level in the 2000 quarter. The increase in operating expenses is largely attributable to an increase in loan expenses. Loan expenses increased $13.8 million primarily due to an $8.0 million write down in the market value of the Bank's mortgage servicing assets as a result of increased prepayments during the current quarter. In addition, the 2000 quarter included a reduction in loan expenses as a result of a $2.8 million recovery of prior valuation adjustments recorded against the Bank's mortgage servicing assets. SIX MONTHS ENDED MARCH 31, 2001 (the "2001 period") COMPARED TO SIX MONTHS ENDED MARCH 31, 2000 (the "2000 period"). REAL ESTATE The Real Estate Trust recorded income before depreciation and amortization of $8.5 million and operating income of $27,000 in the 2001 period compared to income before depreciation and amortization of $1.9 million and an operating loss of $5.9 million in the 2000 period. The changes reflect improved results in operations of hotels and office and industrial properties, partially reduced by higher interest expense. Additionally, in the 2001 period the Trust recognized approximately $2.5 million in gains from the sale of two properties. Income after direct operating expenses from hotels increased $2,169,000 (13.9%) in the 2001 period over the level achieved in the 2000 period. $543,000 (3.6%) of this increase reflected improved results from fifteen hotels owned throughout both periods and $1,626,000 (10.3%) reflected results from acquisition properties. The increase in total revenue of $5,531,000 (12.8%)exceeded the increase of $3,362,000 (12.1%)in direct operating expenses. For the fifteen hotels owned throughout both periods, the increase in total revenue was $2,343,000 (5.5%)and the increase in direct operating expenses was $1,800,000 (6.6%). The revenue increase was attributable to improved market conditions which permitted the Real Estate Trust to raise average room rates. Income after direct operating expenses from office and industrial properties increased $3,816,000 (33.7%) in the 2001 period compared to such income in the 2000 period. $894,000 (9.3%) of this increase reflected improved results from the seven properties owned throughout both periods and $2,922,000 (24.4%) reflected results from acquisition properties. The increase in total revenue of $4,694,000 (29.8%)exceeded the increase of $878,000 (19.9%)in direct operating expenses. For the eight properties owned throughout both periods, the increase in total revenue was $1,344,000 (10.0%) and the increase in direct operating expenses was $355,000 (9.0%). Other income decreased $406,000 (25.0%)during the 2001 period primarily due to lower interest income and secondarily to lower apartment income. Land parcels and other expense increased $1,000 (0.2%) during the 2001 period. Interest expense increased $2,486,000 (11.0%)in the 2001 period, primarily because of higher mortgage interest and higher interest on bank lines of credit borrowings. Average balances of the Real Estate Trust's outstanding borrowings increased to $548.0 million for the 2001 period from $499.9 million for the 2000 period. The increase in average borrowings occurred as a result of mortgage loan refinancings and lines of credit of borrowings. The weighted average cost of borrowings was 9.45% in the 2001 period compared to 9.27% in the 2000 period. Capitalized interest decreased $46,000 (9.9%) during the 2001 period due to the lower level of development activity in the current period. Amortization of debt expense increased $98,000 (30.9%) in the 2001 period, primarily due to costs experienced in adding new debt. Depreciation increased $565,000 (7.5%) in the 2001 period as a result of the additions of new properties and new assets placed in service in the past year. Advisory, management and leasing fees paid to related parties increased $630,000 (12.1%) in the 2001 period from their expense level in the 2000 period. The monthly advisory fee in the 2000 period was $363,000 compared to $349,000 in the prior period, which resulted in an aggregate increase of $84,000. Management and leasing fees increased $546,000 (17.6%) in the current period, reflecting both higher hotel sales and office rents on which fees are based. General and administrative expense decreased $1,663,000 (60.1%)in the 2001 period, principally because expenses in the 2000 period included a $1.2 million payment to terminate the Howard Johnson franchise at one hotel. Equity in earnings of unconsolidated entities reflected earnings of $3,998,000 for the 2001 period and earnings of $3,978,000 for the 2000 period, an increase of $20,000 (0.5%). The improvement was due to increased period-to-period earnings of Saul Centers, Inc. BANKING Overview. The Bank recorded operating income of $55.4 million in the 2001 period compared to operating income of $30.1 million in the 2000 period. The increase in income for the period was primarily attributable to an increase in other income of $52.1 million and interest income on loans and leases of $66.1 million. Partially offsetting the increase in income were increases in interest expense of $43.3 million and other (non-interest) expense of $25.9 million. Net Interest Income. Net interest income, before the provision for loan and lease losses, increased $9.3 million (or 5.6%) in the 2001 period compared to the 2000 period. Included in interest income during the 2001 period was $0.2 million recorded on non-accrual assets and restructured loans. The Bank would have recorded additional interest income of $1.8 million for the 2001 period if non-accrual assets and restructured loans had been current in accordance with their original terms. The Bank's net interest income in future periods will continue to be adversely affected by the Bank's non-performing assets. See "Financial Condition - Asset Quality - Non-Performing Assets." The following table sets forth, for the periods indicated, information regarding the total amount of income from interest-earning assets and the resulting yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net yield on interest-earning assets. Net Interest Margin Analysis (Dollars in thousands) Six Months Ended March 31, -------------------------------------------------------------------------------------------- 2001 2000 ---------------------------------------------- --------------------------------------------- Average Yield/ Average Yield/ Balances Interest Rate Balances Interest Rate ------------------ --------------- ----------- ----------------- --------------- ----------- Assets: Interest-earning assets: Loans and leases receivable, net (1) $ 8,615,603 $ 358,031 8.31 % $ 6,972,919 $ 291,958 8.37 % Mortgage-backed securities 968,204 31,498 6.51 1,254,203 38,846 6.19 Federal funds sold and securities purchased under agreements to resell 51,778 1,557 6.01 216,496 6,111 5.65 Trading securities 18,324 661 7.21 22,480 737 6.56 Investment securities 45,667 1,378 6.03 45,276 1,297 5.73 Other interest-earning assets 187,514 6,488 6.92 256,388 8,090 6.31 ------------------ --------------- ----------------- --------------- Total 9,887,090 399,613 8.08 8,767,762 347,039 7.92 --------------- ----------- --------------- ----------- Noninterest-earning assets: Cash 276,234 291,481 Real estate held for investment or sale 52,147 48,907 Property and equipment, net 376,533 305,603 Goodwill and other intangible assets, net 25,514 27,297 Other assets 285,103 220,114 ------------------ ----------------- Total assets $ 10,902,621 $ 9,661,164 ================== ================= Liabilities and stockholders' equity: Interest-bearing liabilities: Deposit accounts: Demand deposits $ 1,262,406 4,721 0.75 $ 1,181,148 5,181 0.88 Savings deposits 873,619 7,515 1.72 963,498 8,997 1.87 Time deposits 3,026,989 94,650 6.25 2,418,167 64,172 5.31 Money market deposits 1,267,032 25,481 4.02 1,106,012 18,687 3.38 ------------------ ------------- ----------------- ------------- Total deposits 6,430,046 132,367 4.12 5,668,825 97,037 3.42 Borrowings 2,983,480 90,450 6.06 2,784,774 82,503 5.93 ------------------ --------------- ----------------- --------------- Total liabilities 9,413,526 222,817 4.73 8,453,599 179,540 4.25 --------------- ----------- --------------- ----------- Noninterest-bearing items: Noninterest-bearing deposits 635,623 483,257 Other liabilities 236,166 123,302 Minority interest 144,000 144,000 Stockholders' equity 473,306 457,006 ------------------ ----------------- Total liabilities and stockholders' equity $ 10,902,621 $ 9,661,164 ================== ================= Net interest income $ 176,796 $ 167,499 =============== =============== Net interest spread (2) 3.35 % 3.67 % =========== =========== Net yield on interest-earning assets (3) 3.58 % 3.82 % =========== =========== Interest-earning assets to interest-bearing liabilities 105.03 % 103.72 % =========== =========== - ------------------------------------------------------------------------------------------------------------------------------------ (1) Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the extent reflected in the Consolidated Statements of Operations; however, the loan balance is included in the average amount outstanding until transferred to real estate acquired in settlement of loans. (2) Equals weighted average yield on total interest-earning assets less weighted average rate on total interest-bearing liabilities. (3) Equals annualized net interest income divided by the average balances of total interest-earning assets. The following table presents certain information regarding changes in interest income and interest expense of the Bank during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate); changes in rate (change in rate multiplied by old volume); and changes in rate and volume. Volume and Rate Changes in Net Interest Income (Dollars in thousands) Six Months Ended March 31, 2001 Compared to Six Months Ended March 31, 2000 Increase (Decrease) Due to Change in (1) ---------------------------------------------------------------------------- Total Volume Rate Change --------------------- --------------------- --------------------- Interest income: Loans (2) $ 72,242 $ (6,169) $ 66,073 Mortgage-backed securities (12,533) 5,185 (7,348) Federal funds sold and securities purchased under agreements to resell (5,640) 1,086 (4,554) Trading securities (240) 164 (76) Investment securities 11 70 81 Other interest-earning assets (3,478) 1,876 (1,602) --------------------- --------------------- --------------------- Total interest income 50,362 2,212 52,574 --------------------- --------------------- --------------------- Interest expense: Deposit accounts 13,996 21,334 35,330 Borrowings 6,079 1,868 7,947 --------------------- --------------------- --------------------- Total interest expense 20,075 23,202 43,277 --------------------- --------------------- --------------------- Increase in net interest income $ 30,287 $ (20,990) $ 9,297 ===================== ===================== ===================== - ----------------------------------------------------------------------------------------------------------------------------- (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 the 2001 period increased $52.6 million (or 15.1%) from the level in the 2000 period as a result of higher average balances of loans and leases receivable, which were partially offset by slightly lower average yields on loans and leases receivable. The Bank's net interest spread decreased to 3.35% in the 2001 period, from 3.67% in the 2000 period. The 32 basis point decrease primarily reflected an increase in the average cost of interest-bearing liabilities at a rate greater than the increase in the average yield of interest-bearing assets. Partially offsetting this decline was an increase in the average balances of earning assets, which was funded primarily with higher cost Federal Home Loan Bank advances and brokered deposits. Average interest-earning assets as a percentage of average interest-bearing liabilities increased to 105.03% for the 2001 period, compared to 103.72% for the 2000 period. Interest income on loans, the largest category of interest-earning assets, increased by $66.1 million (or 22.6%), from the 2000 period primarily because of higher average balances. Higher average balances of the Bank's single-family residential loans, which increased $815.0 million (or 19.0%), resulted in a $31.1 million (or 20.7%) increase in interest income from such loans. Average balances of automobile loans, commercial loans, real estate construction and home equity loans increased $559.8 million, $203.3 million, $52.9 million and $44.1 million, respectively, and contributed to a $21.2 million, $9.1 million, $2.7 million and $2.9 million increase in interest income from such loans, respectively. Lower average yields on automobile loans partially offset the effects of the higher average balances. The average yield on the loan portfolio in the 2001 period decreased six basis points (from 8.37% to 8.31%), from the average yield in the 2000 period. Contributing to the lower average yield was a decrease in the yield on automobile loans, which resulted from management's decision to shift from higher yielding subprime loans, which have higher risks of default, to lower yielding prime automobile loans and leases, with relatively lower risk of default. Average subprime automobile loans as a percentage of total automobile loans and leases declined to 27.4% during the 2001 period, from 31.9% during the 2000 period. Partially offsetting the decreased average yield on the loan portfolio was an increase in the average yield on home improvement loans (from 8.89% to 9.50%) and home equity loans (from 8.40% to 9.08%), resulting from increases in the index on which the interest rates on such loans are based. Interest income on mortgage-backed securities decreased $7.3 million (or 18.9%) primarily because of lower average balances. The effect of the $286.0 million decrease in average balances was partially offset by an increase in the average interest rates on those securities from 6.19% to 6.51%. Interest expense on deposits increased $35.3 million (or 36.4%) during the 2001 period due to increased average rates and average balances. The 70 basis point increase in the average rate on deposits (from 3.42% to 4.12%) resulted from a shift in the deposit mix towards higher cost certificates of deposit. The Bank continues to use brokered deposits as an alternative funding source. Interest expense on borrowings increased $7.9 million (or 9.6%) in the 2001 period over the 2000 period. A $200.1 million (or 10.3%) increase in average balances on Federal Home Loan Bank advances and, to a lesser extent, the increase in the average rate on such borrowings (from 5.62% to 5.70%) resulted in an increase of $6.5 million in interest expense. Provision for Loan and Lease Losses. The Bank's provision for loan and lease losses increased to $33.9 million in the 2001 period from $23.8 million in the 2000 period. The $10.1 million increase primarily reflected increased charge-offs as a result of the aging of the Bank's loan portfolio following recent growth. See "Financial Condition - Asset Quality - Allowances for Losses." Other Income. Other non-interest income increased to $114.9 million in the 2001 period from $62.7 million in the 2000 period. The $52.2 million (or 83.1%) increase was primarily attributable to an increase in servicing and securitization income of $27.1 million and an increase in gain on trading securities of $4.9 million. Also contributing to the increase in other income was an increase in deposit servicing fees of $8.7 million. Servicing and securitization income increased $27.0 million (or 201.1%) during the current period primarily as a result of a $14.1 million gain resulting from the securitization and sale of $401.5 million of automobile loan receivables in the 2001 period. Two securitizations of automobile loan receivables in the latter half of fiscal 2000 also contributed to increased servicing and securitization income in the current period. Gain on trading securities, net increased $4.9 million over the 2000 period. The increase was primarily the result of a non-recurring, pre-tax gain of $9.4 million from the sale of the Bank's interest in Star Systems, Inc. to Concord EFS, Inc. during the current period. Deposit servicing fees increased $8.7 million (or 21.6%) during the 2001 period primarily due to fees generated from the continued expansion of the Bank's branch and ATM network. Operating Expenses. Operating expenses for the 2001 period increased $25.9 million (or 14.7%) from the level in the 2000 period. Salaries and employee benefits increased $3.4 million (or 3.6%). The Bank recognized $3.0 million of expenses related to the closing of its subprime origination network during December 2000. The increase in operating expenses is largely attributable to an increase in loan expenses. Loan expenses increased $19.2 million primarily due to an $8.0 million write down in the market value of the Bank's mortgage servicing assets as a result of increased prepayments during the current period. In addition, the 2000 period included a reduction in loan expenses as a result of a $6.3 million recovery of prior valuation adjustments recorded against the Bank's mortgage servicing assets. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this Item is included in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations." PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K are set forth below. EXHIBITS DESCRIPTION - -------- ----------------------------------------------------------------- 3. ORGANIZATIONAL DOCUMENTS (a) Amended and Restated Declaration of Trust filed with the Maryland State Department of Assessments and Taxation on June 22, 1990 as filed as Exhibit 3(a) to Registration Statement No. 33-34930 is hereby incorporated by reference. (b) Amendment to Amended and Restated Declaration of Trust reflected in Secretary Certificate filed with the Maryland State Department of Assessments and Taxation on June 26, 1990 as filed as Exhibit 3(b) to Registration Statement No. 33-34930 is hereby incorporated by reference. (c) Amended and Restated By-Laws of the Trust dated as of February 28, 1991 as filed as Exhibit T3B to the Trust's Form T-3 Application for Qualification of Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is hereby incorporated by reference. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (a) Indenture dated as of March 25, 1998 between the Trust and Norwest Bank Minnesota, National Association, as Trustee, with respect to the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as filed as Exhibit 4(a) to Registration Statement 333-49937 is hereby incorporated by reference. (b) Indenture with respect to the Trust's Senior Notes Due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration No. 33-19909 is hereby incorporated by reference. (c) First Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for Qualification of Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is hereby incorporated by reference. (d) Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 33-9336 is hereby incorporated by reference. (e) Fourth Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby incorporated by reference. (f) Third Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby incorporated by reference. (g) Second Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby incorporated by reference. (h) Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-68652 is hereby incorporated by reference. (i) Indenture with respect to the Trust's Senior Notes due from One Year to Five Years from Date of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for Qualification of Indentures under the Trust Indenture Act of 1939 (file No. 22-10206) is hereby incorporated by reference (j) Indenture dated as of September 1, 1992 with respect to the Trust's Notes due from One to Ten Years form Date of Issue filed as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby incorporated by reference. (k) First Supplemental Indenture dated as of January 16, 1997 with respect to the Trust's Notes due from One to Ten years from Date of Issue filed as Exhibit 4(b) to Registration Statement No. 33-34930 is hereby incorporated by reference. (l) Second Supplemental Indenture dated as of January 13, 1999 with respect to the Trust's Notes due from One to Ten Years from Date of Issuance as filed as Exhibit 4(l) to Registration Statement No. 333-70753 is hereby incorporated by reference. 10. MATERIAL CONTRACTS (a) Advisory Contract with B.F. Saul Advisory Company effective October 1, 1982 filed as Exhibit 10(a) to Registration Statement No. 2-80831 is hereby incorporated by reference. (b) Commercial Property Leasing and Management Agreement effective October 1, 1982 between the Trust and Franklin Property Company filed as Exhibit 10(b) to Registration Statement No. 2-80831 is hereby incorporated by reference. (c) Tax sharing Agreement dated June 28,1990 among the Trust, Chevy Chase Savings Bank F.S.B. and certain of their subsidiaries filed as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby incorporated by reference. (d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company, Franklin Development Co., Inc., The Klingle Corporation and Westminster Investing Corporation relating to the transfer of certain shares of Chevy Chase Savings Bank, F.S.B. and certain real property to the Trust in exchange for Preferred Shares of the Trust filed as Exhibit 10(d) to Registration Statement No. 33-34930 is hereby incorporated by reference. (e) Regulatory Capital Maintenance/Dividend Agreement dated May 17, 1988 among B.F. Saul Company, the Trust and the Federal Savings and Loan Insurance Corporation filed as Exhibit 10(e) to the Trust's Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 1991 is hereby incorporated by reference. (f) Written Agreement dated September 30, 1991 between the Office of Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as Exhibit 10(f) to Registration Statement No. 33-34930 is hereby incorporated by reference. (g) Amendments to Commercial Property Leasing and Management Agreement between the Trust and Franklin Property Company dated as of December 31, 1992 (Amendment No. 5), July 1, 1989 (Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1, 1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed as Exhibit 10(o) to Registration Statement No. 33-34930 is hereby incorporated by reference. (h) Advisory Contract between B.F. Saul Advisory Company and Dearborn Corporation dated as of December 31, 1992 filed as Exhibit 10(p) to Registration Statement No. 33-34930 is hereby incorporated by reference. (i) Commercial Property Leasing and Management Agreement between Dearborn Corporation and Franklin Property Company dated as of December 31, 1992 filed as Exhibit 10(q) to Registration Statement No. 33-34930 is hereby incorporated by reference. (j) Registration Rights and Lock-Up Agreement dated August 26, 1993 by and among Saul Centers, Inc. and the Trust, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn Corporation, Franklin Property Company and Avenel Executive Park Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference. (k) Exclusivity and Right of First Refusal Agreement dated August 26, 1993 among Saul Centers, Inc., the Trust, B. F. Saul Company, Westminster Investing Corporation, Franklin Property Company, Van Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as filed as Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference. (l) Fourth Amended and Restated Reimbursement Agreement dated as of April 25, 2000 by and among Saul Centers, Inc., Saul Holdings Limited Partnership, Saul Subsidiary I Limited Partnership, Saul Subsidiary II Limited Partnership, Saul QRS, Inc., Franklin Property Company, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn, L.L.C., Avenel Executive Park Phase II, L.L.C., and the Trust. (m) Amendment to Written Agreement dated October 29, 1993 between the Office of Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as Exhibit 10(u) to Registration Statement No. 33-34930 is hereby incorporated by reference. (n) Registration Rights Agreement dated as of March 25, 1998 among the Trust, Merrill Lynch and Co., Merrill Lynch, Pierce, Fenner and Smith Incorporated and Friedman, Billings, Ramsey and Co., Inc. as filed as Exhibit 4(c) to Registration Statement No. 333-49937 is hereby incorporated by reference. (o) Bank Stock Registration Rights Agreement dated as of March 25, 1998 between the Trust and Norwest Bank Minnesota, National Association, as Trustee, as filed as Exhibit 4(d) to Registration Statement No. 333-49937 is hereby incorporated by reference. - ------------------------------------------------------------------------------- (b) The Registrant did not file any reports on Form 8-K during the fiscal quarter covered by this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. B. F. SAUL REAL ESTATE INVESTMENT TRUST ----------------------------------------------- (Registrant) Date: May 14, 2001 Stephen R. Halpin, Jr. ----------------- ----------------------------------------------- Stephen R. Halpin, Jr. Vice President and Chief Financial Officer Date: May 14, 2001 Bill D. Tzamaras ----------------- ----------------------------------------------- Bill D. Tzamaras Vice President and Principal Accounting Officer
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10-Q Filing
Saul B F Real Estate Investment Trust Inactive 10-Q2001 Q2 Quarterly report
Filed: 15 May 01, 12:00am