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
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OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1-7184
B. F. SAUL REAL ESTATE INVESTMENT TRUST
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(Exact name of registrant as specified in the charter)
Maryland 52-6053341
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 Connecticut Avenue,
Chevy Chase, Maryland 20815
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(Address of principal executive office) (Zip Code)
(301) 986-6000
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(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
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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
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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
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TOTAL ASSETS $ 11,417,716 $ 11,115,858
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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
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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
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Commitments and contingencies
Minority interest held by affiliates 82,215 79,028
Minority interest -- other 218,307 218,307
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TOTAL LIABILITIES 11,392,675 11,107,247
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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
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,417,716 $ 11,115,858
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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
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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
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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
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Equity in earnings of unconsolidated entities 2,114 1,875 3,998 3,978
Gain on sale of property -- -- 2,545 --
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REAL ESTATE OPERATING INCOME (LOSS) $ (804) $ (1,886) $ 27 $ (5,946)
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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
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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)
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Net interest income after provision for loan losses 73,216 73,348 142,857 143,737
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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
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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
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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
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BANKING OPERATING INCOME $ 36,772 $ 13,352 $ 55,425 $ 30,110
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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)
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TOTAL COMPANY NET INCOME $ 13,743 $ 1,368 $ 20,753 $ 3,047
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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)
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NET INCOME PER COMMON SHARE $ 2.57 $ -- $ 3.74 $ 0.07
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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
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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)
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TOTAL COMPREHENSIVE INCOME $ 12,545 $ 1,362 $ 19,138 $ 3,038
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CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516 $ 516 $ 516
------------------- --------------- --------------- ---------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642 6,642
------------------- --------------- --------------- ---------------
PAID-IN SURPLUS
Beginning and end of period 92,943 92,943 92,943 92,943
------------------- --------------- --------------- ---------------
DEFICIT
Beginning of period (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)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ 25,041 $ (7,992) $ 25,041 $ (7,992)
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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
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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
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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)
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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
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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
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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)
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Total
Volume Rate Change
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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)
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Total interest income 50,362 2,212 52,574
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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
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Increase in net interest income $ 30,287 $ (20,990) $ 9,297
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(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
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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.
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(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
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(Registrant)
Date: May 14, 2001 Stephen R. Halpin, Jr.
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Stephen R. Halpin, Jr.
Vice President and Chief Financial Officer
Date: May 14, 2001 Bill D. Tzamaras
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Bill D. Tzamaras
Vice President and Principal Accounting Officer
