Saul B F Real Estate Investment Trust Inactive
Filed: 31 Dec 01, 12:00am
Registration No. 333-70753
Rule 424(b)(3)
Supplement Dated December 31, 2001 to
Prospectus Dated January 31, 2001
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B. F. SAUL
REAL ESTATE INVESTMENT TRUST
ANNUAL REPORT
FOR YEAR ENDED
SEPTEMBER 30, 2001
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TABLE OF CONTENTS
FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2001 and 2000.........
Consolidated Statements of Operations for the years ended
September 30, 2001, 2000 and 1999.............................
Consolidated Statements of Comprehensive Income and Changes in
Shareholders' Equity (Deficit) for the years ended
September 30, 2001, 2000 and 1999.............................
Consolidated Statements of Cash Flows for the years ended
September 30, 2001, 2000 and 1999.............................
Notes to Consolidated Financial Statements.........................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition ...............................................
Real Estate ..................................................
Banking ......................................................
Liquidity and Capital Resources ...................................
Real Estate ..................................................
Banking ......................................................
Results of Operations .............................................
Fiscal 2001 Compared to Fiscal 2000 ..........................
Real Estate .............................................
Banking .................................................
Fiscal 2000 Compared to Fiscal 1999 ..........................
Real Estate .............................................
Banking .................................................
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST
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September 30
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(In thousands) 2001 2000
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ASSETS
Real Estate
Income-producing properties
Hotel $ 254,165 $ 209,861
Office and industrial 157,653 148,581
Other 2,825 3,991
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414,643 362,433
Accumulated depreciation (131,659) (124,184)
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282,984 238,249
Land parcels 40,835 39,716
Construction in progress 15,681 49,096
Cash and cash equivalents 13,860 18,129
Note receivable and accrued interest -- related party 7,787 11,787
Other assets 86,983 73,887
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Total real estate assets 448,130 430,864
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Banking
Cash and other deposits 325,610 357,792
Interest-bearing deposits 84,385 30,441
Federal funds sold and securities purchased under agreements to resell -- 40,000
Loans held for sale 246,083 126,108
Loans held for securitization and sale 282,000 70,000
Investment securities (market value $46,181 and $45,559, respectively) 45,794 45,648
Trading securities 6,690 3,380
Mortgage-backed securities (market value $1,489,835 and $1,025,540, respectively) 1,474,495 1,046,809
Loans and leases receivable (net of allowance for losses of $63,018 and $54,018, respectively) 8,018,495 8,105,031
Federal Home Loan Bank stock 113,030 97,676
Real estate held for investment or sale (net of allowance for losses of $85,354 and $80,954,
respectively) 31,704 49,386
Property and equipment, net 437,795 362,469
Goodwill and other intangible assets, net 27,058 25,270
Interest only strips, net 47,146 16,763
Servicing assets, net 62,434 75,045
Other assets 185,747 233,176
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Total banking assets 11,388,466 10,684,994
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TOTAL ASSETS $ 11,836,596 $ 11,115,858
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LIABILITIES
Real Estate
Mortgage notes payable $ 325,750 $ 307,214
Notes payable - secured 202,500 200,000
Notes payable - unsecured 50,717 47,463
Deferred gains - real estate 113,045 112,834
Accrued dividends payable - preferred shares of beneficial interest 19,303 25,885
Other liabilities and accrued expenses 36,874 44,971
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Total real estate liabilities 748,189 738,367
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Banking
Deposit accounts 7,562,470 7,037,789
Securities sold under repurchase agreements and other short-term borrowings 282,350 540,042
Federal Home Loan Bank advances 2,240,598 1,946,971
Custodial accounts 119,349 64,152
Amounts due to banks 58,167 51,902
Other liabilities 225,674 180,689
Capital notes -- subordinated 250,000 250,000
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Total banking liabilities 10,738,608 10,071,545
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Commitments and contingencies
Minority interest held by affiliates 86,310 79,028
Minority interest -- other 218,307 218,307
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TOTAL LIABILITIES 11,791,414 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 (11,401) (49,642)
Accumulated other comprehensive loss (1,670) --
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87,030 50,459
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
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TOTAL SHAREHOLDERS' EQUITY 45,182 8,611
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,836,596 $ 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
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For the Year Ended September 30
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(In thousands, except per share amounts) 2001 2000 1999
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REAL ESTATE
Income
Hotels $ 100,314 $ 95,381 $ 78,914
Office and industrial (including $3,983, $2,672 and $203
of rental income from banking segment, respectively) 40,399 34,341 24,289
Other 2,239 3,136 2,822
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Total income 142,952 132,858 106,025
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Expenses
Direct operating expenses:
Hotels 63,578 59,436 50,039
Office and industrial properties 11,852 9,635 8,071
Land parcels and other 1,181 1,309 880
Interest expense, net 49,652 45,320 39,286
Amortization of debt expense 982 654 299
Depreciation 18,600 14,309 12,508
Advisory, management and leasing fees - related parties 11,762 11,013 9,431
General and administrative 4,195 3,808 1,162
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Total expenses 161,802 145,484 121,676
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Equity in earnings of unconsolidated entities 8,314 7,711 5,360
Gain on sale of property 11,077 994 --
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REAL ESTATE OPERATING INCOME (LOSS) $ 541 $ (3,921) $ (10,291)
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BANKING
Interest income
Loans and leases $ 695,399 $ 635,246 $ 402,263
Mortgage-backed securities 71,685 74,614 96,589
Trading securities 2,508 1,288 3,553
Investment securities 2,746 2,643 2,466
Other 14,517 22,868 14,622
--------------- --------------- ---------------
Total interest income 786,855 736,659 519,493
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Interest expense
Deposit accounts 247,606 222,263 146,345
Short-term borrowings 63,225 55,977 38,446
Long-term borrowings 111,913 116,160 60,716
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Total interest expense 422,744 394,400 245,507
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Net interest income 364,111 342,259 273,986
Provision for loan and lease losses (67,852) (49,930) (22,880)
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Net interest income after provision for loan losses 296,259 292,329 251,106
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Other income
Servicing and securitization income 69,792 38,441 31,670
Deposit servicing fees 101,482 88,253 69,570
Gain on sales of trading securities, net 3,954 1,490 7,243
Net unrealized holding gains on trading securities 448 -- 1,192
Gain (loss) on real estate held for investment or sale, net 2,815 (1,523) 34,049
Gain on sales of loans, net 4,904 1,486 4,152
Gain on other investment 10,294 -- --
Other 32,242 26,112 22,320
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Total other income 225,931 154,259 170,196
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Continued on following page.
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
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For the Year Ended September 30
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(In thousands, except per share amounts) 2001 2000 1999
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BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 198,480 $ 193,204 $ 175,149
Loan 43,819 14,441 13,292
Property and equipment (including $3,983, $2,672 and $203
of rental expense paid to real estate segment, respectively) 36,347 31,347 26,089
Marketing 11,353 11,424 12,664
Data processing 28,316 24,447 18,247
Depreciation and amortization 34,197 32,434 33,362
Deposit insurance premiums 1,413 2,291 4,431
Amortization of goodwill and other intangible assets 2,390 2,632 3,083
Other 51,582 53,096 39,005
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Total operating expenses 407,897 365,316 325,322
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BANKING OPERATING INCOME $ 114,293 $ 81,272 $ 95,980
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TOTAL COMPANY
Operating income $ 114,834 $ 77,351 $ 85,689
Income tax provision 34,963 23,217 29,302
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Income before extraordinary item and minority interest 79,871 54,134 56,387
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (166) --
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Income before minority interest 79,871 53,968 56,387
Minority interest held by affiliates (10,899) (6,298) (7,604)
Minority interest -- other (25,313) (25,313) (25,313)
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TOTAL COMPANY NET INCOME $ 43,659 $ 22,357 $ 23,470
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NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 38,241 $ 16,939 $ 18,052
NET INCOME PER COMMON SHARE
Income before extraordinary item and minority interest $ 15.42 $ 10.08 $ 10.56
Extraordinary item:
Loss on early extinguishment of debt, net of taxes -- (0.03) --
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Income before minority interest 15.42 10.05 10.56
Minority interest held by affiliates (2.26) (1.30) (1.58)
Minority interest -- other (5.24) (5.24) (5.24)
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NET INCOME PER COMMON SHARE $ 7.92 $ 3.51 $ 3.74
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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
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For the Year Ended September 30
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(Dollars in thousands) 2001 2000 1999
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COMPREHENSIVE INCOME
Net income $ 43,659 $ 22,357 $ 23,470
Other comprehensive income:
Net unrealized holding losses (1,670) (6) (38)
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TOTAL COMPREHENSIVE INCOME $ 41,989 $ 22,351 $ 23,432
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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
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COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642
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PAID-IN SURPLUS
Beginning and end of period 92,943 92,943 92,943
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DEFICIT
Beginning of period (49,642) (63,884) (81,936)
Net income 43,659 22,357 23,470
Minority interest in capital contribution -- (2,697) --
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (5,418) (5,418) (5,418)
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End of period (11,401) (49,642) (63,884)
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period -- 6 44
Net unrealized holding losses (1,670) (6) (38)
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End of period (1,670) -- 6
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TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ 45,182 $ 8,611 $ (5,625)
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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
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For the Year Ended September 30
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(In thousands) 2001 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss) $ 62 $ (2,836) $ (6,946)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 18,600 14,308 12,481
Gain on sale of property (11,077) (994) --
Early extinguishment of debt, net of taxes -- 166 --
Decrease in accounts receivable and accrued income (9,301) (691) (3,046)
(Increase) decrease in deferred tax asset 5,323 5,205 (803)
Increase (decrease) in accounts payable and accrued expenses (5,711) 1,892 3,346
(Increase) decrease in tax sharing receivable (1,889) (88) 3,794
Amortization of debt expense 1,717 1,620 1,270
Equity in earnings of unconsolidated entities (8,314) (7,711) (5,360)
Other 7,933 10,359 24,152
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(2,657) 21,230 28,888
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Banking
Net income 42,749 25,193 30,416
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 9,210 (2,817) 1,578
Depreciation and amortization 34,148 32,434 33,362
Provision for loan and lease losses 67,852 49,930 22,880
Capitalized interest on real estate under development (2,017) (3,786) (3,391)
Proceeds from sales of trading securities 834,745 299,881 933,596
Net fundings of loans held for sale and/or securitization (1,629,837) (710,549) (1,035,602)
Proceeds from sales of loans held for sale and/or securitization 1,484,481 1,056,200 57,337
Gain on sales of real estate held for sale (6,241) (9,257) (30,791)
Provision for losses on real estate held for investment or sale 4,200 1,400 --
Gain on sales of trading securities, net (3,954) (1,533) (7,243)
(Increase) decrease in interest-only strips (30,383) (9,137) 5,882
(Increase) decrease in servicing assets 12,602 (44,577) (3,336)
(Increase) decrease in goodwill and other intangible assets 3,296 2,643 2,990
(Increase) decrease in other assets 43,575 12,993 (14,283)
Increase (decrease) in other liabilities 51,323 80,447 (5,335)
Increase (decrease) in tax sharing payable 1,889 88 (3,794)
Minority interest held by affiliates 10,899 6,298 7,604
Minority interest - other 9,750 9,750 9,750
Other 73,281 92,384 (12,154)
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1,011,568 887,985 (10,534)
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Net cash provided by operating activities 1,008,911 909,215 18,354
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (22,546) (77,571) (46,987)
Property acquisitions (16,535) (19,518) --
Property sales 19,702 1,897 --
Note receivable and accrued interest -- related party
Repayments 4,000 3,750 1,500
Equity investment in unconsolidated entities 2,935 6,527 2,748
Other 3 -- 2
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(12,441) (84,915) (42,737)
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Banking
Net proceeds from maturities of investment securities -- 44,000 --
Net proceeds from redemption of Federal Home Loan Bank stock 58,894 11,877 24,165
Net proceeds from sales of real estate 31,183 28,590 36,479
Net fundings of loans receivable 37,373 (1,110,357) (1,361,713)
Principal collected on mortgage-backed securities 410,739 267,273 710,426
Purchases of Federal Home Loan Bank stock (74,248) (22,371) (62,311)
Purchases of investment securities (119) (45,231) (394)
Purchases of loans receivable (1,970,548) (1,549,508) (2,278,834)
Purchases of property and equipment (109,644) (107,336) (52,766)
Disbursements for real estate held for investment or sale (8,723) (9,607) (6,911)
Increase in goodwill (4,178) -- --
Other 9,475 17,404 (3,246)
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(1,619,796) (2,475,266) (2,995,105)
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Net cash used in investing activities (1,632,237) (2,560,181) (3,037,842)
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Continued on following page.
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
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For the Year Ended September 30
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(In thousands) 2001 2000 1999
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CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 50,978 $ 130,802 $ 25,562
Principal curtailments and repayments of mortgages (32,442) (37,035) (10,989)
Proceeds from secured note financings 20,500 24,200 16,000
Repayments of secured note financings (18,000) (40,200) --
Proceeds from sales of unsecured notes 9,310 10,246 5,355
Repayments of unsecured notes (6,056) (8,905) (9,568)
Costs of obtaining financings (1,461) (2,651) (2,104)
Dividends paid - preferred shares of beneficial interest (12,000) (12,500) (6,500)
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10,829 63,957 17,756
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Banking
Proceeds from customer deposits and sales of certificates of deposit 43,408,719 38,470,514 40,084,375
Customer withdrawals of deposits and payments for maturing certificates of deposit (42,884,038) (37,196,211) (39,209,119)
Net increase (decrease) in securities sold under repurchase agreements (258,791) (156,943) 139,267
Advances from the Federal Home Loan Bank 19,932,789 2,348,672 2,926,366
Repayments of advances from the Federal Home Loan Bank (19,639,162) (2,144,889) (1,535,205)
Net proceeds from other borrowings 1,025 66,148 (307)
Cash dividends paid on preferred stock (9,750) (9,750) (9,750)
Cash dividends paid on common stock (16,000) (16,000) (33,000)
Other 55,198 63,827 16,702
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589,990 1,425,368 2,379,329
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Net cash provided by financing activities 600,819 1,489,325 2,397,085
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Net decrease in cash and cash equivalents (22,507) (161,641) (622,403)
Cash and cash equivalents at beginning of year 446,362 608,003 1,230,406
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Cash and cash equivalents at end of year $ 423,855 $ 446,362 $ 608,003
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Components of cash and cash equivalents at end of year as presented in the
consolidated balance sheets:
Real Estate
Cash and cash equivalents $ 13,860 $ 18,129 $ 17,857
Banking
Cash and due from banks 325,610 357,792 326,758
Interest-bearing deposits 84,385 30,441 69,388
Federal funds sold and securities purchased under agreements to resell -- 40,000 194,000
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Cash and cash equivalents at end of year $ 423,855 $ 446,362 $ 608,003
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) 480,083 $ 449,449 $ 261,664
Income taxes paid (refunded) (23,889) (69,691) 95,417
Shares of Saul Centers, Inc. common stock 7,878 3,770 3,393
Limited partnership units of Saul Holdings Limited Partnership -- -- 6,120
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 4,287 3,770 3,393
Distributions from Saul Holdings Limited Partnership 6,527 6,527 6,120
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 4,022 5,335 6,581
Loans held for sale exchanged for trading securities 839,224 297,462 924,710
Loans receivable exchanged for mortgage-backed securities held-to-maturity 837,661 4,798 1,792
Loans receivable transferred to (from) loans held for sale and/or securitization 766,861 744,823 (125,000)
Loans made in connection with the sale of real estate -- 1,260 31,615
Loans receivable transferred to real estate acquired in settlement of loans 774 5,695 1,909
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The Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
B.F. Saul Real Estate Investment Trust operates as a Maryland real estate
investment trust. The principal business activities of B.F. Saul Real Estate
Investment Trust and its consolidated subsidiaries (the "Trust") are the
ownership of 80% of the outstanding common stock of Chevy Chase Bank, F.S.B.,
whose assets accounted for 96% of the Trust's consolidated assets as of
September 30, 2001, and the ownership and development of income-producing
properties. The properties are located predominantly in the mid-Atlantic and
Southeastern regions of the United States and consist principally of hotels,
office projects, and undeveloped land parcels. Chevy Chase Bank, F.S.B. is a
federally chartered and federally insured stock savings bank and, as such, is
subject to comprehensive regulation, examination and supervision by the Office
of Thrift Supervision ("OTS") and by the Federal Deposit Insurance Corporation
("FDIC"). The bank is principally engaged in the business of attracting deposits
from the public and using such deposits, together with borrowings and other
funds, to make loans secured by real estate, primarily residential mortgage
loans, and various types of consumer loans and leases and commercial loans. The
bank's principal deposit market is the Washington, DC metropolitan area.
"Real Estate Trust" refers to B.F. Saul Real Estate Investment Trust and its
wholly owned subsidiaries. Chevy Chase Bank, F.S.B. and its subsidiaries are
referred to in the consolidated financial statements and notes thereto as the
"bank" or the "Corporations". The accounting and reporting practices of the
Trust conform to accounting principles generally accepted in the United States
and, as appropriate, predominant practices within the real estate and banking
industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Real Estate
Trust and its subsidiaries. Accordingly, the accompanying financial statements
reflect the assets, liabilities, operating results, and cash flows for two
business segments: Real Estate and Banking. Entities in which the Trust holds a
non-controlling interest (generally 50% or less) are accounted for on the equity
method. See Note 2. All significant intercompany transactions, except as
disclosed elsewhere in the financial statements, have been eliminated in
consolidation. Tax sharing and dividend payments between the Real Estate Trust
and the bank are presented gross in the Consolidated Statements of Cash Flows.
Although the financial results of Trust subsidiaries are included in these
consolidated financial statements, each Trust subsidiary, including, but not
limited to, Arlington Hospitality Corp., Auburn Hills Hotel Corporation, Dulles
Hospitality Corp., Herndon Hotel Corporation, Pueblo Hotel Corp. and Sharonville
Hotel Corporation, is a separate legal entity whose assets are not available to
pay the claims of creditors of other entities included in these consolidated
financial statements.
USE OF ESTIMATES
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the balance sheet and revenues and expenses for
the reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, the Trust recognizes an impairment loss.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that the Trust expects to hold and use is based on the fair value of
the asset. Long-lived assets and certain identifiable intangibles to be disposed
of are generally reported at the lower of carrying amount or fair value less the
cost to sell.
INCOME TAXES
The Trust files a consolidated federal income tax return which includes
operations of all 80% or more owned subsidiaries. It voluntarily terminated its
qualification as a real estate investment trust under the Internal Revenue Code
during fiscal 1978.
The Trust uses an asset and liability approach in accounting for income taxes.
Deferred income taxes are recorded using currently enacted tax laws and rates.
To the extent that realization of deferred tax assets is more likely than not,
such assets are recognized.
NET INCOME PER COMMON SHARE
Net income per common share is determined by dividing net income, after
deducting preferred share dividend requirements, by the weighted average number
of common shares outstanding during the year. For fiscal years 2001, 2000 and
1999, the weighted average number of shares used in the calculation was
4,826,910. The Trust has no common share equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 2000 and 1999 to conform with the
presentation used for the year ended September 30, 2001.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - REAL ESTATE TRUST
CASH EQUIVALENTS
The Real Estate Trust considers all highly liquid, temporary investments with an
original maturity of three months or less to be cash equivalents.
PROPERTIES
Income-producing properties are stated at the lower of depreciated cost (except
those which were acquired through foreclosure or equivalent proceedings, the
carrying amounts of which are based on the lower of cost or fair value at the
time of acquisition) or net realizable value.
Interest, real estate taxes and other carrying costs are capitalized on projects
under construction. Once construction is completed and the assets are placed in
service, rental income, direct operating expenses, and depreciation associated
with such properties are included in current operations. The Real Estate Trust
considers a project to be substantially complete and held available for
occupancy upon completion of tenant improvements, but no later than one year
from the cessation of major construction activity. Substantially completed
portions of a project are accounted for as separate projects. Expenditures for
repairs and maintenance are charged to operations as incurred.
Depreciation is calculated using the straight-line method and estimated useful
lives of 28 to 47 years for buildings and up to 20 years for certain other
improvements. Tenant improvements are amortized over the lesser of their
estimated useful lives or the lives of the related leases using the
straight-line method.
INCOME RECOGNITION
The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. Hotel revenue is recognized as earned. The Real Estate Trust
derives rental income under noncancelable long-term leases from tenants at its
commercial properties. Commercial property rental income is recognized on a
straight-line basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term maturity
of these instruments.
Liabilities
The carrying amount of notes payable - secured approximates their fair value
since most of the debt has been financed in recent periods at prevailing market
interest rates. The fair value of mortgage notes payable is based on
management's estimate of current market rates for its debt. At September 30,
2001, and 2000, the fair value of mortgage notes payable was $328.3 and $297.8
million. The fair value of notes payable - unsecured is based on the rates
currently offered by the Real Estate Trust for similar notes. At September 30,
2001 and 2000, the fair value of notes payable - unsecured was $51.9 and $48.6
million.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
Federal Reserve Board regulations require the bank to maintain reserves in the
form of cash or deposits in its account at the Federal Reserve Bank of
Richmond. The average reserve requirements, before credit for vault cash, were
$185.1, $190.2 and $161.1 million during the years ended September 30, 2001,
2000 and 1999, respectively.
LOANS HELD FOR SALE
The bank engages in mortgage banking activities. At September 30, 2001 and 2000,
loans held for sale are composed of single-family residential loans and home
improvement and related loans originated or purchased for sale in the secondary
market and are carried at the lower of aggregate cost or aggregate market value.
Single-family residential loans held for sale will either be sold or will be
exchanged for mortgage-backed securities and then sold. Gains and losses on
sales of whole loans held for sale are determined using the specific
identification method. See "Trading Securities."
LOANS HELD FOR SECURITIZATION AND SALE
The bank periodically securitizes and sells certain pools of loan receivables in
the public and private markets. These securitizations are recorded as sales.
Gains on the sale of loans are limited to amounts related to loans existing at
the date of sale and do not include amounts related to loans expected to be sold
during any future reinvestment period.
Loans held for securitization and sale are the lesser of loans eligible for
securitization or loans that management contemplates to securitize within six
months. Such loans held for securitization and sale are reported at the lower of
aggregate cost or aggregate market value for each asset type.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. Investment and mortgage-backed securities classified as
"held-to-maturity" are reported at amortized cost. Investment and
mortgage-backed securities classified as "available-for-sale" are reported at
fair value, with unrealized gains and losses, net of the related tax effect,
reported as a separate component of stockholders' equity. Investment and
mortgage-backed securities classified as "trading" are reported at fair value,
with unrealized gains and losses included in earnings. All investment securities
and mortgage-backed securities are classified as held-to-maturity at September
30, 2001 and 2000. Premiums and discounts on investment securities and
mortgage-backed securities are amortized or accreted using the level-yield
method. Realized gains and losses are determined using the specific
identification method.
TRADING SECURITIES
As part of its mortgage banking activities, the bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $834.7,
$299.9 and $933.6 million during the years ended September 30, 2001, 2000 and
1999, respectively. The bank realized net gains of $4.0, $1.5 and $7.2 million
on the sales of trading securities for the years ended September 30, 2001, 2000
and 1999, respectively. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
2001 and 2000.
At September 30, 2001 and 2000, the bank held automobile receivables-backed
securities with carrying amounts of $1.2 and $3.4 million, respectively, which
were classified as trading securities. These securities were established in
conjunction with two automobile loan securitization transactions and represent
subordinate classes of certificates retained by the bank. There were no changes
in unrealized gains or losses during fiscal 2001 and 2000. The bank recognized
net unrealized holding gains on these securities of $1.2 million during fiscal
1999. See Note 15.
At September 30, 2001, the bank held stock in Concord EFS, Inc. with a carrying
amount of $5.5 million, which was also classified as trading securities. The
bank recognized net unrealized holding gains of $448,000 and net realized gains
of $10.3 million on this investment during the year ended September 30, 2001.
LOAN ORIGINATION AND COMMITMENT FEES
Nonrefundable loan fees, such as origination and commitment fees, and
incremental loan origination costs relating to loans originated or purchased are
deferred. Net deferred fees (costs) related to loans held for investment are
amortized over the life of the loan using the level-yield or straight-line
method. Net fees (costs) related to loans held for sale are deferred until such
time as the loan is sold, at which time the net deferred fees (costs) become a
component of the gain or loss on sale.
IMPAIRED LOANS
A loan is considered impaired when, based on all current information and events,
it is probable that the bank will be unable to collect all amounts due according
to the contractual terms of the agreement, including all scheduled principal and
interest payments. Loans reviewed by the bank for impairment include real estate
and commercial loans and loans modified in a troubled debt restructuring. Large
groups of smaller-balance homogeneous loans that have not been modified in a
troubled debt restructuring are collectively evaluated for impairment, which for
the bank include residential mortgage loans and consumer loans. Impaired loans
are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or, as a practical expedient,
impairment may be measured based on the loan's observable market price, or, if
the loan is collateral-dependent, the fair value of the collateral. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. Loans for which
foreclosure is probable continue to be accounted for as loans.
Each impaired real estate or commercial loan is evaluated individually to
determine the income recognition policy. Generally, payments received are
applied in accordance with the contractual terms of the note or as a reduction
of principal.
At September 30, 2001 and 2000, the bank did not have any impaired loans. The
average recorded investment in impaired commercial and real estate loans for the
year ended September 30, 2000 and 1999 was $51,000 and $65,000, respectively.
The bank did not recognize any interest income on its impaired loans for the
years ended September 30, 2001, 2000 and 1999.
ALLOWANCES FOR LOSSES
Management reviews the loan and lease, real estate held for investment and real
estate held for sale portfolios to establish allowances for estimated losses.
The allowances for losses are reviewed periodically, and allowances are provided
after consideration of the borrower's financial condition and/or the estimated
value of collateral or real estate, including estimated selling and holding
costs. Allowances are also provided by management after considering such factors
as the economy in lending areas, delinquency statistics and past loss
experience.
The allowances for losses are based on estimates and ultimate losses may vary
from current estimates. As adjustments to the allowances become necessary,
provisions for losses are reported in operations in the periods they are
determined to be necessary.
ACCRUED INTEREST RECEIVABLE ON LOANS
Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management, the full collection of principal or interest has
become unlikely. Uncollectible accrued interest receivable on non-accrual loans
is charged against current period interest income.
REAL ESTATE HELD FOR INVESTMENT OR SALE
Real Estate Held for Investment
At September 30, 2001 and 2000, real estate held for investment consists of
developed land owned by one of the bank's subsidiaries. Real estate held for
investment is carried at the lower of cost or net realizable value. See Note 13.
Real Estate Held for Sale
Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value (less estimated
selling costs). Costs relating to the development and improvement of property,
including interest, are capitalized, whereas costs relating to the holding of
property are expensed. Capitalized interest amounted to $2.0, $3.8 and $3.4
million for the years ended September 30, 2001, 2000 and 1999, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method which allocates the cost of the applicable assets over their estimated
useful lives. Major improvements and alterations to office premises and
leaseholds are capitalized. Leasehold improvements are amortized over the
shorter of the terms of the respective leases (including renewal options that
are expected to be exercised) or 20 years. Maintenance and repairs are charged
to operating expenses as incurred. Capitalized interest amounted to $4.7, $2.1
and $0.4 million during the years ended September 30, 2001, 2000 and 1999,
respectively. The bank has developed an office building to use as its new
corporate headquarters and began to occupy it in late summer of 2001.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is stated net of accumulated amortization and is being amortized using
the straight-line method over 15 years. At September 30, 2001 and 2000, goodwill
totaled $25.0 and $22.0 million, respectively. In February 2001, the bank
purchased an investment management firm and recorded $4.2 million of goodwill.
The acquisition was accounted for using the purchase method and the operating
results have been included in the bank's Consolidated Statements of Operations
since the date of acquisition.
The premium attributable to the value of the home equity relationships from home
equity loans purchased in fiscal 1999, amounting to $2.1 and $3.3 million at
September 30, 2001 and 2000, respectively, is included in goodwill and other
intangible assets in the Consolidated Balance Sheets. The bank did not purchase
any home equity loans in fiscal 2001 and 2000. This premium is being amortized
over the estimated term of the underlying relationships.
Accumulated amortization of goodwill and other intangible assets was $51.7 and
$49.3 million at September 30, 2001 and 2000, respectively.
SERVICING ASSETS
Servicing assets are recorded when purchased and in conjunction with loan sales
and securitization transactions. Servicing assets, which are stated net of
accumulated amortization, are amortized in proportion to the remaining net
servicing revenues estimated to be generated by the underlying loans.
Amortization of these assets amounted to $16.5, $10.9 and $12.3 million for the
years ended September 30, 2001, 2000 and 1999, respectively. Accumulated
amortization was $107.5 and $91.0 million at September 30, 2001 and 2000,
respectively. During fiscal 2001, 2000 and 1999, the bank recorded $24.0, $49.4
and $14.8 million, respectively, of servicing assets.
The bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets at
September 30, 2001 and 2000 was $62.8 and $78.0 million, respectively.
Activity in the valuation allowance for servicing assets is summarized as
follows:
Year Ended September 30,
-----------------------------------------------------------
(In thousands) 2001 2000 1999
--------------- --------------- ---------------
Balance at beginning of year $ 3,591 $ 9,724 $ 13,498
Additions charged / (reductions
credited) to loan expenses 20,042 (6,133) (3,774)
--------------- --------------- ---------------
Balance at end of year $ 23,633 $ 3,591 $ 9,724
=============== =============== ===============
There were no sales of rights to service mortgage loans during fiscal 2001, 2000
and 1999. Servicing fees are included in servicing and securitization income in
the Consolidated Statements of Operations.
INTEREST-ONLY STRIPS
Interest-only strips capitalized in the years ended September 30, 2001 and 2000
amounted to $33.2 and $13.8 million, respectively, and were related to the
securitization and sale of automobile receivables. Interest-only strips
capitalized in the year ended September 30, 1999 amounted to $2.7 million and
were primarily related to the sale of new home equity receivables to existing
trusts. See Note 15.
Interest-only strips are amortized using the effective yield method over the
estimated lives of the underlying loans. Amortization amounted to $2.8, $7.3 and
$8.7 million for the years ended September 30, 2001, 2000 and 1999,
respectively, and is included in servicing and securitization income in the
Consolidated Statements of Operations and Comprehensive Income. The bank uses
certain assumptions to calculate amortization of the interest-only strips,
mainly estimates of prepayment speeds, credit losses and interest rates. To the
extent actual results differ from the assumptions, amortization is adjusted
accordingly. See Note 15.
The bank accounts for its interest-only strips as trading securities and,
accordingly, carries them at fair value. The bank estimates the fair value of
the interest-only strips on a discounted cash flow basis using appropriate
discount and prepayment rates. The fair value adjustments for interest-only
strips are included in servicing and securitization income. The fair value
adjustments amounted to a net loss of $34,000 in fiscal 2001 and a net gain of
$2.6 million in fiscal 2000. There were no fair value adjustments during fiscal
year 1999. Certain assumptions inherent in the determination of the amortization
and fair value of interest-only strips are influenced by factors outside the
bank's control, and actual performance could differ materially from such
assumptions. See Note 15.
DERIVATIVE FINANCIAL INSTRUMENTS
The bank uses various strategies to minimize interest-rate risk and fluctuations
in the fair value of mortgage servicing rights, including interest-rate cap
agreements, forward sale or purchase commitments and futures and options
contracts. Premiums paid for interest-rate cap agreements are included in other
assets in the Consolidated Balance Sheets and are amortized to expense over the
terms of the interest-rate caps on a straight-line basis. Funds payable to the
bank are recognized as income in the month such funds are earned. There were no
unamortized premiums at September 30, 2001 and 2000. Gains and losses on forward
sale commitments are deferred and recorded as a component of the gain on sales
of loans at the time the forward sale commitment matures. Gains and losses on
forward purchase commitments are recorded as a component of the gain on sales of
loans in the month the transaction occurs. Gains and losses on hedges of
mortgage servicing rights are recorded as a component of loan expenses in the
Consolidated Statements of Operations and Comprehensive Income. See Note 27. The
bank does not hold any derivative financial instruments for trading purposes.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The bank adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") effective October 1, 2000. SFAS
133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of Financial Accounting
Standards Board Statement No. 133" ("SFAS 137") and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an amendment
of FASB Statement No. 133" ("SFAS 138"). SFAS 133, as amended by SFAS 137 and
SFAS 138, establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 requires an entity to recognize all
derivative instruments as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. Changes in the
fair value of those instruments are reported in earnings or other comprehensive
income depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative instrument and the effect on the consolidated
financial statements depends on its hedge designation and whether the hedge is
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged. The impact of the adoption of SFAS 133, as amended,
was not material to the bank's financial condition or results of operations. On
October 1, 2000, the bank recorded an after tax loss of $476,000 in Other
Comprehensive Income representing its transition adjustment from the adoption of
these standards.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" - a replacement of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
("SFAS 140") was issued in September 2000 and replaces SFAS No. 125. SFAS 140
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. Under SFAS 140, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 140 is effective for transfers after March 31, 2001, except
that the effective date for the isolation standards was suspended for financial
institutions until January 1, 2002, and is effective for disclosures about
securitizations and collateral and for recognition and reclassification of
collateral for fiscal years ending after December 15, 2000. The adoption of SFAS
140 did not have a material impact on the bank's financial condition or results
of operations.
In July 2000, the Emerging Issues Task Force of the FASB issued Consensus No.
99-20, "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." This consensus requires
that all changes in assumptions regarding expected future cash flows related to
such assets that are used to calculate income yields be recognized prospectively
through revised income yields unless impairment is required to be recognized, at
which time an investment is written down to fair value. Consensus No. 99-20 was
effective on April 1, 2001 and did not have a material impact on the bank's
financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS 141 supersedes Accounting Principles Board ("APB"), Opinion No. 16,
"Business Combinations" and requires that all business combinations be accounted
for as purchases and prohibits further usage of the pooling-of-interests method.
In addition, SFAS 141 establishes new rules concerning recognition of intangible
assets (apart from goodwill) arising in a purchase business combination. SFAS
141 is applied prospectively to all business combinations initiated and
accounted for using the purchase method for which the date of acquisition is
after June 30, 2001.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") was issued in
June 2001. SFAS 142 supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142
establishes new guidance on accounting for goodwill and other assets acquired in
a business combination and reaffirms that acquired intangible assets should
initially be recognized at fair value and the costs of internally developed
intangible assets should be charged to expense as incurred. SFAS 142 also
requires that goodwill arising in a business combination should no longer be
amortized, but subject to impairment testing. Potential impairment is identified
by comparing the fair value with its carrying amount and if fair value is less
than the carrying amount, an impairment loss is recognized. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 and must be applied
as of the beginning of the fiscal year. The bank is currently assessing the
impact that the adoption of SFAS 142 may have on the bank's financial condition
or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 provides guidance on the initial
measurement and subsequent accounting for obligations associated with the sale,
abandonment, or other type of disposal of long-lived tangible assets. SFAS 143
requires an entity to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The liability is
initially recorded by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
bank believes that the adoption of SFAS 143 will not have a material impact on
the bank's financial position or results of operations in future periods.
1. LIQUIDITY AND CAPITAL RESOURCES - REAL ESTATE TRUST
The Real Estate Trust's cash flow from operating activities has been
historically insufficient to meet all of its cash flow requirements. 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
indebtedness, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financing, the sale of unsecured notes,
refinancing of maturing mortgage debt, proceeds from asset sales, and dividends
and tax sharing payments from the bank. For the foreseeable future, the Real
Estate Trust's ability to generate positive cash flow from operating activities
and to meet its liquidity needs, including debt service payments, repayment of
debt principal and capital expenditures, will continue to depend on these
available external sources. Dividends received from the bank are a component of
funding sources available to the Real Estate Trust. The availability and amount
of dividends in future periods is dependent upon, among other things, the bank's
operating performance and income, and regulatory restrictions on such payments.
Tax sharing and dividend payments received by the Real Estate Trust are
presented as cash flows from operating activities in the Consolidated Statements
of Cash Flows.
The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods, as well as the bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive dividends from the
bank. During fiscal 2001, 2000 and 1999, the bank made tax sharing payments
totaling $3.4, $6.6 and $6.6 million to the Real Estate Trust. During fiscal
2001, 2000 and 1999, the bank made dividend payments totaling $12.8, $12.8 and
$26.4 million to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. The Trust's consolidation of the bank's
operations into the Trust's federal income tax return has resulted in the use of
the Trust's net operating losses to reduce the federal income taxes the bank
would otherwise have owed. If in any future year, the bank has taxable losses or
unused credits, the Trust would be obligated to reimburse the bank for the
greater of (i) the tax benefit to the group using such tax losses or unused tax
credits in the group's consolidated federal income tax returns or (ii) the
amount of the refund which the bank would otherwise have been able to claim if
it were not being included in the consolidated federal income tax return of the
group.
2. SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST
In fiscal 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The Real
Estate Trust transferred its 22 shopping centers and one of its office
properties together with the debt associated with such properties to a newly
formed partnership, Saul Holdings Limited Partnership ("Saul Holdings"), in
which as of September 30, 2001, the Real Estate Trust owns (directly or through
one of its wholly owned subsidiaries) a 26.6% interest, other entities
affiliated with the Real Estate Trust own a 7.9% interest, and Saul Centers owns
a 65.5% interest. Certain officers and trustees of the Trust are also officers
and/or directors of Saul Centers.
In connection with the transfer of its properties to Saul Holdings, the Real
Estate Trust was relieved of approximately $196 million in mortgage debt and
deferred interest. Pursuant to a reimbursement agreement among the partners of
Saul Holdings and its subsidiary limited partnerships (collectively, the
"Partnerships"), the Real Estate Trust and its subsidiaries that are partners in
the Partnerships have agreed to reimburse Saul Centers and the other partners in
the event the Partnerships fail to make payments with respect to certain
portions of the Partnerships' debt obligations and Saul Centers or any such
other partners personally make payments with respect to such debt obligations.
At September 30, 2001, the maximum potential obligations of the Real Estate
Trust and its subsidiaries under this agreement totaled approximately $115.5
million.
The fair market value of each of the properties contributed to the Partnerships
by the Real Estate Trust at the date of transfer (the FMV of each such property)
exceeded the tax basis of such property (with respect to each property, such
excess is referred to as the FMV-Tax Difference). In the event Saul Centers, as
general partner of the Partnerships, causes the Partnerships to dispose of one
or more of such properties, a disproportionately large share of the total gain
for federal income tax purposes would be allocated to the Real Estate Trust or
its subsidiaries. In general, if the gain recognized by the Partnerships on a
property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of
depreciation deductions to the partners), a gain equal to the FMV-Tax Difference
(as adjusted) will be allocated to the Real Estate Trust. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all the
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of gain allocated to the Real Estate Trust in the event of
such a property disposition is likely to exceed, perhaps substantially, the
amount of cash, if any, distributable to the Real Estate Trust as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, or any release of the guarantees of such debt by the Real
Estate Trust, could cause the Real Estate Trust to have taxable constructive
distributions without the receipt of any corresponding amounts of cash.
Currently, management does not intend to seek a release of or a reduction in the
guarantees or to convert its limited partner units in Saul Holdings into shares
of Saul Centers common stock.
At the date of transfer of the Real Estate Trust properties to Saul Holdings,
liabilities exceeded assets transferred by approximately $104.3 million on an
historical cost basis. The assets and liabilities were recorded by Saul Holdings
and Saul Centers at their historical cost rather than market value because of
affiliated ownership and common management and because the assets and
liabilities were the subject of the business combination between Saul Centers
and Saul Holdings, newly formed entities with no prior operations.
Immediately subsequent to the business combination and initial public offering
of common stock by Saul Centers, Saul Centers had total owners' equity of
approximately $16.4 million of which approximately $3.5 million related to the
Real Estate Trust's original 21.5% ownership interest. Recognition by the Real
Estate Trust of the change in its investment in the properties of approximately
$107.8 million has been deferred due to the Real Estate Trust's guarantee of
$115.5 million under the Saul Centers reimbursement agreement. The deferred gain
of $107.8 million is included in "Deferred gains - real estate" in the financial
statements. The gain will be recognized in future periods to the extent the Real
Estate Trust's obligations are terminated under the reimbursement agreement.
The management of Saul Centers has adopted a strategy of maintaining a ratio of
total debt to total asset value, as estimated by management, of fifty percent or
less. The management of Saul Centers has concluded at September 30, 2001, that
the total debt of Saul Centers remains below fifty percent of total asset value.
As a result, the management of the Real Estate Trust has concluded that fundings
under the reimbursement agreement are remote.
In addition to the deferred gains, as of September 30, 2001, the Real Estate
Trust's investment in the consolidated entities of Saul Centers, which is
accounted for under the equity method, consisted of the following.
(In thousands)
-------------------------------------------------------------------
Saul Holdings:
Acquisition of partnership units $ 9,011
Distributions in excess of allocated net income (14,954)
Saul Centers:
Acquisition of common shares 48,877
Distributions in excess of allocated net income (10,038)
-------------
Total $ 32,896
=============
The $32.9 million balance is included in "Other assets" in the financial
statements.
As of September 30, 2001, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of common shares of Saul Centers,
effectively owns 36.9% of the consolidated entities of Saul Centers.
Substantially all of these shares and/or units have been deposited as collateral
for the Trust's revolving lines of credit. See Note 4.
The unaudited Condensed Consolidated Balance Sheet as of September 30, 2001 and
2000, and the unaudited Condensed Consolidated Statements of Operations for the
twelve-month periods ended September 30, 2001, 2000 and 1999 of Saul Centers
follow.
Saul Centers, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30,
-----------------------------
(In thousands) 2001 2000
- ----------------------------------------------- -------------- --------------
Assets
Real estate investments $ 426,520 $ 384,923
Accumulated depreciation (133,938) (120,660)
Other assets 49,855 61,418
-------------- --------------
Total assets $ 342,437 $ 325,681
============== ==============
Liabilities and stockholders' deficit
Notes payable $ 350,247 $ 335,995
Other liabilities 19,118 21,016
-------------- --------------
Total liabilities 369,365 357,011
Total stockholders' deficit (26,928) (31,330)
-------------- --------------
Total liabilities and stockholders' deficit $ 342,437 $ 325,681
============== ==============
Saul Centers, Inc.
Condensed Consolidated Statements of Operations
(Unaudited) For the Twelve Months
Ended September 30
-----------------------------
(In thousands) 2001 2000 1999
- ----------------------------------------------- -------- --------- ---------
Revenue
Base rent $68,823 $62,763 $57,789
Other revenue 15,775 14,754 14,704
-------- --------- ---------
Total revenue 84,598 77,517 72,493
-------- --------- ---------
Expenses
Operating expenses 16,021 14,741 14,363
Interest expense 24,898 23,529 22,389
Amortization of deferred debt expense 543 434 416
Depreciation and amortization 15,259 12,817 12,883
General and administrative 4,074 3,871 3,551
-------- --------- ---------
Total expenses 60,795 55,392 53,602
-------- --------- ---------
Operating income 23,803 22,125 18,891
Non-operating item
Gain on sale of property -- 553 --
-------- --------- ---------
Net income before minority interest 23,803 22,678 18,891
Minority interest (8,069) (8,068) (7,779)
-------- --------- ---------
Net income $15,734 $14,610 $11,112
======== ========= =========
3. INVESTMENT PROPERTIES - REAL ESTATE TRUST
The following table summarizes the cost basis of income-producing properties and
land parcels together with their related debt.
(Dollars in Buildings and Related
thousands) No. Land Improvements Total Debt
- ---------------------- ------ --------- --------------- ---------- ----------
September 30, 2001:
Income-producing
properties
Hotels 18 $18,684 $235,481 $254,165 $169,722
Office and industrial 11 11,503 146,150 157,653 149,257
Other 4 2,825 -- 2,825 --
------ --------- --------------- ---------- ----------
33 $33,012 $381,631 $414,643 $318,979
====== ========= =============== ========== ==========
Land Parcels 10 $40,835 $ -- $ 40,835 $ --
====== ========= =============== ========== ==========
September 30, 2000
Income-producing
properties:
Hotels 16 $17,068 $192,793 $209,861 $144,012
Office and industrial 10 7,883 140,698 148,581 137,153
Other 5 3,075 916 3,991 1,790
------ --------- --------------- ---------- ----------
31 $28,026 $334,407 $362,433 $282,955
====== ========= =============== ========== ==========
Land Parcels 9 $39,716 $ -- $ 39,716 $ 206
====== ========= =============== ========== ==========
On December 18, 2000, the Real Estate Trust sold its 124-unit San Simeon
apartment project in Dallas, Texas. The sales price was $3.1 million and the
Real Estate Trust recognized a gain of $2.2 million on the transaction. The
proceeds of the sales were used to acquire a 10.7 acre parcel of land in Loudoun
County, Virginia, for $2.8 million.
On June 13, 2001, the Real Estate Trust sold a 4.79 acre section of its Circle
75 land parcel located in Atlanta, Georgia for $3.0 million. The Real Estate
Trust recognized a gain of $2.4 million on this transaction.
On August 8, 2001, the Real Estate Trust sold Metairie Tower, a 91,000 square
foot office building located in Metairie, Louisiana for $7.2 million. The Real
Estate Trust recognized a gain of $5.2 million on this transaction.
On September 7, 2001, the Real Estate Trust sold 9.5 acres of its Commerce
Center land parcel located in Ft. Lauderdale, Florida for approximately $2.0
million, and recognized a gain of $245,000 on the transaction.
During fiscal 2001, the Real Estate Trust also received net proceeds of $2.0
million and recognized a gain of $620,000 from the condemnation of portions of
two land parcels in Colorado and Michigan.
4. DEBT - REAL ESTATE TRUST
Mortgage notes payable are secured by various income-producing properties, land
parcels, and properties under construction. Almost all mortgage notes are
payable in monthly installments, have maturity dates ranging to 2021 and accrue
interest at annual rates from 4.9% to 10.0%. Certain mortgages contain a number
of restrictions, including cross default provisions.
Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization, but are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates were
10.1% at September 30, 2001 and 2000. During fiscal 2001 and 2000, the Real
Estate Trust sold notes amounting to approximately $9.3 and $10.2 million.
In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of the 9 3/4% Senior Secured Notes. These Notes are nonrecourse
obligations of the Real Estate Trust and are secured by a first priority
perfected security interest in 8,000 shares, or 80% of the issued and
outstanding common stock of the bank, which constitute all of the bank common
stock held by the Real Estate Trust.
In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. In September 1999, this facility was increased to
$50.0 million and its term was set at three years with provisions for extending
the term annually. The current maturity date for this line is September 29,
2002. This facility is secured by a portion of the Real Estate Trust's ownership
in Saul Holdings Partnership and Saul Centers. Interest is computed by reference
to a floating rate index. At September 30, 2001, the Real Estate Trust had
borrowings under the facility of $2.5 million and unrestricted availability of
$35.4 million. At September 30, 2001 the interest rate under this facility was
4.91%.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, 1998 and 2000, the line of
credit was increased to $10.0, $20.0 and $25.0 million. The current maturity
date for this line is November 15, 2003. Interest is computed by reference to a
floating rate index. At September 30, 2001, the Real Estate Trust had no
outstanding borrowings and unrestricted availability was $22.8 million. At
September 30, 2001 the interest rate under this facility was 4.66%.
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 2001 for the fiscal years commencing October 1, 2001 is set forth in the
following table.
Debt Maturity Schedule
(In thousands)
--------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable -- Payable --
Year Notes Secured Unsecured Total
------------- --------- ----------- ----------- --------------
2002 $ 33,162 $ 2,500 $ 8,022 $ 43,684
2003 27,296 -- 11,681 38,977
2004 9,008 -- 11,482 20,490
2005 13,604 -- 8,157 21,761
2006 94,406 -- 5,523 99,929
Thereafter 148,274 200,000 5,852 354,126
--------- ----------- ----------- --------------
Total $325,750 $202,500 $ 50,717 $ 578,967
--------------------------------------------------------------
Of the $325.8 million of mortgage notes outstanding at September 30, 2001,
$258.6 million was nonrecourse to the Real Estate Trust.
5. LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST
The Real Estate Trust has no minimum future rental commitments and no long term
leases.
6. INCOME FROM COMMERCIAL PROPERTIES - REAL ESTATE TRUST
Income from commercial properties includes minimum rent arising from
noncancelable commercial leases. Minimum rent for fiscal years 2001, 2000, and
1999 amounted to $37.0, $32.1 and $23.2 million. Future minimum rentals as of
September 30, 2001 under noncancelable leases are as follows:
Fiscal Year (In thousands)
------------------------------------------------------------
2002 $ 31,188
2003 28,459
2004 24,680
2005 20,925
2006 17,065
Thereafter 70,610
-----------
Total $192,927
------------------------------------------------------------
7. TRANSACTIONS WITH RELATED PARTIES - REAL ESTATE TRUST
TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES
The Real Estate Trust is managed by B. F. Saul Advisory Company, L.L.C.,
formerly B. F. Saul Advisory Company, (the "Advisor"), a wholly-owned subsidiary
of B. F. Saul Company ("Saul Co."). All of the Real Estate Trust officers and
four Trustees of the Trust are also officers and/or directors of Saul Co. The
Advisor is paid a fixed monthly fee which is subject to annual review by the
Trustees. The monthly fee was $363,000 during fiscal 2001, $349,000 during
fiscal 2000, and $337,000 during fiscal 1999. The advisory contract has been
extended until September 30, 2002, and will continue thereafter unless canceled
by either party at the end of any contract year. Certain loan agreements
prohibit termination of this contract.
Saul Co. and B.F. Saul Property Company ("Saul Property Co."), formerly known as
Franklin Property Company, a wholly-owned subsidiary of Saul Co., provide
services to the Real Estate Trust through commercial property management and
leasing, hotel management, development and construction management, and
acquisitions, sales and financings of real property. Fees paid to Saul Co. and
Saul Property Co. amounted to $7.4, $7.2 and $5.7 million in fiscal 2001, 2000
and 1999.
The Real Estate Trust reimburses the Advisor and Saul Property Co. for costs and
expenses incurred on behalf of the Real Estate Trust, in-house legal expenses,
and for all travel expenses incurred in connection with the affairs of the Real
Estate Trust.
The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of the unsecured notes as they are issued to offset its costs of administering
the program. These payments amounted to $93,000, $102,000 and $120,000 in
fiscal 2001, 2000 and 1999.
A subsidiary of Saul Co. is a general insurance agency which receives
commissions and countersignature fees in connection with the Real Estate Trust's
insurance program. Such commissions and fees amounted to approximately $171,000,
$200,000 and $167,000 in fiscal 2001, 2000 and 1999.
At October 1, 1999, the Real Estate Trust had an unsecured note receivable from
the Saul Co. with an outstanding balance of $13.8 million. During fiscal 2001
and 2000, curtails of $4.0 and $3.8 million were paid by the Saul Co. Interest
on the loans is computed by reference to a floating rate index. At September 30,
2001, the total due the Real Estate Trust was $6.0 million in principal and
$1.75 million in deferred interest. Interest accrued on these loans amounted to
$0.7, $1.1 and $1.1 million during fiscal 2001, 2000 and 1999.
REMUNERATION OF TRUSTEES AND OFFICERS
For fiscal years 2001, 2000, and 1999, the Real Estate Trust paid the Trustees
approximately $94,000 each year for their services. No compensation was paid to
the officers of the Real Estate Trust for acting as such; however, one Trustee
was paid by the bank for his services as Chairman and Chief Executive Officer of
the bank, and four received payments for their services as directors of the
bank. Four of the Trustees and all of the officers of the Real Estate Trust
receive compensation from Saul Co. as directors and/or officers.
SAUL HOLDINGS LIMITED PARTNERSHIP AND SAUL CENTERS, INC.
The Real Estate Trust accounts for these investments under the equity method.
The Real Estate Trust's share of earnings for fiscal 2001, 2000 and 1999 was
$8.3, $7.7 and $6.1 million. See Note 2.
OTHER TRANSACTIONS
The Real Estate Trust leases space to the bank and Saul Property Co. at two of
its income-producing properties. Minimum rents and expense recoveries paid by
these affiliates amounted to approximately $4.0, $2.7 and $0.3 million in fiscal
2001, 2000 and 1999.
8. LOANS HELD FOR SALE - THE BANK
Loans held for sale are composed of the following:
(In thousands) September 30,
------------------------------------------------
2001 2000
---------------------- ----------------------
Single-family residential $ 233,359 $ 116,480
Home improvement and
related loans 12,724 9,628
---------------------- ----------------------
Total $ 246,083 $ 126,108
====================== ======================
9. LOANS HELD FOR SECURITIZATION AND SALE - THE BANK
At September 30, 2001 and 2000, loans held for securitization and sale totaled
$282.0 and $70.0 million, respectively, and were composed of automobile loans.
10. INVESTMENT SECURITIES - THE BANK
At September 30, 2001 and 2000, all investment securities are classified as held-to-maturity. Gross unrealized holding
gains and losses on the bank's investment securities at September 30, 2001 and 2000 are as follows:
(In thousands) Gross Gross
Unrealized Unrealized Aggregate Fair
Amortized Cost Holding Gains Holding Losses Value
----------------- ----------------- ----------------- -----------------
September 30, 2001
- ------------------
U.S. Government securities:
Original maturity after
one year, but within five years $ 45,794 $ 387 $ - $ 46,181
================= ================= ================= =================
September 30, 2000
- ------------------
U.S. Government securities:
Original maturity after
one year, but within five years $ 45,648 $ 84 $ (173) $ 45,559
================= ================= ================= =================
There were no sales of investment securities during the years ended September
30, 2001, 2000 and 1999.
11. MORTGAGE-BACKED SECURITIES - THE BANK
At September 30, 2001 and 2000, all mortgage-backed securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the bank's
mortgage-backed securities at September 30, 2001 and 2000 are as follows:
(In thousands) Gross Unrealized Gross Unrealized
Holding Holding Losses Aggregate
Amortized Cost Gains Fair
Value
------------------ ------------------ ------------------ ------------------
September 30, 2001
FNMA $ 295,712 $ 2,295 $ (2,354) $ 295,653
FHLMC 909,429 12,536 (1,608) 920,357
Private label, AAA-rated 269,354 5,517 (1,046) 273,825
------------------ ------------------ ------------------ ------------------
Total $ 1,474,495 $ 20,348 $ (5,008) $ 1,489,835
================== ================== ================== ==================
September 30, 2000
FNMA $ 349,258 $ 84 $ (19,171) $ 330,171
FHLMC 170,894 745 (2,007) 169,632
Private label, AAA-rated 522,192 10,657 (11,555) 521,294
Private label, AA-rated 4,465 - (22) 4,443
------------------
------------------ ------------------ ------------------
Total $ 1,046,809 $ 11,486 $ (32,755) $ 1,025,540
================== ================== ================== ==================
Accrued interest receivable on mortgage-backed securities totaled $8.3 and $5.6
million at September 30, 2001 and 2000, respectively, and is included in other
assets in the Consolidated Balance Sheets.
12. LOANS AND LEASES RECEIVABLE - THE BANK
Loans receivable is composed of the following:
(In thousands) September 30,
--------------------------------------
2001 2000
---------------- ---------------
Single-family residential $ 4,555,814 $ 4,896,439
Home equity 372,095 274,355
Real estate construction and ground 472,489 507,461
Commercial real estate and multifamily 30,703 39,917
Commercial 1,376,582 1,015,146
Automobile 361,930 719,276
Subprime automobile 420,658 620,588
Automobile leasing 1,124,106 568,091
Home improvement and related loans 100,494 77,345
Overdraft lines of credit and
other consumer 36,356 31,608
---------------- ---------------
8,851,227 8,750,226
---------------- ---------------
Less:
Undisbursed portion of loans 812,325 630,205
Unearned discounts and net
deferred loan origination costs (42,611) (39,028)
Allowance for losses on loans and leases 63,018 54,018
---------------- ---------------
832,732 645,195
---------------- ---------------
Total $ 8,018,495 $ 8,105,031
================ ===============
The bank serviced loans owned by others amounting to $7.4 and $6.4 billion at
September 30, 2001 and 2000, respectively.
Accrued interest receivable on loans totaled $39.0 and $43.4 million at
September 30, 2001 and 2000, respectively, and is included in other assets in
the Consolidated Balance Sheets.
13. REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK
Real estate held for investment or sale is composed of the following:
September 30,
---------------------------------
(In thousands) 2001 2000
-------------- ---------------
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
$85,152 and $80,752, respectively) 30,779 48,461
-------------- ---------------
Total real estate held for investment or sale $ 31,704 $ 49,386
============== ===============
Gain (loss) on real estate held for investment or sale is composed of the
following:
Year Ended September 30,
-----------------------------------------------------
(In thousands) 2001 2000 1999
--------------- -------------- ---------------
Provision for losses $ (4,200) $ (1,400) $ -
Net gain (loss) from operating properties 774 (260) 1,519
Net gain on sales 6,241 137 32,530
--------------- -------------- ---------------
Total gain (loss) $ 2,815 $ (1,523) $ 34,049
=============== ============== ===============
14. ALLOWANCE FOR LOSSES - THE BANK
Activity in the allowance for losses on loans and leases receivable is
summarized as follows:
(In thousands) Loans and
Leases
Receivable
----------------
Balance, September 30, 1998 $ 60,157
Provision for losses 22,880
Charge-offs (26,774)
Recoveries 1,876
----------------
Balance, September 30, 1999 58,139
Provision for losses 49,930
Charge-offs (58,883)
Recoveries 4,832
----------------
Balance, September 30, 2000 54,018
Provision for losses 67,852
Charge-offs (68,220)
Recoveries 9,368
----------------
Balances, September 30, 2001 $ 63,018
================
The allowance for losses at September 30, 2001 is based on management's
estimates of the amount of allowance required to reflect the losses incurred in
the loan and lease portfolio based on circumstances and conditions known at the
time. As adjustments to the allowance become necessary, provisions for losses
are reported in operations in the periods they are determined to be necessary.
15. ASSET-BACKED TRANSACTIONS - THE BANK
The bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.
The bank sold automobile loan receivables and issued notes in the amount of
$804.9 million during the year ended September 30, 2001 and recognized gains of
$27.9 million. The bank sold automobile loan receivables and issued notes in the
amount of $668.1 million during the year ended September 30, 2000 and recognized
gains of $4.6 million. The bank did not sell automobile loan receivables during
the year ended September 30, 1999. The outstanding trust certificate balances
were $1.2 billion at September 30, 2001, $1.3 million of which represents
subordinate classes of certificates retained by the bank. The outstanding trust
certificate balances were $857.8 million at September 30, 2000, $3.5 million of
which represents subordinate classes of certificates retained by the bank. The
retained certificates were classified as trading securities at September 30,
2001 and 2000 and had carrying values of $1.2 million and $3.4 million,
respectively. See Summary of Significant Accounting Policies - The Bank. The
bank continues to service the underlying loans related to these transactions.
See Note 27.
The bank did not sell any home equity credit line receivables into new trusts
during the years ended September 30, 2001 and 2000. The bank sold home equity
credit line receivables of $46.2, $64.4 and $79.4 million into existing trusts
and recognized gains of $1.8, $2.3 and $2.9 million during the years ended
September 30, 2001, 2000 and 1999, respectively. The outstanding trust
certificate balances were $86.2 million at September 30, 2001 and $141.2 million
at September 30, 2000. The bank continues to service the underlying loans
related to these transactions. See Note 27.
The bank did not sell any home loan receivables into new trusts during the years
ended September 30, 2001, 2000 and 1999. The bank sold home loan receivables of
$2.6 million into an existing trust during the year ended September 30, 2001 and
did not recognize a gain or loss on this transaction. The bank sold home loan
receivables of $1.9 million into an existing trust during the year ended
September 30, 2000 and recognized a gain of $27,000. The bank sold home loan
receivables of $1.8 million into an existing trust during the year ended
September 30, 1999 and did not recognize a gain or loss on this transaction. The
outstanding trust certificate balances were $57.6 million at September 30, 2001
and $82.1 million at September 30, 2000. The bank continues to service the
underlying loans related to these transactions. See Note 27.
The bank continues to service, and receive servicing fees on, the outstanding
balance of securitized receivables. The bank also retains rights to future cash
flows arising from the receivables after the expenses of the securitization
trust are paid. With the securitization and sale of receivables transactions,
the bank typically retains subordinated interests, which include an
interest-only strip receivable. Gain or loss on sale of the receivables depends
in part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair value at the date of transfer. To obtain fair values, quoted
market prices are used if available. However, quotes are generally not available
for retained interests, so the bank generally estimates fair value based on the
estimated present value of the future residual cash flows from securitized and
sold receivables, using management's best estimates of the key assumptions -
credit losses, prepayment speeds and discount rates commensurate with the risks
involved.
Securitization and sale revenue on a managed basis includes the gross initial
gains on current securitization and sale transactions less amortization of
interest-only strips recognized in connection with current and prior period
securitization and sale transactions. The following table represents the
components of securitization and sale related income on a managed basis which is
included in servicing and securitization income in the Consolidated Statements
of Operations:
Year Ended
(In thousands) September 30, 2001
-----------------------------
Gross initial gains $ 33,308
Amortization (4,842)
-----------------------------
Securitization and sale related income $ 28,466
=============================
At September 30, 2001, key economic assumptions and the sensitivity of the
current fair value of interest-only strip receivables to an immediate 10 percent
and 20 percent adverse change in those assumptions are as follows:
(Dollars in thousands) Automobile Home Equity/
Home Improvement
---------------------------- ---------------------------
Carrying value (fair value) $43,260 $3,886
Weighted average life (in years) 1.52 2.00
Prepayment speed assumption (annual rate) 1.46%(1) 35.92%(2)
Impact on fair value at 10% adverse change $(1,449) $(1,029)
Impact on fair value at 20% adverse change $(2,803) $(1,408)
Expected credit losses (annual rate) 0.89% 0.30%
Impact on fair value at 10% adverse change $(1,594) $(789)
Impact on fair value at 20% adverse change $(3,190) $(1,142)
Residual cash flows discount rate (annual) 9.44% 8.88%
Impact on fair value at 10% adverse change $(617) $(512)
Impact on fair value at 20% adverse change $(1,223) $(588)
Key economic assumptions used in measuring interest-only strip receivables at
the date of securitizations completed during fiscal year 2001 are as follows:
Prepayment speed assumption (annual rate) 1.55%(1) -
Expected credit losses (annual rate) 0.99% -
Residual cash flows discount rate (annual) 10.00% -
(1) Represents absolute prepayment model or ABS - an assumed rate of prepayment each month relative to the original number
of automobile loans in a pool.
(2) Represents Constant Prepayment Rate.
These sensitivities are hypothetical and should be used with caution. Changes in
fair value based on variations in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair value
may not be linear. The effect shown in the above table of a variation in a
particular assumption on the fair value of interest-only strip receivables is
calculated without changing any other assumption. In reality, changes in one
factor may result in changes in another factor, which might magnify or
counteract the sensitivities.
The following table summarizes certain cash flows received from securitization
trusts during the year ended September 30, 2001:
(In thousands)
Proceeds from new securitizations $ 804,861
Servicing fees received 11,991
Other cash flows received on retained interests 28,837
Portfolio balances, delinquent amounts and net credit losses for securitized
loans for the year ended September 30, 2001 were as follows:
September 30, 2001
-------------------------------------------------
(In thousands) Total Principal Principal Amount of Year Ended
Loans Past Due 90 Days
Amount of Loans and or More or September 30, 2001
Leases Non-Performing Net Credit Losses
--------------------- ------------------------ --------------------------
Automobile $ 1,171,618 $ 11,380 $ 10,084
Home equity, home improvement and
related loans 149,280 1,729 1,124
--------------------- ------------------------ --------------------------
Total $ 1,320,898 $ 13,109 $ 11,208
===================== ======================== ==========================
16. PROPERTY AND EQUIPMENT - THE BANK
Property and equipment is composed of the following:
Estimated
Useful September 30,
-----------------------------------------
(Dollars in thousands) Lives 2001 2000
---------------- ----------------- ----------------
Land - $ 46,948 $ 46,813
Construction in progress - 29,885 97,569
Buildings and improvements 10-45 years 268,956 117,220
Leasehold improvements 5-20 years 112,069 103,925
Furniture and equipment 5-10 years 198,747 188,918
Automobiles 3-5 years 3,162 4,000
----------------- ----------------
659,767 558,445
Less:
Accumulated depreciation and amortization 221,972 195,976
----------------- ----------------
Total $ 437,795 $ 362,469
================= ================
Depreciation and amortization expense amounted to $34.0, $32.2 and $33.1 million
for the years ended September 30, 2001, 2000 and 1999, respectively. Capitalized
interest amounted to $4.7, $2.1 and $0.4 million during the years ended
September 30, 2001, 2000 and 1999, respectively.
17. LEASES - THE BANK
The bank has noncancelable, long-term leases for office premises and retail
space which have a variety of terms expiring from fiscal 2002 to 2021 and ground
leases which have terms expiring from fiscal 2029 to 2081. These leases are
accounted for as operating leases. Some of the leases are subject to rent
adjustments in the future based upon changes in the Consumer Price Index and
some also contain renewal options. The following is a schedule by years of
future minimum lease payments required at September 30, 2001:
Year Ending (In thousands)
September 30,
-----------------------
2002 $ 23,922
2003 22,827
2004 21,992
2005 21,151
2006 20,470
Thereafter 136,620
-------------------
Total $ 246,982
===================
Rent expense totaled $26.9, $23.2 and $17.9 million for the years ended
September 30, 2001, 2000 and 1999, respectively.
18. DEPOSIT ACCOUNTS - THE BANK
An analysis of deposit accounts and the related weighted average effective
interest rates at year end are as follows:
September 30,
-------------------------------------------------------------------------
2001 2000
---------------------------------- ------------------------------------
(Dollars in thousands) Weighted Weighted Average
Average
Amount Rate Amount Rate
----------------- ---------------- ---------------- -----------------
Demand accounts $ 642,490 - $ 559,320 -
NOW accounts 1,428,486 0.44% 1,289,883 0.88%
Money market deposit accounts 1,570,297 2.83% 1,156,829 3.98%
Statement savings accounts 780,655 1.26% 779,344 1.90%
Other deposit accounts 117,207 0.99% 113,245 1.66%
Certificate accounts, less than $100 2,361,174 5.20% 2,524,769 6.21%
Certificate accounts, $100 or more 662,161 4.57% 614,399 6.30%
----------------- ----------------
Total $ 7,562,470 2.84% $ 7,037,789 3.83%
================= ================
The bank's deposits are insured by the FDIC up to $100,000 for each insured
depositor.
Interest expense on deposit accounts is composed of the following:
Year Ended September 30,
-------------------------------------------------------
(In thousands) 2001 2000 1999
--------------- --------------- --------------
NOW accounts $ 7,773 $ 10,585 $ 11,598
Money market deposit accounts 48,744 39,351 36,395
Statement savings accounts 11,963 15,684 19,226
Certificate accounts 177,619 154,738 77,084
Other deposit accounts 1,507 1,905 2,042
--------------- --------------- --------------
Total $ 247,606 $ 222,263 $ 146,345
=============== =============== ==============
Outstanding certificate accounts at September 30, 2001 mature in the years
indicated as follows:
Year Ending (In thousands)
September 30,
-----------------------
2002 $2,709,720
2003 238,064
2004 29,091
2005 33,081
2006 13,379
------------------
Total $3,023,335
==================
At September 30, 2001, certificate accounts of $100,000 or more have contractual
maturities as indicated below:
(In thousands)
Three months or less $ 324,722
Over three months through six months 123,838
Over six months through 12 months 174,926
Over 12 months 38,675
--------------
Total $ 662,161
==============
19. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
SHORT-TERM BORROWINGS - THE BANK
Short-term borrowings are summarized as follows:
September 30,
------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999
----------------- ---------------- ----------------
Securities sold under repurchase agreements:
Balance at year end $ 110,837 $ 369,628 $ 526,571
Average amount outstanding during the year 397,842 490,333 371,660
Maximum amount outstanding at any month end 534,170 647,779 526,571
Amount maturing within 30 days 110,837 369,628 526,571
Weighted average interest rate during the year 5.74% 6.27% 5.22%
Weighted average interest rate on year end balances 3.21% 6.74% 5.78%
Other short-term borrowings:
Balance at year end $ 171,513 $ 170,414 $ 104,200
Average amount outstanding during the year 169,820 137,607 99,593
Maximum amount outstanding at any month end 181,942 170,414 134,313
Amount maturing within 30 days 171,513 170,414 104,200
Weighted average interest rate during the year 4.39% 5.42% 4.46%
Weighted average interest rate on year end balances 2.18% 5.87% 4.62%
The investment and mortgage-backed securities underlying the repurchase
agreements were delivered to the dealers who arranged the transactions. The
dealers may have loaned such securities to other parties in the normal course of
their operations and agreed to resell to the bank the identical securities upon
the maturities of the agreements.
At September 30, 2001, the bank had pledged mortgage-backed securities with a
book value of $200.5 million to secure certain other short-term borrowings. Also
at September 30, 2001, the bank had pledged, but did not borrow against,
automobile loans with a total principal balance of $299.9 million and commercial
loans with a total principal balance of $929.8 million.
20. FEDERAL HOME LOAN BANK ADVANCES - THE BANK
At September 30, 2001, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $2.2 billion. The advances bear interest at a weighted average
interest rate of 4.99%, which is fixed for the term of the advances, and mature
over varying periods between October 2001 and August 2016.
Under a Specific Collateral Agreement with the FHLB, advances are secured by the
bank's FHLB stock, qualifying first mortgage loans with a total principal
balance of $3.1 billion and certain mortgage-backed securities with a book value
of $396.7 million. The FHLB requires that members maintain qualifying collateral
at least equal to 100% of the member's outstanding advances at all times. The
collateral held by the FHLB in excess of the September 30, 2001 advances is
available to secure additional advances from the FHLB, subject to its
collateralization guidelines.
21. CAPITAL NOTES - SUBORDINATED - THE BANK
Capital notes, which are subordinated to the interest of deposit account holders
and other senior debt, are composed of the following:
Issue September 30, Interest
-------------------------------
(Dollars in thousands) Date 2001 2000 Rate
----------------------- ------------- ------------- --------------
Subordinated debentures due 2005 November 23, 1993 $150,000 $150,000 9 1/4%
Subordinated debentures due 2008 December 3, 1996 100,000 100,000 9 1/4%
------------- -------------
Total $250,000 $250,000
============= =============
The 9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures") are subject
to redemption at any time on or after December 1, 1998, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:
If redeemed during the
12-month period beginning Redemption
December 1, Price
(In thousands)
----------------------------- ---------------------
2000......................... $ 102.775
2001......................... $ 101.850
2002......................... $ 100.925
2003 and thereafter.......... $ 100.000
The 9 1/4% Subordinated Debentures due 2008 (the "1996 Debentures") are subject
to redemption at any time on or after December 1, 2001, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:
If redeemed during the
12-month period beginning Redemption
December 1, Price
(In thousands)
----------------------------- ---------------------
2001......................... $ 104.625
2002......................... $ 103.700
2003......................... $ 102.775
2004......................... $ 101.850
2005......................... $ 100.925
2006 and thereafter.......... $ 100.000
The indenture pursuant to which the 1993 Debentures were sold (the "Indenture")
provides that the bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be
continuing and the bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15.0 million, (ii) 662/3% of the bank's consolidated net income
(as defined in the Indenture) accrued on a cumulative basis commencing on
October 1, 1993 and (iii) the aggregate net cash proceeds received by the bank
after October 1, 1993 from the sale of qualified capital stock or certain debt
securities, minus the aggregate amount of any restricted payments made by the
bank. Notwithstanding the above restrictions on dividends, provided no event of
default has occurred or is continuing, the Indenture does not restrict the
payment of dividends on the 13% Preferred Stock (as defined below) or any
payment-in-kind preferred stock issued in lieu of cash dividends on the
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 22.
The bank received OTS approval to include the principal amount of the 1996
Debentures and the 1993 Debentures in the bank's supplementary capital for
regulatory capital purposes.
Deferred debt issuance costs, net of accumulated amortization, amounted to $6.3
and $6.9 million at September 30, 2001 and 2000, respectively, and are included
in other assets in the Consolidated Balance Sheets.
22. REAL ESTATE INVESTMENT TRUST SUBSIDIARY - THE BANK
On December 3, 1996, a new real estate investment trust subsidiary of the bank
(the "REIT Subsidiary") sold $150,000 of its Noncumulative Exchangeable
Preferred Stock, Series A, par value $5.00 per share (the "REIT Preferred
Stock"), and received net cash proceeds of $144.0 million. Cash dividends on the
REIT Preferred Stock are payable quarterly in arrears at an annual rate of
10 3/8%. The liquidation value of each share of REIT Preferred Stock is $50,000
plus accrued and unpaid dividends. Except under certain limited circumstances,
the holders of the REIT Preferred Stock have no voting rights. The REIT
Preferred Stock is automatically exchangeable for a new series of Preferred
Stock of the bank upon the occurrence of certain events.
The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at
any time on or after January 15, 2007, in whole or in part, at the following per
share redemption prices plus accrued and unpaid dividends:
If redeemed during the
12-month period beginning Redemption
January 15, Price
(In thousands)
----------------------------- --------------------------
2007.................... $ 52.594
2008.................... $ 52.075
2009.................... $ 51.556
2010.................... $ 51.038
2011.................... $ 50.519
2012 and thereafter..... $ 50.000
The bank received OTS approval to include the proceeds from the sale of the REIT
Preferred Stock in the core capital of the bank for regulatory capital purposes
in an amount up to 25% of the bank's core capital. The net cash proceeds from
the sale of the REIT Preferred Stock are reflected as minority interest in the
Consolidated Balance Sheets. Dividends on the REIT Preferred Stock are
presented as a reduction of net income in the Consolidated Statements of
Operations.
23. PREFERRED STOCK - THE BANK
Cash dividends on the bank's Noncumulative Perpetual Preferred Stock, Series A
(the "Preferred Stock") are payable quarterly in arrears at an annual rate of
13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the bank.
The OTS has approved the inclusion of the Preferred Stock as core capital and
has not objected to the payment of dividends on the Preferred Stock, provided
certain conditions are met. The holders of the Preferred Stock have no voting
rights, except in certain limited circumstances.
Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25,000 per share, plus accrued and unpaid
dividends for the then-current dividend period in the event of any voluntary
liquidation of the bank, after payment of the deposit accounts and other
liabilities of the bank, and out of the assets available for distribution to
shareholders. The Preferred Stock ranks superior and prior to the issued and
outstanding common stock of the bank with respect to dividend and liquidation
rights.
The Preferred Stock is redeemable by the bank at its option at any time on and
after May 1, 2003, in whole or in part, at the following per share redemption
prices in cash, plus, in each case, an amount in cash equal to accrued and
unpaid dividends for the then-current dividend period:
If redeemed during the
12-month period beginning Redemption
May 1, Price
(In thousands)
----------------------------- --------------------------
2003.................... $ 27.250
2004.................... $ 27.025
2005.................... $ 26.800
2006.................... $ 26.575
2007.................... $ 26.350
2008.................... $ 26.125
2009.................... $ 25.900
2010.................... $ 25.675
2011.................... $ 25.450
2012.................... $ 25.225
2013 and thereafter..... $ 25.000
24. RETIREMENT PLAN - THE BANK
The bank participates in a defined contribution profit sharing retirement plan
(the "Plan") which covers those full-time employees who meet the requirements as
specified in the Plan. The Plan, which can be modified or discontinued at any
time, requires participating employees to contribute 2.0% of their compensation.
Corporate contributions, at the discretionary amount of three times the employee
contribution, were $8.9, $8.0 and $7.2 million for the years ended September 30,
2001, 2000 and 1999, respectively. There are no past service costs associated
with the Plan and the bank has no liability under the Plan other than its
current contributions. The Plan owns 4.0% of the bank's common stock.
25. REGULATORY MATTERS - THE BANK
The bank's regulatory capital requirements at September 30, 2001 were a 1.5%
tangible capital requirement, a 4.0% core capital requirement and an 8.0% total
risk-based capital requirement. Under the OTS "prompt corrective action"
regulations, the bank must maintain minimum leverage, tier 1 risk-based and
total risk- based capital ratios of 4.0%, 4.0% and 8.0%, respectively, to meet
the ratios established for "adequately capitalized" institutions. At September
30, 2001, the bank was in compliance with its tangible, core and total
risk-based regulatory capital requirements and exceeded the capital standards
established for "well capitalized" institutions under the "prompt corrective
action" regulations. The information below is based upon the bank's
understanding of the applicable regulations and related interpretations.
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 $ 525,424
Minority interest in REIT Subsidiary (1) 144,000
Accumulated other comprehensive loss (2) 2,087
--------------
671,511
Adjustments for tangible and core capital:
Intangible assets (48,990)
Non-includable subsidiaries (3) (1,414)
Non-qualifying purchased/originated loan
servicing rights (3,592)
--------------
Total tangible capital 617,515 5.44% $ 170,348 1.50% $ 447,167 3.94%
-------------- ========== =============== ========== =============== =========
Total core capital (4) 617,515 5.44% $ 454,262 4.00% $ 163,253 1.44%
-------------- ========== =============== ========== =============== =========
Tier 1 risk-based capital (4) 617,515 6.84% $ 361,283 4.00% $ 256,232 2.84%
-------------- ========== =============== ========== =============== =========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and lease
losses 63,018
--------------
Total supplementary capital 313,018
--------------
Total available capital 930,533
Equity investments (3) (2,365)
--------------
Total risk-based capital (4) $ 928,168 10.52% $ 722,566 8.00% $ 205,602 2.52%
============== ========== =============== ========== =============== =========
(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 loss is included in
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%.
At September 30, 2000, the bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "well capitalized" institutions under the "prompt
corrective action" regulations. The information below is based upon the bank's
understanding of the applicable regulations and related interpretations.
SEPTEMBER 30, 2000
------------------------------------------------------------------------------------
(Dollars in thousands) MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
----------- -- ---------- ----------- -- ---------- ----------- --- ---------
As a %
As a % As a % of
Amount of Assets Amount of Assets Amount Assets
----------- ---------- ----------- ---------- ----------- ---------
Capital per financial statements $492,406
Minority interest in REIT
Subsidiary(1) 144,000
-----------
Adjusted capital 636,406
Adjustments for tangible and core capital:
Intangible assets (50,797)
Non-includable subsidiaries(2) (1,424)
Non-qualifying purchased/
originated loan servicing (188)
-----------
Total tangible capital 583,997 5.48% $159,840 1.50% $424,157 3.98%
----------- ==========
=========== ========== =========== =========
Total core capital(3) 583,997 5.48% $426,239 4.00% $157,758 1.48%
----------- ========== =========== ========== =========== =========
Tier 1 risk-based capital(3) 583,997 7.21% $324,089 4.00% $259,908 3.21%
----------- ========== =========== ========== =========== =========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and
lease losses 54,018
-----------
Total supplementary capital 304,018
-----------
Total available capital 888,015
Equity investments(2) (6,463)
-----------
Total risk-based capital(3) $ 881,552 11.01% $648,178 8.00% $233,374 3.01%
=========== ========== =========== ========== =========== =========
(1) Eligible for inclusion in core capital in an amount up to 25% of the
bank's core capital pursuant to authorization from the OTS.
(2) Reflects an aggregate offset of $2.0 million representing the allowance
for general loan losses maintained against the bank's equity investments
and non-includable subsidiaries which, pursuant to OTS guidelines, is
available as a credit against the deductions from capital otherwise
required for such investments.
(3) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least
6.0% and a total risk- based capital ratio of at least 10.0%.
At September 30, 2001 and 2000, the bank had $1.6 and $1.6 million,
respectively, in loans to and investments in subsidiaries engaged in activities
impermissible for national banks ("non-includable subsidiaries") which were
fully deducted from all three capital requirements. At September 30, 2001 and
2000, the bank also had an equity investment with a balance, after subsequent
valuation allowances, of $2.4 and $8.3 million, respectively, which was fully
deducted from total risk-based capital.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In December 2001, the
bank received from the OTS an extension of the holding periods for certain of
its REO properties through December 19, 2002. The following table sets forth the
bank's REO at September 30, 2001, after valuation allowances of $85.2 million,
by the fiscal year in which the property was acquired through foreclosure.
Fiscal Year (In thousands)
--------------------------
1990 $ 5,134(1)(2)
1991 20,247(2)
1992 -
1993 -
1994 -
1995 5,054(2)
1996 -
1997 -
1998 -
1999 -
2000 -
2001 344
--------------------------
Total REO $ 30,779
==========================
(1) Includes REO with an aggregate net book value of $2.4 million, which the
bank treats as an equity investment for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $28.1 million, for which
the bank received an extension of the holding periods through December 19, 2002.
26. TRANSACTIONS WITH RELATED PARTIES - THE BANK
Loans Receivable:
From time to time, in the normal course of business, the bank may make loans to
executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same terms
as similar loans with unrelated parties. An analysis of activity with respect to
these loans for the year ended September 30, 2001 is as follows:
(In thousands)
Balance, September 30, 2000 $ 4,952
Additions 709
Reductions (134)
-----------------
Balance, September 30, 2001 $ 5,527
=================
Services:
B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the bank. These services include property
management, insurance brokerage and leasing. Fees for these services were $1.7
million, $850,000 and $35,000 for the years ended September 30, 2001, 2000 and
1999, respectively.
The law firm in which one director of the bank is a senior counsel received
$2.4, $2.1 and $4.7 million for legal services rendered to the bank during the
years ended September 30, 2001, 2000 and 1999, respectively.
For the years ended September 30, 2001, 2000 and 1999, one of the directors of
the bank was paid $100,000, $100,000 and $50,000, respectively, for consulting
services rendered to the bank. Another director of the bank was paid total fees
of $100,000 for each of the years ended September 30, 2001, 2000 and 1999 for
consulting services. A third director of the bank was paid $50,000, $50,000 and
$100,000 for consulting services rendered to the bank for the years ended
September 30, 2001, 2000 and 1999, respectively.
Tax Sharing Agreement:
The bank and the other companies in the Trust's affiliated group are parties to
a tax sharing agreement dated June 28, 1990 (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides for payments to be made by members of the Trust's
affiliated group to the Trust based on their separate company tax liabilities.
The Tax Sharing Agreement also provides that, to the extent net operating losses
or tax credits of a particular member are used to reduce the overall tax
liability of the Trust's affiliated group, such member will be reimbursed by the
other members of the affiliated group that have taxable income in an amount
equal to such tax reduction. The bank paid $3.4, $6.6 and $6.6 million to the
Trust during fiscal 2001, 2000 and 1999, respectively, under the Tax Sharing
Agreement. At September 30, 2001 and 2000, the estimated tax sharing payment
payable to the Trust by the bank was $4.9 and $3.5 million, respectively.
Other:
The bank sold an office building located in McLean, Virginia to its parent
company, the B.F. Saul Real Estate Investment Trust, in December 1999. Because
this transfer was between entities under common control, the $13.5 million of
proceeds in excess of the bank's carrying value, net of related income taxes of
$8.8 million, was accounted for as a capital contribution.
The bank paid $5,.8, $5.2 and $5.0 million for office space leased from or
managed by companies affiliated with the bank or its directors during the years
ended September 30, 2001, 2000 and 1999, respectively.
The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and Van
Ness Square Corporation, affiliates of the bank, from time to time maintain
interest-bearing deposit accounts with the bank. Those accounts totaled $28.0
and $16.8 million at September 30, 2001 and 2000, respectively. The bank paid
interest on the accounts amounting to $989,000, $736,000 and $716,000 during
fiscal years ended 2001, 2000 and 1999, respectively.
27. FINANCIAL INSTRUMENTS - THE BANK
The bank, in the normal course of business, is a party to financial instruments
with off-balance-sheet risk and other derivative financial instruments to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit at both fixed and variable rates, letters of credit,
interest-rate cap agreements and assets sold with limited recourse. All such
financial instruments are held or issued for purposes other than trading.
These instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the Consolidated
Balance Sheets.
The contractual or notional amount of these instruments reflect the extent of
involvement the bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to Extend Credit:
The bank had approximately $2.0 billion of commitments to extend credit at
September 30, 2001. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments are subject to
the bank's normal underwriting and credit evaluation policies and procedures.
Standby Letters of Credit:
Standby letters of credit are conditional commitments issued by the bank to
guarantee the performance of a customer to a third party. At September 30, 2001,
the bank had issued standby letters of credit in the amount of $56.5 million to
guarantee the performance of and irrevocably assure payment by customers under
construction projects.
Of the total, $34.1 million will expire in fiscal 2002 and the remainder will
expire over time through fiscal 2006. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan commitments to customers. Mortgage-backed securities with a book value of
$2.4 million were pledged as collateral for certain of these letters of credit
at September 30, 2001.
Recourse Arrangements:
The bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $24.3 and $28.5
million, respectively, at September 30, 2001, and $42.1 and $18.9 million,
respectively, at September 30, 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 $1.2 and $3.4
million at September 30, 2001 and 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 September 30, 2001, recourse to the bank under these arrangements was
$6.6 million, consisting of restricted cash accounts amounting to $4.2 million
and overcollateralization of receivables of $2.4 million.
The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. The recourse to the bank under
this arrangement was $3.4 million for both September 30, 2001 and 2000.
Derivative Financial Instruments:
Interest-rate cap agreements may be used to limit the bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 2001, the bank was not a party to
any interest-rate cap agreements.
To manage the potentially adverse impact of interest rate movements on its held
for sale fixed-rate mortgage loan pipeline, the bank hedges its pipeline by
entering into whole loan and mortgage-backed security forward sale commitments
and mortgage-backed security forward purchase commitments.
Forward sale commitments are used to sell specific financial instruments (whole
loans or mortgage-backed securities) at a future date for a specified price.
Forward purchase commitments are used to purchase specific financial instruments
(whole loans or mortgage-backed securities) at a future date for a specified
price.
At September 30, 2001, the bank had mortgage-backed security forward sale
commitments of $226.3 million and mortgage-backed security forward purchase
commitments of $5.8 million related to its hedging activities. These hedges are
accounted for as cash flow hedges and gains and losses are recorded in other
comprehensive income in the Consolidated Balance Sheets. The total net
unrealized loss in value of cash flow hedges, net of tax, was $2.1 million at
September 30, 2001. In addition, the bank had whole loan forward sale
commitments of $45.4 million at September 30, 2001. Forward commitments
generally settle within 90 days. Gains and losses are deferred and recorded as a
component of the gain on sales of loans at the time the forward sale commitment
matures. Gains and losses on forward purchase commitments are recorded as a
component of the gain on sales of loans in the month the transaction occurs.
The bank owns mortgage servicing rights which are subject to large fluctuations
in their fair value due to changes in the benchmark Treasury index, as well as
changes inherent to mortgage loans such as prepayment speeds, escrow earning
rates, discount rates and returns required by investors. As a result of the
potentially significant risk of these fair value fluctuations, the bank hedges
these changes in fair value in mortgage servicing rights through treasury
futures and options. The bank evaluates the mortgage servicing portfolio daily
at the pool level and monthly at the loan level to insure a high degree of
correlation between hedging instruments and the underlying asset. Management
expects that the cumulative change in the value of the hedging instrument will
be between 80% and 120% of the inverse cumulative change in the fair value of
the hedged mortgage servicing rights asset. The effectiveness of hedging
relationships is assessed on a cumulative basis every three months and whenever
financial statements or earnings are reported by the bank.
At September 30, 2001, the bank had treasury futures representing a notional
amount of $65.0 million, call options on the treasury futures representing a
notional amount of $43.0 million and put options on treasury futures
representing a notional amount of $47.0 million related to its mortgage
servicing rights fair value hedges. At September 30, 2001 the gain on these
hedges was $2.5 million and is included as a reduction to loan expenses on the
Consolidated Statements of Operations and Comprehensive Income.
Concentrations of Credit:
The bank's principal real estate lending market is the metropolitan Washington,
DC area. In addition, a significant portion of the bank's consumer loan
portfolio was generated by customers residing in the metropolitan Washington, DC
area. Service industries and federal, state and local governments employ a
significant portion of the Washington, DC area labor force. Adverse changes in
economic conditions could have a direct impact on the timing and amount of
payments by borrowers.
28. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - THE BANK
The majority of the bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting in a
great degree of subjectivity inherent in the indicated fair value amounts. Since
fair value is estimated as of the balance sheet date, the amount which would
actually be realized or paid upon settlement or maturity could be significantly
different. Comparability of fair value amounts among financial institutions may
be difficult due to the wide range of permitted valuation techniques and the
numerous estimates and assumptions which must be made. The estimated fair values
of the bank's financial instruments at September 30, 2001 and 2000 are as
follows:
September 30,
--------------------------------------------------------------------------
2001 2000
------------------------------------ -----------------------------------
(In thousands) Carrying Fair Carrying Amount Fair
Amount Value Value
----------------- --------------- ----------------- ---------------
Financial assets:
Cash, due from banks,
interest-bearing deposits, federal
funds sold and securities purchased
under agreements to resell $ 409,995 $ 409,995 $ 428,233 $ 428,233
Loans held for sale 246,083 249,842 126,108 126,577
Loans held for securitization and sale 32,000 32,000 70,000 70,000
Trading securities 6,690 6,690 3,380 3,380
Investment securities 45,794 46,181 45,648 45,559
Mortgage-backed securities 1,474,495 1,489,835 1,046,809 1,025,540
Loans and leases receivable, net 8,268,495 8,366,675 8,105,031 7,993,260
Other financial assets 318,715 318,715 327,211 327,211
Financial liabilities:
Deposit accounts with no stated maturities 4,539,135 4,539,135 3,898,621 3,898,621
Deposit accounts with stated maturities 3,023,335 2,920,234 3,139,168 3,124,362
Securities sold under
repurchase agreements and other
short-term borrowings and Federal Home
Loan bank advances 2,522,948 2,443,395 2,487,013 2,515,551
Capital notes-subordinated 243,744(1) 250,000 243,102(1) 235,750
Other financial liabilities 383,743 383,743 292,802 292,802
- ---------------------------------------------------------------------------------------------------------------------------
(1) Net of deferred debt issuance costs which are included in other assets in
the Consolidated Balance Sheets.
The following methods and assumptions were used to estimate the fair value
amounts at September 30, 2001 and 2000:
Cash, due from banks, interest-bearing deposits, federal funds sold and
securities purchased under agreements to resell: Carrying amount approximates
fair value.
Loans held for sale: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.
Loans held for securitization and sale: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.
Trading securities: Fair value is equal to carrying value.
Investment securities: Fair value is based on quoted market prices.
Mortgage-backed securities: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.
Loans and leases receivable, net: Fair value of certain homogeneous groups of
loans (e.g., single-family residential, automobile loans, home improvement loans
and fixed-rate commercial and multifamily loans) is estimated using discounted
cash flow analyses based on contractual repayment schedules and management's
estimate of future prepayment rates. The discount rates used in these analyses
are based on either the interest rates paid on U.S. Treasury securities of
comparable maturities adjusted for credit risk and non-interest operating costs,
or the interest rates currently offered by the bank for loans with similar terms
to borrowers of similar credit quality. For loans which reprice frequently at
market rates (e.g., home equity, variable-rate commercial and multifamily, real
estate construction and ground loans), the carrying amount approximates fair
value. The fair value of the bank's loan portfolio as presented above does not
include the value of established credit line customer relationships, or the
value relating to estimated cash flows from future receivables and the
associated fees generated from existing customers.
Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips and derivative financial instruments are carried at
fair value.
Deposit accounts with no stated maturities: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
bank's established deposit customer relationships.
Deposit accounts with stated maturities: Fair value of fixed-rate certificates
of deposit is estimated based on discounted cash flow analyses using the
remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.
Securities sold under repurchase agreements and other short-term borrowings and
Federal Home Loan Bank advances: For these borrowings which either reprice
frequently to market interest rates or are short-term in duration, the carrying
amount approximates fair value. Fair value of the remaining amounts borrowed is
estimated based on discounted cash flow analyses using interest rates currently
charged by the lender for comparable borrowings with similar remaining
maturities.
Capital notes-subordinated: Fair value of the 1993 Debentures and the 1996
Debentures is based on quoted market prices.
Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable, notes payable and other short-term
payables approximates fair value.
Off-balance sheet instruments: The difference between the original fees charged
by the bank for commitments to extend credit and letters of credit and the
current fees charged to enter into similar agreements is immaterial.
29. LITIGATION - THE BANK
During the normal course of business, the bank is involved in certain
litigation, including litigation arising out of its lending activities, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the bank is a defendant may be material, the bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the bank.
30. COMMITMENTS AND CONTINGENCIES - THE TRUST
The Trust is involved in a number of lawsuits arising from the normal course of
its business. On the basis of consultations with counsel, management does not
believe that any material loss will result from the resolution of these matters.
31. MINORITY INTEREST - THE TRUST
At September 30, 2001 and 2000, minority interest held by affiliates of $86.3
and $79.0 million represent the 20% minority interest in the bank's common
shares.
Minority interest -- other consists of the following:
September 30,
--------------------------------------
(In thousands) 2001 2000
- ---------------------------------------- ---------------- ---------------
Preferred Stock of Chevy Chase's
REIT subsidiary (See Note 22) $ 144,000 $ 144,000
Chevy Chase's Preferred Stock
(See Note 23) 74,307 74,307
---------------- ---------------
Total minority interest -- other $ 218,307 $ 218,307
================ ===============
The proceeds paid by the Real Estate Trust to the bank for Tysons Park Place
exceeded the bank carrying value. The $2.7 million minority interest in
capital contribution shown on the Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity (Deficit) for fiscal 2000 represents
the 20% minority interest in the excess of proceeds over the carrying value, net
of related income taxes.
32. INCOME TAXES - THE TRUST
The Trust voluntarily terminated its qualification as a real estate investment
trust under the Internal Revenue Code during fiscal 1978.
The provisions for income taxes for the years ended September 30, 2001, 2000 and
1999, consist of the following:
Year Ended September 30,
--------------------------------------------
(In thousands) 2001 2000 1999
- ----------------------------------------------------------- ------------- ------------- -------------
Current provision (benefit):
Federal $ 3,314 $ (43,603) $ (50,552)
State 2,578 (1,071) 619
------------- ------------- -------------
5,892 (44,674) (49,933)
------------- ------------- -------------
Deferred provision (benefit):
Federal 31,327 65,044 73,415
State (2,256) 2,847 5,820
------------- ------------- -------------
29,071 67,891 79,235
------------- ------------- -------------
Subtotal 34,963 23,217 29,302
Tax effect of other items:
Tax effect of extraordinary item -- (89) --
Tax effect of other comprehensive income
reported in stockholders' equity (1,365) (12) (26)
------------- ------------- -------------
Total $ 33,598 $ 23,116 $ 29,276
============= ============= =============
The Trust's effective income tax rate varies from the statutory Federal income
tax rate as a result of the following factors:
Year Ended September 30,
--------------------------------------------
(In thousands) 2001 2000 1999
- ----------------------------------------------------------- ------------- ------------- -------------
Computed tax at statutory Federal income tax rate $ 40,192 $ 27,073 $ 29,990
Increase (reduction) in taxes resulting from:
Minority interest (5,447) (5,447) (5,447)
Goodwill and other purchase accounting adjustments 71 124 189
Change in valuation allowance for deferred
tax asset allocated to income tax expense (6,565) (1,979) 366
State income taxes 5,804 2,635 3,952
Other 908 811 252
------------- ------------- -------------
$ 34,963 $ 23,217 $ 29,302
============= ============= =============
The components of the net deferred tax asset (liability) were as follows:
September 30,
-----------------------------
(In thousands) 2001 2000
- -------------------------------------------------------------------------- ------------- -------------
Deferred tax assets:
Provision for loan and lease losses in excess of tax deductions $ 6,892 $ 293
Intangible assets and goodwill, net 6,847 6,669
Deferred compensation 6,033 4,441
Unrealized losses on servicing assets 2,076 2,076
Net unrealized holding gains and losses 12,753 --
State net operating loss carry forwards 42,127 42,524
Partnership investments 1,560 1,338
Forgiveness of debt 2,121 2,583
Unrealized losses on property, net 12,514 9,155
Other 10,559 11,106
------------- -------------
Gross deferred tax assets 103,482 80,185
------------- -------------
Deferred tax liabilities:
Net unrealized holding losses -- (40,454)
Mortgage servicing rights (13,265) (6,004)
Asset securitizations, net (8,695) (860)
Saul Holdings (4,606) (4,606)
Lease financing (110,872) (40,456)
Depreciation (24,891) (17,657)
FHLB stock dividends (1,285) (1,957)
Deferred Expenses (10,017) (4,395)
Other (5,962) (3,889)
------------- -------------
Gross deferred tax liabilities (179,593) (120,278)
------------- -------------
Valuation allowance (9,145) (15,709)
------------- -------------
Net deferred tax liability $ (85,256) $ (55,802)
============= =============
The Trust establishes a valuation allowance against the gross deferred tax asset
to the extent the Trust cannot determine that it is more likely than not that
such assets will be realized through taxes available in carryback years, future
reversals of existing taxable temporary differences or projected future taxable
income. Such a valuation allowance has been established to reduce the gross
deferred asset for state net operating loss carryforwards to an amount that is
considered more likely than not to be realized. The state net operating losses
relate primarily to costs associated with the support of the bank's retail
activities, most significantly the credit card operations. Having reduced the
bank's costs through the sale of its former credit card operations in 1998 and
subsequent actions, management believes that the likelihood that the bank will
generate sufficient state taxable income to utilize a significant portion of the
state net operating losses, before their expirations beginning in 2010, has
increased since the prior period. As a result, the valuation allowance has
declined.
Management believes the existing net deductible temporary differences will
reverse during periods in which the bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive
consolidated earnings will continue as a result of the bank's earnings.
TAX SHARING AGREEMENT
The Trust's affiliated group, including the bank, entered into a tax sharing
agreement dated June 28, 1990, as amended. This agreement provides that payments be made by
members of the affiliated group to the Trust based on their respective allocable
shares of the overall federal income tax liability of the affiliated group for
taxable years and partial taxable years beginning on or after that date.
Allocable shares of the overall tax liability are prorated among the members
with taxable income calculated on a separate return basis. The agreement also
provides that, to the extent net operating losses or tax credits of a particular
member are used to reduce overall tax liability of the Trust's affiliated group,
such member will be reimbursed on a dollar-for-dollar basis by the other members
of the affiliated group that have taxable income in an amount equal to such tax
reduction. Under the tax sharing agreement, the bank paid $3.4, $6.6 and $6.6
million, to the Trust during fiscal 2001, 2000 and 1999.
In recent years, the operations of the Real Estate Trust have generated net
operating losses while the bank has reported net income. It is anticipated that
the Trust's consolidation of the bank's operations into the Trust's federal
income tax return will result in the use of the Real Estate Trust's net
operating losses to reduce the federal income taxes the bank would otherwise
owe. If in any future year, the bank has taxable losses or unused credits, the
Trust would be obligated to reimburse the bank for the greater of (i) the tax
benefit to the group using such tax losses or unused tax credits in the group's
consolidated Federal income tax returns or (ii) the amount of tax refund which
the bank would otherwise have been able to claim if it were not being included
in the consolidated Federal income tax return of the group.
As of September 30, 2001, there was no alternative minimum tax carryforward.
33. SHAREHOLDERS' EQUITY - THE TRUST
In June 1990, the Trust acquired from affiliated companies an additional equity
interest in the bank, which raised the Trust's ownership share of the bank to
80%. In exchange for the interest acquired, the Trust issued 450,000 shares of a
new class of $10.50 cumulative preferred shares of beneficial interest with a
par value of $1 (the "preferred shares"). The transaction has been accounted for
at historical cost in a manner similar to the pooling of interests method
because the entities are considered to be under common control. In addition, the
Trust acquired two real estate properties from an affiliate in exchange for
66,000 preferred shares.
The Trust paid preferred dividends of $12.0, $12.5 and $6.5 million in fiscal
2001, 2000 and 1999. At September 30, 2000, 1999, and 1998, the amount of
dividends in arrears on the preferred shares was $19.3 million ($37.41 per
share), $25.9 million ($50.16 per share) and $33.0 million ($63.88 per share).
34. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST
Year Ended September 30, 2001
----------------------------------------------------------------------
(In thousands, except per share amounts) December March June September
- ---------------------------------------- ---------------- ---------------- ---------------- ---------------
Real Estate Trust:
Total income $ 34,039 $ 36,461 $ 39,568 $ 32,884
Operating income (loss) 831 (804) 4,462 (3,948)
The Bank:
Interest income 198,582 201,031 194,011 193,231
Interest expense 113,018 109,799 101,457 98,470
Provision for loan losses (15,923) (18,016) (16,683) (17,230)
Other income 46,716 68,134 53,607 57,474
Operating income 18,653 36,772 30,080 28,788
Total Company:
Operating income 19,484 35,968 34,542 24,840
Income before minority interest 14,793 23,806 23,807 17,465
Net income 7,010 13,743 14,552 8,354
Net income per common share 1.17 2.57 2.73 1.45
- -----------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000
----------------------------------------------------------------------
(In thousands, except per share amounts) December March June September
- ---------------------------------------- ---------------- ---------------- ---------------- ---------------
Real Estate Trust:
Total income $ 28,434 $ 32,247 $ 37,020 $ 35,157
Operating income (loss) (4,060) (1,886) 2,221 (196)
The Bank:
Interest income 168,751 178,288 192,926 196,694
Interest expense 87,374 92,166 104,242 110,618
Provision for loan losses (10,988) (12,774) (10,760) (15,408)
Other income 32,170 30,540 43,468 48,081
Operating income 16,758 13,352 25,901 25,261
Total Company:
Operating income 12,698 11,466 28,122 25,065
Income before minority interest 9,081 8,364 19,587 17,102
Net income 1,679 1,368 10,898 8,412
Net income per common share 0.07 0.00 1.98 1.46
35. INDUSTRY SEGMENT INFORMATION - THE TRUST
Industry segment information with regard to the Real Estate Trust is presented
below. For information regarding the bank, please refer to the "Banking"
sections of the accompanying financial statements.
Year Ended September 30
-----------------------------------------------------
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
INCOME
Hotels $ 100,314 $ 95,381 $ 78,914
Office and industrial properties 40,399 34,341 24,289
Other 2,239 3,136 2,822
---------------- ---------------- ----------------
$ 142,952 $ 132,858 $ 106,025
================ ================ ================
OPERATING PROFIT (LOSS)
Hotels $ 24,896 $ 27,013 $ 21,167
Office and industrial properties 21,805 19,380 11,465
Other 9,354 9,487 7,255
---------------- ---------------- ----------------
56,055 55,880 39,887
Gain (loss) on sales of property 11,077 994 --
Interest and debt expense (50,634) (45,974) (39,585)
Advisory fee, management and leasing fees - related parties (11,762) (11,013) (9,431)
General and administrative (4,195) (3,808) (1,162)
---------------- ---------------- ----------------
Operating profit ( loss) $ 541 $ (3,921) $ (10,291)
================ ================ ================
IDENTIFIABLE ASSETS (AT YEAR END)
Hotels $ 189,170 $ 151,615 $ 146,585
Office and industrial properties 114,270 105,493 73,613
Other 144,690 173,756 144,873
---------------- ---------------- ----------------
$ 448,130 $ 430,864 $ 365,071
================ ================ ================
DEPRECIATION
Hotels $ 11,840 $ 8,932 $ 7,708
Office and industrial properties 6,742 5,326 4,753
Other 18 51 47
---------------- ---------------- ----------------
$ 18,600 $ 14,309 $ 12,508
================ ================ ================
CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS
Hotels $ 12,406 $ 37,681 $ 40,803
Office and industrial properties 23,180 32,947 5,249
Other 3,495 3,805 935
---------------- ---------------- ----------------
$ 39,081 $ 74,433 $ 46,987
================ ================ ================
36. CONDENSED FINANCIAL STATEMENTS - THE TRUST
These condensed financial statements reflect the Real Estate Trust and all its
consolidated subsidiaries except for the bank which has been reflected on the
equity method.
CONDENSED BALANCE SHEETS
September 30
------------------------------------
(In thousands) 2001 2000
- ------------------------------------------------------------ ------------------------------------
ASSETS
Income-producing properties $ 414,643 $ 362,433
Accumulated depreciation (131,659) (124,184)
------------------------------------
282,984 238,249
Land parcels 40,835 39,716
Construction in progress 15,681 49,096
Equity investment in bank 345,241 316,114
Cash and cash equivalents 13,860 18,129
Note receivable and accrued interest -- related party 7,787 11,787
Other assets 86,983 73,887
------------------
------------------
TOTAL ASSETS $ 793,371 $ 746,978
====================================
LIABILITIES
Mortgage notes payable $ 325,750 $ 307,214
Notes payable - secured 202,500 200,000
Notes payable - unsecured 50,717 47,463
Deferred gains - real estate 113,045 112,834
Accrued dividends payable - preferred shares of beneficial interest 19,303 25,885
Other liabilities and accrued expenses 36,874 44,971
------------------------------------
Total liabilities 748,189 738,367
------------------------------------
TOTAL SHAREHOLDERS' DEFICIT* 45,182 8,611
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 793,371 $ 746,978
====================================
* See Consolidated Statements of Shareholders' Deficit
CONDENSED STATEMENTS OF OPERATIONS
For the Year Ended September 30
-------------------------------------------------------
(In thousands) 2001 2000 1999
- ------------------------------------------------------------ ------------------ ------------------------------------
Total income $ 142,952 $ 132,858 $ 106,025
Total expenses (161,802) (145,484) (121,676)
Equity in earnings of unconsolidated entities 8,314 7,711 5,360
Gain on sales of property 11,077 994 --
------------------ ------------------------------------
Real estate operating income (loss) 541 (3,921) (10,291)
Equity in earnings of bank 43,597 25,193 30,416
------------------ ------------------------------------
Total company operating income 44,138 21,272 20,125
Income tax provision (benefit) 479 (1,251) (3,345)
------------------ ------------------------------------
Income before extraordinary item 43,659 22,523 23,470
Extraordinary item: loss on early extinguishment of debt -- (166) --
------------------ ------------------------------------
TOTAL COMPANY NET INCOME $ 43,659 $ 22,357 $ 23,470
================== ====================================
CONDENSED STATEMENTS OF CASH FLOWS
For the Year Ended September 30
-------------------------------------------------------
(In thousands) 2001 2000 1999
- ------------------------------------------------------------ ------------------ ------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 43,659 $ 22,357 $ 23,470
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 18,600 14,308 12,481
Gain on sales of property (11,077) (994) --
Early extinguishment of debt, net of taxes -- 166 --
Equity in earnings of bank (43,597) (25,193) (30,416)
(Increase) decrease in deferred tax asset 5,323 5,205 (803)
Decrease in accounts receivable and accrued income (9,301) (691) (3,046)
Increase (decrease) in accounts payable and accrued expenses (5,711) 1,892 3,346
(Increase) decrease in tax sharing receivable (1,889) (88) 3,794
Other 1,336 4,268 20,062
------------------ ------------------------------------
Net cash provided by (used in) operating activities (2,657) 21,230 28,888
------------------ ------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - properties (22,546) (54,915) (46,987)
Property acquisitions (16,535) (19,518) --
Property sales 19,702 1,897 --
Equity investment in bank -- (22,302) --
Note receivable and accrued interest repayments -- related party 4,000 3,750 1,500
Equity investment in unconsolidated entities 2,935 6,527 2,748
Other 3 (354) 2
------------------ ------------------------------------
Net cash used in investing activities (12,441) (84,915) (42,737)
------------------ ------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 80,788 165,248 53,498
Repayments of long-term debt (56,498) (86,140) (27,138)
Costs of obtaining financings (1,461) (2,651) (2,104)
Dividends paid - preferred shares of beneficial interest (12,000) (12,500) (6,500)
------------------ ------------------------------------
Net cash provided by financing activities 10,829 63,957 17,756
------------------ ------------------------------------
Net increase (decrease) in cash and cash equivalents (4,269) 272 3,907
Cash and cash equivalents at beginning of year 18,129 17,857 13,950
------------------ ------------------------------------
Cash and cash equivalents at end of year $ 13,860 $ 18,129 $ 17,857
================== ====================================
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. The term "Real Estate Trust" refers to B. F.
Saul Real Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The operations conducted by the Real Estate Trust are
designated as "Real Estate," while the business conducted by the bank and its
subsidiaries is identified by the term "Banking."
Financial Condition
Real Estate
The Real Estate Trust's investment portfolio at September 30, 2001 consisted
primarily of hotels, office projects, and land parcels. During fiscal 2001, the
Real Estate Trust added a 152-unit Hampton Inn and a 229-unit Courtyard by
Marriott to its hotel portfolio, which at year-end included 18 properties
containing 3,578 available rooms. Also during fiscal 2001, the Real Estate Trust
acquired a 150,000 square foot office/warehouse building and developed a
single-story building containing 54,000 square feet of gross leasable area.
Overall, the hotel portfolio experienced an average occupancy rate of 66% and an
average room rate of $94.32 during fiscal 2001, compared to an average occupancy
of 71% and an average room rate of $89.16 during the prior year. For the 15
hotels owned throughout both periods, the average occupancies were 66% and 71%,
and the average rates were $93.01 and $89.70. REVPAR (revenue per available
room) for the 15 hotels was $61.33 for fiscal 2001, a 3.9% decrease from REVPAR
for fiscal 2000 of $63.83.
The Real Estate Trust was directly affected by the terrorist attacks of
September 11 because of its concentration of hotels in the Washington, DC
metropolitan area, one of the sites of the attacks. Eleven of the Real Estate
Trust's eighteen hotels are located in the Washington, DC metropolitan area. In
addition, five of these eleven hotels are within minutes from either Washington
Reagan National Airport or Dulles International Airport, and thus, were more
directly affected by the sharp decline in air travel. The two hotels located
close to Reagan National were especially affected by Reagan National's prolonged
closure and current limited flight schedule.
The sharp reduction in travel following the terrorist attacks has resulted in
declines in REVPAR and average occupancy during fiscal 2001 as compared to
fiscal 2000. Our REVPAR in September and October was down 32.21% and 29.40%,
respectively, from the same months last year. Since the September 11 tragedy,
the hotels' occupancy, as well as the occupancy of the hotel industry in
general, has continued to be lower on a year over year basis. The average
occupancy in September and October was down 27.56% and 20.52%, respectively,
from the same months last year.
The Real Estate Trust has developed strategies to manage its hotel operations
through this downturn. The Real Estate Trust has focused on reducing its direct
operating expenses related to the hotels and has reevaluated its hotel capital
expenditure budget for 2002.
Office space in the Real Estate Trust's office property portfolio was 92% leased
at September 30, 2001, compared to a leasing rate of 98% at September 30, 2000.
At September 30, 2001, the Real Estate Trust's office property portfolio
consisted of 11 properties and had a total gross leasable area of 1,797,000
square feet, of which 247,000 square feet (13.8%) and 209,000 square feet
(11.7%) are subject to leases expiring in fiscal 2002 and fiscal 2003.
Banking
General. The bank's assets grew to $11.4 billion during fiscal 2001, an increase
of $703 million from fiscal 2000. The bank recorded operating income of $114.3
million during fiscal 2001, compared to operating income of $81.3 million during
fiscal 2000. The increase in income for fiscal 2001 was attributable to a $21.9
million increase in net interest income, a $32.9 million increase in servicing
and securitization income, a $10.3 million gain on other investment and a $13.2
million increase in deposit service fees. Partially offsetting the increase in
income were a $42.6 million increase in operating expenses, and a $17.9 million
increase in the provision for loan and lease losses. See "Banking - Results of
Operations."
Servicing and securitization income increased $32.9 million, or 89.4%, during
fiscal 2001 primarily as a result of increased securitization activity. During
fiscal 2001, the bank securitized and sold $804.9 million of automobile loan
receivables and recognized a gain of $27.9 million compared to securitization of
$668.1 million for a gain of $4.6 million fiscal 2000. See Summary Of
Significant Accounting Policies - The bank and Note 15 to the Consolidated
Financial Statements in this report. See "Liquidity." The bank recognized a net
unrealized loss of $0.1 million during fiscal 2001 on its interest-only strips
receivables and a net unrealized gain of $2.6 million on interest-only strips
receivables during fiscal 2000. In addition, amortization of interest-only
strips receivable related to prior sales of loans totaled $2.8 million during
fiscal 2001 compared to $7.3 million during fiscal 2000.
Real estate owned, net of valuation allowances, decreased from $48.5 million at
September 30, 2000 to $30.8 million at September 30, 2001. This reduction was
primarily due to sales in the Communities and other properties and to provisions
for losses, partially offset by capitalized costs. See "Banking - Asset
Quality - REO."
At September 30, 2001, the bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.44%, 5.44%, 6.84% and 10.52%,
respectively. The bank's capital ratios exceeded regulatory requirements as well
as the standards established for well-capitalized institutions under OTS prompt
corrective action regulations. See "Banking - Capital."
During fiscal 2001, the bank declared and paid, out of the retained earnings of
the bank, cash dividends on its Common Stock in the aggregate amount of $1,600
per share. Subsequent to September 30, 2001, the bank declared and paid, out of
the retained earnings of the bank, cash dividends on its Common Stock in the
amount of $500 per share.
The bank's assets are subject to review and classification by the OTS upon
examination. The OTS concluded its most recent examination of the bank in March
2001.
Although the bank does not have any significant exposure to the industries
directly affected by the tragic events of September 11, 2001, those events have
exacerbated what was already a weakening U.S. economy, the effects of which may
be experienced well into 2002. As a result, the credit quality of the bank's
loan and lease portfolio may decline from the levels reported at September 30,
2001.
Asset Quality. Non-Performing Assets. The bank's level of non-performing assets
decreased during fiscal 2001. The following table sets forth information
concerning the bank's non-performing assets at the dates indicated. The figures
shown are after charge-offs and, in the case of real estate acquired in
settlement of loans, after all valuation allowances.
Non-Performing Assets
(Dollars in thousands)
September 30,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- -------------- -------------- -------------
Non-performing assets:
Non-accrual loans:
Residential $ 7,314 5,171 $ 4,756 $ 8,106 $ $ 9,617
Real estate and construction and ground - 70 - - -
------------- ------------- -------------- -------------- -------------
Total non-accrual real estate loans 7,314 5,241 4,756 8,106 9,617
Commercial - - 269 - -
Subprime automobile 13,379 12,026 6,640 3,563 3,154
Other consumer 7,028 5,399 1,607 938 1,072
------------- ------------- -------------- -------------- -------------
Total non-accrual loans (1) 27,721 22,666 13,272 12,607 13,843
------------- ------------- -------------- -------------- -------------
Real estate acquired in settlement of loans 115,931 129,213 133,157 218,972 231,407
Allowance for losses on real estate acquired in
settlement of loans (85,152) (80,752) (84,405) (153,564) (140,738)
------------- ------------- -------------- -------------- -------------
Real estate acquired in settlement of loans, net 30,779 48,461 48,752 65,408 90,669
------------- ------------- -------------- -------------- -------------
Total non-performing assets 58,500 71,127 62,024 78,015 104,512
Accruing loans past due 90 days (2) (3) - - - - 25,700
------------- ------------- -------------- -------------- -------------
Total non-performing assets and accruing loans past
due 90 days $ 58,500 71,127 $ 62,024 $ 78,015 $ $ 130,212
============= ============= ============== ============== =============
Troubled debt restructurings $ - - $ 11,714 $ 11,800 $ $ 11,861
============= ============= ============== ============== =============
Allowance for losses on loans and leases $ 63,018 54,018 $ 58,139 $ 60,157 $ $ 105,679
Allowance for losses on real estate held for investment 202 202 202 202 198
Allowance for losses on real estate acquired in
settlement of loans 85,152 80,752 84,405 153,564 140,738
------------- ------------- -------------- -------------- -------------
Total allowances for losses $ 148,372 134,972 $ 142,746 $ 213,923 $ $ 246,615
============= ============= ============== ============== =============
Interest income recorded
Non-accrual assets $ 358 4 $ 17 $ 38 $ $ 441
============= ============= ============== ============== =============
Restructured loans $ - 340 $ 229 $ 367 $ $ 265
============= ============= ============== ============== =============
Interest income that would have been recorded had the
loans been current in accordance with their original
terms
Non-accrual assets $ 3,321 2,434 $ 1,769 $ 1,081 $ $ 5,692
============= ============= ============== ============== =============
Restructured loans $ - 1,323 $ 1,261 $ 1,244 $ $ 1,244
============= ============= ============== ============== =============
- --------------------------------------------------------------------------------------------------------------------------------
(1) Before deduction of allowances for losses.
(2) The bank sold its credit card portfolio and
related operations on September 30, 1998.
(3) Effective June 30, 1997, the bank stopped
placing credit card loans on non-accrual
status.
Non-Performing Assets (Continued)
September 30,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------ -------------- -------------- -------------
Ratios:
Non-performing assets and accruing credit card
loans past due 90 days, net to total
assets (1) (2) N/M 0.16% 0.04% 0.26% 0.40%
Allowance for losses on real estate loans to
non-accrual real estate loans (3) 70.86% 205.76% 361.35% 204.18% 99.81%
Allowance for losses on consumer loans to
non-accrual consumer and other loans (3)(4) 230.55% 208.49% 440.52% 758.08% 148.37%
Allowance for losses on loans and leases to
non-accrual loans (3) 227.33% 238.32% 438.06% 477.17% 763.41%
Allowance for losses on loans and leases to
total loans and leases receivable (5) 0.73% 0.65% 0.90% 2.17% 4.14%
Non-performing assets include non-accrual loans, non-accrual real estate held
for investment, and REO, acquired either through foreclosure or deed-in-lieu of
foreclosure, or pursuant to in-substance foreclosure. Non-accrual loans consist
of loans contractually past due 90 days or more or with respect to which other
factors indicate that full payment of principal and interest is unlikely.
Non-performing assets totaled $58.5 million, after valuation allowances on REO
of $85.2 million, at September 30, 2001, compared to $71.1 million, after
valuation allowances on REO of $80.8 million, at September 30, 2000. The bank
also maintained valuation allowances of $63.0 million and $54.0 million on its
loan and lease portfolio at September 30, 2001 and 2000, respectively. The $12.6
million decrease in non-performing assets reflected a net decrease in REO of
$17.7 million which was partially offset by an increase in non-accrual loans of
$5.1 million.
Non-accrual Loans. The bank's non-accrual loans totaled $27.7 million at
September 30, 2001, an increase from $22.6 million at September 30, 2000. At
September 30, 2001, non-accrual loans consisted of $7.3 million of non-accrual
real estate loans and $20.4 million of non-accrual subprime automobile and other
consumer loans compared to non-accrual real estate loans of $5.2 million and
non-accrual subprime automobile and other consumer loans of $17.4 million at
September 30, 2000.
REO. At September 30, 2001, the bank's REO totaled $30.8 million, after
valuation allowances on such assets of $85.2 million as set forth in the
following table:
Balance Balance
Number of Before After Percent
Properties Gross Charge-offs Valuation Valuation Valuation of
Balance Allowances Allowances Allowances Total
------------- ----------- ---------- --------------- ---------------- ---------------- ----------
(Dollars in thousands)
Communities 4 $137,722 $32,509 $105,213 $79,833 $25,380 82.5%
Residential ground 2 3,607 - 3,607 1,689 1,918 6.2%
Commercial ground 1 9,499 2,732 6,767 3,630 3,137 10.2%
Single-family
residential
properties 2 397 53 344 - 344 1.1%
------------- ----------- ---------- --------------- --------------- ---------------- ----------
Total REO 9 $151,224 $35,294 $115,931 $85,152 $30,779 100.0%
============= =========== ========== =============== =============== ================ ==========
During fiscal 2001, REO decreased $17.7 million, primarily as a result of sales
in the Communities and other properties and additional provisions for losses,
but partially offset by an increase in the bank's ownership interest in two of
the Communities and additional capitalized costs.
During fiscal 2001, the bank received revenues of $34.9 million resulting from
dispositions of 332 residential lots or units in the Communities ($16.4
million), approximately 25.0 acres of commercial land in the Communities ($7.3
million), one commercial permanent property ($9.7 million) and various
single-family residential properties ($1.5 million). In addition, the bank
provided $4.2 million for losses on one of its properties. During fiscal
2001, the bank also purchased from investors additional interests in two of the
Communities for $5.7 million. The bank's ownership interest in one of the
Communities increased from 90% to 100% and in the other community from 84% to
91% as a result of the purchases.
The bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in a manner which will best preserve the value of
the bank's assets. The bank's ability to achieve this objective will depend on a
number of factors, some of which are beyond its control, such as the general
economic conditions in the Washington, DC metropolitan area.
The principal component of REO consists of the four Communities, all of which
are under active development. At September 30, 2001, two of the active
Communities had 543 remaining residential lots, of which 463 lots, or 85.3%,
were under contract and pending settlement. The four active Communities had
approximately 197 remaining acres of land designated for commercial use, of
which 5.34 acres, or 2.7%, were under contract and pending settlement. In
addition, at September 30, 2001, the bank was engaged in discussions with
potential purchasers regarding the sale of additional residential units and
retail land.
The following chart provides historical sales information regarding the four
remaining Communities:
Residential Lots Commercial Ground (Acres)
---------------- -------------------------
Under Under
Property Location Total Sold Contract Total Sold Contract
- ---------------------------- ---------------- --------------- --------------- ---------------- ---------------- -------------
Loudoun County, VA 5,051 4,182 463 213.00 42.00 --
Loudoun County, VA 2,042 2,042 -- 31.00 10.00 --
Montgomery County, MD 1,805 1,789 -- 71.15 67.55 3.60
Loudoun County, VA 4,352 4,352 -- 116.02 114.28 1.74
---------------- --------------- --------------- ---------------- ---------------- -------------
Total 13,250 12,365 463 431.17 233.83 5.34
================ =============== =============== ================ ================ =============
The bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
During fiscal 2001, the bank capitalized interest in the amount of $2.0 million
relating to its four active Communities.
The bank will continue to monitor closely its major non-performing and potential
problem assets in light of current and anticipated market conditions. The bank's
asset workout group focuses its efforts in resolving these problem assets as
expeditiously as possible.
Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. At
September 30, 2001 and 2000, none of the bank's assets were deemed by management
to be potential problem assets.
The bank's Watch List Committee meets quarterly and reviews all relationships in
Commercial Lending which are rated as vulnerable, criticized or classified with
commitments of $1.0 million and greater. This Committee reviews the current
status of each relationship, recent changes, performance against the correction
action plan presented at the prior meeting, and the current action plan to deal
with the relationship. On December 17, 2001, the Committee reviewed loans with
commitments of $49.6 million at September 30, 2001.
Delinquent Loans. At September 30, 2001, delinquent loans totaled $111.2
million, or 1.3% of loans, compared to $89.4 million, or 1.1% of loans, at
September 30, 2000. The following table sets forth information regarding the
bank's delinquent loans at September 30, 2001.
Principal Balance
(Dollars in Thousands)
-------------------------------------------------------------------------------------
Subprime Other Total as a
Real Estate Automobile Consumer Loans Percentage
Loans Loans Total of Loans(1)
------------------ -------------------- ----------------- ---------------- -----------------
Loans delinquent for:
30-59 days...... $ 13,755 $ 55,385 $ 17,132 $86,272 1.0%
60-89 days...... 2,209 17,285 5,385 24,879 0.3%
-----------------
------------------ -------------------- ----------------- ----------------
Total............ $ 15,964 $ 72,670 $ 22,517 $111,151 1.3%
================== ==================== ================= ================ =================
- -----------------------
(1) Includes loans held for sale and/or securitization, before deduction
of valuation allowances, unearned premiums and discounts and deferred
loan origination fees (costs).
Real estate loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity loans. Total
delinquent real estate loans increased to $16.0 million at September 30, 2001,
from $7.2 million at September 30, 2000, largely as a result of deteriorating
economic conditions.
Total delinquent subprime automobile loans increased to $72.7 million at
September 30, 2001, from $68.1 million at September 30, 2000. On November 9,
2000, the bank stopped the origination of subprime automobile loans. The bank
continues its collection efforts on the existing loan portfolio.
Other consumer loans delinquent 30-89 days increased to $22.5 million at
September 30, 2001 from $14.1 million at September 30, 2000, largely as a result
of deteriorating economic conditions.
Troubled Debt Restructurings. A troubled debt restructuring occurs when the bank
agrees to modify significant terms of a loan in favor of a borrower experiencing
financial difficulties. The bank had no troubled debt restructurings at
September 30, 2001 and 2000.
Real Estate Held for Investment. At September 30, 2001 and 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 years indicated and may
include charge-offs taken against assets which the bank disposed of during such
years.
Analysis of Allowance for and Charge-offs of Loans and Leases
(Dollars in thousands)
Year Ended September 30,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
Balance at beginning of year $ 54,018 $ 58,139 $ 60,157 $ 105,679 $ 95,523
-------------- -------------- -------------- -------------- --------------
Provision for loan and lease losses 67,852 49,930 22,880 150,829 125,115
-------------- -------------- -------------- -------------- --------------
Increase due to acquisition of loans - - - - 118
-------------- -------------- -------------- -------------- --------------
Reduction due to sale of credit card portfolio - - - (87,609) -
-------------- -------------- -------------- -------------- --------------
Charge-offs:
Single family residential and home equity (786) (807) (617) (1,629) (1,014)
Commercial real estate and multifamily - (7,120) - - -
Credit card - - - (108,289) (115,835)
Subprime automobile (49,749) (40,110) (21,169) (7,298) (3,309)
Other (17,685) (10,847) (4,988) (5,436) (6,348)
-------------- -------------- -------------- -------------- --------------
Total charge-offs (68,220) (58,884) (26,774) (122,652) (126,506)
-------------- -------------- -------------- -------------- --------------
Recoveries (1):
Single family residential and home equity 80 78 85 49 34
Credit card - - - 12,732 10,365
Subprime automobile 7,104 3,074 744 297 104
Other 2,184 1,681 1,047 832 926
-------------- -------------- -------------- -------------- --------------
Total recoveries 9,368 4,833 1,876 13,910 11,429
-------------- -------------- -------------- -------------- --------------
Charge-offs, net of recoveries (58,852) (54,051) (24,898) (108,742) (115,077)
-------------- -------------- -------------- -------------- --------------
Balance at end of year $ 63,018 $ 54,018 $ 58,139 $ 60,157 $ 105,679
============== ============== ============== ============== ==============
Provision for loan and lease losses to average
loans and leases (2) 0.78% 0.66% 0.48% 5.43% 3.50%
Net loan and lease charge-offs to average loans
and leases (2) 0.68% 0.71% 0.52% 3.92% 3.22%
Ending allowance for losses on loans and leases to
total loans and leases (2) (3) 0.73% 0.65% 0.90% 2.17% 4.15%
(1) Includes proceeds received from the sale of charged-off loans.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of allowance for losses.
Components of Allowance for Losses on Loans and Leases by Type
(Dollars in thousands)
September 30,
--------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------- --------------------- --------------------- --------------------- ----------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
-------- ------------ --------- ----------- --------- ----------- --------- ----------- --------- ------------
Balance at end
of year allocated
to:
Single family
residential $ 2,686 55.9 % $ 2,686 60.3 % $ 3,187 63.4 % $ 1,822 65.7 % $ 661 33.2 %
Home equity 448 4.4 448 3.3 947 3.7 676 4.9 683 3.7
Commercial real
estate and
multifamily 197 0.4 893 0.5 10,580 0.9 10,828 2.7 7,705 2.1
Real estate
construction and
ground 1,852 3.1 4,757 3.6 2,472 3.5 3,225 3.9 550 2.2
Commercial 9,135 9.0 6,904 7.2 4,623 6.1 3,623 6.3 364 3.9
Credit card - - - - - - - - 89,446 42.3
Automobile loans 7,034 7.5 6,034 9.5 3,334 11.1 3,034 4.4 340 4.4
Automobile leases 6,000 13.1 1,500 6.8 - 1.7 - - - -
Subprime automobile 32,000 4.9 28,782 7.4 28,782 7.4 26,010 8.5 2,740 4.6
Home improvement
and related loans 1,523 1.3 1,523 1.0 3,523 1.7 3,403 2.4 2,415 2.2
Overdraft lines of
credit and other
consumer 491 0.4 491 0.4 691 0.5 1,674 1.2 775 1.4
Unallocated 1,652 - - - - - 5,862 - - -
--------- --------- --------- --------- ---------
Total $ 63,018 $ 54,018 $ 58,139 $ 60,157 $105,679
========= ========= ========= ========= =========
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)
Year Ended September 30,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------- ------------ ------------- ------------
Balance at beginning of year:
Real estate held for investment $ 202 $ 202 $ 202 $ 198 $ 191
Real estate held for sale 92,179 95,832 164,991 146,135 126,519
------------ ------------- ------------ ------------- ------------
Total 92,381 96,034 165,193 146,333 126,710
------------ ------------- ------------ ------------- ------------
Provision for real estate losses:
Real estate held for investment - - - 4 7
Real estate held for sale 4,200 1,400 - 18,856 19,616
------------ ------------- ------------ ------------- ------------
Total 4,200 1,400 - 18,860 19,623
------------ ------------- ------------ ------------- ------------
Charge-offs, net of recoveries :
Real estate held for sale:
Residential ground - (64) (1,703) - -
Commercial ground - (3,397) - (6,030) (5,397)
Communities 200 (1,592) (67,456) - -
------------ ------------- ------------ ------------- ------------
Total net (charge-offs) recoveries 200 (5,053) (69,159) - -
------------ ------------- ------------ ------------- ------------
Total (charge-offs) recoveries on real estate
held for investment or sale 200 (5,053) (69,159) - -
------------ ------------- ------------ ------------- ------------
Balance at end of year:
Real estate held for investment 202 202 202 202 198
Real estate held for sale 96,579 92,179 95,832 164,991 146,135
------------ ------------- ------------ ------------- ------------
Total $ 96,781 $ 92,381 $ 96,034 $ 165,193 $ 146,333
============ ============= ============ ============= ============
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)
September 30,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------- ------------ ------------- ------------
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202 $ 202 $ 198
------------ ------------- ------------ ------------- ------------
Allowance for losses on real estate held for sale:
Residential ground 1,689 1,689 1,520 3,123 1,040
Commercial ground 3,631 3,631 5,800 5,800 6,793
Communities 79,832 75,432 77,085 144,641 132,905
------------ ------------- ------------ ------------- ------------
Total 85,152 80,752 84,405 153,564 140,738
------------ ------------- ------------ ------------- ------------
Total allowance for losses on real
estate held for investment or sale $ 85,354 $ 80,954 $ 84,607 $ 153,766 $ 140,936
============ ============= ============ ============= ============
The bank maintains valuation allowances for estimated losses on loans and leases
and real estate. The bank's total valuation allowances for losses on loans and
leases and real estate held for investment or sale increased to $148.4 million
at September 30, 2001, from $135.0 million at September 30, 2000. The $13.4
million increase was primarily attributable to increased valuation allowances on
the automobile and subprime automobile loan portfolios as well as additional
valuation on the REO Communities. The increase in valuation allowances for the
current fiscal year reflects the deterioration in general economic conditions
and resulting increasing levels of delinquencies and charge-offs in the bank's
non-commercial loan portfolios. Management reviews the adequacy of the valuation
allowances on loans and leases and real estate using a variety of measures and
tools including historical loss performance, delinquent status, current economic
conditions, internal risk ratings and current underwriting policies and
procedures. Using this analysis, management determines a range of acceptable
valuation allowances. Management believes that the overall level of the
allowance is appropriate.
The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $90.5 million at September 30, 2001, which
constituted 73.5% of total non-performing real estate assets before valuation
allowances. This amount represented a $0.8 million increase from the September
30, 2000 level of $89.7 million, or 66.7% of total non-performing real estate
assets before valuation allowances at that date.
When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change,
it may be necessary to provide additional valuation allowances based on new
information. The allowance for losses on real estate held for sale at September
30, 2001 is in addition to approximately $35.3 million of cumulative charge-offs
previously taken against assets remaining in the bank's portfolio at September
30, 2001.
The bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans, including the Communities. As a result of such
updated appraisals, the bank could be required to increase its valuation
allowances. The bank may also increase its allowances for losses after
considering local market conditions, including the bank's efforts to sell
individual properties or portions of properties. In addition to ongoing sales of
lots, management periodically receives and reviews offers to purchase various
parcels of these Communities. If information is deemed credible and can be
supported with market comparables, additional allowances for losses may be
provided.
Consistent with regulatory requirements, the bank performs ongoing real estate
evaluations for all REO as a basis for substantiating the carrying values in
accordance with accounting principles generally accepted in the United States.
As indicated, as of September 30, 2001, the bank's REO consisted primarily of
residential Communities under active development. As a part of its development
activities, the bank maintains and updates real estate project evaluations in
accordance with regulatory requirements which include analyses of lot and
acreage sales, status and budgets for development activities and consideration
of project market trends. These real estate evaluations are reviewed
periodically as part of management's review and evaluation of the carrying
values of REO. Following a review of the real estate assets and the related
carrying values, management reports its actions to the bank's board of
directors.
The allowance for losses on consumer loans and leases, including automobile,
home improvement, overdraft lines of credit and other consumer loans, increased
to $47.0 million at September 30, 2001 from $38.3 million at September 30, 2000.
Net charge-offs of subprime automobile loans for fiscal 2001 were $42.6 million,
compared to $37.0 million for fiscal 2000 primarily due to adverse trends in
delinquencies related to the deterioration of general economic conditions. On
November 9, 2000, the bank stopped the origination of subprime automobile loans.
Asset and Liability Management. A key element of banking is the monitoring and
management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mix, volume and maturity to stabilize the net
interest spread is referred to as asset and liability management. The objective
of asset and liability management is to maximize the net interest yield within
the constraints imposed by prudent lending and investing practices, liquidity
needs and capital planning.
The bank's assets and liabilities are inherently sensitive to changes in
interest rates. These movements can result in variations to the overall level of
income and market value of equity. Based on the characteristics of a specific
asset or liability (including maturity, repricing frequency and interest rate
caps) a change in interest rates can significantly affect the contribution to
net income and market value for the instrument. If, in the aggregate, the bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the bank is termed "asset sensitive" and will tend to experience
increased income and market value during periods of rising interest rates and
declining income and market value during periods of falling interest rates.
Conversely, if the bank's liabilities mature or reprice more quickly or to a
greater extent than its assets, the bank is termed "liability sensitive" and
will tend to experience decreased income and market value during periods of
rising interest rates and increased income and market value during periods of
falling interest rates.
The bank pursues an asset-liability management strategy designed both to control
risk from changes in market interest rates and to maximize interest income in
its loan and lease portfolio. To achieve this strategy, the bank emphasizes the
origination and retention of a mix of both adjustable-rate and fixed-rate loan
products.
Throughout fiscal 2001, the bank continued to originate and hold in its
portfolio adjustable rate loan products at a greater volume than those with
fixed interest rates. At September 30, 2001, adjustable-rate loans accounted for
48.5 % of total loans and leases, compared to 42.0% at September 30, 2000. This
increase was primarily due to increased originations of adjustable-rate mortgage
products, which typically reprice monthly and are tied to either an index based
on the one-year average Constant Maturity Treasury (or "CMT") for the previous
twelve months or one-month LIBOR and an increase in payoffs of fixed-rate
mortgage loans due to refinancing activity.
A traditional measure of interest-rate risk within the banking industry is the
interest sensitivity "gap," which is the sum of all interest-earning assets
minus all interest-bearing liabilities subject to repricing within the same
period. Gap analysis is a tool used by management to evaluate interest-rate risk
which results from the difference between repricing and maturity characteristics
of the bank's assets and those of the liabilities that fund them. By analyzing
these differences, management can attempt to estimate how changes in interest
rates affect the bank's future net interest income.
The bank views control over interest rate sensitivity as a key element in its
financial planning process and monitors interest rate sensitivity through its
forecasting system. The bank manages interest rate exposure and will narrow or
widen its gap depending on its perception of interest rate movements and the
composition of its balance sheet. For the reasons discussed above, the bank
might take action to narrow its gap if it believes that market interest rates
will experience a significant prolonged increase, and might widen its gap if it
believes that market interest rates will decline or remain relatively stable.
A number of asset and liability management strategies are available to the bank
in structuring its balance sheet. These include selling or retaining certain
portions of the bank's current residential mortgage loan production; altering
the bank's pricing on certain deposit products to emphasize or de-emphasize
particular maturity categories; altering the type and maturity of securities
acquired for the bank's investment portfolio when replacing securities following
normal portfolio maturation and turnover; lengthening or shortening the maturity
or repricing terms for any current period asset securitizations; and altering
the maturity or interest rate reset profile of borrowed funds, if any, including
funds borrowed from the FHLB of Atlanta.
The following table presents the interest rate sensitivity of the bank's
interest-earning assets and interest-bearing liabilities at September 30, 2001,
which reflects management's estimate of mortgage loan prepayments and
amortization and provisions for adjustable interest rates. Adjustable and
floating rate loans are included in the period in which their interest rates are
next scheduled to adjust, and prepayment rates are assumed for the bank's loans
based on recent actual experience. Statement savings and passbook accounts with
balances under $20,000 are classified based upon management's assumed attrition
rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW
accounts, are assumed to be subject to repricing within six months or less.
Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
-------------- ------------- -------------- --------------- ------------- --------------
As of September 30, 2001
Real estate loans:
Adjustable-rate $ 2,130,802 $ 236,154 $ 655,666 $ 339,071 $ 286,874 $ 3,648,567
Fixed-rate 80,005 75,107 247,803 182,950 575,934 1,161,799
Home equity credit lines and second
mortgages 310,704 13,917 41,884 26,751 66,138 459,394
Commercial 611,562 20,789 65,843 44,224 24,928 767,346
Consumer and other 525,411 376,175 944,159 158,062 40,600 2,044,407
Loans held for sale 246,083 - - - - 246,083
Loans held for securitization and sale 282,000 - - - - 282,000
Mortgage-backed securities 186,020 213,364 276,198 177,683 621,230 1,474,495
Trading securities 6,690 - - - - 6,690
Other investments 236,843 - 45,794 - - 282,637
-------------- ------------- -------------- --------------- ------------- --------------
Total interest-earning assets 4,616,120 935,506 2,277,347 928,741 1,615,704 10,373,418
Total non-interest earning assets - - - - 1,015,048 1,015,048
-------------- ------------- -------------- --------------- ------------- --------------
Total assets $ 4,616,120 $ 935,506 $ 2,277,347 $ 928,741 $ 2,630,752 $ 11,388,466
============== ============= ============== =============== ============= ==============
Deposits:
Fixed maturity deposits $ 1,667,956 $ 1,023,521 $ 276,612 $ 55,245 $ - $ 3,023,334
NOW, statement and passbook accounts 1,828,120 43,595 145,199 98,826 210,609 2,326,349
Money market deposit accounts 1,570,297 - - - - 1,570,297
Borrowings:
Capital notes - subordinated - - - 150,000 100,000 250,000
Other 926,004 9,331 1,231,938 301,066 54,842 2,523,181
-------------- ------------- -------------- --------------- ------------- --------------
Total interest-bearing liabilities 5,992,377 1,076,447 1,653,749 605,137 365,451 9,693,161
Minority interest - - - - 144,000 144,000
Total non-interest bearing liabilities - - - - 1,025,881 1,025,881
Stockholders' equity - - - - 525,424 525,424
-------------- ------------- -------------- --------------- ------------- --------------
Total liabilities and stockholders'
equity $ 5,992,377 $ 1,076,447 $ 1,653,749 $ 605,137 $ 2,060,756 $ 11,388,466
============== ============= ============== =============== ============= ==============
Gap $ (1,376,257) $ (140,941) $ 623,598 $ 323,604 $ 1,250,253
Cumulative gap $ (1,376,257) $ (1,517,198) $ (893,600) $ (569,996) $ 680,257
Adjusted cumulative gap as a percentage
of total assets (12.1)% (13.3)% (7.8)% (5.0)% 6.0 %
The bank's one-year gap as a percentage of total assets was negative 13.3% at
September 30, 2001, compared to negative 18.9% at September 30, 2000. The
improvement in the bank's one-year gap was attributable primarily to an increase
during fiscal year 2001 in origination and retention of adjustable-rate
mortgages, consumer loans, and commercial loans with repricing terms of one year
or less. The increase in assets with repricing characteristics of one year or
less was partially offset by an increase in fixed rate and non-contractual
deposits with similar maturities. The bank continues to consider a variety of
strategies to manage its interest rate risk position.
In addition to gap measurements, the bank measures and manages interest-rate
risk with the extensive use of computer simulation. This simulation includes
calculations of Market Value of Portfolio Equity and Net Interest Margin as
promulgated by the OTS's Thrift Bulletin 13a. Under this regulation,
institutions are required to establish limits on the sensitivity of their net
interest income and net portfolio value ("NPV") to parallel changes in interest
rates. Those changes in interest rates are defined as instantaneous and
sustained movements of interest rates in 100 basis point increments. In
addition, the bank is required to calculate its ratio of NPV to the present
value of total assets ("NPV Ratio") for each interest rate shock scenario. The
following table shows the estimated impact of parallel shifts in interest rates
at September 30, 2001, calculated in a manner consistent with the requirements
of TB 13a.
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Changes in Change in
(Basis Points) Net Interest Net Portfolio
Change in Interest Income(1) Value(2) NPV
Rates Ratio
------------------------------------- ------------------------------------------
Percent Amount Percent Amount
- ---------------------- -------------- ------------------ ----------------- -------------------- -------------
+ 200 0.56% $ 2,144 -15.14% $ (165,547) 8.39%
+ 100 2.01% 7,772 -7.64% (83,558) 8.95%
- 100 -3.98% (15,358) 4.23% 46,216 9.78%
- 200 -7.15% (27,580) 3.17% 34,669 9.59%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Represents the difference between net interest income for 12 months in a
stable interest rate environment and the various interest rate scenarios.
(2) Represents the difference between net portfolio value (NPV) of the bank's
equity in a stable interest rate environment and the NPV in the various rate
scenarios. The OTS defines NPV as the present value of expected net cash flows
from existing assets minus the present value of expected net cash flows from
existing liabilities plus the present value of expected net cash flows from
existing off-balance sheet contracts.
Computations of prospective effects of hypothetical interest rate changes are
based on many assumptions, including relative levels of market interest rates,
prepayments and deposit run-offs and therefore, should not be relied upon as
indicative of actual results. Certain limitations are inherent in these
computations. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react at different times and in
different degrees to changes in the market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets, such as
adjustable-rate mortgage loans, may have features which restrict interest rate
changes on a short-term basis and over the life of the asset. In the event of a
change in market interest rates, loan prepayments and early deposit withdrawal
levels could deviate significantly from those assumed in making the calculations
set forth above. Additionally, credit risk may increase if an interest rate
increase adversely affects the ability of borrowers to service their debt.
Inflation. The impact of inflation on the bank is different from the impact on
an industrial company because substantially all of the assets and liabilities of
the bank are monetary in nature. The most direct impact of an extended period of
inflation would be to increase interest rates and to place upward pressure on
the operating expenses of the bank. However, the actual effect of inflation on
the net interest income of the bank would depend on the extent to which the bank
was able to maintain a spread between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities, which would depend
to a significant extent on its asset-liability sensitivity. The effect of
inflation on the bank's results of operations for the past three fiscal years
has been minimal.
Deferred Taxes. At September 30, 2001, the bank recorded a net deferred tax
liability of $93.9 million, which generally represents the cumulative excess of
the bank's actual income tax liability over its income tax expense for financial
reporting purposes. The bank establishes a valuation allowance against gross
deferred tax assets to the extent the bank cannot determine that it is more
likely than not that such assets will be realized through taxes available in
carryback years, future reversals of existing taxable temporary differences or
projected future taxable income. A valuation allowance has been established to
reduce the gross deferred tax asset for state net operating loss carryforwards
to an amount that is considered more likely than not to be realized. The state
net operating losses relate primarily to costs associated with the support of
the bank's retail activities, most significantly its former credit card
operations. Having reduced these costs through the sale of its credit card
operations in 1998 and subsequent actions, management believes that the
likelihood that the bank will generate sufficient state taxable income to
utilize a significant portion of the state net operating losses before their
expiration beginning 2010 has increased since the prior period. As a result, the
valuation allowance has declined. See Note 32 to the Consolidated Financial
Statements in this report.
Capital. At September 30, 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 September 30,
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 $ 525,424
Minority interest in REIT Subsidiary (1) 144,000
Accumulated other comprehensive loss (2) 2,087
--------------
671,511
Adjustments for tangible and core capital:
Intangible assets (48,990)
Non-includable subsidiaries (3) (1,414)
Non-qualifying purchased/originated loan
servicing rights (3,592)
--------------
Total tangible capital 617,515 5.44% $ 170,348 1.50% $ 447,167 3.94%
-------------- ========== =============== ========== =============== =========
Total core capital (4) 617,515 5.44% $ 454,262 4.00% $ 163,253 1.44%
-------------- ========== =============== ========== =============== =========
Tier 1 risk-based capital (4) 617,515 6.84% $ 361,283 4.00% $ 256,232 2.84%
-------------- ========== =============== ========== =============== =========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and lease
losses 63,018
--------------
Total supplementary capital 313,018
--------------
Total available capital 930,533
Equity investments (3) (2,365)
--------------
Total risk-based capital (4) $ 928,168 10.52% $ 722,566 8.00% $ 205,602 2.52%
============== ========== =============== ========== =============== =========
(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 loss is included in
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%.
Under the OTS prompt corrective action regulations, an institution is
categorized as well capitalized if it has a leverage or core capital ratio of at
least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total
risk-based capital ratio of at least 10.0% and is not subject to any written
agreement, order, capital directive or prompt corrective action directive to
meet and maintain a specific capital level. At September 30, 2001, the bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 5.44%,
6.84% and 10.52%, respectively, which exceeded the ratios established for
well-capitalized institutions. The OTS may reclassify an institution from one
category to the next lower category, for example from well capitalized to
adequately capitalized, if, after notice and an opportunity for a hearing, the
OTS determines that the institution is in an unsafe or unsound condition or has
received and has not corrected a less than satisfactory examination rating for
asset quality, management, earnings or liquidity.
OTS capital regulations provide a five-year holding period, or such longer
period as may be approved by the OTS, for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the bank is unable to dispose of any REO property,
whether through bulk sales or otherwise, prior to the end of its applicable
five-year holding period and is unable to obtain an extension of the five-year
holding period from the OTS, the bank could be required to deduct the
then-current book value of such REO property from total risk-based capital. In
December 2001, the bank received from the OTS an extension of the holding
periods for certain of its REO properties through December 19, 2002. The
following table sets forth the bank's REO at September 30, 2001, after valuation
allowances of $85.2 million, by the fiscal year in which the property was
acquired through foreclosure.
Fiscal Year (In thousands)
----------- --------------------
1990 $ 5,134(1)(2)
1991 20,247(2)
1992 -
1993 -
1994 -
1995 5,054(2)
1996 -
1997 -
1998 -
1999 -
2000 -
2001 344
--------------------
Total REO $ 30,779
====================
- -----------------------------------------------------------------------------------------------------------
(1) Includes REO with an aggregate net book value of $2.4 million, which the
bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $28.1 million, for which
the bank received an extension of the holding periods through December 19, 2002.
Failure to obtain the REO extensions discussed above could adversely affect the
bank's regulatory capital ratios. The bank's ability to maintain or increase its
capital levels in future periods also will be subject to general economic
conditions, particularly in the bank's local markets. Adverse general economic
conditions or a downturn in local real estate markets could require further
additions to the bank's allowances for losses and further charge-offs. Any of
those developments would adversely affect the bank's earnings and thus its
regulatory capital levels. The bank has historically relied on preferred stock
and subordinated debt as significant components of its regulatory capital. Those
instruments require significant fixed payments to holders, which increase the
bank's expenses and make it more difficult for the bank to generate additional
core capital through retained earnings.
The OTS has amended its capital rules to increase the amount of capital the bank
will be required to maintain against certain of its residual interests. As of
September 30, 2001, the bank had $31.5 million in residual interests that would
be subject to dollar-for-dollar reduction from Tier 1 capital beginning December
31, 2001 under the amendments.
Failure by the Bank to remain well capitalized could have a material adverse
effect on certain aspects of the Bank's operations, including its ability to pay
dividends. See "Dividends and Other Capital Distributions."
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
The Real Estate Trust's cash flow from operating activities has been
historically insufficient to meet all of its cash flow requirements. The Real
Estate Trust's internal source 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
indebtedness, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financings, the sale of unsecured notes,
refinancing of maturing mortgage debt, proceeds from asset sales, and dividends
and tax sharing payments from the bank. For the foreseeable future, the Real
Estate Trust's ability to generate positive cash flow from operating activities
and to meet its liquidity needs, including debt service payments, repayment of
debt principal and capital expenditures, will continue to depend on these
available external sources. Dividends received from the bank are a component of
funding sources available to the Real Estate Trust. The availability and amount
of dividends in future periods is dependent upon, among other things, the bank's
operating performance and income, and regulatory restrictions on such payments.
The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods should enhance prospects for the Real
Estate Trust to receive tax sharing payments and dividends from the bank. During
fiscal 2001, the bank made tax sharing payments totaling $3.4 million and
dividend payments totaling $12.8 million to the Real Estate Trust. Tax sharing
and dividend payments received by the Real Estate Trust are presented as cash
flows from operating activities in the Consolidated Statements of Cash Flows.
Although the Real Estate Trust generated net income in fiscal 2001, in recent
years, the operations of the Real Estate Trust have generated net operating
losses while the bank has reported net income. The Trust's consolidation of the
bank's operations into the Trust's federal income tax return has resulted in the
use of the Real Estate Trust's net operating losses to reduce the federal income
taxes the bank would otherwise have owed. If in any future year, the bank has
taxable losses or unused credits, the Trust would be obligated to reimburse the
bank for the greater of (1) the tax benefit to the group using such tax losses
or unused tax credits in the group's consolidated federal income tax returns or
(2) the amount of the refund which the bank would otherwise have been able to
claim if it were not being included in the consolidated federal income tax
return of the group.
During fiscal 2001, the Real Estate Trust purchased either in the open market or
through dividend reinvestment approximately 452,000 shares of common stock of
Saul Centers, and as of September 30, 2001, owns approximately 3,029,000 shares
representing 21.1% of such company's outstanding common stock. As of September
30, 2001, the market value of these shares was approximately $57.6 million.
Substantially all of these shares have been pledged as collateral with the Real
Estate Trust's revolving credit lenders.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Partnership, the Real Estate Trust shares
in cash distributions from operations and from capital transactions involving
the sale of properties. The partnership agreement of Saul Holdings Partnership
provides for quarterly cash distributions to the partners out of net cash flow.
In fiscal 2001, the Real Estate Trust received total cash distributions of $6.5
million from Saul Holdings Partnership. Substantially all of the Real Estate
Trust's ownership interest in Saul Holdings Partnership has been pledged as
collateral with the Real Estate Trust's two revolving credit lenders.
In March 1998, the Trust issued $200.0 million aggregate principal amount of
9 3/4% Senior Secured Notes due 2008. These Notes are nonrecourse obligations of
the Trust and are secured by a first priority perfected security interest in
8,000 shares, or 80%, of the issued and outstanding common stock of the bank,
which constitute all of the bank common stock held by the Trust.
The Real Estate Trust is currently selling unsecured notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
unsecured notes. During fiscal 2001, the Real Estate Trust sold notes amounting
to $9.3 million at a weighted average interest rate of 9.7%. To the degree that
the Real Estate Trust does not sell new unsecured notes in an amount sufficient
to finance completely the scheduled repayment of outstanding unsecured notes as
they mature, it will finance such repayments from other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million revolving
credit line with an unrelated bank. This facility was for a two-year term
subject to extension for one or more additional one-year terms. In fiscal 1997,
the facility was increased to $20.0 million and was renewed for an additional
two-year period. In September 1999, this facility was increased to $50.0 million
and its term was set at three years with provisions for extending the term
annually. The current maturity date for this line is September 29, 2002. This
facility is secured by a portion of the Real Estate Trust's ownership in Saul
Holdings Partnership and Saul Centers. Interest is computed by reference to a
floating rate index. At September 30, 2001, the Real Estate Trust had
outstanding borrowings under the facility of $2.5 million and unrestricted
availability of $35.4 million. The Real Estate Trust is currently negotiating
modifications to this loan, including a one-year extension of the term of the
loan, with the lender. The Real Estate Trust anticipates that the amendments to
the loan will become effective in the second fiscal quarter of 2002.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank. This facility was for a one-year term, after
which any outstanding loan amount would amortize over a two-year period. During
fiscal 1997, 1998 and 2000, the line of credit was increased to $10.0, $20.0, and
$25.0 million. The current maturity date for this line is November 15, 2003.
This facility is secured by a portion of the Real Estate Trust's ownership in
Saul Holdings Partnership and Saul Centers. Interest is computed by reference to
a floating rate index. At September 30, 2001, the Real Estate Trust had no
outstanding borrowings and unrestricted availability was $22.8 million.
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 2001 for fiscal years commencing October 1, 2001 is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
--------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable -- Payable --
Year Notes Secured Unsecured Total
------------- --------- ----------- ----------- --------------
2002 $ 33,162 $ 2,500 $ 8,022 $ 43,684
2003 27,296 -- 11,681 38,977
2004 9,008 -- 11,482 20,490
2005 13,604 -- 8,157 21,761
2006 94,406 -- 5,523 99,929
Thereafter 148,274 200,000 5,852 354,126
--------- ----------- ----------- --------------
Total $325,750 $202,500 $ 50,717 $ 578,967
--------------------------------------------------------------
Of the $325.8 million of mortgage notes outstanding at September 30, 2001,
$258.6 million was nonrecourse to the Real Estate Trust.
In May 2001, the Real Estate Trust paid off its construction loan on Dulles
North Six with the proceeds of a $5.0 million permanent loan. The interest rate
is 7.88% and the term is 20 years. In July 2001, the Real Estate Trust closed a
$10.8 million permanent loan on the Sweitzer Lane office/warehouse building. The
interest rate is 7.98% and the term is 15 years. In August 2001, the Real Estate
Trust closed three permanent loans on its three Florida hotel properties. The
loans aggregate $16.1 million, have a 7.77% interest rate and a 10-year term.
From all of its permanent financings in fiscal 2001, the Real Estate Trust
obtained approximately $8.5 million in additional funds after construction loan
payoffs and expenses.
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 Tysons
Corner Holiday Inn in McLean, Virginia. The new hotel was franchised as a
Courtyard by Marriott and cost approximately $30.0 million. Financing of $25.0
million has been obtained for an initial period of three years with options for
two one-year extensions. This hotel opened for business on December 15, 2000.
On December 16, 1999, the Real Estate Trust purchased a 4.6 acre site located in
Cascades Town Center in Sterling, Virginia, for the purpose of constructing a
152-room Hampton Inn. The purchase price was $1.1 million and the seller was
Chevy Chase. Development costs for the hotel were $11.4 million. The hotel has
been financed with the proceeds of a $9.15 million mortgage loan, which has a
three-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 revolving credit
lines. The project is 100% leased to a single tenant. In July 2000, the Real
Estate Trust agreed to sell its interest in this project to Saul Centers at a
price of $4.2 million, as determined by an independent appraisal. The sale was
completed in October 2000 and the Trust recognized a current year gain of
$383,000 and 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 to be known as Loudoun Tech Phase I.
The cost of development was approximately $8.4 million and has been 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 was completed in
December 2000. No leases have been signed as yet for space in the building.
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 is known as Dulles North Four. Development costs are projected to
be $10.8 million and will be financed with the proceeds of a $9.5 million
construction loan, which has a three-year term, a floating interest rate and two
one-year renewal options. Construction of the base building has been completed.
The Real Estate Trust has obtained a tenant for the entire building and
occupancy is expected during the third quarter of fiscal 2002.
On November 15, 2000, the Real Estate Trust purchased a 19.1 acre land parcel in
Laurel, Maryland, which contains a 105,000 square foot office/warehouse building
know as Sweitzer Lane. The purchase price was $13.8 million and was financed
from the Real Estate Trust's revolving credit lines. The entire building has
been leased to Chevy Chase under a long-term agreement. As noted above, the Real
Estate Trust obtained permanent loan financing in July 2001 of $10.8 million.
On December 18, 2000, the Real Estate Trust sold its 124-unit San Simeon
apartment project in Dallas, Texas. The sales price was $3.1 million and the
Real Estate Trust recognized a gain of $2.2 million on the transaction. The
proceeds of the sales were used to acquire a 10.7 acre parcel of land in Loudoun
County, Virginia, for $2.8 million.
On June 13, 2001, the Real Estate Trust sold a 4.79 acre section of its Circle
75 land parcel located in Atlanta, Georgia for $3.0 million. The Real Estate
Trust recognized a gain of $2.4 million on this transaction.
On August 8, 2001, the Real Estate Trust sold Metairie Tower, a 91,000 square
foot office building located in Metairie, Louisiana for $7.2 million. The Real
Estate Trust recognized a gain of $5.2 million on this transaction.
On September 7, 2001, the Real Estate Trust sold 9.5 acres of its Commerce
Center land parcel located in Ft. Lauderdale, Florida for approximately $2.0
million, and recognized a gain of $245,000 on the transaction.
During fiscal 2001, the Real Estate Trust also received net proceeds of $2.0
million and recognized a gain of $620,000 from the condemnation of portions of
two land parcels in Colorado and Michigan.
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. The standard measure of liquidity in the savings industry is the
ratio of cash and short-term U.S. Government and other specified securities to
net withdrawable accounts and borrowings payable in one year or less. 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 primary sources of funds historically have consisted of:
o principal and interest payments on loans and mortgage-backed securities;
o savings deposits;
o sales of loans and trading securities;
o securitizations and sales of loans; and
o borrowed funds, including funds borrowed from the FHLB of Atlanta.
The bank's holdings of readily marketable securities constitute another
important source of liquidity. As of September 30, 2001, the estimated remaining
borrowing capacity, after market value and other adjustments, against that
portion of those assets that may be pledged to the FHLB of Atlanta and various
securities dealers totaled $1.4 billion. Assets available to be pledged to the
Federal Reserve bank of Richmond totaled $1.0 billion. A portion of these assets
may also be available to be pledged to the FHLB of Atlanta.
In addition, the bank from time to time accesses the capital markets as an
additional means of funding its operations and managing its capital ratios and
asset growth. Specifically, the bank has securitized financial assets, including
home equity, home loan and automobile loan receivables, as well as single-family
residential loans, because the securitizations provide the bank with a source
of financing at competitive rates and assist the bank in maintaining compliance
with regulatory capital requirements. Additionally, the securitizations have
permitted the bank to limit the credit risk associated with these assets while
continuing to earn servicing fees and other income associated with the
securitized assets.
Since 1988, the bank has securitized approximately $14.5 billion of loan
receivables. These transactions depend on sophisticated back-office systems to
service complex securitization structures and on personnel with the experience
to design, install and manage those systems. At September 30, 2001, the bank
continues to service $91.7 million, $1.2 billion and $57.6 million of
securitized home equity, automobile and home loan receivables, respectively.
Chevy Chase derives fee-based income from servicing these securitized
portfolios. However, that fee-based income has been adversely affected in prior
periods by increases in delinquencies and charge-offs related to the receivables
placed in these securitized pools.
The bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust, which holds the receivables and issues the
asset-backed certificates, and ultimately the risk of repayment is transferred
to the holders of those certificates. The bank retains risk with respect to the
assets transferred to the trust only to the extent that it retains recourse
based on the performance of the assets or holds certificates issued by the
trust, such as a seller certificate. In its securitizations, the bank typically
retains a limited amount of recourse through one or more means, most often
through the establishment of spread accounts. Other structures, such as
overcollateralization of receivables or subordinated asset-backed certificates,
are occasionally used. Spread accounts are funded by initial deposits, if
required, and by amounts generated by the securitized assets over and above the
amount required to pay interest, defaults and other charges and fees on the
investors' interests in the securitization transaction. Because amounts on
deposit in the spread accounts are at risk depending upon performance of the
securitized receivables, those amounts represent recourse to the bank.
Under the OTS low-level recourse rule in effect during fiscal 2001, which sets
capital requirements for assets sold with recourse at the lower of the
applicable capital requirement or the amount of recourse retained, the bank
maintains dollar-for-dollar capital against the securitized assets in the amount
of the recourse retained up to the otherwise applicable capital requirement.
Even if defaults on outstanding receivables significantly exceed projected and
historical levels so that a pay out event is triggered, the immediate
consequence is that investors will begin receiving payments of principal from
the securitized assets earlier than originally scheduled. Even if payments are
insufficient to repay investors in full, the bank's assets are not exposed to
risk of loss beyond the relevant amount of recourse retained, including amounts
outstanding in the spread accounts and the amount of any overcollateralization
of receivables or subordinated interest, which, as noted above, constitute a
dollar-for-dollar capital requirement for the bank. The bank also retains risk
through the bank's interest in any seller certificate. Seller certificates share
collections on the securitized assets on an unsubordinated basis with the
investor certificates, unless and to the extent recourse is retained through an
express subordination, and are on-balance sheet assets against which the bank
must maintain capital. The OTS has amended its capital rules to increase the
amount of capital the bank is required to maintain against certain of its
residual interests for transactions that close on or after January 1, 2002.
The bank securitized and sold $804.9 million and $668.1 million of automobile
loan receivables during fiscal 2001 and 2000, respectively. At September 30,
2001 and 2000, the bank had $282.0 million and $70.0 million, respectively, of
automobile loan receivables held for securitization and sale. The proceeds from
the securitization and sale of home equity, automobile and home loan receivables
will continue to be a significant source of liquidity for the Bank.
As part of its operating strategy, the bank continues to explore opportunities
to sell assets and to securitize and sell mortgage, home equity, automobile and
home loan receivables and automobile leases to meet liquidity and other balance
sheet objectives.
The bank uses its liquidity primarily to meet its commitments to fund maturing
savings certificates and deposit withdrawals, fund existing and continuing loan
commitments, repay borrowings and meet operating expenses. During fiscal 2001,
the bank used the cash provided by operating, investing and financing activities
primarily to meet its commitments (i) to fund maturing savings certificates and
deposit withdrawals of $42.9 billion, (ii) repay borrowings, fund existing and
continuing loan commitments, including real estate held for investment or sale,
of $3.5 billion, (iii) purchase investments and loans of $2.0 billion and (iv)
meet operating expenses, before depreciation and amortization, of $371.3
million. These commitments were funded primarily through (i) proceeds from
customer deposits and sales of certificates of deposit of $43.4 billion, (ii)
proceeds, net of repayments, from borrowings of $35.9 million, (iii) proceeds
from sales of loans, trading securities and real estate of $2.4 billion, and
(iv) principal and interest collected on investments, loans, and securities of
$2.7 billion.
The bank is obligated under various recourse provisions, primarily related to
credit losses, related to the securitization and sale of receivables. As a
result of these recourse provisions, the bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $24.3 million and
$28.5 million, respectively, at September 30, 2001, and $42.1 million and $18.9
million, respectively, at September 30, 2000. In addition, the bank owned
subordinated automobile receivables-backed securities with carrying values of
$1.2 million and $3.4 million at September 30, 2001 and 2000, respectively,
which were classified as trading securities in the Consolidated Balance Sheets
in this report.
The bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
bank. At September 30, 2001, recourse to the bank under these arrangements was
$6.6 million, consisting of restricted cash accounts amounting to $4.2 million
and overcollateralization of receivables of $2.4 million.
The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At September 30, 2001, recourse to
the bank under this arrangement totaled $3.4 million.
The bank's commitments to extend credit at September 30, 2001 are set forth in
the following table.
(In thousands)
Commitments to originate loans............................................. $ 488,945
--------------------
Loans in process (collateralized loans):
Home equity.............................................................. 563,525
Real estate construction and ground...................................... 205,186
Commercial............................................................... 293,465
--------------------
Subtotal 1,062,176
--------------------
Loans in process (unsecured loans):
Overdraft lines.......................................................... 124,173
Commercial............................................................... 313,674
--------------------
Subtotal 437,847
--------------------
Total commitments to extend credit......................................... $ 1,988,968
====================
Based on historical experience, the bank expects to fund substantially less than
the total amount of its outstanding overdraft line and home equity credit line
commitments, which together accounted for 34.6% of commitments to extend credit
at September 30, 2001.
At September 30, 2001, repayments of borrowed money scheduled to occur during
the next 12 months were $935.3 million. Certificates of deposit maturing during
the next 12 months amounted to $2.7 billion, including $1.1 billion of brokered
deposits. The bank expects that a significant portion of these maturing
certificates of deposit will remain with the bank. In the event that deposit
withdrawals are greater than anticipated, particularly among the more volatile
brokered deposits, the bank may have to increase deposit interest rates or rely
on alternative and potentially higher cost sources of funds in order to meet its
liquidity needs.
There were no material commitments for capital expenditures at September 30,
2001.
The bank's liquidity requirements in years subsequent to fiscal 2001 will
continue to be affected both by the asset size of the bank, the growth of which
may be constrained by capital requirements, and the composition of the asset
portfolio. Management believes that the bank's primary sources of funds,
described above, will be sufficient to meet the bank's foreseeable liquidity
needs. The mix of funding sources utilized from time to time will be determined
by a number of factors, including capital planning objectives, lending and
investment strategies and market conditions.
RESULTS OF OPERATIONS
The Real Estate Trust's ability to generate revenues from property ownership and
development is significantly influenced by a number of factors, including
national and local economic conditions, the level of mortgage interest rates,
governmental actions, such as changes in real estate tax rates, and the type,
location, size and stage of development of the Real Estate Trust's properties.
Debt service payments and most of the operating expenses associated with
income-producing properties are not decreased by reductions in occupancy or
rental income. Therefore, the ability of the Real Estate Trust to produce net
income in any year from its income-producing properties is highly dependent on
the Real Estate Trust's ability to maintain or increase the properties' levels
of gross income. The relative illiquidity of real estate investments tends to
limit the ability of the Real Estate Trust to vary its portfolio promptly in
response to changes in economic, demographic, social, financial and investment
conditions. See "Financial Condition - Real Estate."
The bank's operating results historically have depended primarily on its "net
interest spread," which is the difference between the rates of interest earned
on its loans and securities investments and the rates of interest paid on its
deposits and borrowings. In addition to interest paid on its interest-bearing
liabilities, the bank's principal expenses are operating expenses.
Fiscal 2001 Compared to Fiscal 2000
Real Estate
The Real Estate Trust recorded income before depreciation and amortization of
debt expense of $20.1 million and operating income of $0.5 million for fiscal
2001, compared to income before depreciation and amortization of debt expense of
$11.0 million and an operating loss of $3.9 million for fiscal 2000. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office and industrial properties, increased equity in
the earnings of unconsolidated entities, and increased gains on sale of
property.
Income after direct operating expenses from hotels increased $791,000, or 2.2%,
in fiscal 2001 over the level achieved in fiscal 2000. This net increase
resulted from $4,731,000 generated from three newly constructed properties,
while the results from 15 hotels owned throughout both periods reflected a
decrease in income after operating expenses of $3,940,000. The increase in total
revenue of $4,933,000 exceeded the increase of $4,142,000 in direct operating
expenses. However, the percentage increase in direct operating expenses of 7.0%
exceeded the percentage increase in total revenue of 5.2%. Room sales for fiscal
2001 increased $5,460,000 or 7.4%, over fiscal 2000, while food and beverage
sales decreased $749,000 or 4.4%, over the prior year. For the 15 hotels owned
throughout both periods, the decrease in total revenue was $4,591,000 or 4.9%,
and the decrease in direct operating expense was $651,000 or 1.1%.
Income after direct operating expenses from office and industrial properties
increased $3,840,000, or 15.5%, in fiscal 2001 compared to such income in fiscal
2000. Gross income increased $6,058,000, or 17.6%, in fiscal 2001, while
expenses increased $2,218,000, or 23.0%. The improvement was largely due to the
addition of four new properties during the two-year period.
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, declined by $897,000, or 28.6%, in fiscal
2001 due to lower interest income and the sale early in the year of the Real
Estate Trust's only apartment project.
Land parcels and other expense decreased $128,000, or 9.8%, in fiscal 2001
primarily due to the sale of the Real Estate Trust's apartment project.
Interest expense increased $3,726,000, or 8.0%, in fiscal 2001, primarily
because of the higher level of outstanding borrowings. The average balance of
outstanding borrowings increased to $560.1 million for fiscal 2001 from $513.9
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and unsecured note sales. The average cost
of borrowings was 9.26% in fiscal 2001 and 9.35% in fiscal 2000.
Capitalized interest decreased $606,000 or 51.5%, during fiscal 2001 due to the
lower level of development activity in the current year.
Amortization of debt expense increased $328,000, or 50.1%, primarily due to new
financings completed during the year.
Depreciation increased $3,677.000, or 24.6%, in fiscal 2001 as a result of the
additions of new income-producing properties, new tenant improvements and
capital replacements.
Advisory, management and leasing fees paid to related parties increased
$749,000, or 6.8%, in fiscal 2001. The advisory fee in fiscal 2001 was $363,000
per month compared to $349,000 per month for fiscal 2000, which resulted in an
aggregate increase of $167,000, or 4.0%. Management and leasing fees were higher
by $582,000, or 8.5%, in fiscal 2001 as a result of increased gross income on
which fees are based.
General and administrative expense increased $332,000, or 8.6%, in fiscal 2001
as a result of more projects being abandoned in fiscal 2001 than in fiscal 2000.
Equity in earnings of unconsolidated entities reflected earnings of $8,314,000
in fiscal 2001 and earnings of $7,711,000 in fiscal 2000, an increase of
$603,000 or 7.8%. The improvement was due to increased period-to-period earnings
of Saul Centers.
Gain on sale of property was $11,077,000 in fiscal 2001 and consisted of a $2.2
million gain on the sale of an apartment project in Texas, a gain of $5.2
million on an office project in Louisiana, and an aggregate gain of $3.7 million
on the sales of land parcels in Florida, Georgia, and Maryland, and the
condemnation of two land parcels in Colorado and Michigan. Gain on sale of
property was $994,000 in fiscal 2000 due to the condemnation of a small section
of a land parcel in Georgia.
Banking
Overview. The bank recorded operating income of $114.3 million during fiscal
2001, compared to operating income of $81.3 million during fiscal 2000. The
increase in income in fiscal 2001 was primarily due to an increase in interest
income from loans and leases of $60.2 million. Also contributing to increased
income were a $32.9 million increase in servicing and securitization income, a
$10.3 million gain on other investment and $13.2 million increase in deposit
service fees. Partially offsetting the increase in income were a $42.6 million
increase in operating expenses, a $28.3 million increase in total interest
expense and a $17.9 million increase in the provision for loan and lease losses.
The bank's net income in future periods will continue to be affected by
increased operating expenses associated with expansion of the bank's branch
network and other areas of business and reliance on relatively higher cost
sources of funding to support continued growth.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $21.9 million (or 6.4%) in fiscal 2001 over fiscal 2000.
Included in interest income during fiscal 2000 was $0.5 million recorded on
non-accrual assets and restructured loans. The bank would have recorded
additional interest income of $3.2 million in fiscal 2001 if non-accrual assets
and restructured loans had been current in accordance with their original terms.
The bank's net interest income in future periods will continue to be adversely
affected by the bank's non-performing assets. See "Financial Condition - Asset
Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
Net Interest Margin Analysis
(Dollars in thousands)
Year Ended September 30,
------------------------------------------------------------------------------------------------
2001 2000 1999
September 30, ------------------------------ ------------------------------- -------------------------------
2001 Average Yield/ Average Yield/ Average Yield/
Yield/Rate Balances Interest Rate Balances Interest Rate Balances Interest Rate
------------ ------------ --------- ------- ------------ --------- -------- ----------- ---------- --------
Assets:
Interest-earning
assets:
Loans and leases
receivable, net (1) 7.58% $ 8,670,266 $695,399 8.02% $ 7,590,197 $635,246 8.37% $4,791,302 $402,263 8.40%
Mortgage-backed
securities 6.30 1,143,471 71,685 6.27 1,187,094 74,614 6.29 1,631,711 96,589 5.92
Federal funds sold
and securities
purchased under
agreements to
resell - 42,745 2,257 5.28 141,814 8,105 5.72 58,234 2,953 5.07
Trading securities 9.14 40,459 2,508 6.20 18,964 1,288 6.79 50,759 3,553 7.00
Investment
securities 5.97 45,693 2,746 6.01 45,386 2,643 5.82 44,473 2,466 5.54
Other interest-
earning assets 5.28 188,484 12,260 6.50 220,134 14,763 6.71 204,548 11,669 5.70
------------ --------- ------------ --------- ----------- ----------
Total 7.34 10,131,118 786,855 7.77 9,203,589 736,659 8.00 6,781,027 519,493 7.66
----------- --------- ------- --------- -------- ---------- --------
Non-interest
earning assets:
Cash 276,389 273,878 234,320
Real estate held
for investment
or sale 44,356 49,685 60,346
Property and
equipment, net 395,357 321,705 292,322
Goodwill and
other intangible
assets, net 33,578 26,635 23,741
Other assets 250,959 249,503 252,316
------------ ------------ -----------
Total assets $11,131,757 $10,124,995 $7,644,072
============ ============ ===========
Liabilities and
stockholders'
equity:
Interest-bearing
liabilities:
Deposit accounts:
Demand deposits 0.30 $ 1,311,067 7,851 0.60 $ 1,212,789 10,644 0.88 $1,121,970 11,648 1.04
Savings deposits 1.22 883,756 13,392 1.52 942,985 17,531 1.86 1,023,744 21,218 2.07
Time deposits 5.06 2,964,052 177,619 5.99 2,721,138 154,737 5.69 1,578,571 77,084 4.88
Money market
deposits 2.83 1,370,774 48,744 3.56 1,107,338 39,351 3.55 1,084,273 36,395 3.36
------------ --------- ------------ --------- ----------- ----------
Total deposits 2.84 6,529,649 247,606 3.79 5,984,250 222,263 3.71 4,808,558 146,345 3.04
Borrowings 5.13 3,076,350 175,138 5.69 2,843,834 172,137 6.05 1,718,721 99,162 5.77
------------ --------- ------------ --------- ----------- ----------
Total
liabilities 3.45 9,605,999 422,744 4.40 8,828,084 394,400 4.47 6,527,279 245,507 3.76
----------- --------- --------- --------- ---------- ---------- --------
Non interest-bearing
items:
Non-interest
bearing deposits 690,883 523,882 457,832
Other liabilities 199,260 172,334 78,322
Minority interest 144,000 144,000 144,000
Stockholders'
equity 491,615 456,695 436,639
------------ ------------ -----------
Total liabilities
and stockholders'
equity $11,131,757 $10,124,995 $7,644,072
============ ============ ===========
Net interest income $364,111 $342,259 $273,986
========= ========= ==========
Net interest spread (2) 3.37% 3.53% 3.90%
======= ======== ========
Net yield on interest-
earning assets (3) 3.59% 3.72% 4.04%
======= ======== ========
Interest-earning assets
to interest-bearing
liabilities 105.47% 104.25% 103.89%
======= ======== ========
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the consolidated
statements of operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans. Includes ($6,321), $3,847, and $4,196 of amortized loan fees, premiums
and discounts in interest income for the years ended September 30, 2001, 2000
and 1999.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities. (3) Equals net interest
income divided by the average balances of total interest-earning assets.
The following table presents certain information regarding changes in interest
income and interest expense of the bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(In thousands)
Year Ended September 30, 2001 Year Ended September 30, 2000
Compared to Compared to
Year Ended September 30, 2000 Year Ended September 30, 1999
Increase (Decrease) Increase (Decrease)
Due to Change in (1) Due to Change in (1)
---------------------------------------- ----------------------------------------
Total Total
Volume Rate Change Volume Rate Change
----------- ----------- ------------ ----------- ----------- ------------
Interest income:
Loans and leases (2) $ 87,555 $ (27,402) $ 60,153 $ 234,425 $ (1,442) $ 232,983
Mortgage-backed securities (2,696) (233) (2,929) (27,697) 5,722 (21,975)
Federal funds sold and securities
purchased under agreements to resell (5,268) (580) (5,848) 4,730 422 5,152
Trading securities 1,341 (121) 1,220 (2,161) (104) (2,265)
Investment securities 18 85 103 51 126 177
Other interest-earning assets (2,056) (447) (2,503) 930 2,164 3,094
----------- ----------- ------------ ----------- ----------- ------------
Total interest income 78,894 (28,698) 50,196 210,278 6,888 217,166
----------- ----------- ------------ ----------- ----------- ------------
Interest expense:
Deposit accounts 20,494 4,849 25,343 39,927 35,991 75,918
Borrowings 13,588 (10,587) 3,001 67,939 5,036 72,975
----------- ----------- ------------ ----------- ----------- ------------
Total interest expense 34,082 (5,738) 28,344 107,866 41,027 148,893
----------- ----------- ------------ ----------- ----------- ------------
Increase (decrease) in net interest income $ 44,812 $ (22,960) $ 21,852 $ 102,412 $ (34,139) $ 68,273
=========== =========== ============ =========== =========== ============
- ----------------------------------------------------------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
Interest income in fiscal 2001 increased $50.2 million (or 6.8%) from the level
in fiscal 2000 as a result of higher average balances of loans and leases
receivable, which was slightly offset by lower average yields on loans and
leases receivable.
The bank's net interest spread decreased to 3.37% in fiscal 2001 from 3.53% in
fiscal 2000. The 16 basis point reduction in the net interest spread primarily
reflected a shift in the mix of consumer loans to lower yielding prime
automobile loans and leases from higher yielding subprime automobile loans.
Partially offsetting this decline was an increase in the average balances of
earning assets, which was funded primarily with Federal Home Loan Bank advances
and deposits. Average interest-earning assets as a percentage of average
interest bearing liabilities increased slightly to 105.47% in fiscal 2001
compared to 104.25% in fiscal 2000.
Interest income on loans and leases, the largest category of interest-earning
assets, increased by $60.2 million from fiscal 2000 primarily because of higher
average balances. Higher average balances of the bank's single-family
residential loans, which increased $463.9 million (or 10.2%), resulted in a
$28.3 million (or 8.8%) increase in interest income from those loans. Average
balances of automobile loans and leases, commercial loans and home equity loans
increased $363.4 million, $186.2 million and $58.3 million, respectively, and
contributed to a $20.4 million, $10.3 million and $2.2 million increase in
interest income from those loans, respectively. Lower average yields on these
loans partially offset the effects of the higher average balances.
The average yield on the loan portfolio in fiscal 2001 decreased 35 basis points
(from 8.37% to 8.02%) from the average yield in fiscal 2000. 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 23.9% during
fiscal 2001 from 29.2% during fiscal 2000, reflecting the bank's decision in
November 2000 to stop origination of subprime automobile loans. Also
contributing to the decreased average yield on the loan and lease portfolio were
decreases in commercial loans, construction loans and home equity loans
resulting from decreases in the index on which the interest rates on such loans
are based.
Interest income on mortgage-backed securities decreased $2.9 million (or 3.9%)
primarily because of lower average balances. Also contributing to the $43.6
million decrease in average balances was a slight decrease in the average
interest rates on those securities from 6.29% to 6.27%.
Interest expense on deposits increased $25.3 million (or 11.4%) during fiscal
2001 due to increased average rates and average balances. The eight basis point
increase in the average rate on deposits (from 3.71% to 3.79%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits and money
market deposits. During fiscal 2001, the bank decreased its use of brokered
deposits as an alternative funding source.
Interest expense on borrowings increased $3.0 million (or 1.7%) in fiscal 2001
over fiscal 2000. A $294.0 million (or 15.0%) increase in average balances on
Federal Home Loan Bank advances was partially offset by a decrease in the
average rate on such borrowings (from 5.68% to 5.43%) which resulted in an
increase of $11.1 million in interest expense. Partially offsetting the increase
in interest expense on borrowings was a decrease in the average balance of $93.6
million and average yield (from 6.08% to 5.48%) in securities sold under
repurchase agreements.
Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses increased to $67.9 million in fiscal 2001 from $49.9 million in fiscal
2000. The $17.9 million increase primarily reflected increased charge-offs as a
result of the maturation of the bank's loan and lease portfolio following recent
growth and a deterioration in general economic conditions.
Other Income. Other income increased to $225.9 million in fiscal 2001 from
$154.3 million in fiscal 2000. The $71.6 million (or 46.5%) increase was
primarily attributable to increased servicing and securitization income of $32.9
million, deposit service fees of $13.2 million and gain on other investment of
$10.3 million.
Servicing and securitization income during fiscal 2001 increased $32.9 million
(or 89.4%) from fiscal 2000, primarily as a result of gains of $27.9 million
resulting from the securitization and sale of $804.9 million of automobile loan
receivables during year 2001. Prior securitizations also contributed to
increased servicing income for the current year.
Deposit servicing fees increased $13.2 million (or 15.0%) during the current
year primarily due to fees generated from the continued expansion of the bank's
branch and ATM networks.
Gain on other investment income was $10.3 million in fiscal 2001. The $10.3
million gain was the result of a pre-tax gain of $10.3 million from the sale of
the bank's interest in Star Systems, Inc. to Concord EFS, Inc.
Operating Expenses. Operating expenses for fiscal 2001 increased $42.6 million
(or 11.7%) from fiscal 2000. The increase in operating expenses is largely
attributable to an increase in loan expenses. Loan expenses increased $29.4
million primarily due to a $12.9 million write down in the market value of the
bank's mortgage servicing assets as a result of increased prepayments during
fiscal 2001 resulting from lower mortgage interest rates and increased
amortization of purchased and originated mortgage servicing rights acquired in
the latter half of fiscal 2000. In addition, fiscal 2000 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. Salaries and
employee benefits increased $5.3 million (or 2.7%) in fiscal 2001, which
includes $3.0 million of expenses related to the closing of the subprime
origination network in the first quarter of fiscal 2001. Also contributing to
the increase in operating expenses was an increase in property and equipment of
$5.0 million primarily due to increased rent expense and related property taxes
associated with the addition of new deposit branches during fiscal 2001.
Fiscal 2000 Compared to Fiscal 1999
Real Estate
The Real Estate Trust recorded income before depreciation and amortization of
debt expense of $11.0 million and an operating loss of $3.9 million for fiscal
2000, compared to a loss before depreciation and amortization of debt expense of
$2.5 million and an operating loss of $10.3 million for fiscal 1999. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office properties, increased equity in the earnings of
unconsolidated entities, partially reduced by increased net interest expense and
general and administrative expense.
Income after direct operating expenses from hotels increased $7,070,000, or
24.5%, in fiscal 2000 over the level achieved in fiscal 1999. $3,351,000 of this
increase reflected improved results from 12 hotels owned throughout both
periods, and $3,719,000 reflected results from four newly constructed
properties. The increase in total revenue of $16,467,000, or 20.9%, exceeded the
increase of $9,397,000 or 18.8%, in direct operating expenses. Room sales for
fiscal 2000 increased $14,143,000, or 23.7%, over fiscal 1999, while food and
beverage sales increased $1,579,000, or 10.3%, over the prior year. For the 12
hotels owned throughout both periods, the increase in total revenue was
$8,934,000, or 11.4%, and the increase in direct operating expense was
$5,582,000, or 11.3%. The revenue increase was attributable to market conditions
which permitted the Real Estate Trust to raise average room rates without
adversely affecting occupancy levels at a majority of the hotels.
Income after direct operating expenses from office properties increased
$8,488,000, or 52.3%, in fiscal 2000 compared to such income in fiscal 1999.
Gross income increased $10,052,000, or 41.4%, in fiscal 2000, while expenses
increased $1,564,000, or 19.4%. For the seven office properties owned throughout
both periods, the increase in total revenue was $1,744,000 or 7.2%, and the
increase in direct operating expenses was $170,000 or 2.1%. The improvement was
largely due to the acquisition of one new building and the development of two
new properties.
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, increased by $313,000, or 11.1%, in
fiscal 2000 primarily due to higher interest earnings.
Land parcels and other expense increased $429,000, or 48.8%, in fiscal 2000
largely as the result of a real estate tax refund at one property in the prior
year.
Interest expense increased $6,248,000, or 15.5%, in fiscal 2000, primarily
because of increases in average outstanding borrowings. The average balance of
outstanding borrowings increased to $513.9 million for fiscal 2000 from $444.9
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and new construction loans. The average
cost of borrowings was 9.35% in fiscal 2000 and 9.26%, in fiscal 1999.
Capitalized interest increased $214,000, or 22.3%, during fiscal 2000 due to the
higher level of development activity in the current year.
Amortization of debt expense increased $355,000, or 118.7%, due to new
financings completed during the past two years.
Depreciation increased $1,801,000, or 14.4%, in fiscal 2000 as a result of new
tenant improvements, capital replacements, and the additions of new
income-producing properties.
Advisory, management and leasing fees paid to related parties increased
$1,582,000, or 16.8%, in fiscal 2000. The advisory fee in fiscal 2000 was
$349,000 per month compared to $337,000 per month for fiscal 1999, which
resulted in an aggregate increase of $142,000, or 3.5%. Management and leasing
fees were higher by $1,440,000, or 26.7%, in fiscal 2000 as a result of
increased gross income on which fees are based.
General and administrative expense increased $2,646,000, or 227.8%, in fiscal
2000, principally as a result of a $1.2 million payment to terminate the Howard
Johnson franchise at one hotel, higher legal and accounting costs, start-up
expenses for new hotels, and the write-off of abandoned development expenses.
Equity in earnings of unconsolidated entities reflected earnings of $7,711,000
in fiscal 2000 and earnings of $4,409,000 in fiscal 1999, an increase of
$2,351,000 (43.9%). The improvement was due to increased period-to-period
earnings of Saul Centers.
In April 2000, the Real Estate Trust received $1.3 million from Cobb County,
Georgia, in payment on the condemnation for road improvements of a 3.4 acre
piece of its Circle 75 land parcel. The gain on this transaction was $994,000.
Banking
Overview. The bank recorded operating income of $81.3 million for fiscal 2000,
compared to opearting income of $96.0 million for fiscal 1999. The decrease in
income for the period was primarily attributable to a decrease in other
(non-interest) income resulting from the inclusion in last year's results of a
$31.6 million gain from the sale of one of the bank's REO properties.
Contributing to the decrease in net income were increases in operating
(non-interest) expense of $40.0 million and in the provision for loan and lease
losses of $27.1 million. Partially offsetting the reduction of income were
increases in net interest income of $68.3 million and deposit service fees of
$18.7 million. The bank's net income in future periods will continue to be
affected by increased operating expenses associated with expansion of the bank's
branch network and other areas of business and reliance on relatively higher
cost sources of funding to support continued growth.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $68.3 million (or 24.9%) in fiscal 2000 over fiscal
1999. Included in interest income during fiscal 2000 was $0.3 million recorded
on non-accrual assets and restructured loans. The bank would have recorded
additional interest income of $3.4 million in fiscal 2000 if non-accrual assets
and restructured loans had been current in accordance with their original terms.
The bank's net interest income in future periods will continue to be adversely
affected by the bank's non-performing assets.
Interest income in fiscal 2000 increased $217.2 million (or 41.8%) from the
level in fiscal 1999 as a result of higher average balances of loans and leases
receivable, which was slightly offset by lower average yields on loans and
leases receivable.
The bank's net interest spread decreased to 3.53% in fiscal 2000 from 3.90% in
fiscal 1999. The 37 basis point reduction in the net interest spread primarily
reflected a shift in the mix of consumer loans to lower yielding prime
automobile loans from higher yielding subprime automobile loans. Partially
offsetting this decline was an increase in the average balances of earning
assets, which was funded primarily with higher cost Federal Home Loan Bank
advances and brokered deposits. Average interest-earning assets as a percentage
of average interest bearing liabilities increased slightly to 104.25% in fiscal
2000 compared to 103.89% in fiscal 1999.
Interest income on loans and leases, the largest category of interest-earning
assets, increased by $233.0 million from fiscal 1999 primarily because of higher
average balances. Higher average balances of the bank's single-family
residential loans, which increased $1.3 billion (or 40.9%), resulted in a $95.3
million (or 42.0%) increase in interest income from such loans. Average balances
of automobile loans, commercial loans and real estate construction loans
increased $1.1 billion, $223.4 million and $88.4 million, respectively, and
contributed to a $103.1 million, $19.6 million and $9.8 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 fiscal 2000 decreased 3 basis points
(from 8.40% to 8.37%) from the average yield in fiscal 1999. Contributing to the
lower net yield was a decrease in the yield on automobile loans which resulted
from management's decision to shift from higher yielding subprime loans which
have higher risks of default to lower yielding prime automobile loans and leases
with relatively lower risk of default. Average subprime automobile loans as a
percentage of total automobile loans and leases declined to 29.2% during fiscal
2000 from 44.1% during fiscal 1999. Effective November 9, 2000, the bank stopped
the originations of subprime automobile loans. The bank will continue servicing
and collecting the existing portfolio of those loans. Also contributing to the
decreased average yield on the loan portfolio was a decrease in the average
yield on home improvement loans (from 10.05% to 9.11%). An increase in the
average yield on home equity loans (from 7.22% to 8.68%) resulting from
increases in the index on which the interest rates on such loans are based
offset the decreases in the average yield on the loan portfolio.
Interest income on mortgage-backed securities decreased $22.0 million (or 22.8%)
primarily because of lower average balances. The effect of the $444.6 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.92% to 6.29%.
Interest expense on deposits increased $75.9 million (or 51.9%) during fiscal
2000 due to increased average rates and average balances. The 67 basis point
increase in the average rate on deposits (from 3.04% to 3.71%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal 2000, the bank increased its use of brokered deposits as an alternative
funding source.
Interest expense on borrowings increased $73.0 million (or 73.6%) in fiscal 2000
over fiscal 1999. A $967.0 million (or 96.9%) increase in average balances on
Federal Home Loan Bank advances and, to a lesser extent, the increase in the
average rate on such borrowings (from 5.29% to 5.69%) resulted in an increase of
$58.9 million in interest expense. Also contributing to the increase in interest
expense on borrowings was an increase in the average balance of $120.2 million
and average yield (from 5.07% to 6.08%) in securities sold under repurchase
agreements.
Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses increased to $49.9 million in fiscal 2000 from $22.9 million in fiscal
1999. The $27.1 million increase was primarily due to increased delinquencies in
subprime automobile loans and increased charge-offs as a result of the
maturation of the bank's loan portfolio.
Other Income. Other non-interest income decreased to $154.3 million in fiscal
2000 from $170.2 million in fiscal 1999. The $15.9 million (or 9.4%) decrease
was primarily attributable to a gain of $31.6 million included in fiscal 1999
resulting from the sale of one of the bank's REO properties. In addition, the
bank had gains on sales of trading securities of $1.5 million during fiscal 2000
compared to gains of $7.2 million during fiscal 1999. Partially offsetting this
decrease was a $18.7 million (or 26.9%) increase in deposit service fees during
the 2000 period primarily due to fees generated from the continued expansion of
the bank's branch and ATM network.
Operating Expenses. Operating expenses for fiscal 2000 increased $40.0 million
(or 12.3%) from the level in fiscal 1999. Salaries and employee benefits
increased $18.1 million (or 10.3%) as a result of additions of staff to the
bank's consumer lending department and branch operations. Also contributing to
increased operating expenses for fiscal 2000 was an increase in other operating
expenses of $14.1 million (or 36.1%). The increase is partially related to
increased other operating expenses associated with the expansion of the branch
network. Also contributing to the increase in other operating expenses was a
fiscal 1999 reduction to other operating expenses of $6.5 million related to
services the bank provided to First USA following the sale of the credit card
portfolio on September 30, 1998. In addition, property and equipment increased
$5.3 million primarily due to increased rent expense associated with the
addition of new deposit branches during fiscal 2000.