Saul B F Real Estate Investment Trust Inactive
Filed: 14 Feb 02, 12:00am
Registration No. 333-70753
Rule 424(b)(3)
Supplement Dated February 14, 2002 to
Prospectus Dated February 8, 2002
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B. F. SAUL
REAL ESTATE INVESTMENT TRUST
QUARTERLY REPORT
FOR QUARTER ENDED
DECEMBER 31, 2001
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TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Statements (Unaudited):
(a) Consolidated Balance Sheets at December 31, 2001 and
September 30, 2001
(b) Consolidated Statements of Operations for the three-month
periods ended December 31, 2001 and 2000
(c) Consolidated Statements of Comprehensive Income and Changes in
Shareholders' Equity (Deficit) for the three-month
periods ended December 31, 2001 and 2000
(d) Consolidated Statements of Cash Flows for the three-month
periods ended December 31, 2001 and 2000
(e) Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three months ended December 31, 2001 compared to
three months ended December 31, 2000
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
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December 31 September 30
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(In thousands) 2001 2001
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ASSETS
Real Estate
Income-producing properties
Hotel $ 254,532 $ 254,165
Office and industrial 157,797 157,653
Other 2,825 2,825
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415,154 414,643
Accumulated depreciation (136,248) (131,659)
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278,906 282,984
Land parcels 40,972 40,835
Construction in progress 16,394 15,681
Cash and cash equivalents 12,368 13,860
Note receivable and accrued interest -- related party 7,787 7,787
Other assets 81,791 86,983
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Total real estate assets 438,218 448,130
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Banking
Cash and other deposits 480,546 409,995
Loans held for sale 502,576 246,083
Loans held for securitization and sale 730,000 282,000
Investment securities (market value $45,866 and $46,181, respectively) 46,078 45,794
Trading securities 8,180 6,690
Mortgage-backed securities (market value $1,342,436 and $1,489,835, respectively) 1,349,529 1,474,495
Loans and leases receivable (net of allowance for losses of $66,018 and $63,018, respectively) 7,293,813 8,018,495
Federal Home Loan Bank stock 93,937 113,030
Real estate held for investment or sale (net of allowance for losses of $86,504 and $85,354,
respectively) 30,295 31,704
Property and equipment, net 450,785 437,795
Goodwill and other intangible assets, net 26,458 27,058
Interest only strips, net 48,396 47,146
Other assets 238,852 248,181
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Total banking assets 11,299,445 11,388,466
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TOTAL ASSETS $ 11,737,663 $ 11,836,596
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LIABILITIES
Real Estate
Mortgage notes payable $ 324,721 $ 325,750
Notes payable - secured 200,000 202,500
Notes payable - unsecured 52,932 50,717
Deferred gains - real estate 113,045 113,045
Accrued dividends payable - preferred shares of beneficial interest 20,657 19,303
Other liabilities and accrued expenses 27,639 36,874
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Total real estate liabilities 738,994 748,189
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Banking
Deposit accounts 7,461,205 7,562,470
Borrowings 665,271 282,350
Federal Home Loan Bank advances 1,803,734 2,240,598
Other liabilities 457,519 403,190
Capital notes -- subordinated 250,000 250,000
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Total banking liabilities 10,637,729 10,738,608
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Commitments and contingencies
Minority interest held by affiliates 88,682 86,310
Minority interest -- other 218,307 218,307
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TOTAL LIABILITIES 11,683,712 11,791,414
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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 (6,591) (11,401)
Accumulated other comprehensive income (loss) 2,289 (1,670)
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95,799 87,030
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
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TOTAL SHAREHOLDERS' EQUITY 53,951 45,182
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,737,663 $ 11,836,596
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The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
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For the Three Months
Ended December 31
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(In thousands, except per share amounts) 2001 2000
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REAL ESTATE
Income
Hotels $ 19,861 $ 23,337
Office and industrial (including $1,184 and $825
of rental income from banking segment, respectively) 9,674 9,971
Other 423 731
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Total income 29,958 34,039
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Expenses Direct operating expenses:
Hotels 13,741 15,108
Office and industrial properties 2,618 2,553
Land parcels and other 315 367
Interest expense 12,622 12,865
Capitalized interest (170) (879)
Amortization of debt expense 220 191
Depreciation 4,589 3,898
Advisory, management and leasing fees - related parties 3,001 2,833
General and administrative 720 701
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Total expenses 37,656 37,637
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Equity in earnings of unconsolidated entities 2,602 1,884
Gain on sale of property -- 2,545
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REAL ESTATE OPERATING INCOME (LOSS) $ (5,096) $ 831
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BANKING
Interest income
Loans and leases $ 148,186 $ 177,030
Mortgage-backed securities 21,719 16,554
Trading securities 815 289
Investment securities 485 695
Other 2,578 4,014
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Total interest income 173,783 198,582
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Interest expense
Deposit accounts 46,252 67,625
Borrowings 34,370 45,393
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Total interest expense 80,622 113,018
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Net interest income 93,161 85,564
Provision for loan and lease losses (17,920) (15,923)
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Net interest income after provision for loan losses 75,241 69,641
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Other income
Servicing and securitization income 13,422 14,499
Deposit servicing fees 28,245 24,978
Gain (loss) on sales of trading securities, net 5,066 (1,800)
Loss on real estate held for investment or sale, net (913) (880)
Gain on sales of loans, net 1,583 3,246
Other 10,012 6,673
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Total other income 57,415 46,716
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Continued on following page.
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
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For the Three Months
Ended December 31
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(In thousands, except per share amounts) 2001 2000
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BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 48,340 $ 50,817
Loan 9,639 6,489
Property and equipment (including $1,184 and $825
of rental expense paid to real estate segment, respectively) 12,503 8,426
Marketing 2,858 3,623
Data processing 8,230 6,244
Depreciation and amortization 8,801 8,406
Deposit insurance premiums 334 346
Amortization of goodwill and other intangible assets 601 598
Other 13,915 12,755
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Total operating expenses 105,221 97,704
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BANKING OPERATING INCOME $ 27,435 $ 18,653
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TOTAL COMPANY
Operating income $ 22,339 $ 19,484
Income tax provision 7,464 4,691
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Income before minority interest 14,875 14,793
Minority interest held by affiliates (2,382) (1,454)
Minority interest -- other (6,329) (6,329)
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TOTAL COMPANY NET INCOME $ 6,164 $ 7,010
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NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 4,810 $ 5,656
NET INCOME PER COMMON SHARE
Income before minority interest $ 2.80 $ 2.78
Minority interest held by affiliates (0.49) (0.30)
Minority interest -- other (1.31) (1.31)
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NET INCOME PER COMMON SHARE $ 1.00 $ 1.17
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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
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
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For the Three Months
Ended December 31
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(Dollars in thousands) 2001 2000
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COMPREHENSIVE INCOME
Net income $ 6,164 $ 7,010
Other comprehensive income:
Net unrealized holding gains (losses) 3,959 (417)
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TOTAL COMPREHENSIVE INCOME $ 10,123 $ 6,593
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CHANGES IN SHAREHOLDERS' EQUITY
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516
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COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642
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PAID-IN SURPLUS
Beginning and end of period 92,943 92,943
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DEFICIT
Beginning of period (11,401) (49,642)
Net income 6,164 7,010
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (1,354) (1,354)
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End of period (6,591) (43,986)
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period (1,670) --
Net unrealized holding losses 3,959 (417)
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End of period 2,289 (417)
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TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848)
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TOTAL SHAREHOLDERS' EQUITY $ 53,951 $ 13,850
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The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
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For the Three Months
Ended December 31
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(In thousands) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss) $ (3,363) $ 1,193
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 4,589 3,898
Gain on sale of property -- (2,545)
(Increase) decrease in accounts receivable and accrued income 3,203 (1,334)
Increase in deferred tax asset (1,733) (362)
Decrease in accounts payable and accrued expenses (9,413) (11,740)
Amortization of debt expense 460 437
Equity in earnings of unconsolidated entities (2,602) (1,884)
Dividends and tax sharing payments 8,900 3,200
Other 417 522
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458 (8,615)
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Banking
Net income 9,527 5,817
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of premiums, discounts and net deferred loan fees 5,208 (171)
Depreciation and amortization 8,801 8,406
Provision for loan and lease losses 17,920 15,923
Capitalized interest on real estate under development -- (867)
Proceeds from sales of trading securities 314,946 76,502
Net fundings of loans held for sale and/or securitization (745,009) (177,854)
Proceeds from sales of loans held for sale and/or securitization 415,001 118,950
(Gain) loss on sales of real estate held for sale 24 (471)
Provision for losses on real estate held for investment or sale 1,050 1,050
(Gain) loss on sales of trading securities, net (5,066) 1,800
Increase in interest-only strips (1,250) (1,156)
Increase in servicing assets (6,427) (394)
Amortization of goodwill and other intangible assets 603 564
(Increase) decrease in other assets 20,733 (921)
Decrease in other liabilities (34,495) (11,325)
Minority interest held by affiliates 2,382 1,454
Minority interest - other 2,438 2,438
Other 21,773 20,454
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28,159 60,199
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Net cash provided by operating activities 28,617 51,584
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CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (1,361) (11,619)
Property acquisitions -- (15,159)
Property sales -- 7,287
Note receivable and accrued interest -- related party
Repayments -- 750
Equity investment in unconsolidated entities 735 904
Other 25 1
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(601) (17,836)
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Banking
Net proceeds from redemption of Federal Home Loan Bank stock 28,528 1,530
Proceeds from sale of loans -- 2,493
Net proceeds from sales of real estate 3,812 4,406
Net principal collected (fundings) of loans and leases receivable 599,906 (256,641)
Principal collected on mortgage-backed securities 124,168 76,755
Purchases of Federal Home Loan Bank stock (9,435) (8,796)
Purchases of investment securities (298) (10)
Purchases of loans receivable (608,407) (176,041)
Purchases of property and equipment (21,821) (25,404)
Disbursements for real estate held for investment or sale (2,407) (7,773)
Other 2,170 1,036
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116,216 (388,445)
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Net cash provided by (used in) investing activities 115,615 (406,281)
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Continued on following page.
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
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For the Three Months
Ended December 31
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(In thousands) 2001 2000
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CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 1,025 $ 10,339
Principal curtailments and repayments of mortgages (2,054) (2,820)
Proceeds from secured note financings -- 13,000
Repayments of secured note financings (2,500) (4,500)
Proceeds from sales of unsecured notes 4,532 2,300
Repayments of unsecured notes (2,317) (1,443)
Costs of obtaining financings (35) (98)
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(1,349) 16,778
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Banking
Proceeds from customer deposits and sales of certificates of deposit 11,868,189 10,538,051
Customer withdrawals of deposits and payments for maturing certificates of deposit (11,969,454) (10,443,737)
Net increase in securities sold under repurchase agreements 375,365 100,425
Advances from the Federal Home Loan Bank 2,665,125 604,660
Repayments of advances from the Federal Home Loan Bank (3,101,989) (452,800)
Net increase (decrease) in other borrowings 7,536 (9,880)
Cash dividends paid on preferred stock (2,438) (2,438)
Cash dividends paid on common stock (5,000) (4,000)
Other 88,842 (11,324)
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(73,824) 318,957
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Net cash provided by (used in) financing activities (75,173) 335,735
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Net increase (decrease) in cash and cash equivalents 69,059 (18,962)
Cash and cash equivalents at beginning of period 423,855 446,362
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Cash and cash equivalents at end of period $ 492,914 $ 427,400
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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 $ 12,368 $ 8,456
Banking
Cash and other deposits 480,546 393,944
Federal funds sold and securities purchased under agreements to resell -- 25,000
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Cash and cash equivalents at end of period $ 492,914 $ 427,400
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 101,939 $ 124,229
Income taxes paid (refunded) (23,714) 70
Shares of Saul Centers, Inc. common stock 2,079 1,005
Cash received during the year from:
Dividends on shares of Saul Centers, Inc. common stock 1,181 1,005
Distributions from Saul Holdings Limited Partnership 1,632 1,632
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 1,796 1,081
Loans held for sale exchanged for trading securities 311,370 78,302
Loans receivable transferred to loans held for securitization and sale 934,085 165,000
Loans receivable transferred to real estate acquired in settlement of loans 1,102 172
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The Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the consolidated financial statements reflect
all adjustments necessary for a fair presentation of the Trust's financial
position and results of operations. All such adjustments are of a normal
recurring nature. These financial statements and the accompanying notes should
be read in conjunction with the Trust's audited consolidated financial
statements included in its Form 10-K for the fiscal year ended September 30,
2001. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year.
2. The accompanying financial statements include the accounts of B. F. Saul Real
Estate Investment Trust and its wholly owned subsidiaries (the "Real Estate
Trust"), which are involved in the ownership and development of income-producing
properties. The accounts of the Trust's 80%-owned banking subsidiary, Chevy
Chase Bank, F.S.B., and its subsidiaries ("Chevy Chase" or the "Bank") have also
been consolidated. Accordingly, the accompanying financial statements reflect
the assets, liabilities, operating results and cash flows for two business
segments: Real Estate and Banking. All significant intercompany 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.
3. The Trust voluntarily terminated its qualification as a real estate
investment trust under the Internal Revenue Code during fiscal 1978. As a result
of the Trust's acquisition of an additional 20% equity interest in the Bank in
June 1990, the Bank became a member of the Trust's affiliated group filing
consolidated federal income tax returns. The current effect of the Trust's
consolidation of the Bank's operations into its federal income tax return
results in the use of the Trust's net operating losses and net operating loss
carryforwards to reduce the federal income taxes the Bank would otherwise owe.
4. BANKING:
LOANS HELD FOR SALE:
Loans held for sale is composed of the following:
December 31, September 30,
2001 2001
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Single-family residential loans $ 468,014 $ 233,359
Automobile loans 22,620 -
Home improvement and related loans 11,942 12,724
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Total $ 502,576 $ 246,083
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LOANS HELD FOR SECURITIZATION AND SALE:
At December 31, 2001, loans held for securitization and sale totaled $730,000
and were composed of $600,000 of single-family loans and $130,000 of automobile
loans. At September 30, 2001, loans held for securitization and sale totaled
$282,000 and were composed of automobile loans.
NOTE 5 - LOANS AND LEASES RECEIVABLE:
Loans and leases receivable is composed of the following:
December 31, September 30,
2001 2001
---------------- ----------------
Single-family residential $ 3,886,212 $ 4,555,814
Home equity 425,137 372,095
Real estate construction and ground 455,170 472,489
Commercial real estate and multifamily 30,568 30,703
Commercial 1,387,183 1,376,582
Automobile 322,512 361,930
Subprime automobile 363,963 420,658
Automobile leases 1,115,215 1,124,106
Home improvement and related loans 99,560 100,494
Overdraft lines of credit and other consumer 37,733 36,356
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8,123,253 8,851,227
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Less:
Undisbursed portion of loans 809,165 812,325
Unearned discounts and net deferred loan origination costs (45,743) (42,611)
Allowance for losses on loans and leases 66,018 63,018
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829,440 832,732
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Total $ 7,293,813 $ 8,018,495
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REAL ESTATE HELD FOR INVESTMENT OR SALE:
The Bank's real estate held for investment is carried at the lower of aggregate
cost or net realizable value. The Bank's real estate acquired in settlement of
loans or real estate owned ("REO") is considered to be held for sale and is
carried at the lower of cost or fair value (less estimated selling costs).
Real estate held for investment or sale is composed of the following:
December 31, September 30,
2001 2001
--------------- ---------------
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 $86,302 and $85,152, respectively) 29,370 30,779
--------------- ---------------
Total real estate held for investment or sale $ 30,295 $ 31,704
=============== ===============
MANAGEMENT'SDISCUSSION 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 and its subsidiaries, including Chevy Chase and
Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real Estate
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the Bank and its subsidiaries
is identified by the term "Banking."
FINANCIAL CONDITION
REAL ESTATE
The Real Estate Trust's investment portfolio at December 31, 2001, consisted
primarily of hotels, office projects, and land parcels. During the quarter ended
December 31, 2001, the Real Estate Trust's hotel portfolio included 18
properties containing 3,578 available rooms.
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.
Consequently, the hotel portfolio experienced an average occupancy rate of 54%
and an average room rate of $84.68 during the quarter ended December 31, 2001,
compared to an average occupancy of 64% and an average room rate of $92.30
during the same period in the prior year. For the sixteen hotels owned
throughout both periods, the average occupancies were 54% and 66%, and the
average rates were $81.04 and $92.10. REVPAR (revenue per available room) for
the sixteen hotels was $43.47 for the quarter ended December 31, 2001, a 28.0%
decrease from REVPAR for the quarter ended December 31, 2000 of $60.41.
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 reduced its hotel capital
expenditure budget for 2002.
Office space in the Real Estate Trust's office property portfolio was 87% leased
at December 31, 2001, compared to a leasing rate of 98% at December 31, 2000.
The decline in leasing rate is primarily due to the Trust placing into service,
during December 2001, an 81,000 square foot building that remains unleased. At
December 31, 2001, the Real Estate Trust's office property portfolio consisted
of 13 properties and had a total gross leasable area of 1,878,000 square feet,
of which 141,000 square feet (7.5%) and 206,000 square feet (11.0%) are subject
to leases expiring in fiscal 2002 and fiscal 2003.
BANKING
General. The Bank's assets at the end of the current quarter were $11.3 billion,
a decrease of $89.9 million from September 30, 2001. Total loans and leases
decreased $20.2 million during the quarter to $8.5 billion at December 31, 2001.
This decrease was primarily due to the securitization and sale of $236.1 million
of automobile loan receivables, which was partially offset by increases in
residential and home equity loans. The Bank recorded operating income of $27.4
million during the quarter ended December 31, 2001, compared to operating income
of $18.7 million in the prior corresponding quarter. Increased net interest
income and other (non-interest) income were partially offset by increases in
operating expense and provision for loan and lease losses.
At December 31, 2001, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.55%, 5.55%, 7.00% and 10.70%,
respectively. The Bank's regulatory capital ratios exceeded the requirements
under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well-capitalized"
institutions under the prompt corrective action regulations issued pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
See "Capital."
During the quarter ended December 31, 2001, the Bank declared and paid out of
retained earnings a cash dividend on its Common Stock in the amount of $500 per
share.
During the December quarter, the amount of delinquent and non-performing loans
in the Bank's various portfolios increased as a result of seasonal trends and
adverse general economic conditions. The levels of delinquent and non-performing
loans could increase further if general economic conditions do not improve.
Asset Quality. Non-Performing Assets. The following table sets forth information
concerning the Bank's non-performing assets. The figures shown are after
charge-offs and, in the case of REO, after all valuation allowances.
Non-Performing Assets
(Dollars in thousands)
December 31, September 30, December 31,
2001 2001 2000
------------------ ------------------ -----------------
Non-performing assets:
Non-accrual loans:
Residential $ 11,338 $ 7,314 $ 5,464
Subprime automobile 14,816 13,379 13,043
Other consumer 6,882 7,028 6,246
------------------ ------------------ -----------------
Total non-accrual loans (1) 33,036 27,721 24,753
------------------ ------------------ -----------------
Real estate owned 115,672 115,931 134,077
Allowance for losses on real estate owned (86,302) (85,152) (81,789)
------------------ ------------------ -----------------
Real estate owned, net 29,370 30,779 52,288
------------------ ------------------ -----------------
Total non-performing assets $ 62,406 $ 58,500 $ 77,041
================== ================== =================
Allowance for losses on loans and leases $ 66,018 $ 63,018 $ 54,518
Allowance for losses on real estate held for investment 202 202 202
Allowance for losses on real estate owned 86,302 85,152 81,789
------------------ ------------------ -----------------
Total allowances for losses $ 152,522 $ 148,372 $ 136,509
================== ================== =================
Ratios:
Non-performing assets, net to total assets (2) N/M N/M 0.20%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 70.96% 70.86% 149.96%
Allowance for losses on consumer loans and leases to
non-accrual consumer loans (1)(3) 207.58% 230.55% 190.93%
Allowance for losses on loans and leases
to non-accrual loans (1) 199.84% 227.33% 220.25%
Allowance for losses on loans and leases to total loans
and leases receivable (4) 0.77% 0.73% 0.62%
(1) Before deduction of allowances for losses.
(2) Non-performing assets, net are presented after all allowances for losses
on loans and leases and real estate held for investment or sale.
(3) Includes subprime automobile loans.
(4) Includes loans and leases receivable and loans held for sale and/or
securitization, before deduction of allowance for losses.
Non-performing assets totaled $62.4 million, after valuation allowances on REO
of $86.3 million, at December 31, 2001, compared to $58.5 million, after
valuation allowances on REO of $85.2 million, at September 30, 2001. In addition
to the valuation allowances on REO, the Bank maintained $66.0 million and $63.0
million of valuation allowances on its loan and lease portfolio at December 31,
2001 and September 30, 2001, respectively. The $3.9 million increase in
non-performing assets for the current quarter was attributable to an increase in
non-accrual loans of $5.3 million, partially offset by a net decrease in REO of
$1.4 million. See "Non-accrual Loans" and "REO."
Non-accrual Loans. The Bank's non-accrual loans totaled $33.0 million at
December 31, 2001, as compared to $27.7 million at September 30, 2001. At
December 31, 2001, non-accrual loans consisted of $11.3 million of non-accrual
residential real estate loans and $21.7 million of non-accrual consumer and
other loans, compared to non-accrual residential real estate loans of $7.3
million and non-accrual consumer and other loans of $20.4 million at September
30, 2001. The increase in non-accrual residential real estate loans was largely
the result of adverse economic conditions.
REO. At December 31, 2001, the Bank's REO totaled $29.4 million, after valuation
allowances on such assets of $86.3 million as set forth in the following table.
The principal component of REO consists of four planned unit developments (the
"Communities"), all of which are under active development. Only commercial
ground properties remain in two of the four Communities.
Number Balance Balance Percent
of Gross Charge- Before After of
Properties Balance Valuation Valuation Valuation
Offs Allowances Allowances Allowances Total
---------------------------------------------------------------------------
4 $ 136,353 $ 32,509 $ 103,844 $ 80,982 $ 22,862 77.8%
Communities
Residential ground 2 3,614 - 3,614 1,689 1,925 6.6%
Commercial ground 1 9,580 2,732 6,848 3,631 3,217 11.0%
Single-family
residential
properties 4 1,451 85 1,366 - 1,366 4.6%
---------------------------------------------------------------------------
Total REO 11 $ 150,998 $ 35,326 $ 115,672 $ 86,302 $ 29,370 100.0%
===========================================================================
During the three months ended December 31, 2001, REO decreased $1.4 million
primarily as a result of additional sales in the communities and other
properties and additional provisions for losses.
During the three months ended December 31, 2001, the Bank received revenues of
$3.5 million from the disposition of 82 residential lots or units in the
Communities ($3.4 million) and various single-family residential properties
($0.1 million). In addition, the Bank provided $1.1 million for losses on one of
its properties.
Delinquent Loans. At December 31, 2001, delinquent loans totaled $117.5 million,
or 1.4% of loans, compared to $111.2 million, or 1.3% of loans, at September 30,
2001. The following table sets forth information regarding the Bank's delinquent
loans at December 31, 2001.
Principal Balance
(Dollars in Thousands)
------------------------------------------------------------
Subprime Other Total as a
Real Estate Automobile Consumer Percentage
Loans Loans Loans Total of Loans
(1)
------------- ------------- ----------- ----------- -----------
Loans delinquent for:
30-59 days...... $ 11,734 $ 57,836 $ 16,561 $ 86,131 1.0%
60-89 days...... 7,037 18,978 5,375 31,390 0.4%
------------- ------------- ----------- ----------- -----------
Total............ $ 18,771 $ 76,814 $ 21,936 $ 117,521 1.4%
============= ============= =========== =========== ===========
- --------------------------
(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 $18.8 million at December 31, 2001,
from $16.0 million at September 30, 2001, largely as a result of adverse
economic conditions coupled with traditional seasonal delinquencies.
Total delinquent subprime automobile loans increased to $76.8 million at
December 31, 2001, from $72.7 million at September 30, 2001, largely as a result
of adverse economic conditions coupled with traditional seasonal
delinquencies. Effective November 9, 2000, the Bank stopped the origination of
subprime automobile loans. The Bank continues its collection efforts on the
existing portfolio.
Other consumer loans delinquent 30-89 days decreased slightly to $21.9 million
at December 31, 2001 from $22.5 million at September 30, 2001.
Troubled Debt Restructurings. At December 31, 2001 and September 30, 2001, the
Bank had no troubled debt restructurings.
Real Estate Held for Investment. At December 31, 2001 and September 30, 2001,
real estate held for investment consisted of one property with book value of
$1.1 million, before valuation allowances of $0.2 million.
Allowances for Losses. The following tables show loss experience by asset type
and the components of the allowance for losses on loans and leases and the
allowance for losses on real estate held for investment or sale. These tables
reflect charge-offs taken against assets during the periods indicated and may
include charge-offs taken against assets which the Bank disposed of during such
periods.
Analysis of Allowance for and Chargeoffs of Loans and Leases
(Dollars in thousands)
Three Months Ended Year Ended
December 31, September 30,
---------------------------------
2001 2000 2001
--------------- ---------------- ---------------
Balance at beginning of period $ 63,018 $ 54,018 $ 54,018
--------------- ---------------- ---------------
Provision for loan and lease losses 17,920 15,923 67,852
--------------- ---------------- ---------------
Chargeoffs:
Single-family residential and home equity (208) (170) (786)
Subprime automobile (12,449) (13,342) (49,749)
Other (5,209) (3,719) (17,685)
--------------- ---------------- ---------------
Total chargeoffs (17,866) (17,231) (68,220)
--------------- ---------------- ---------------
Recoveries:
Single-family residential and home equity 35 3 80
Subprime automobile 2,351 1,404 7,104
Other 560 401 2,184
--------------- ---------------- ---------------
Total recoveries 2,946 1,808 9,368
--------------- ---------------- ---------------
Chargeoffs, net of recoveries (14,920) (15,423) (58,852)
--------------- ---------------- ---------------
Balance at end of period $ 66,018 $ 54,518 $ 63,018
=============== ================ ===============
Provision for loan and lease losses to average loans
and leases (1) (2) 0.84% 0.75% 0.78%
Net loan and lease chargeoffs to average loans
and leases (1) (2) 0.70% 0.73% 0.68%
Ending allowance for losses on loans and leases to total
loans and leases (2) (3) 0.77% 0.62% 0.73%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of allowance for losses.
Components of Allowance for Losses on Loans and Leases by Type
(Dollars in thousands)
December 31, September 30,
------------------------------------------------------
2001 2000 2001
-------------------------- -------------------------- -------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------------ ------------ ------------ ------------ ----------- ------------
Balance at end of period allocated to:
Single-family residential $ 2,817 57.9 % $ 2,714 58.3 % $ 2,686 55.9 %
Home equity 465 5.0 420 3.3 448 4.4
Commercial real estate and multifamily 190 0.4 640 0.4 197 0.4
Real estate construction and ground 4,574 2.9 4,420 3.5 1,852 3.1
Commercial 11,180 9.2 9,494 7.5 9,135 9.0
Automobile 5,395 5.6 6,534 11.0 7,034 7.5
Automobile leases 4,630 13.0 2,000 7.5 6,000 13.1
Subprime automobile 32,000 4.3 25,782 7.0 32,000 4.9
Home improvement and related loans 2,321 1.3 2,023 1.1 1,523 1.3
Overdraft lines of credit and
other consumer 695 0.4 491 0.4 491 0.4
Unallocated 1,751 - - - 1,652 -
------------ ------------ -----------
Total $ 66,018 $ 54,518 $ 63,018
============ ============ ===========
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowance for Losses
Three Months Ended Year Ended
December 31, September 30,
----------------------------------------
2001 2000 2001
------------------ ------------------ ------------------
Balance at beginning of period:
Real estate held for investment $ 202 $ 202 $ 202
Real estate held for sale 85,152 80,752 80,752
------------------ ------------------ ------------------
Total 85,354 80,954 80,954
------------------ ------------------ ------------------
Provision for real estate losses:
Real estate held for sale 1,050 1,050 4,200
------------------ ------------------ ------------------
Total 1,050 1,050 4,200
------------------ ------------------ ------------------
Chargeoffs net of recoveries:
Real estate held for sale:
Communities 100 (13) 200
------------------ ------------------ ------------------
Total net (chargeoffs) recoveries 100 (13) 200
------------------ ------------------ ------------------
Balance at end of period:
Real estate held for investment 202 202 202
Real estate held for sale 86,302 81,789 85,152
------------------ ------------------ ------------------
Total $ 86,504 $ 81,991 $ 85,354
================== ================== ==================
Components of Allowance for Losses
December 31, September 30,
----------------------------------------
2001 2000 2001
------------------ ------------------ ------------------
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202
------------------ ------------------ ------------------
Allowance for losses on real estate held
for sale:
Residential ground 1,689 1,689 1,689
Commercial ground 3,631 3,631 3,631
Communities 80,982 76,469 79,832
------------------ ------------------ ------------------
Total 86,302 81,789 85,152
------------------ ------------------ ------------------
Total allowance for losses on real
estate held for investment or sale $ 86,504 $ 81,991 $ 85,354
================== ================== ==================
At December 31, 2001, the Bank's total valuation allowances for losses on loans
and leases and real estate held for investment or sale was $152.5 million, an
increase from $148.4 million at September 30, 2001. Management reviews the
adequacy of the valuation allowances on loans and leases and real estate using a
variety of measures and tools including historical loss performance, delinquency
status, internal risk ratings, current economic conditions and current
underwriting policies and procedures. Using this analysis, management determines
a range of acceptable valuation allowances. 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 $94.6 million at December 31, 2001, which
constituted 74.4% of total non-performing real estate assets, before valuation
allowances. During the three months ended December 31, 2001, the Bank recorded
net charge-offs of $0.1 million on these assets. The allowance for losses on
real estate held for sale at December 31, 2001 is in addition to approximately
$35.3 million of cumulative charge-offs previously taken against assets
remaining in the Bank's portfolio at December 31, 2001.
At both December 31, 2001 and September 30, 2001, the combined allowance for
losses on consumer loans and leases, including automobile, subprime automobile,
home improvement and related loans, overdraft lines of credit and other consumer
loans was $45.0 and $47.0 million, respectively. The decline in the allowance
for losses on consumer loans and leases is primarily attributable to declining
loan balances following recent automobile securitizations and sales. Net
chargeoffs of consumer and other loans totaled $14.7 million for the three
months ended December 31, 2001 compared to $15.3 million for the three months
ended December 31, 2000. The modest decline in net chargeoffs is attributable to
declining subprime automobile loan balances partially offset by adverse economic
conditions coupled with seasonal delinquencies.
Asset and Liability Management. The following table presents the interest rate
sensitivity of the Bank's interest-earning assets and interest-bearing
liabilities at December 31, 2001, which reflects loan amortization and
management's estimate of loan prepayments. Variable rate loans are assumed to
mature in the period in which their interest rates are next scheduled to adjust.
Prepayment rates for the Bank's loans are based on recent actual and market
experience. Statement savings 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 December 31, 2001 Real estate loans:
Adjustable-rate $ 1,875,131 $ 273,697 $ 514,032 $ 232,589 $ 161,796 $ 3,057,245
Fixed-rate 91,762 61,074 231,268 170,713 519,202 1,074,019
Home equity credit lines and second
mortgages 363,918 13,683 41,131 26,030 63,184 507,946
Commercial 621,836 21,467 67,887 45,463 25,540 782,193
Consumer and other 373,332 297,673 958,848 240,148 68,427 1,938,428
Loans held for sale 502,576 - - - - 502,576
Loans held for securitization and sale 730,000 - - - - 730,000
Mortgage-backed securities 205,512 174,197 250,761 173,365 545,694 1,349,529
Trading securities 8,180 - - - - 8,180
Other investments 270,035 - 46,078 - - 316,113
-------------- -------------- --------------- ------------ ------------- ---------------
Total interest-earning assets 5,042,282 841,791 2,110,005 888,308 1,383,843 10,266,229
Total non-interest earning assets - - - - 1,051,934 1,051,934
-------------- -------------- --------------- ------------ ------------- ---------------
Total assets $ 5,042,282 $ 841,791 $ 2,110,005 $ 888,308 $ 2,435,777 $ 11,318,163
============== ============== =============== ============ ============= ===============
Deposits:
Fixed maturity deposits $ 1,800,390 $ 539,228 $ 205,128 $ 56,411 $ - $ 2,601,157
NOW, statement and passbook accounts 1,981,603 43,728 145,643 99,128 211,254 2,481,356
Money market deposit accounts 1,712,459 - - - - 1,712,459
Borrowings:
Capital notes - subordinated - - - 150,000 100,000 250,000
Other 866,219 775 1,355,575 147,553 99,096 2,469,218
-------------- -------------- --------------- ------------ ------------- ---------------
Total interest-bearing liabilities 6,360,671 583,731 1,706,346 453,092 410,350 9,514,190
Minority interest - - - - 144,000 144,000
Total non-interest bearing liabilities - - - - 1,123,539 1,123,539
Stockholders' equity - - - - 536,434 536,434
-------------- -------------- --------------- ------------ ------------- ---------------
Total liabilities and stockholders'
equity $ 6,360,671 $ 583,731 $ 1,706,346 $ 453,092 $ 2,214,323 $ 11,318,163
============== ============== =============== ============ ============= ===============
Gap $ (1,318,389) $ 258,060 $ 403,659 $ 435,216 $ 973,493
Cumulative gap $ (1,318,389) $ (1,060,329) $ (656,670) $ (221,454) $ 752,039
Adjusted cumulative gap as a percentage
of total assets (11.6)% (9.4)% (5.8)% (2.0)% 6.6 %
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, as a percentage of total
assets, was a negative 9.4% at December 31, 2001 compared to a negative 13.3% at
September 30, 2001. The improvement in the Bank's one-year gap during this
period reflects an increase in production of adjustable-rate mortgage loans with
repricing terms of less than one-year, partially offset by an increase in money
market deposit accounts and short-term borrowings with maturity of one year or
less. The Bank continues to consider a variety of strategies to manage its
interest rate risk position.
Capital. At December 31, 2001, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for "well-capitalized" institutions under OTS prompt
corrective action regulations.
The following table shows the Bank's regulatory capital levels at December 31,
2001, in relation to the regulatory requirements in effect at that date. The
information below is based upon the Bank's understanding of the regulations and
interpretations currently in effect and may be subject to change.
Regulatory Capital
(Dollars in thousands)
Minimum Excess
Actual Capital Requirement Capital
--------------------------- --------------------------- -------------------------
As a % As a % As a %
Amount of Assets Amount of Assets Amount of Assets
--------------- ---------- --------------- ---------- -------------- ----------
Stockholders' equity per financial statements $ 536,434
Minority interest in REIT Subsidiary (1) 144,000
Accumulated other comprehensive income (2) (2,862)
---------------
677,572
Adjustments for tangible and core capital:
Intangible assets (47,491)
Non-includable subsidiaries (3) (1,415)
Non-qualifying purchased/originated loan
servicing rights (3,290)
---------------
Total tangible capital 625,376 5.55% $ 168,953 1.50% $ 456,423 4.05%
--------------- ========== =============== ========== ============== ==========
Total core capital (4) 625,376 5.55% $ 450,541 4.00% $ 174,835 1.55%
--------------- ========== =============== ========== ============== ==========
Tier 1 risk-based capital (4) 625,376 7.00% $ 312,688 4.00% $ 312,688 3.00%
--------------- ========== =============== ========== ============== ==========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and lease losses 66,018
---------------
Total supplementary capital 316,018
---------------
Total available capital 941,394
Equity investments (3) (1,583)
---------------
Total risk-based capital (4) $ 939,811 10.70% $ 714,370 8.00% $ 225,441 2.70%
=============== ========== =============== ========== ============== ==========
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, accumulated other comprehensive income is excluded
from regulatory capital.
(3) Reflects an aggregate offset of $.2 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. The following table sets forth the Bank's REO at December 31, 2001,
after valuation allowances of $86.3 million, by the fiscal year in which the
property was acquired through foreclosure.
Fiscal Year (In thousands)
----------- --------------
1990 $ 4,408 (1) (2)
1991 18,454 (2)
1992 -
1993 -
1994 -
1995 5,142 (2)
1996 -
1997 -
1998 -
1999 -
2000 -
2001 287
2002 1,079
--------------
Total REO $ 29,370
==============
- -----------------------
(1) Includes REO, with an aggregate net book value of $1.6 million, which the
Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $26.4 million, for which
the Bank received an extension of the holding periods through December 19,
2002.
Although the Bank stopped originating subprime automobile loans in November 9,
2000, the Bank's subprime automobile lending portfolio at December 31, 2001
continued to exceed 25% of its Tier 1 capital. As a result, the Bank remains
potentially subject to the OTS guidance for subprime lending, including
increased capital requirements of 1 1/2 to 3 times the amount required for
non-subprime assets of the same type.
LIQUIDITY AND CAPITAL RESOURCES
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
the quarter ended December 31, 2001, the bank made tax sharing payments totaling
$4.9 million and a dividend payment of $4.0 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.
In recent years, the operations of the Trust have generated net operating losses
while the bank has reported net income. It is anticipated that the Trust's
consolidation of the bank's operations into the Trust's federal income tax
return will result in the use of the Trust's net operating losses to reduce the
federal income taxes the bank would otherwise owe. If in any future year, the
bank has taxable losses or unused credits, the Trust would be obligated to
reimburse the bank for the greater of (i) the tax benefit to the group using
such tax losses or unused tax credits in the group's consolidated federal income
tax returns or (ii) the amount of the refund which the bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.
During the quarter ended December 31, 2001, the Trust has purchased through
dividend reinvestment 112,000 shares of common stock of Saul Centers and as of
December 31, 2001 owned approximately 3,141,000 shares representing 21.6% of
such company's outstanding common stock. As of December 31, 2001, the market
value of these shares was approximately $67.1 million. Substantially all these
shares have been pledged as collateral with the Real Estate Trust's credit line
banks.
As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Limited Partnership ("Saul Holdings
Partnership") the Real Estate Trust shares in cash distributions from operations
and from capital transactions involving the sale of properties. The partnership
agreement of Saul Holdings Partnership provides for quarterly cash distributions
to the partners out of net cash flow. During the quarter ended December 31,
2001, the Real Estate Trust received total cash distributions of $1.6 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 lines of credit banks.
In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of 9 3/4% Senior Secured Notes due 2008, (the "1998 Notes"). After
providing for the retirement of $175.0 million aggregate principal amount of 11
5/8% Senior Secured Notes issued in 1994 (the "1994 Notes"), including a
prepayment premium of $10.0 million and debt issuance costs of approximately
$5.9 million, the Real Estate Trust realized approximately $9.1 million in new
funds. In addition, the Real Estate Trust received about $13.2 million in cash
which had been held as additional collateral by the indenture agent under the
1994 Notes. The 1998 Notes are secured by a first priority perfected security
interest in 8,000 shares, or 80%, of the issued and outstanding common stock of
the bank, which constitute all of the bank common stock held by the Real Estate
Trust. The 1998 Notes are nonrecourse obligations of the Real Estate Trust.
The Real Estate Trust is currently selling unsecured notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
unsecured notes. To the degree that the Real Estate Trust does not sell new
unsecured notes in an amount sufficient to finance completely the scheduled
repayment of outstanding unsecured notes as they mature, it will finance such
repayments from other sources of funds.
In fiscal 1995, the Real Estate Trust established a $15.0 million revolving
credit line with an unrelated bank. This facility was for an inital 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 December 31, 2001 the Real Estate Trust had no
outstanding borrowings under the facility and unrestricted availability was
$42.6 million.
In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, the line of credit was
increased to $10.0 million and was extended for a year. During fiscal 1998, the
line of credit was increased to $20.0 million and was extended for an additional
year. In July 2000, the line of credit was further increased to $25.0 million.
The current maturity date for this line is July 31, 2002. Interest is computed
by reference to a floating rate index. At December 31, 2001, the Real Estate
Trust had no outstanding borrowings and unrestricted availability was $25.0
million.
The maturity schedule for the Real Estate Trust's outstanding debt at December
31, 2001 for the balance of fiscal 2002 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
Notes Payable- Notes Payable-
Fiscal Year Mortgage Note Secured Unsecured Total
- -------------------- -------------- -------------- -------------- -----------
2002 (1) $31,443 $ -- $ 5,725 $37,168
2003 27,940 -- 11,777 39,717
2004 9,008 -- 11,542 20,550
2005 13,651 -- 8,980 22,631
2006 94,406 -- 5,528 99,934
Thereafter 148,273 200,000 9,380 357,653
-------------- -------------- -------------- -----------
Total $324,721 $200,000 $52,932 $577,653
============== ============== ============== ===========
(1) January 1, 2001 - September 30, 2002
Of the $324.7 million of mortgage debt outstanding at December 31, 2001, $296.3
million was nonrecourse to the Real Estate Trust.
DEVELOPMENT AND CAPITAL EXPENDITURES
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 is projected to be $8.4 million and will be financed by
a $7.4 million construction loan, which has a five-year term, a floating
interest rate and one two-year renewal option. Construction of the base
building was completed in December 2000, and the building was placed in service
during December 2001. 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 will be known as Dulles North Building Four. Development costs are
projected to be $10.8 million and will be financed with the proceeds of a $9.5
million construction loan, which has a three-year term, a floating interest rate
and two one-year renewal options. Construction of the base building has been
completed. The Real Estate Trust has negotiated a lease with a tenant for the
entire building and occupancy is expected during the third quarter of fiscal
2002.
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 Bank's average liquidity ratio for the quarter ended December 31,
2001, was 9.1% compared to 7.7% for the quarter ended December 31, 2000.
The Bank securitized and sold automobile loan receivables of $236.1 million
during the current quarter. At December 31, 2001, the Bank is considering the
securitization and sale of approximately $600 million of single-family loan
receivables, all of which are outstanding at December 31, 2001. The Bank is also
considering the securitization and sale of approximately $350 million of
automobile loan receivables, including $130 million of receivables outstanding
at December 31, 2001 and $220 million of receivables that the Bank expects to
become available through additional fundings during the six months ending June
30, 2001. As part of its operating strategy, the Bank continues to explore
opportunities to sell assets and to securitize and sell single-family, home
equity, automobile and home loan receivables to meet liquidity and other balance
sheet objectives. The Bank is obligated under various recourse provisions
(primarily related to credit losses) related to the securitization and sale of
receivables. As a result of these recourse provisions, the Bank maintained
restricted cash accounts and overcollateralization of receivables amounting to
$26.0 million and $29.6 million, respectively, at December 31, 2001, and $24.3
million and $28.5 million, respectively, at September 30, 2001, 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 $0.9 million and $1.2 million at December 31, 2001 and
September 30, 2001, 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 December 31, 2001, recourse to the Bank under these arrangements was
$6.3 million, consisting of restricted cash accounts of $3.9 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 December 31, 2001 and September
30, 2001 recourse to the Bank under this arrangement totaled $3.4 million.
There were no material commitments for capital expenditures at December 31,
2001.
The Bank's liquidity requirements in fiscal 2002, and for years subsequent to
fiscal 2002, will continue to be affected both by the asset size of the Bank,
the growth of which will be constrained by capital requirements, and the
composition of the asset portfolio. Management believes that the Bank's primary
sources of funds will be sufficient to meet the Bank's foreseeable long-term
liquidity needs. The mix of funding sources utilized from time to time will be
determined by a number of factors, including capital planning objectives,
lending and investment strategies and market conditions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED
DECEMBER 31,2000
REAL ESTATE
The Real Estate Trust recorded a loss before depreciation and amortization of
$287,000 and an operating loss of $5.1 million in the three-month period ended
December 31, 2001 (the "2002 quarter") compared to income before depreciation
and amortization of $4.9 million and operating income of $831,000 in the
three-month period ended December 31, 2000, (the "2001 quarter"). The changes
reflect declining results in operations of hotels, office and industrial
properties, and higher interest expense. Additionally, in the 2001 quarter the
Trust recognized approximately $2.5 million in gains from the sale of two
properties.
Income after direct operating expenses from hotels decreased $2.1 million
(25.6%) in the 2002 quarter over the level achieved in the 2001 quarter. Results
from the sixteen hotels owned throughout both quarters, decreased by $3.3
million, while results from newly developed properties amounted to $1.3 million.
The decrease in total revenue of $3,476,000 (14.9%) was offset somewhat by the
decrease of $1,367,000 (9.0%) in direct operating expenses. For the sixteen
hotels owned throughout both periods, the decrease in total revenue was
$5,754,000 (24.9%) and the decrease in direct operating expenses was $2,496,000
(16.7%). The revenue decrease was attributable to declining market conditions
resulting from the effects of the September 11 terrorist attacks and the slowing
economy.
Income after direct operating expenses from office and industrial properties
decreased $363,000 (4.9%) in the 2002 quarter over the 2001 quarter. $448,000 of
this decrease reflected reduced results from the ten office properties owned
throughout both quarters, and $85,000 relected results from two new properties.
Gross income decreased $297,000 (3.0%), while expenses increased $65,000 (2.6%).
For the ten office properties owned throughout both periods, the decrease in
total revenue was $281,000 (3.0%) and the increase in direct operating expenses
was $167,000 (7.0%). The downturn was due to leased space turning over in the
current period.
Interest expense increased $253,000 (2.1%) in the 2002 quarter because of higher
average borrowings. Average balances of the Real Estate Trust's outstanding
borrowings increased to $579.8 million for the 2002 quarter from $533.6 million
for the 2001 quarter. Average interest rates in the 2002 and 2001 quarters were
9.00% and 9.54%, respectively.
Capitalized interest decreased $213,000 (66.5%) in the 2002 quarter due to lower
level of development activity in the current period.
Amortization of debt expense increased $29,000 (14.9%) in the 2002 quarter,
primarily due to costs incurred in connection with obtaining additional mortgage
loans.
Depreciation increased $691,000 (17.7%) in the 2002 quarter, largely as a result
of new income-producing assets placed in service.
Advisory, management and leasing fees paid to related parties increased $168,000
(5.9%) in the 2002 quarter from their level in the 2001 quarter. The monthly
advisory fees were $475,000 in the 2002 quarter, compared to $363,000 in the
2001 quarter, an increase aggregating $337,000 (30.9%). Management and leasing
fees decreased $169,000 (9.7%) in the current quarter, reflecting lower hotel
sales and office rents on which the fees are based.
General and administrative expense increased $20,000 (2.8%) in the 2002 quarter,
primarily due to increases in legal of $189,000 (122.6%) and accounting of
$48,000 (35.8%) offset by a decrease of $217,000 in other administrative
expenses.
Equity in earnings of unconsolidated entities reflected earnings of $2,602,000
in the 2002 quarter as compared to earnings of $1,884,000 in the 2001 quarter,
an increase of $718,000 (38.1%).
BANKING
Overview. The Bank recorded operating income of $27.4 million for the 2002
quarter compared to operating income of $18.7 million for the 2001 quarter.
Increased net interest income and other (non-interest) income were partially
offset by increases in operating expense and provision for loan and lease
losses.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $7.6 million (or 8.9%) in the 2002 quarter compared to
the 2001 quarter. There was no interest income recorded during the 2002 quarter
on non-accrual assets and restructured loans. The Bank would have recorded
interest income of $1.1 million for the 2002 quarter if non-accrual assets and
restructured loans had been current in accordance with their original terms. The
Bank's net interest income in future periods will continue to be adversely
affected by the Bank's non-performing assets. See "Financial Condition - Asset
Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
Net Interest Margin Analysis
(Dollars in thousands)
Three Months Ended December 31,
-------------------------------------------------------------------------------------
2001 2000
------------------------------------------ ------------------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
-------------- ----------- ----------- ------------- ----------- -----------
Assets:
Interest-earning assets:
Loans and leases receivable, net (1) $ 8,518,506 $ 148,186 6.96 % $ 8,449,912 $ 177,030 8.38 %
Mortgage-backed securities 1,419,951 21,719 6.12 1,010,792 16,554 6.55
Federal funds sold and securities
purchased under agreements to resell 16,250 81 1.99 47,196 783 6.64
Trading securities 59,962 815 5.44 15,598 289 7.41
Investment securities 45,579 485 4.26 45,655 695 6.09
Other interest-earning assets 228,433 2,497 4.37 183,589 3,231 7.04
-------------- ----------- ------------- -----------
Total 10,288,681 173,783 6.76 9,752,742 198,582 8.14
----------- ----------- ----------- -----------
Noninterest-earning assets:
Cash 251,586 292,376
Real estate held for investment or sale 31,813 55,354
Property and equipment, net 443,739 369,777
Goodwill and other intangible assets, net 26,845 25,057
Other assets 274,589 265,568
-------------- -------------
Total assets $ 11,317,253 $ 10,760,874
============== =============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,403,886 1,176 0.34 $ 1,239,997 2,605 0.84
Savings deposits 907,234 2,321 1.02 875,575 3,953 1.81
Time deposits 2,782,351 34,180 4.91 3,072,505 48,694 6.34
Money market deposits 1,644,349 8,575 2.09 1,196,844 12,373 4.14
-------------- ----------- ------------- -----------
Total deposits 6,737,820 46,252 2.75 6,384,921 67,625 4.24
Borrowings 2,886,795 34,370 4.76 2,910,380 45,393 6.24
-------------- ----------- ------------- -----------
Total liabilities 9,624,615 80,622 3.35 9,295,301 113,018 4.86
----------- ----------- ----------- -----------
Noninterest-bearing items:
Noninterest-bearing deposits 807,420 616,447
Other liabilities 229,392 233,911
Minority interest 144,000 144,000
Stockholders' equity 511,826 471,215
-------------- -------------
Total liabilities and stockholders' equity $ 11,317,253 $ 10,760,874
============== =============
Net interest income $ 93,161 $ 85,564
=========== ===========
Net interest spread (2) 3.41 % 3.28 %
=========== ===========
Net yield on interest-earning assets (3) 3.62 % 3.51 %
=========== ===========
Interest-earning assets to interest-bearing liabilities 106.90 % 104.92 %
=========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Three Months Ended December 31, 2001
Compared to
Three Months Ended December 31, 2000
Increase (Decrease)
Due to Change in (1)
----------------------------------------------------------------------------
Total
Volume Rate Change
--------------------- --------------------- ---------------------
Interest income:
Loans (2) $ 9,652 $ (38,496) $ (28,844)
Mortgage-backed securities 11,924 (6,759) 5,165
Federal funds sold and securities
purchased under agreements to resell (339) (363) (702)
Trading securities 1,043 (517) 526
Investment securities (1) (209) (210)
Other interest-earning assets 3,553 (4,287) (734)
--------------------- --------------------- ---------------------
Total interest income 25,832 (50,631) (24,799)
--------------------- --------------------- ---------------------
Interest expense:
Deposit accounts 22,954 (44,327) (21,373)
Borrowings (364) (10,659) (11,023)
--------------------- --------------------- ---------------------
Total interest expense 22,590 (54,986) (32,396)
--------------------- --------------------- ---------------------
Increase in net interest income $ 3,242 $ 4,355 $ 7,597
===================== ===================== =====================
- ------------------------------------------------------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
Interest income in the 2002 quarter decreased $24.8 million (or 12.5%) from the
level in the 2001 quarter as a result of lower average yields on loans and
leases receivable, which was partially offset by increases in the average
balances of loans and leases receivable of $68.6 million and mortgage-backed
securities of $409.2 million.
The Bank's net interest spread increased to 3.41% in the 2002 quarter from 3.28%
in the 2001 quarter. The 13 basis point increase primarily reflected a decrease
in the average cost of interest-bearing liabilities at a greater rate than the
rate of decrease in the average yield of interest-earning assets. Average
interest-earning assets as a percentage of average interest bearing liabilities
increased to 106.90% for the 2002 quarter compared to 104.92% for the 2001
quarter.
Interest income on loans and leases, the largest category of interest-earning
assets, decreased $28.8 million from the 2001 quarter primarily because of lower
average yields. The average yield on the loan and lease portfolio decreased 142
basis points (from 8.38% to 6.96%) from the 2001 quarter. Lower average yields,
as well as lower average balances on the Bank's single-family residential loans
and construction loans, resulted in a $14.9 million (or 16.6%) and a $3.4
million (or 46.4%) decrease in interest income, respectively, from those loans.
In addition, lower average yields on commercial loans, home equity loans and
automobile loans contributed to decreases of $2.8 million (or 21.8%), $1.5
million (or 21.0%) and $6.6 million (or 11.8%), respectively, from those loans.
Partially offsetting the decrease in interest income were increases in the
average balances of commercial loans, home equity loans and automobile loans.
Interest income on mortgage-backed securities increased $5.2 million (or 31.2%)
primarily because of higher average balances. The effect of the $409.2 million
increase in average balances was partially offset by an decrease in the average
interest rates on those securities from 6.55% to 6.12%.
Interest expense on deposits decreased $21.4 million (or 31.6%) during the 2002
quarter, due to decreased average rates. The 149 basis point decrease in the
average rate on deposits (from 4.24% to 2.75%) resulted from a decline in market
rates on which the deposit rates are based. The Bank has also reduced the use
of higher cost brokered deposits as an alternative funding source in the 2002
quarter compared to the 2001 quarter.
Interest expense on borrowings decreased $11.0 million (or 24.3%) in the 2002
quarter over the 2001 quarter. The average balances on Federal Home Loan Bank
advances decreased by $80.3 million, or 3.9%, and the average rate on such
borrowings fell (from 5.83% to 5.12%), resulting in a reduction of $4.7 million
in interest expense. Also contributing to the decrease in interest expense on
borrowings were decreases in average yield in securities sold under repurchase
agreements (from 6.57% to 2.24%) and in other borrowings (from 5.92% to 1.45%),
which contributed to $4.5 million and $1.9 million decrease in interest expense,
respectively. Partially offsetting the decreased expense on borrowings were
increases in the average balances of $50.5 and $6.3 million in securities sold
under repurchase agreements and other borrowings, respectively.
Provision for Loan and Lease Losses. The Bank's provision for loan and lease
losses increased to $17.9 million in the 2002 quarter from $15.9 million in the
2001 quarter. The $2.0 million increase primarily reflected adverse economic
conditions. See "Financial Condition - Asset Quality - Allowances for Losses."
Other Income. Other non-interest income increased to $57.4 million in the 2002
quarter from $46.7 million in the 2001 quarter. The $10.7 million (or 22.9%)
increase was primarily attributable to an increase in the net gain on trading
securities, deposit servicing fees and other income. Partially offsetting this
increase was a decrease in gain on sales of loans and servicing and
securitization income.
The $6.9 million increase in the net gain on trading securities was primarily
due to $4.8 million in gains on sales of mortgage-backed securities related to
mortgage banking activities and a $1.9 million unrealized gain in market value
of the Bank's interest in other securities.
Deposit servicing fees increased $3.3 million (or 13.1%) during the 2002 quarter
primarily due to fees generated from the continued expansion of the Bank's
branch and ATM network.
Operating Expenses. Operating expenses for the 2002 quarter increased $7.5
million (or 7.7%) from the 2001 quarter. Loan expenses increased $3.2 million,
primarily due to an increase in the amortization of capitalized mortgage
servicing rights. Property and equipment expenses increased by $4.1 million due
primarily to increased rent expense and related property taxes associated with
the Bank's new headquarters.