UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
-----------------------------------------------
OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file number: 1-7184
B. F. SAUL REAL ESTATE INVESTMENT TRUST
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(Exact name of registrant as specified in the charter)
Maryland 52-6053341
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7501 Wisconsin Avenue,
Bethesda, Maryland 20814
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(Address of principal executive office) (Zip Code)
(301) 986-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No
--- ---
The number of Common Shares of Beneficial Interest, $1 Par Value,
outstanding as of May 14, 2002, was 4,826,910.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a) Consolidated Balance Sheets at March 31, 2002 and
September 30, 2001
(b) Consolidated Statements of Operations for the three-month
and six-month periods ended March 31, 2002 and 2001
(c) Consolidated Statements of Comprehensive Income and Changes in
Shareholders' Equity (Deficit) for the three-month
and six-month periods ended March 31, 2002 and 2001
(d) Consolidated Statements of Cash Flows for the six-month
periods ended March 31, 2002 and 2001
(e) Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
(a) Financial Condition
Real Estate
Banking
(b) Liquidity and Capital Resources
Real Estate
Banking
(c) Results of Operations
Three months ended March 31, 2002 compared to
three months ended March 31, 2001
Six months ended March 31, 2002 compared to
six months ended March 31, 2001
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports On Form 8-K
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
============================================================================================================================
March 31 September 30
----------------------------
(In thousands) 2002 2001
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ASSETS
Real Estate
Income-producing properties
Hotel $ 254,143 $ 254,165
Office and industrial 163,767 157,653
Other 2,803 2,825
------------- -------------
420,713 414,643
Accumulated depreciation (140,863) (131,659)
------------- -------------
279,850 282,984
Land parcels 41,014 40,835
Construction in progress 13,076 15,681
Cash and cash equivalents 16,493 13,860
Note receivable and accrued interest -- related party 7,787 7,787
Other assets 82,122 86,983
------------- -------------
Total real estate assets 440,342 448,130
- ----------------------------------------------------------------------------------------------------------------------------
Banking
Cash and other deposits 460,108 409,995
Loans held for securitization and/or sale 752,728 528,083
Investment securities (market value $46,002 and $46,181, respectively) 46,427 45,794
Trading securities 7,412 6,690
Mortgage-backed securities (market value $1,211,094 and $1,489,835, respectively) 1,219,439 1,474,495
Loans and leases receivable (net of allowance for losses of $69,018 and $63,018, respectively) 7,403,036 8,018,495
Federal Home Loan Bank stock 84,843 113,030
Real estate held for investment or sale (net of allowance for losses of $85,468 and $85,354,
respectively) 25,009 31,704
Property and equipment, net 453,937 437,795
Goodwill and other intangible assets, net 25,904 27,058
Interest only strips, net 63,231 47,146
Other assets 228,273 248,181
------------- -------------
Total banking assets 10,770,347 11,388,466
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TOTAL ASSETS $ 11,210,689 $ 11,836,596
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LIABILITIES
Real Estate
Mortgage notes payable $ 322,948 $ 325,750
Notes payable - secured 200,000 202,500
Notes payable - unsecured 54,904 50,717
Deferred gains - real estate 113,045 113,045
Accrued dividends payable - preferred shares of beneficial interest 16,012 19,303
Other liabilities and accrued expenses 34,249 36,874
------------- -------------
Total real estate liabilities 741,158 748,189
- ----------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts 7,560,384 7,562,470
Borrowings 211,578 282,350
Federal Home Loan Bank advances 1,676,858 2,240,598
Other liabilities 402,407 403,190
Capital notes -- subordinated 250,000 250,000
------------- -------------
Total banking liabilities 10,101,227 10,738,608
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Commitments and contingencies
Minority interest held by affiliates 90,163 86,310
Minority interest -- other 218,307 218,307
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TOTAL LIABILITIES 11,150,855 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
Retained earnings (deficit) 800 (11,401)
Accumulated other comprehensive income (loss) 781 (1,670)
------------- -------------
101,682 87,030
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 59,834 45,182
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,210,689 $ 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)
============================================================================================================================
For the Three Months For the Six Months
Ended March 31 Ended March 31
------------------------------- ----------------------------
(In thousands, except per share amounts) 2002 2001 2002 2001
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REAL ESTATE
Income
Hotels $ 20,350 $ 25,509 $ 40,211 $ 48,846
Office and industrial (including $830, $812, $1,646 and $1,637
of rental income from banking segment, respectively) 9,633 10,463 19,307 20,434
Other 370 489 793 1,220
---------------- ------------- ------------- -------------
Total income 30,353 36,461 60,311 70,500
- ----------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
Hotels 14,028 15,945 27,769 31,053
Office and industrial properties 2,731 2,744 5,349 5,297
Land parcels and other 234 276 549 643
Interest expense 12,493 12,731 25,115 25,037
Capitalized interest (117) (101) (287) (421)
Amortization of debt expense 196 225 416 416
Depreciation 4,614 4,165 9,203 8,063
Advisory, management and leasing fees - related parties 3,021 2,991 6,022 5,824
General and administrative 501 403 1,221 1,104
---------------- ------------- ------------- -------------
Total expenses 37,701 39,379 75,357 77,016
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Equity in earnings of unconsolidated entities 3,140 2,114 5,742 3,998
Gain on sale of property -- -- -- 2,545
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REAL ESTATE OPERATING INCOME (LOSS) $ (4,208) $ (804) $ (9,304) $ 27
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BANKING
Interest income
Loans and leases 132,777 $ 181,001 $ 280,963 $ 358,031
Mortgage-backed securities 19,010 14,944 40,729 31,498
Trading securities 1,037 372 1,852 661
Investment securities 384 683 869 1,378
Other 1,950 4,031 4,528 8,045
---------------- ------------- ------------- -------------
Total interest income 155,158 201,031 328,941 399,613
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts 38,086 64,742 84,338 132,367
Borrowings 31,383 45,057 65,753 90,450
---------------- ------------- ------------- -------------
Total interest expense 69,469 109,799 150,091 222,817
---------------- ------------- ------------- -------------
Net interest income 85,689 91,232 178,850 176,796
Provision for loan and lease losses (14,976) (18,016) (32,896) (33,939)
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 70,713 73,216 145,954 142,857
- ----------------------------------------------------------------------------------------------------------------------------
Other income
Servicing and securitization income 25,529 26,004 38,951 40,503
Deposit servicing fees 27,365 24,130 55,610 49,108
Gain (loss) on sales of trading securities, net 3,825 17 8,891 (119)
Loss on real estate held for investment or sale, net (50) (729) (963) (1,609)
Gain (loss) on sales of loans, net (655) 1,353 928 2,935
Gain on other investment -- 9,444 -- 9,444
Other 9,117 7,915 19,129 14,588
---------------- ------------- ------------- -------------
Total other income 65,131 68,134 122,546 114,850
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Continued on following page.
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
============================================================================================================================
For the Three Months For the Six Months
Ended March 31 Ended March 31
------------------------------- ----------------------------
(In thousands, except per share amounts) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
BANKING (Continued)
Operating expenses
Salaries and employee benefits $ 50,459 $ 48,616 $ 98,799 $ 99,433
Loan 9,102 15,531 18,741 22,020
Property and equipment (including $830, $812, $1,646 and $1,637
of rental expense paid to real estate segment, respectively) 11,410 8,781 23,913 17,207
Marketing 1,171 2,066 4,029 5,689
Data processing 8,484 6,835 16,714 13,079
Depreciation and amortization 8,952 8,450 17,753 16,856
Deposit insurance premiums 346 363 680 709
Amortization of goodwill and other intangible assets 554 575 1,155 1,173
Other 13,703 13,361 27,618 26,116
---------------- ------------- ------------- -------------
Total operating expenses 104,181 104,578 209,402 202,282
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BANKING OPERATING INCOME $ 31,663 $ 36,772 $ 59,098 $ 55,425
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TOTAL COMPANY
Operating income $ 27,455 $ 35,968 $ 49,794 $ 55,452
Income tax provision 9,524 12,162 16,988 16,853
---------------- ------------- ------------- -------------
Income before minority interest 17,931 23,806 32,806 38,599
Minority interest held by affiliates (2,858) (3,736) (5,240) (5,190)
Minority interest -- other (6,327) (6,327) (12,656) (12,656)
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TOTAL COMPANY NET INCOME $ 8,746 $ 13,743 $ 14,910 $ 20,753
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 7,391 $ 12,389 $ 12,201 $ 18,045
NET INCOME PER COMMON SHARE
Income before minority interest $ 3.43 $ 4.65 $ 6.24 $ 7.44
Minority interest held by affiliates (0.59) (0.77) (1.09) (1.08)
Minority interest -- other (1.31) (1.31) (2.62) (2.62)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.53 $ 2.57 $ 2.53 $ 3.74
- ----------------------------------------------------------------------------------------------------------------------------
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)
============================================================================================================================
For the Three Months For the Six Months
Ended March 31 Ended March 31
------------------------------- ----------------------------
(Dollars in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $ 8,746 $ 13,743 $ 14,910 $ 20,753
Other comprehensive income:
Net unrealized holding gains (losses) (1,508) (1,198) 2,451 (1,615)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 7,238 $ 12,545 $ 17,361 $ 19,138
- ----------------------------------------------------------------------------------------------------------------------------
CHANGES IN SHAREHOLDERS' EQUITY
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares) $ 516 $ 516 $ 516 $ 516
---------------- ------------- ------------- -------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares) 6,642 6,642 6,642 6,642
---------------- ------------- ------------- -------------
PAID-IN SURPLUS
Beginning and end of period 92,943 92,943 92,943 92,943
---------------- ------------- ------------- -------------
RETAINED EARNINGS (DEFICIT)
Beginning of period (6,591) (43,986) (11,401) (49,642)
Net income 8,746 13,743 14,910 20,753
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable (1,355) (1,354) (2,709) (2,708)
---------------- ------------- ------------- -------------
End of period 800 (31,597) 800 (31,597)
---------------- ------------- ------------- -------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period 2,289 (417) (1,670) --
Net unrealized holding gains (losses) (1,508) (1,198) 2,451 (1,615)
---------------- ------------- ------------- -------------
End of period 781 (1,615) 781 (1,615)
---------------- ------------- ------------- -------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848) (41,848)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 59,834 $ 25,041 $ 59,834 $ 25,041
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The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
============================================================================================================================
For the Six Months
Ended March 31
----------------------------
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss $ (6,048) $ (7)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 9,203 8,063
Gain on sale of property -- (2,545)
Increase in accounts receivable and accrued income (366) (670)
Increase in deferred tax asset (3,256) (4)
Decrease in accounts payable and accrued expenses (1,600) (5,938)
Amortization of debt expense 920 890
Equity in earnings of unconsolidated entities (5,742) (3,998)
Dividends and tax sharing payments 12,900 6,400
Other (3,512) (1,456)
------------- -------------
2,499 735
------------- -------------
Banking
Net income 20,958 20,760
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of premiums, discounts and net deferred loan fees 8,804 2,241
Depreciation and amortization 17,753 16,856
Loss on retirement of fixed assets 2,034 --
Provision for loan and lease losses 32,896 33,939
Capitalized interest on real estate under development -- (1,683)
Proceeds from sales of trading securities 733,206 182,482
Net fundings of loans held for sale and/or securitization (1,099,220) (546,546)
Proceeds from sales of loans held for sale and/or securitization 1,108,716 637,976
Loss on sales of real estate held for sale 1,013 248
Provision for losses on real estate held for investment or sale 2,100 2,100
(Gain) loss on sales of trading securities, net (8,891) 119
Increase in interest-only strips (16,085) (18,137)
(Increase) decrease in servicing assets (20,053) 10,218
Amortization of goodwill and other intangible assets 1,159 1,178
Decrease in other assets 43,081 3,506
Increase (decrease) in other liabilities (24,403) 26,187
Minority interest held by affiliates 5,240 5,190
Minority interest - other 4,875 4,875
Other 46,677 39,641
------------- -------------
859,860 421,150
------------- -------------
Net cash provided by operating activities 862,359 421,885
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties (3,666) (17,067)
Property acquisitions -- (15,159)
Property sales 22 7,287
Note receivable and accrued interest -- related party
Repayments -- 2,000
Equity investment in unconsolidated entities 1,469 1,467
Net proceeds from settlement escrow 9,628 --
Other -- 2
------------- -------------
7,453 (21,470)
------------- -------------
Banking
Net proceeds from redemption (purchases) of Federal Home Loan Bank stock 28,187 (8,087)
Net proceeds from sales of real estate 13,283 9,758
Net principal collected (fundings) of loans and leases receivable 889,990 (143,072)
Principal collected on mortgage-backed securities 264,514 165,779
Purchases of investment securities (11,730) (31)
Purchases of loans receivable (1,327,025) (564,327)
Purchases of property and equipment (35,989) (48,533)
Disbursements for real estate held for investment or sale (5,199) --
Increase in goodwill -- (4,178)
Other 2,076 (4,634)
------------- -------------
(181,893) (597,325)
------------- -------------
Net cash provided by (used in) investing activities (174,440) (618,795)
- ----------------------------------------------------------------------------------------------------------------------------
Continued on following page.
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)
============================================================================================================================
For the Six Months
Ended March 31
----------------------------
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing $ 1,386 $ 14,160
Principal curtailments and repayments of mortgages (4,188) (5,557)
Proceeds from secured note financings -- 13,000
Repayments of secured note financings (2,500) (5,500)
Proceeds from sales of unsecured notes 7,969 5,385
Repayments of unsecured notes (3,782) (2,758)
Costs of obtaining financings (204) (254)
Dividends paid - preferred shares of beneficial interest (6,000) (6,000)
------------- -------------
(7,319) 12,476
------------- -------------
Banking
Proceeds from customer deposits and sales of certificates of deposit 24,120,079 20,919,769
Customer withdrawals of deposits and payments for maturing certificates of deposit (24,122,165) (20,739,955)
Net increase in securities sold under repurchase agreements (63,623) (138,464)
Advances from the Federal Home Loan Bank 3,815,317 3,800,748
Repayments of advances from the Federal Home Loan Bank (4,379,057) (3,652,447)
Net increase (decrease) in other borrowings (7,189) (4,842)
Cash dividends paid on preferred stock (4,875) (4,875)
Cash dividends paid on common stock (10,000) (8,000)
Other 23,659 61,968
------------- -------------
(627,854) 233,902
------------- -------------
Net cash provided by (used in) financing activities (635,173) 246,378
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 52,746 49,468
Cash and cash equivalents at beginning of period 423,855 446,362
------------- -------------
Cash and cash equivalents at end of period $ 476,601 $ 495,830
- ----------------------------------------------------------------------------------------------------------------------------
Components of cash and cash equivalents at end of period as presented in the
consolidated balance sheets:
Real Estate
Cash and cash equivalents $ 16,493 $ 9,870
Banking
Cash and other deposits 460,108 352,960
Federal funds sold and securities purchased under agreements to resell -- 133,000
------------- -------------
Cash and cash equivalents at end of period $ 476,601 $ 495,830
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 173,262 $ 241,567
Income taxes paid 12,712 109
Shares of Saul Centers, Inc. common stock 4,201 3,852
Cash received during the year from:
Dividends on shares of Saul Centers, Inc. common stock 2,406 2,055
Distributions from Saul Holdings Limited Partnership 3,263 3,263
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured 2,620 2,079
Loans held for sale exchanged for trading securities 725,037 192,045
Loans receivable transferred to loans held for securitization and sale 924,085 396,529
Loans receivable transferred to real estate acquired in settlement of loans 1,882 376
Loans held for sale transferred to loans receivable 11,406 --
- ----------------------------------------------------------------------------------------------------------------------------
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 on 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 SECURITIZATION AND/OR SALE:
Loans held for securitization and/or sale is composed of the following:
March 31, September 30,
2002 2001
------------------ ------------------
Single-family residential loans $ 712,670 $ 233,359
Automobile loans 39,562 282,000
Home improvement and related loans 496 12,724
------------------ ------------------
Total $ 752,728 $ 528,083
================== ==================
LOANS AND LEASES RECEIVABLE:
Loans and leases receivable is composed of the following:
March 31, September 30,
2002 2001
-------------------- --------------------
Single-family residential $ 3,792,957 $ 4,555,814
Home equity 485,269 372,095
Real estate construction and ground 450,674 472,489
Commercial real estate and multifamily 27,842 30,703
Commercial 1,397,223 1,376,582
Automobile 530,492 361,930
Subprime automobile 317,774 420,658
Automobile leases 1,135,450 1,124,106
Home improvement and related loans 110,380 100,494
Overdraft lines of credit and other consumer 36,961 36,356
-------------------- --------------------
8,285,022 8,851,227
-------------------- --------------------
Less:
Undisbursed portion of loans 860,595 812,325
Unearned discounts and net deferred loan origination costs (47,627) (42,611)
Allowance for losses on loans and leases 69,018 63,018
-------------------- --------------------
881,986 832,732
--------------------
--------------------
Total $ 7,403,036 $ 8,018,495
==================== ====================
REAL ESTATE HELD FOR INVESTMENT OR SALE:
The bank's real estate held for investment is carried at the lower of aggregate
cost or net realizable value. The bank's real estate acquired in settlement of
loans or real estate owned ("REO") is considered to be held for sale and is
carried at the lower of cost or fair value (less estimated selling costs).
Real estate held for investment or sale is composed of the following:
March 31, September 30,
2002 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 $85,266 and $85,152, respectively) 24,084 30,779
------------------- -------------------
Total real estate held for investment or sale $ 25,009 $ 31,704
=================== ===================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Trust has prepared its financial statements and other disclosures on a fully
consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B.F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real
Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The operations conducted by the Real Estate Trust are
designated as "Real Estate," while the business conducted by the bank and its
subsidiaries is identified by the term "Banking."
Recent Developments Regarding Arthur Andersen LLP. On March 14, 2002, our
independent public accountant, Arthur Andersen LLP, was indicted on federal
obstruction of justice charges arising from the government's investigation of
Enron. In light of this and other recent, highly publicized developments
concerning Arthur Andersen, the Audit Committee and the Board of Trustees has
been monitoring, and will continue to monitor, the engagement of Arthur Andersen
and other developments relating to that firm. In addition, it is becoming
increasingly likely that in the near future, based on circumstances existing at
that time, the Company will elect to appoint an accounting firm other than
Arthur Andersen to serve as our independent public accountant for the fiscal
year ending September 30, 2002.
FINANCIAL CONDITION
REAL ESTATE
The Real Estate Trust's investment portfolio at March 31, 2002, consisted
primarily of hotels, office projects and land parcels. At March 31, 2002 the
hotel portfolio included 18 properties containing 3,578 available rooms and the
office portfolio consisted of 12 properties containing 1,878,000 square feet of
gross leasable area. An additional office property containing 100,000 square
feet of gross leasable area was placed in service in April 2002.
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 were more directly
affected by the sharp decline in air travel. The two hotels located near Reagan
National were especially affected by Reagan National's prolonged closure and
limited flight schedule during the first half of fiscal 2002.
Consequently, the hotel portfolio experienced an average occupancy rate of 55%
and an average room rate of $86.05 during the six-month period ended March 31,
2002, compared to an average occupancy of 64% and an average room rate of $96.14
during the same period in the prior year. For the sixteen hotels owned
throughout both periods, the average occupancies were 55% and 65%, and the
average rates were $82.72 and $94.41. REVPAR (revenue per available room) for
the sixteen hotels was $45.81 for the six-month period ended March 31, 2002, a
25% decrease from REVPAR for the six-month period ended March 31, 2001 of
$61.27.
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 March 31, 2002, compared to leasing rates of 92% and 96% at September 30,
2001 and at March 31, 2001. The decline in leasing rates was primarily due to
the Trust placing into service, during December 2001, an 81,000 square foot
building that remains unleased. At March 31, 2002, the Real Estate Trust's
office property portfolio consisted of 12 properties and had a total gross
leasable area of 1.9 million square feet, of which 80,000 square feet (4.3%) and
205,000 square feet (11.0%) are subject to leases whose terms expire in the
balance of fiscal 2002 and in fiscal 2003.
BANKING
General. The bank's assets at the end of the current quarter were $10.8 billion,
a decrease of $529.9 million from the last quarter. Total loans and leases
decreased $370.6 million during the quarter to $8.2 billion at March 31, 2002.
This decrease was primarily due to the securitization and/or sale of $687.4
million of single-family residential loans, which was partially offset by
increases in automobile leases, commercial loans and home equity loans. The bank
recorded operating income of $31.7 million during the quarter ended March 31,
2002, compared to operating income of $36.8 million in the prior corresponding
quarter. Contributing to the decreased income for the current quarter were
decreases in net interest income and other (non-interest) income which was
partially offset by a decrease in the provision for loan and lease losses.
At March 31, 2002, the bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.91%, 5.91%, 7.28% and 11.14%,
respectively. The bank's regulatory capital ratios exceeded the requirements
under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well-capitalized"
institutions under the prompt corrective action regulations issued pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
See "Capital."
During the quarter ended March 31, 2002, the bank declared and paid out of
retained earnings a cash dividend on its Common Stock in the amount of $500 per
share.
Asset Quality. Non-Performing Assets. The following table sets forth information
concerning the bank's non-performing assets. The figures shown are after
charge-offs and, in the case of REO, after all valuation allowances.
Non-Performing Assets
(Dollars in thousands)
March 31, December 31, September 30,
2002 2001 2001
----------------- ------------------ ------------------
Non-performing assets:
Non-accrual loans:
Residential $ 12,101 $ 11,338 $ 7,314
Real estate construction and ground 527 - -
Subprime automobile 9,983 14,816 13,379
Other consumer 5,126 6,882 7,028
----------------- ------------------ ------------------
Total non-accrual loans (1) 27,737 33,036 27,721
----------------- ------------------ ------------------
Real estate owned 109,350 115,672 115,931
Allowance for losses on real estate owned (85,266) (86,302) (85,152)
----------------- ------------------ ------------------
Real estate owned, net 24,084 29,370 30,779
----------------- ------------------ ------------------
Total non-performing assets $ 51,821 $ 62,406 $ 58,500
================= ================== ==================
Allowance for losses on loans and leases $ 69,018 $ 66,018 $ 63,018
Allowance for losses on real estate held for investment 202 202 202
Allowance for losses on real estate owned 85,266 86,302 85,152
----------------- ------------------ ------------------
Total allowances for losses $ 154,486 $ 152,522 $ 148,372
================= ================== ==================
Ratios:
Total non-performing assets to total assets (2) 0.48% 0.55% 0.51%
Total allowance for losses to total non-performing assets (1) 112.69% 102.56% 103.29%
Allowance for losses on real estate loans to non-accrual
real estate loans (1) 61.97% 70.96% 70.86%
Allowance for losses on consumer loans and leases to
non-accrual consumer loans (1)(3) 290.89% 207.58% 230.55%
Allowance for losses on loans and leases
to non-accrual loans (1) 248.83% 199.84% 227.33%
Allowance for losses on loans and leases to total loans
and leases receivable (4) 0.84% 0.77% 0.73%
(1) Before deduction of allowances for losses.
(2) Total non-performing assets are presented after allowances for losses on real estate held for 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 $51.8 million, after valuation allowances on REO
of $85.3 million, at March 31, 2002, compared to $62.4 million, after valuation
allowances on REO of $86.3 million, at December 31, 2001. In addition to the
valuation allowances on REO, the bank maintained $69.0 million and $66.0 million
of valuation allowances on its loan and lease portfolio at March 31, 2002 and
December 31, 2001, respectively. The $10.6 million decrease in non-performing
assets for the current quarter was attributable to a decrease in non-accrual
loans of $5.3 million and a net decrease in REO of $5.3 million. See
"Non-accrual Loans" and "REO."
Non-accrual Loans. The bank's non-accrual loans totaled $27.7 million at March
31, 2002, as compared to $33.0 million at December 31, 2001. At March 31, 2002,
non-accrual loans consisted of $12.6 million of non-accrual real estate loans
and $15.1 million of non-accrual consumer and other loans, compared to
non-accrual real estate loans of $11.3 million and non-accrual consumer and
other loans of $21.7 million at December 31, 2001. Total non-accrual consumer
loans decreased primarily as a result of decreases of delinquent discontinued
subprime automobile loans.
REO. At March 31, 2002, the bank's REO totaled $24.1 million, after valuation
allowances on those assets of $85.3 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 Before Balance After Percent
of Gross Charge- Valuation Valuation Valuation of
(Dollars in thousands) Properties Balance Offs Allowances Allowances Allowances Total
-------------------------------------------------------------------------------------------
Communities 4 $ 130,295 $ 29,767 $ 100,528 $ 81,535 $ 18,993 78.9%
Residential ground 1 100 - 100 100 - -
Commercial ground 1 9,754 2,732 7,022 3,631 3,391 14.1%
Single-family
residential properties 8 1,875 175 1,700 - 1,700 7.0%
-------------------------------------------------------------------------------------------
Total REO 14 $ 142,024 $ 32,674 $ 109,350 $ 85,266 $ 24,084 100.0%
===========================================================================================
During the three months ended March 31, 2002, REO decreased $5.3 million
primarily as a result of sales of $7.4 million and increased provision for
losses of $1.1 million. The decrease was partially offset by $2.6 million in lot
finishing and infrastructure costs in one of the communities and $0.6 million in
other additions to REO.
During the three months ended March 31, 2002, the bank received revenues of $8.4
million from the disposition of 30 residential lots or units in the Communities
($1.2 million), approximately 22 acres of commercial land in two of the
Communities ($4.2 million), one residential ground property ($2.5 million) and
one single-family residential property ($0.5 million).
Delinquent Loans. At March 31, 2002, delinquent loans totaled $81.7 million, or
1.0% of loans, compared to $117.5 million, or 1.4% of loans, at December 31,
2001. The following table sets forth information regarding the bank's delinquent
loans at March 31, 2002.
Principal Balance
(Dollars in Thousands)
------------------------------------------------------------------------------
Real Subprime Other Total as a
Estate Automobile Consumer Percentage
Loans Loans Commercial Loans Total of Loans (1)
----------- ------------- -------------- ------------ ----------- -------------
Loans delinquent for:
30-59 days... $ 7,736 $ 37,855 $ 5,850 $ 11,792 $63,233 0.8%
60-89 days.... 4,132 11,000 - 3,290 18,422 0.2%
-------------
------------- ------------- -------------- ------------ -----------
Total........... $ 11,868 $ 48,855 $ 5,850 $ 15,082 $81,655 1.0%
============= ============= ============== ============ =========== =============
- --------------------------
(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 residential mortgage loans and home equity loans. Total delinquent
real estate loans decreased to $11.9 million at March 31, 2002, from $18.8
million at December 31, 2001, when delinquencies are at their traditional season
high.
Delinquent subprime automobile loans decreased to $48.9 million at March 31,
2002, from $76.8 million at December 31, 2001, primarily because delinquencies
are at their traditional season high in the December quarter and the bank's
portfolio of these discontinued loans continues to decline as a result of the
bank's prior decision to discontinue origination of these loans.
Commercial loans classified as delinquent 30-89 days consisted of 20 loans
totaling $5.9 million at March 31, 2002. There were no delinquent commercial
loans at December 31, 2001. The increase in delinquencies reflect general
economic conditions.
Other consumer loans delinquent 30-89 days decreased to $15.1 million at March
31, 2002, from $21.9 million at December 31, 2001, when the delinquencies are at
their traditional seasonal high.
Troubled Debt Restructurings. At March 31, 2002 and December 31, 2001, the bank
had no troubled debt restructurings.
Real Estate Held for Investment. At March 31, 2002 and December 31, 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)
Six Months Ended Three Months
March 31, Ended
--------------------------------- March 31,
2002 2001 2002
--------------- ---------------- ---------------
Balance at beginning of period $ 63,018 $ 54,018 $ 66,018
--------------- ---------------- ---------------
Provision for loan and lease losses 32,896 33,939 14,976
--------------- ---------------- ---------------
Chargeoffs:
Single-family residential and home equity (484) (381) (276)
Subprime automobile (22,527) (26,555) (10,078)
Other (10,107) (8,191) (4,898)
--------------- ---------------- ---------------
Total chargeoffs (33,118) (35,127) (15,252)
--------------- ---------------- ---------------
Recoveries:
Single-family residential and home equity 44 38 9
Subprime automobile 4,896 3,127 2,545
Other 1,282 1,023 722
--------------- ---------------- ---------------
Total recoveries 6,222 4,188 3,276
--------------- ---------------- ---------------
Chargeoffs, net of recoveries (26,896) (30,939) (11,976)
--------------- ---------------- ---------------
Balance at end of period $ 69,018 $ 57,018 $ 69,018
=============== ================ ===============
Provision for loan and lease losses to average loans
and leases (1) (2) 0.78% 0.79% 0.72%
Net loan and lease chargeoffs to average loans
and leases (1) (2) 0.64% 0.72% 0.57%
Ending allowance for losses on loans and leases to total
loans and leases (2) (3) 0.84% 0.65% 0.84%
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of allowance for losses.
Components of Allowance for Losses on Loans and Leases by Type
(Dollars in thousands)
March 31,
---------------------------------------------------------- September 30,
2002 2001 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 $ 2,485 55.1 % $ 2,686 60.7 % $ 2,686 55.9 %
Home equity 539 5.9 447 3.5 448 4.4
Commercial real estate and multifamily 160 0.3 1,394 0.4 197 0.4
Real estate construction and ground 4,641 3.0 4,141 4.9 1,852 3.1
Commercial 10,516 9.1 9,021 6.2 9,135 9.0
Automobile 3,780 7.0 9,034 8.2 7,034 7.5
Automobile leases 5,866 13.9 2,500 8.4 6,000 13.1
Subprime automobile 32,000 3.9 25,782 6.2 32,000 4.9
Home improvement and related loans 1,694 1.4 1,523 1.1 1,523 1.3
Overdraft lines of credit and
other consumer 610 0.4 490 0.4 491 0.4
Unallocated 6,727 - - - 1,652 -
------------- ------------- -------------
Total $ 69,018 $ 57,018 $ 63,018
============= ============= =============
Real Estate Held for Investment or Sale
(Dollars in thousands)
Activity in Allowance for Losses
Six Months Ended Three Months
March 31, Ended
---------------------------------- March 31,
2002 2001 2002
--------------- ---------------- -------------------
Balance at beginning of period:
Real estate held for investment $ 202 $ 202 $ 202
Real estate held for sale 85,152 80,752 86,302
--------------- ---------------- -------------------
Total 85,354 80,954 86,504
--------------- ---------------- -------------------
Provision for real estate losses:
Real estate held for sale 2,100 2,100 1,050
--------------- ---------------- -------------------
Total 2,100 2,100 1,050
--------------- ---------------- -------------------
Chargeoffs, net of recoveries:
Real estate held for sale:
Communities (1,986) (41) (2,086)
--------------- ---------------- -------------------
Total net chargeoffs (1,986) (41) (2,086)
--------------- ---------------- -------------------
Balance at end of period:
Real estate held for investment 202 202 202
Real estate held for sale 85,266 82,811 85,266
--------------- ---------------- -------------------
Total $ 85,468 $ 83,013 $ 85,468
=============== ================ ===================
Components of Allowance for Losses
March 31, December 31, September 30,
2002 2001 2001
--------------- ---------------- -------------------
Allowance for losses on real estate
held for investment $ 202 $ 202 $ 202
--------------- ---------------- -------------------
Allowance for losses on real estate
held for sale:
Residential ground 100 1,689 1,689
Commercial ground 3,631 3,631 3,631
Communities 81,535 80,982 79,832
--------------- ---------------- -------------------
Total 85,266 86,302 85,152
--------------- ---------------- -------------------
Total allowance for losses on real
estate held for investment or sale $ 85,468 $ 86,504 $ 85,354
=============== ================ ===================
At March 31, 2002, the bank's total valuation allowances for losses on loans and
leases and real estate held for investment or sale was $154.5 million, an
increase of $2.0 million from December 31, 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 $93.3 million at March 31, 2002, which
constituted 76.5% of total non-performing real estate assets, before valuation
allowances. During the three months ended March 31, 2002, the bank recorded net
charge-offs of $2.4 million on these assets. The allowance for losses on real
estate held for sale at March 31, 2002 is in addition to approximately $32.7
million of cumulative charge-offs previously taken against assets remaining in
the bank's portfolio at March 31, 2002.
At March 31, 2002 and December 31, 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 $44.0 million and $45.0 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 $11.7 million for the three
months ended March 31, 2002, compared to $14.7 million for the three months
ended December 31, 2001. The decline in net chargeoffs is attributable to
declining subprime automobile loan balances coupled with decreased delinquencies
following December's traditional seasonal high.
Asset and Liability Management. The following table presents the interest rate
sensitivity of the bank's interest-earning assets and interest-bearing
liabilities at March 31, 2002, 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 March 31, 2002
Real estate loans:
Adjustable-rate $ 1,964,808 $ 265,386 $ 423,070 $ 182,418 $ 142,303 $ 2,977,985
Fixed-rate 94,577 72,836 237,099 171,534 479,393 1,055,439
Home equity credit lines and second
mortgages 502,170 3,143 11,032 8,840 38,963 564,148
Commercial 581,530 21,700 68,688 46,084 25,943 743,945
Consumer and other 411,077 349,602 1,018,778 267,285 83,795 2,130,537
Loans held for sale 252,728 - - - - 252,728
Loans held for securitization and sale 500,000 - - - - 500,000
Mortgage-backed securities 208,889 144,573 232,252 168,021 465,704 1,219,439
Trading securities 7,412 - - - - 7,412
Other investments 293,989 - 46,427 - - 340,416
--------------- -------------- ---------------- --------------- -------------- ------------
Total interest-earning assets 4,817,180 857,240 2,037,346 844,182 1,236,101 9,792,049
Total non-interest earning assets - - - - 978,298 978,298
--------------- -------------- ---------------- --------------- -------------- ------------
Total assets $ 4,817,180 $ 857,240 $ 2,037,346 $ 844,182 $ 2,214,399 $ 10,770,347
=============== ============== ================ =============== ============== ============
Deposits:
Fixed maturity deposits $ 1,654,381 $ 467,977 $ 181,304 $ 57,618 $ - $ 2,361,280
NOW and statement accounts 2,099,843 46,399 154,538 105,183 224,157 2,630,120
Money market deposit accounts 1,858,174 - - - - 1,858,174
Borrowings:
Capital notes - subordinated - - - 150,000 100,000 250,000
Other 287,986 1,299 1,478,851 22,412 98,081 1,888,629
--------------- -------------- ---------------- --------------- -------------- ------------
Total interest-bearing liabilities 5,900,384 515,675 1,814,693 335,213 422,238 8,988,203
Minority interest - - - - 144,000 144,000
Total non-interest bearing liabilities - - - - 1,095,155 1,095,155
Stockholders' equity - - - - 542,989 542,989
--------------- -------------- ---------------- --------------- -------------- ------------
Total liabilities and stockholders'
equity $ 5,900,384 $ 515,675 $ 1,814,693 $ 335,213 $ 2,204,382 $ 10,770,347
=============== ============== ================ =============== ============== ============
Gap $ (1,083,204) $ 341,565 $ 222,653 $ 508,969 $ 813,863
Cumulative gap $ (1,083,204) $ (741,639) $ (518,986) $ (10,017) $ 803,846
Adjusted cumulative gap as a percentage
of total assets (10.1)% (6.9)% (4.8)% (0.1)% 7.5 %
The interest sensitivity "gap" shown in the table represents the sum of all
interest-earning assets minus all interest-bearing liabilities subject to
repricing within the same period. The one-year gap, as a percentage of total
assets, was a negative 6.9% at March 31, 2002, compared to a negative 9.4% at
December 31, 2001. The improvement in the bank's one year gap during this period
results from various initiatives undertaken by management in light of the
current interest rate environment, including increased origination of short-term
adjustable rate mortgage loans. The bank continues to consider a variety of
strategies to manage its interest rate risk position.
Capital. At March 31, 2002, the bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for "well-capitalized" institutions under OTS prompt
corrective action regulations.
The following table shows the bank's regulatory capital levels at March 31,
2002, 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 $ 542,989
Minority interest in REIT Subsidiary (1) 144,000
Accumulated other comprehensive income (2) (977)
--------------
686,012
Adjustments for tangible and core capital:
Intangible assets (46,038)
Non-includable subsidiaries (3) (1,411)
Non-qualifying purchased/originated loan
servicing rights (4,625)
--------------
Total tangible capital 633,938 5.91% $ 161,034 1.50% $ 472,904 4.41%
-------------- ========== =============== ========== =============== =========
Total core capital (4) 633,938 5.91% $ 429,424 4.00% $ 204,514 1.91%
-------------- ========== =============== ========== =============== =========
Tier 1 risk-based capital (4) 633,938 7.28% $ 316,969 4.00% $ 316,969 3.28%
-------------- ========== =============== ========== =============== =========
Adjustments for total risk-based capital:
Subordinated capital debentures 250,000
Allowance for general loan and lease losses 69,018
--------------
Total supplementary capital 319,018
--------------
Total risk-based capital (4) $ 952,956 11.14% $ 696,613 8.00% $ 256,343 3.14%
============== ========== =============== ========== =============== =========
(1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's
core capital pursuant to authorization from the OTS.
(2) Under OTS policy, accumulated other comprehensive income is excluded from
regulatory capital.
(3) Reflects an aggregate offset of $0.2 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. The following table sets forth the bank's REO at March 31, 2002, after
valuation allowances of $85.3 million, by the fiscal year in which the property
was acquired through foreclosure.
Fiscal Year (In thousands)
----------- ------------------
1990 $ 160 (1)
1991 18,833 (1)
1992 -
1993 -
1994 -
1995 3,391 (1)
1996 -
1997 -
1998 -
1999 -
2000 -
2001 504
2002 1,196
-----------------
Total REO $ 24,084
=================
- -----------------------
(1) Includes REO, with an aggregate net book value of $22.4 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
2000, the bank's subprime automobile loan portfolio at March 31, 2002 exceeded
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 flows from operating activities have 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 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 six-month period ended March 31, 2002, the bank made tax sharing payments
totaling $4.9 million and dividend payments totaling $8.0 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 six-month period ended March 31, 2002, the Trust purchased through
dividend reinvestment 216,000 shares of common stock of Saul Centers and as of
March 31, 2002, owned approximately 3,245,000 shares representing 22.1% of such
company's outstanding common stock. As of March 31, 2002, the market value of
these shares was approximately $72.0 million. Substantially all these shares
have been pledged as collateral with the Real Estate Trust's credit line bank.
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 sales of properties. The partnership
agreement of Saul Holdings Partnership provides for quarterly cash distributions
to the partners out of net cash flow. During the six-month period ended March
31, 2002, the Real Estate Trust received total cash distributions of $3.3
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 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 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 March 31, 2002, the Real Estate Trust had no outstanding
borrowings under the facility and unrestricted availability was $50.0 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
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 March 31,2002, the Real Estate Trust had
no outstanding borrowings under this facility and unrestricted availability was
$25.0 million.
The maturity schedule for the Real Estate Trust's outstanding debt at March 31,
2002 for the balance of fiscal 2002 and subsequent years is set forth in the
following table:
Debt Maturity Schedule
(In thousands)
- -------------------------------------------------------------------
Fiscal Mortgage Notes Payable- Notes Payable-
Year Notes Secured Unsecured Total
- -------------------------------------------------------------------
2002(1) $29,309 $ --- $ 4,260 $ 33,569
2003 27,940 --- 11,919 39,859
2004 9,009 --- 11,617 20,626
2005 13,651 --- 9,659 23,310
2006 94,406 --- 5,714 100,120
Thereafter 148,633 200,000 11,735 360,368
- -------------------------------------------------------------------
Total $322,948 $200,000 $ 54,904 $577,852
===================================================================
(1) April 1,2002 - September 30,2002
Of the $323.0 million of mortgage debt outstanding at March 31, 2002, $294.2
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 was $8.4 million and was 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 is known as Dulles North Building Four. Development costs are
projected to be $10.8 million and are being financed with the proceeds of a $9.5
million construction loan, which has a three-year term, a floating interest rate
and two one-year renewal options. Construction of the base building is completed
and the building was placed in service in April 2002. 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 $8.0 to $13.0 million per
year for the next several years.
BANKING
Liquidity. The bank's average liquidity ratio for the quarter ended March 31,
2002, was 8.4%, compared to 9.1% for the quarter ended December 31, 2001.
As part of its mortgage banking activities, the bank sold $687.4 million of
single-family residential loans during the current quarter. As part of its
operating strategy, the bank continues to explore opportunities to sell assets
and to securitize and sell various 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 loan receivables. As a
result of these recourse provisions, the bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $21.4 million and
$28.0 million, respectively, at March 31, 2002, and $26.0 million and $29.6
million, respectively, at December 31, 2001, both of which are included in other
assets in the Consolidated Balance Sheets.
The bank also is obligated under various recourse provisions related to the swap
of single family residential loans for mortgage-backed securities issued by the
bank. At March 31, 2002, recourse to the bank under these arrangements was $6.1
million, consisting of restricted cash accounts of $3.7 million and
overcollateralization of receivables of $2.4 million.
The bank also is obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At March 31, 2002 and December 31,
2001, recourse to the bank under this arrangement totaled $3.4 million.
There were no material commitments for capital expenditures at March 31, 2002.
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 MARCH 31, 2002 (the "2002 quarter") COMPARED TO
THREE MONTHS ENDED MARCH 31, 2001 (the "2001 quarter")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$602,000 and an operating loss of $4.2 million in the 2002 quarter compared to
income before depreciation and amortization of $3.6 million and an operating
loss of $804,000 in the 2001 quarter. The increase in the operating loss was
largely attributable to declining results from operations of income-producing
properties.
Income after direct operating expenses from hotel properties decreased
$3,242,000 (33.9%)in the 2002 quarter over the level achieved in the 2001
quarter. This decrease was attributable to a decrease of $366,000 from two
acquisition properties while results from sixteen properties owned throughout
both quarters decreased by $2,875,000 (35.7%). The decrease in total revenue of
$5,159,000 (20.2%) was partially offset by the decrease of $1,917,000 (12.0%) in
direct operating expenses. For the sixteen hotels owned throughout both periods,
the decrease in total revenue was $4,774,000 (21%) and the decrease in direct
operating expenses was $1,899,000 (12.9%).
Income after direct operating expenses from office and industrial properties
decreased $807,000 (10.5%) in the 2002 quarter compared to such income in the
2001 quarter. $534,000 (7.6%) of this decrease reflected lower results from the
ten properties owned throughout both quarters and $272,000 reflected lower
results caused by a property no longer in the portfolio and two acquisition
properties. The decrease in total revenue of $830,000 (7.9%) with an increase
was offset slightly by the decrease of $24,000 (0.9%) in direct operating
expenses. For the ten properties owned throughout both periods, the decrease in
total revenue was $464,000 (4.9%) with an increase in direct operating expenses
of $69,000 (2.7%). Additionally the 2001 quarter reflected $369,000 in total
revenue and $158,000 in direct expenses from a property which was sold in the
latter part of fiscal 2001.
Other income decreased $118,000 (24.2%) during the 2002 quarter due principally
to lower interest income.
Land parcels and other expense decreased $34,000 (12.6%) during the 2002
quarter.
Interest expense decreased $176,000 (1.4%) in the 2002 quarter, primarily
because of lower mortgage interest and lower interest on bank lines of credit.
The average balance of the Real Estate Trust's outstanding borrowings increased
to $578.1 million for the 2002 quarter from $562.5 million for the 2001 quarter.
The increase in average borrowings was the result of mortgage loan refinancings
and unsecured note sales. The weighted average cost of borrowings was 8.9% in
the 2002 quarter compared to 9.4% in the 2001 quarter.
Capitalized interest increased $79,000 (78.0%) during the 2002 quarter due to
greater level of development activity in the current period.
Amortization of debt expense decreased $29,000 (12.8%) in the 2001 quarter.
Depreciation increased $450,000 (10.8%) in the 2002 quarter as a result of the
addition new properties and new assets placed in service in the past year.
Advisory, management and leasing fees paid to related parties increased $30,000
(1.0%) in the 2002 quarter from their expense level in the 2001 quarter. The
monthly advisory fee in the 2002 quarter was $475,000 compared to $363,000 in
the 2001 quarter, which resulted in an aggregate increase of $337,000.
Management fees decreased $307,000 (16.1%) in the current quarter, reflecting
both lower hotel sales and office rents on which the fees are based.
General and administrative expense increased $97,000 (24.0%) in the 2002
quarter, principally as a result of higher legal expense in the current period.
Equity on earnings of unconsolidated entities reflected earnings of $3,140,000
in the 2002 quarter, an increase of $1,026,000 (48.5%) over the amount recorded
in the 2001 quarter. The improvement was due to increased period-to-period
earnings of Saul Centers, Inc.
BANKING
Overview. The bank recorded operating income of $31.7 million for the 2002
quarter compared to operating income of $36.8 million for the 2001 quarter. Net
interest income and other (non-interest) income decreased in the 2002 quarter,
but the decrease was partially offset by a decrease in the provision for loan
and lease losses.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, decreased $5.5 million (or 6.1%) 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 $0.9 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 March 31,
--------------------------------------------------------------------------------------
2002 2001
------------------------------------------ ------------------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
------------- ----------- ----------- -------------- ----------- -----------
Assets:
Interest-earning assets:
Loans and leases receivable, net (1) $ 8,358,056 $ 132,777 6.35 % $ 8,781,294 $ 181,001 8.24 %
Mortgage-backed securities 1,261,895 19,010 6.03 925,616 14,944 6.46
Federal funds sold and securities
purchased under agreements to
resell 63,992 283 1.77 56,360 774 5.49
Trading securities 58,852 1,037 7.05 21,050 372 7.07
Investment securities 46,319 384 3.32 45,678 683 5.98
Other interest-earning assets 207,114 1,667 3.22 193,440 3,257 6.73
------------- ----------- -------------- -----------
Total 9,996,228 155,158 6.21 10,023,438 201,031 8.02
----------- ----------- ----------- -----------
Noninterest-earning assets:
Cash 210,336 260,092
Real estate held for investment
or sale 30,371 48,963
Property and equipment, net 454,917 383,291
Goodwill and other intangible
assets, net 26,271 25,972
Other assets 309,605 298,144
------------- --------------
Total assets $ 11,027,728 $ 11,039,900
============= ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,500,238 1,109 0.30 $ 1,284,814 2,116 0.66
Savings deposits 946,598 2,289 0.97 871,662 3,563 1.64
Time deposits 2,489,490 26,974 4.33 2,981,473 45,955 6.17
Money market deposits 1,784,169 7,714 1.73 1,337,221 13,108 3.92
------------- --------- -------------- ---------
Total deposits 6,720,495 38,086 2.27 6,475,170 64,742 4.00
Borrowings 2,623,237 31,383 4.79 3,057,580 45,057 5.89
------------- ----------- -------------- -----------
Total liabilities 9,343,732 69,469 2.97 9,532,750 109,799 4.61
----------- ----------- ----------- -----------
Noninterest-bearing items:
Noninterest-bearing deposits 821,223 654,798
Other liabilities 200,647 231,955
Minority interest 144,000 144,000
Stockholders' equity 518,126 476,397
------------- --------------
Total liabilities and
stockholders' equity $ 11,027,728 $ 11,039,900
============= ==============
Net interest income $ 85,689 $ 91,232
=========== ===========
Net interest spread (2) 3.23 % 3.42 %
=========== ===========
Net yield on interest-earning assets (3) 3.43 % 3.64 %
=========== ===========
Interest-earning assets to interest-bearing liabilities 106.98 % 105.15 %
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
The following table presents certain information regarding changes in interest
income and interest expense of the bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Three Months Ended March 31, 2002
Compared to
Three Months Ended March 31, 2001
Increase (Decrease)
Due to Change in (1)
------------------------------------------------------
Total
Volume Rate Change
--------------- --------------- ---------------
Interest income:
Loans (2) $ (8,374) $ (39,850) $ (48,224)
Mortgage-backed securities 10,164 (6,098) 4,066
Federal funds sold and securities
purchased under agreements to resell 617 (1,108) (491)
Trading securities 672 (7) 665
Investment securities 65 (364) (299)
Other interest-earning assets 1,431 (3,021) (1,590)
--------------- --------------- ---------------
Total interest income 4,575 (50,448) (45,873)
--------------- --------------- ---------------
Interest expense:
Deposit accounts 15,898 (42,554) (26,656)
Borrowings (5,907) (7,767) (13,674)
--------------- --------------- ---------------
Total interest expense 9,991 (50,321) (40,330)
--------------- --------------- ---------------
Increase in net interest income $ (5,416) $ (127) $ (5,543)
=============== =============== ===============
- ----------------------------------------------------------------------------------------------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
Interest income in the 2002 quarter decreased $45.9 million (22.8%) from the
level in the 2001 quarter as a result of lower average yields, particularly on
loans and leases, coupled with a $423.2 million decline in average balances of
loans and leases. A $336.3 million increase in the average balance of
mortgage-backed securities partially offset the decrease in interest income.
The bank's net interest spread decreased to 3.23% in the 2002 quarter, from
3.42% in the 2001 quarter, primarily because the average yield of the bank's
interest-earning assets decreased more than the average cost of its
interest-bearing liabilities. Average interest-earning assets as a percentage of
average interest bearing liabilities increased to 107.0% for the 2002 quarter,
compared to 105.2% for the 2001 quarter.
Interest income on loans and leases, the largest category of interest-earning
assets, decreased $48.2 million from the 2001 quarter primarily because of lower
average yields. The average yield on the loan and lease portfolio decreased 189
basis points (from 8.24% to 6.35%) from the 2001 quarter. Interest income
declined by $24.7 million (or 27.0%) on single-family residential loans, and by
$15.2 million (or 25.8%) on automobile loans, primarily because of lower average
yields on those loans. In addition, lower average yields on commercial loans and
home equity loans contributed to decreases in terest income of $3.7 million (or
29.1%) and $1.9 million (or 27.2%), respectively, from those loans. Partially
offsetting the decrease in interest income were increases in the average
balances of home equity loans, commercial loans and home improvement loans.
Interest income on mortgage-backed securities increased $4.1 million (or 27.2%)
primarily because of higher average balances. The effect of the $336.3 million
increase in average balances was partially offset by a decrease in the average
interest rates on those securities from 6.46% to 6.03%.
Interest expense on deposits decreased $26.7 million (or 41.2%) during the 2002
quarter, due to a decrease in average rates. The 173 basis point decrease in the
average rate on deposits (from 4.00% to 2.27%) resulted from a general decline
in market interest rates. The bank also reduced its use of higher cost brokered
deposits in the 2002 quarter compared to the 2001 quarter.
Interest expense on borrowings decreased $13.7 million (or 30.3%) in the 2002
quarter from the 2001 quarter. The bank used funds from deposit growth to repay
borrowings. Average balances of Federal Home Loan Bank advances decreased by
$391.1 million, or 17.6%, and the average interest rate on such advances
decreased (from 5.59% to 5.12%), resulting in a reduction of $7.6 million in
interest expense. Also contributing to the decrease in interest expense on
borrowings was a decrease in the average cost of securities sold under
repurchase agreements (from 5.94% to 1.82%) and a decrease in the average
balance of those agreements of $51.2 million (or 12.1%), which, combined,
resulted in a $4.6 million decrease in interest expense.
Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses decreased to $15.0 million in the 2002 quarter from $18.0 million in the
2001 quarter. The $3.0 million decrease is largely attributable to decreased
charge-offs due to the declining balance of the subprime automobile loan
portfolio. See "Financial Condition - Asset Quality - Allowances for Losses."
Other Income. Other non-interest income decreased to $65.1 million in the 2002
quarter from $68.1 million in the 2001 quarter. The $3.0 million (or 4.4%)
decrease was primarily attributable to a nonrecurring gain on other investment
in the 2001 quarter, which was partially offset by increases in the net gain on
trading securities and deposit servicing fees.
The bank recognized a pre-tax gain of $9.4 million on the sale of its interest
in Star Systems, Inc. to Concord EFS, Inc. during the 2001 quarter. The gain is
included in Gain on Other Investment in the Consolidated Statements of
Operations.
The $3.8 million increase in the gain on trading securities was primarily due to
gains on sales of mortgage-backed securities related to mortgage banking
activities.
Deposit servicing fees increased $3.2 million (or 13.4%) 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 $0.4
million (or 0.4%) from the 2001 quarter. Loan expenses decreased $6.4 million,
primarily due to a writedown, in the 2001 quarter, of the bank's mortgage
servicing assets as a result of increased prepayments. Property and equipment
expenses increased by $2.6 million due primarily to increased rent expense and
related property taxes associated with the bank's new headquarters.
SIX MONTHS ENDED MARCH 31, 2002 (the "2002 period") COMPARED TO
SIX MONTHS ENDED MARCH 31, 2001(the "2001 period")
REAL ESTATE
The Real Estate Trust recorded income before depreciation and amortization of
$315,000 and an operating loss of $9.3 million in the 2002 period compared to
income before depreciation and amortization of $8.5 million and operating income
of $27,000 in the 2001 period. The changes reflect declining results in
operations of hotels and office and industrial properties. Additionally, in the
2001 period the Trust recognized approximately $2.5 million in gains from the
sale of two properties.
Income after direct operating expenses from hotels decreased $5,351,000 (30.1%)
in the 2002 period over the level achieved in the 2001 period. The decrease is a
result of $6,133,000 (37.9%) lower results from sixteen hotels owned throughout
both periods offset by $782,000 improved results from two acquisition
properties. The decrease in total revenue of $8,635,000 (17.7%) was offset by
decrease of $3,284,000 (10.6%) in direct operating expenses. For the sixteen
hotels owned throughout both periods, the decrease in total revenue was
$10,528,000 (23.0%) and the decrease in direct operating expenses was $4,395,000
(14.8%). The revenue decrease was attributable to declining market conditions
resulting from the effects of the September 11, 2001 terrorist attacks and the
slowing economy.
Income after direct operating expenses from office and industrial properties
decreased $1,179,000 (7.8%) in the 2002 period compared to such income in the
2001 period. $981,000 (7.0%) of this decrease reflected lower results from the
ten properties owned throughout both periods; the balance of the decrease was
caused by a property that was sold late in fiscal 2001, partially reduced by
improved results from two acquisition properties. The decrease in total revenue
of $1,127,000 (5.5%) coupled with the increase of $52,000 (1.0%) in direct
operating expenses resulted in lower income during the 2002 period. For the ten
properties owned throughout both periods, the decrease in total revenue was
$745,000 (3.9%) and the increase in direct operating expenses was $236,000
(4.7%).
Other income decreased $426,000 (34.9%) during the 2002 period primarily due to
lower interest income and less apartment income due to the sale of an apartment
property.
Land parcels and other expense decreased $206,000(27.3%) during the 2002 period
largely due to the sale of an apartment property.
Interest expense increased $78,000 (0.3%) in the 2002 period, primarily because
of higher mortgage borrowings. Average balances of the Real Estate Trust's
outstanding borrowings increased to $578.9 million for the 2002 period from
$548.0 million for the 2001 period. The increase in average borrowings occurred
as a result of mortgage loan refinancings and unsecured note sales. The weighted
average cost of borrowings was 8.96% in the 2002 period compared to 9.45% in the
2001 period.
Capitalized interest decreased $134,000(31.9%) during the 2002 period due to the
lower level of development activity in the current period.
Amortization of debt expense remained at the same level in the 2002 period as it
was in the 2001 period.
Depreciation increased $1,141,000 (14.1%) in the 2002 period as a result of the
additions of new properties and new assets placed in service in the past year.
Advisory, management and leasing fees paid to related parties increased $198,000
(34%) in the 2002 period from their expense level in the 2001 period. The
monthly advisory fee in the 2002 period was $475,000 compared to $363,000 in the
prior period, which resulted in an aggregate increase of $673,000. Management
and leasing fees decreased $475,000 (13.0%) in the current period, reflecting
both lower hotel sales and office rents on which fees are based.
General and administrative expense increased $117,000 (10.6%) in the 2002
period, principally because of increased legal fees.
Equity in earnings of unconsolidated entities reflected earnings of $5,742,000
for the 2002 period and earnings of $3,998,000 for the 2001 period, an increase
of $1,744,000 (43.6%). The improvement was due to increased period-to-period
earnings of Saul Centers, Inc.
BANKING
Overview. The bank recorded operating income of $59.1 million for the 2002
period, compared to operating income of $55.4 million for the 2001 period.
Increased net interest income and other (non-interest) income were partially
offset by increases in operating expense.
Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $2.1 million (or 1.2%) in the 2002 period compared to
the 2001 period. There was no interest income recorded during the 2002 period on
non-accrual assets and restructured loans. The bank would have recorded interest
income of $2.0 million for the 2002 period if non-accrual assets and
restructured loans had been current in accordance with their original terms. The
bank's net interest income in future periods will continue to be adversely
affected by the bank's non-performing assets. See "Financial Condition - Asset
Quality - Non-Performing Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
Net Interest Margin Analysis
(Dollars in thousands)
Six Months Ended March 31,
---------------------------------------------------------------------------------
2002 2001
--------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
Balances Interest Rate Balances Interest Rate
------------- ----------- ---------- -------------- ----------- -----------
Assets:
Interest-earning assets:
Loans and leases receivable, net (1) $ 8,438,281 $ 280,963 6.66 % $ 8,615,603 $ 358,031 8.31 %
Mortgage-backed securities 1,340,923 40,729 6.07 968,204 31,498 6.51
Federal funds sold and securities
purchased under agreements to
resell 40,121 363 1.81 51,778 1,557 6.01
Trading securities 59,407 1,852 6.23 18,324 661 7.21
Investment securities 45,949 869 3.78 45,667 1,378 6.03
Other interest-earning assets 218,505 4,165 3.81 187,514 6,488 6.92
------------- ----------- -------------- -----------
Total 10,143,186 328,941 6.49 9,887,090 399,613 8.08
----------- ---------- ----------- -----------
Noninterest-earning assets:
Cash 230,961 276,234
Real estate held for investment
or sale 31,092 52,147
Property and equipment, net 449,328 376,533
Goodwill and other intangible
assets, net 26,558 25,514
Other assets 291,097 285,103
------------- --------------
Total assets $ 11,172,222 $ 10,902,621
============= ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits $ 1,452,062 2,285 0.31 $ 1,262,406 4,721 0.75
Savings deposits 926,917 4,610 0.99 873,619 7,515 1.72
Time deposits 2,635,920 61,154 4.64 3,026,989 94,650 6.25
Money market deposits 1,714,990 16,289 1.90 1,267,032 25,481 4.02
Total deposits 6,729,889 84,338 2.51 6,430,046 132,367 4.12
Borrowings 2,755,016 65,753 4.77 2,983,480 90,450 6.06
------------- ----------- -------------- -----------
Total liabilities 9,484,905 150,091 3.16 9,413,526 222,817 4.73
----------- ---------- ----------- -----------
Noninterest-bearing items:
Noninterest-bearing deposits 814,322 635,623
Other liabilities 215,020 236,166
Minority interest 144,000 144,000
Stockholders' equity 513,975 473,306
------------- --------------
Total liabilities and
stockholders' equity $ 11,172,222 $ 10,902,621
============= ==============
Net interest income $ 178,850 $ 176,796
=========== ===========
Net interest spread (2) 3.32 % 3.35 %
========== ===========
Net yield on interest-earning assets (3) 3.53 % 3.58 %
========== ===========
Interest-earning assets to interest-bearing liabilities 106.94 % 105.03 %
========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. Interest on non-accruing
loans has been included only to the extent reflected in the Consolidated
Statements of Operations; however, the loan balance is included in the average
amount outstanding until transferred to real estate acquired in settlement of
loans.
(2) Equals weighted average yield on total interest-earning assets less weighted
average rate on total interest-bearing liabilities.
(3) Equals annualized net interest income divided by the average balances of
total interest-earning assets.
The following table presents certain information regarding changes in interest
income and interest expense of the bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(Dollars in thousands)
Six Months Ended March 31, 2002
Compared to
Six Months Ended March 31, 2001
Increase (Decrease)
Due to Change in (1)
------------------------------------------------------
Total
Volume Rate Change
--------------- --------------- ---------------
Interest income:
Loans (2) $ (7,238) $ (69,830) $ (77,068)
Mortgage-backed securities 15,100 (5,869) 9,231
Federal funds sold and securities
purchased under agreements to resell (73) (225) (298)
Trading securities 617 (322) 295
Investment securities 25 (534) (509)
Other interest-earning assets 2,511 (4,834) (2,323)
--------------- --------------- ---------------
Total interest income 10,942 (81,614) (70,672)
--------------- --------------- ---------------
Interest expense:
Deposit accounts 16,953 (64,982) (48,029)
Borrowings (6,534) (18,163) (24,697)
--------------- --------------- ---------------
Total interest expense 10,419 (83,145) (72,726)
--------------- --------------- ---------------
Increase in net interest income $ 523 $ 1,531 $ 2,054
=============== =============== ===============
- ----------------------------------------------------------------------------------------------------------------
(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 period decreased $70.7 million (17.7%) from the
level in the 2001 period as a result of lower average yields, coupled with lower
average balances of $177.3 million, on loans and leases. A $372.7 million
increase in the average balances of mortgage-backed securities partially offset
the decrease in interest income.
The bank's net interest spread decreased slightly to 3.32% in the 2002 period
from 3.35% in the 2001 period primarily because the average yield of the bank's
interest-earning assets decreased more than the average cost of its interest
bearing liabilities. Average interest-earning assets as a percentage of average
interest bearing liabilities increased to 106.9% for the 2002 period compared to
105.0% for the 2001 period.
Interest income on loans and leases, the largest category of interest-earning
assets, decreased $77.1 million from the 2001 period primarily because of lower
average yields. The average yield on the loan and lease portfolio decreased 165
basis points (from 8.31% to 6.66%) from the 2001 period. Interest income
declined by $39.7 million (or 21.8%) on the bank's single-family residential
loans, by $21.7 million (or 19.0%) on automobile loans, and by $6.5 million (or
46.7%) on construction loans, primarily because of lower average yields on those
loans. In addition, lower average yields resulted in a $6.5 million (or 25.4%)
decrease in interest income on commercial loans and a $3.4 million (or 24.1%)
decrease in interest income on home equity loans. Partially offsetting the
decrease in interest income were increases in the average balances of home
equity loans, commercial loans and home improvement loans.
Interest income on mortgage-backed securities increased $9.2 million (or 29.3%)
primarily because of higher average balances. The effect of the $372.7 million
increase in average balances was partially offset by a decrease in the average
interest rates on those securities from 6.51% to 6.07%.
Interest expense on deposits decreased $48.0 million (or 36.3%) during the 2002
period, due to a decrease in average interest rates. The 161 basis point
decrease in the average rate on deposits (from 4.12% to 2.51%) resulted from a
general decline in market interest rates. The bank also reduced its use of
higher cost brokered deposits in the 2002 period compared to the 2001 period.
Interest expense on borrowings decreased $24.7 million (or 27.3%) in the 2002
period over the 2001 period. Average balances of Federal Home Loan Bank advances
decreased by $235.2 million, or 11.0%, and the average interest rate on such
advances decreased (from 5.70% to 5.12%), resulting in a reduction of $12.3
million in interest expense. Also contributing to the decrease in interest
expense on borrowings were decreases in the average cost of securities sold
under repurchase agreements (from 6.26% to 2.06%) and in other borrowings (from
5.36% to 1.26%), which contributed to $9.0 million and $3.4 million decrease in
interest expense, respectively. Partially offsetting the decreased expense on
borrowings was an increase in the average balances of $7.2 million in other
borrowings.
Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses decreased slightly to $32.9 million in the 2002 period from $33.9 million
in the 2001 period. See "Financial Condition - Asset Quality - Allowances for
Losses."
Other Income. Other non-interest income increased to $122.5 million in the 2002
period from $114.9 million in the 2001 period. The $7.6 million (or 6.7%)
increase resulted from increases in the net gain on trading securities and
deposit servicing fees. A nonrecurring gain on other investment during the 2001
period partially offset this increase.
The $9.0 million increase in the gain on trading securities reflected $7.0
million in gains on sales of mortgage-backed securities related to mortgage
banking activities and a $2.0 million unrealized gain in market value of the
bank's interest in other securities.
Deposit servicing fees increased $6.5 million (or 13.2%) during the 2002 period
primarily due to fees generated from the continued expansion of the bank's
branch and ATM network.
The bank recognized a pre-tax gain of $9.4 million on the sale of its interest
in Star Systems, Inc. to Concord EFS, Inc. during the 2001 period. The gain is
included in Gain on Other Investment in the Consolidated Statements of
Operations.
Operating Expenses. Operating expenses for the 2002 period increased $7.1
million (or 3.5%) from the 2001 period. Property and equipment expenses
increased by $6.7 million due primarily to increased rent expense and related
property taxes associated with the bank's new headquarters.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is included in Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K are set forth below.
EXHIBITS
EXHIBITS DESCRIPTION
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3. ORGANIZATIONAL DOCUMENTS
(a) Amended and Restated Declaration of Trust filed with the Maryland
State Department of Assessments and Taxation on June 22, 1990 as
filed as Exhibit 3(a) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
(b) Amendment to Amended and Restated Declaration of Trust reflected
in Secretary Certificate filed with the Maryland State Department
of Assessments and Taxation on June 26, 1990 as filed as Exhibit
3(b) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(c) Amended and Restated By-Laws of the Trust dated as of February
28, 1991 as filed as Exhibit T3B to the Trust's Form T-3
Application for Qualification of Indentures under the Trust
Indenture Act of 1939 (File No. 22-20838) is hereby incorporated
by reference.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
(a) Indenture dated as of March 25, 1998 between the Trust and
Norwest Bank Minnesota, National Association, as Trustee, with
respect to the Trust's 9 3/4% Series B Senior Secured Notes due
2008, as filed as Exhibit 4(a) to Registration Statement
333-49937 is hereby incorporated by reference.
(b) Indenture with respect to the Trust's Senior Notes Due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration No. 33-19909 is hereby incorporated by reference.
(c) First Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit T-3C to the Trust's Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939
(File No. 22-20838) is hereby incorporated by reference.
(d) Indenture with respect to the Trust's Senior Notes due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration Statement No. 33-9336 is hereby incorporated by
reference.
(e) Fourth Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby
incorporated by reference.
(f) Third Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby
incorporated by reference.
(g) Second Supplemental Indenture with respect to the Trust's Senior
Notes due from One Year to Ten Years from Date of Issue as filed
as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby
incorporated by reference.
(h) Supplemental Indenture with respect to the Trust's Senior Notes
due from One Year to Ten Years from Date of Issue as filed as
Exhibit 4(a) to Registration Statement No. 2-68652 is hereby
incorporated by reference.
(i) Indenture with respect to the Trust's Senior Notes due from One
Year to Five Years from Date of Issue as filed as Exhibit T-3C to
the Trust's Form T-3 Application for Qualification of Indentures
under the Trust Indenture Act of 1939 (file No. 22-10206) is
hereby incorporated by reference
(j) Indenture dated as of September 1, 1992 with respect to the
Trust's Notes due from One to Ten Years form Date of Issue filed
as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(k) First Supplemental Indenture dated as of January 16, 1997 with
respect to the Trust's Notes due from One to Ten years from Date
of Issue filed as Exhibit 4(b) to Registration Statement No.
33-34930 is hereby incorporated by reference.
(l) Second Supplemental Indenture dated as of January 13, 1999 with
respect to the Trust's Notes due from One to Ten Years from Date
of Issuance as filed as Exhibit 4(l) to Registration Statement
No. 333-70753 is hereby incorporated by reference.
10. MATERIAL CONTRACTS
(a) Amended and Restated Advisory Contract by and among the Trust,
B.F. Saul Company and B.F. Saul Advisory Company effective
October 1, 1992, as amended, as filed as Exhibit 10(a) to the
Trust's Annual Report on Form 10-K (File No. 1-7184) for the
fiscal year ended September 30, 2001 is hereby incorporated by
reference.
(b) Assignment and Guaranty Agreement effective May 1, 1972 by and
among the Trust, B.F. Saul Company and B.F. Saul Advisory
Company, as filed as Exhibit 10(b) to the Trust's Annual Report
on Form 10-K (File No. 1-7184) for the fiscal year ended
September 30, 2001 is hereby incorporated by reference.
(c) Commercial Property Leasing and Management Agreement effective
October 1, 1982 between the Trust and B.F. Saul Property Company
filed as Exhibit 10(b) to Registration Statement No. 2-80831 is
hereby incorporated by reference.
(d) Amendments to Commercial Property Leasing and Management
Agreement between the Trust and B.F. Saul Property Company dated
as of December 31, 1992 (Amendment No. 5), July 1, 1989
(Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1,
1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed
as Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(e) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy
Chase Bank F.S.B. and certain of their subsidiaries filed
as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(f) First Amendment to Tax Sharing Agreement effective May 16, 1995
among the Trust, Chevy Chase Bank F.S.B. and certain of their
subsidiaries, as filed as Exhibit 10(f) to the Trust's Annual
Report on Form 10-K (File No. 1-7184) for the fiscal year ended
September 30, 2001 is hereby incorporated by reference.
(g) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company,
Franklin Development Co., Inc., The Klingle Corporation and
Westminster Investing Corporation relating to the transfer of
certain shares of Chevy Chase Bank, F.S.B. and certain
real property to the Trust in exchange for Preferred Shares of
the Trust filed as Exhibit 10(d) to Registration Statement
No. 33-34930 is hereby incorporated by reference.
(h) Regulatory Capital Maintenance/Dividend Agreement dated May 17,
1988 among B.F. Saul Company, the Trust and the Federal Savings
and Loan Insurance Corporation filed as Exhibit 10(e) to the
Trust's Annual Report on Form 10-K (File No. 1-7184) for the
fiscal year ended September 30, 1991 is hereby incorporated by
reference.
(i) Registration Rights and Lock-Up Agreement dated August 26, 1993
by and among Saul Centers, Inc. and the Trust, Westminster
Investing Corporation, Van Ness Square Corporation, Dearborn,
L.L.C., B.F. Saul Property Company and Avenel Executive Park
Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement
No. 33-64562 is hereby incorporated by reference.
(j) First Amendment to Registration Rights and Lock-Up Agreement
dated September 29, 1999 by and among Saul Centers, Inc., the
Trust, Westminster Investing Corporation, Van Ness Square
Corporation, Dearborn Corporation, Franklin Property Company and
Avenel Executive Park Phase II, Inc., as filed as Exhibit 10(b)
to the Trust's Annual Report on Form 10-K (File No. 1-7184) for
the fiscal year ended September 30, 2001 is hereby incorporated
by reference.
(k) Exclusivity and Right of First Refusal Agreement dated August 26,
1993 among Saul Centers, Inc., the Trust, B.F. Saul Company,
Westminster Investing Corporation, B.F. Saul Property Company,
Van Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B.
as filed as Exhibit 10.7 to Registration Statement No. 33-64562
hereby incorporated by reference.
(l) Fourth Amended and Restated Reimbursement Agreement dated as of
April 25, 2000 by and among Saul Centers, Inc., Saul Holdings
Limited Partnership, Saul Subsidiary I Limited Partnership, Saul
Subsidiary II Limited Partnership, Saul QRS, Inc., B.F. Saul
Property Company, Westminster Investing Corporation, Van Ness
Square Corporation, Dearborn, L.L.C., Avenel Executive Park
Phase II, L.L.C., and the Trust, as filed as Exhibit 10(k) to the
Trust's Quarterly Report on Form 10-Q (File No. 1-7184) for the
fiscal quarter ended March 31, 2000 is hereby incorporated by
reference.
(m) Bank Stock Registration Rights Agreement dated as of March 25,
1998 between the Trust and Norwest Bank Minnesota, National
Association, as Trustee, as filed as Exhibit 4(d) to Registration
Statement No. 333-49937 is hereby incorporated by reference.
(n) Note Administration Fee Agreement dated as of February 8, 2002,
between the Trust and B.F. Saul Advisory Company L.L.C., as filed
as Exhibit 10(n) to the Trust's Quarterly Report on Form 10-Q
(File No. 1-7184) for the fiscal quarter ended December 31, 2001
is hereby incorporated by reference.
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(b) The Registrant did not file any reports on Form 8-K during the
fiscal quarter covered by this report.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
B. F. SAUL REAL ESTATE INVESTMENT TRUST
(Registrant)
Date: May 15, 2002 Stephen R. Halpin, Jr.
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Stephen R. Halpin, Jr.
Vice President and Chief Financial Officer
Date: May 15, 2002 Bill D. Tzamaras
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Bill D. Tzamaras
Vice President and Principal Accounting Officer
