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 June 30, 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 - ------------------------------------------------------------------------------- (Exact name of registrant as specified in the charter) Maryland 52-6053341 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7501 Wisconsin Avenue, Bethesda, Maryland 20814 - ------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) (301) 986-6000 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- --- The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as of August 14, 2002, was 4,826,910. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): (a) Consolidated Balance Sheets at June 30, 2002 and September 30, 2001 (b) Consolidated Statements of Operations for the three-month and nine-month periods ended June 30, 2002 and 2001 (c) Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity (Deficit) for the three-month and nine-month periods ended June 30, 2002 and 2001 (d) Consolidated Statements of Cash Flows for the nine-month periods ended June 30, 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 June 30, 2002 compared to three months ended June 30, 2001 Nine months ended June 30, 2002 compared to nine months ended June 30, 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) ============================================================================================================================ June 30 September 30 (In thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS (Restated) Real Estate Income-producing properties Hotel $ 254,697 $ 254,165 Office and industrial 178,401 157,653 Other 2,803 2,825 ------------- ------------- 435,901 414,643 Accumulated depreciation (145,511) (131,659) ------------- ------------- 290,390 282,984 Land parcels 41,205 40,835 Construction in progress 2,697 15,681 Cash and cash equivalents 11,999 13,860 Note receivable and accrued interest -- related party 7,287 7,787 Other assets 85,498 86,983 ------------- ------------- Total real estate assets 439,076 448,130 - ---------------------------------------------------------------------------------------------------------------------------- Banking Cash and other deposits 491,713 409,995 Loans held for securitization and/or sale 929,336 528,083 Investment securities (market value $46,556 and $46,181, respectively) 46,476 45,794 Trading securities 6,719 6,690 Mortgage-backed securities (market value $1,150,381 and $1,489,835, respectively) 1,135,901 1,474,495 Loans and leases receivable (net of allowance for losses of $74,468 and $63,018, respectively) 7,486,356 7,977,306 Federal Home Loan Bank stock 88,476 113,030 Real estate held for investment or sale (net of allowance for losses of $83,901 and $85,354, respectively) 26,382 31,704 Property and equipment, net 459,815 437,795 Goodwill and other intangible assets, net 25,359 27,058 Interest only strips, net 81,534 62,978 Other assets 238,777 248,047 ------------- ------------- Total banking assets 11,016,844 11,362,975 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $11,455,920 $11,811,105 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES Real Estate Mortgage notes payable $ 324,972 $ 325,750 Notes payable - secured 200,000 202,500 Notes payable - unsecured 55,781 50,717 Deferred gains - real estate 113,045 113,045 Accrued dividends payable - preferred shares of beneficial interest 14,366 19,303 Other liabilities and accrued expenses 30,412 36,874 ------------- ------------- Total real estate liabilities 738,576 748,189 - ---------------------------------------------------------------------------------------------------------------------------- Banking Deposit accounts 7,420,397 7,562,470 Borrowings 478,022 282,583 Federal Home Loan Bank advances 1,749,522 2,240,598 Other liabilities 456,381 392,761 Capital notes -- subordinated 250,000 250,000 ------------- ------------- Total banking liabilities 10,354,322 10,728,412 - ---------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Minority interest held by affiliates 88,843 83,252 Minority interest -- other 218,307 218,307 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 11,400,048 11,778,160 - ---------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million 516 516 Common shares of beneficial interest, $1 par value, 10 million shares authorized, 6,641,598 shares issued 6,642 6,642 Paid-in surplus 92,943 92,943 Deficit (1,405) (23,638) Accumulated other comprehensive income (loss) (976) (1,670) ------------- ------------- 97,720 74,793 Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 55,872 32,945 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,455,920 $11,811,105 - ---------------------------------------------------------------------------------------------------------------------------- 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 Nine Months Ended June 30 Ended June 30 ------------------------------- ---------------------------- (In thousands, except per share amounts) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- REAL ESTATE (Restated) (Restated) Income Hotels $ 25,614 $ 28,511 $ 65,825 $ 77,357 Office and industrial (including $1,305, $1,179, $3,699 and $2,816 of rental income from banking segment, respectively) 9,979 10,548 29,286 30,982 Other 370 509 1,163 1,729 ---------------- ------------- ------------- ------------- Total income 35,963 39,568 96,274 110,068 - ---------------------------------------------------------------------------------------------------------------------------- Expenses Direct operating expenses: Hotels 15,764 16,435 43,533 47,488 Office and industrial properties 2,995 3,130 8,344 8,427 Land parcels and other 252 282 801 925 Interest expense 12,505 12,697 37,620 37,734 Capitalized interest -- (103) (287) (524) Amortization of debt expense 264 201 680 617 Depreciation 4,648 4,249 13,851 12,312 Advisory, management and leasing fees - related parties 3,308 3,113 9,330 8,937 General and administrative 525 348 1,746 1,452 ---------------- ------------- ------------- ------------- Total expenses 40,261 40,352 115,618 117,368 - ---------------------------------------------------------------------------------------------------------------------------- Equity in earnings of unconsolidated entities 2,355 2,076 8,097 6,074 Gain on sale of property -- 3,170 -- 5,715 - ---------------------------------------------------------------------------------------------------------------------------- REAL ESTATE OPERATING INCOME (LOSS) $ (1,943) $ 4,462 $ (11,247) $ 4,489 - ---------------------------------------------------------------------------------------------------------------------------- BANKING Interest income Loans and leases 130,805 $ 172,629 $ 411,768 $ 530,660 Mortgage-backed securities 17,683 16,455 58,412 47,953 Trading securities 563 1,043 2,415 1,704 Investment securities 357 682 1,226 2,060 Other 1,847 3,202 6,375 11,247 ---------------- ------------- ------------- ------------- Total interest income 151,255 194,011 480,196 593,624 - ---------------------------------------------------------------------------------------------------------------------------- Interest expense Deposit accounts 32,209 58,699 116,547 191,066 Borrowings 31,027 42,758 96,780 133,208 ---------------- ------------- ------------- ------------- Total interest expense 63,236 101,457 213,327 324,274 ---------------- ------------- ------------- ------------- Net interest income 88,019 92,554 266,869 269,350 Provision for loan and lease losses (12,578) (16,683) (45,474) (50,622) - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 75,441 75,871 221,395 218,728 - ---------------------------------------------------------------------------------------------------------------------------- Other income Servicing and securitization income 28,906 4,018 65,237 32,381 Deposit servicing fees 28,809 25,538 84,419 74,646 Gain on sales of trading securities, net 791 2,094 9,682 1,975 Gain on real estate held for investment or sale, net 1,547 5,246 584 3,637 Gain on sales of loans, net 591 176 1,519 3,111 Gain on other investment -- 1,638 -- 11,082 Other 9,580 9,888 28,709 24,476 ---------------- ------------- ------------- ------------- Total other income 70,224 48,598 190,150 151,308 - ---------------------------------------------------------------------------------------------------------------------------- Continued on following page. Consolidated Statements of Operations (Continued) B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) ============================================================================================================================ For the Three Months For the Nine Months Ended June 30 Ended June 30 ------------------------------- ---------------------------- (In thousands, except per share amounts) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- BANKING (Continued) (Restated) (Restated) Operating expenses Salaries and employee benefits $ 50,361 $ 48,001 $ 149,160 $ 147,434 Loan 17,505 10,382 36,246 32,402 Property and equipment (including $1,305, $1,179, $3,699 and $2,816 of rental expense paid to real estate segment, respectively) 8,802 9,054 32,715 26,261 Marketing 1,260 2,351 5,289 8,040 Data processing 7,839 7,479 24,553 20,558 Depreciation and amortization 9,150 8,542 26,903 25,398 Deposit insurance premiums 332 365 1,012 1,074 Amortization of goodwill and other intangible assets 545 612 1,700 1,785 Other 13,697 12,612 41,315 38,728 ---------------- ------------- ------------- ------------- Total operating expenses 109,491 99,398 318,893 301,680 - ---------------------------------------------------------------------------------------------------------------------------- BANKING OPERATING INCOME $ 36,174 $ 25,071 $ 92,652 $ 68,356 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL COMPANY Operating income $ 34,231 $ 29,533 $ 81,405 $ 72,845 Income tax provision 11,765 8,731 27,705 20,728 ---------------- ------------- ------------- ------------- Income before minority interest 22,466 20,802 53,700 52,117 Minority interest held by affiliates (3,493) (2,325) (8,418) (6,058) Minority interest -- other (6,329) (6,329) (18,985) (18,985) - ---------------------------------------------------------------------------------------------------------------------------- TOTAL COMPANY NET INCOME $ 12,644 $ 12,148 $ 26,297 $ 27,074 - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 11,289 $ 10,794 $ 22,233 $ 23,012 NET INCOME PER COMMON SHARE Income before minority interest $ 4.37 $ 4.03 $ 10.28 $ 9.96 Minority interest held by affiliates (0.72) (0.48) (1.74) (1.26) Minority interest -- other (1.31) (1.31) (3.93) (3.93) - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 2.34 $ 2.24 $ 4.61 $ 4.77 - ---------------------------------------------------------------------------------------------------------------------------- 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 Nine Months Ended June 30 Ended June 30 ------------------------------- ---------------------------- (Dollars in thousands) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- (Restated) (Restated) COMPREHENSIVE INCOME Net income $ 12,644 $ 14,552 $ 26,297 $ 35,305 Other comprehensive income: Net unrealized holding gains (losses) (1,757) 1,958 694 343 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME $ 10,887 $ 16,510 $ 26,991 $ 35,648 - ---------------------------------------------------------------------------------------------------------------------------- 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 (12,694) (40,987) (23,638) (53,205) Net income 12,644 12,148 26,297 27,074 Dividends: Real Estate Trust preferred shares of beneficial interest: Distributions payable (1,355) (1,354) (4,064) (4,062) ---------------- ------------- ------------- ------------- End of period (1,405) (30,193) (1,405) (30,193) ---------------- ------------- ------------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Beginning of period 781 (1,615) (1,670) -- Net unrealized holding gains (losses) (1,757) 1,958 694 343 ---------------- ------------- ------------- ------------- End of period (976) 343 (976) 343 ---------------- ------------- ------------- ------------- TREASURY SHARES Beginning and end of period (1,814,688 shares) (41,848) (41,848) (41,848) (41,848) - ---------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 55,872 $ 28,403 $ 55,872 $ 28,403 - ---------------------------------------------------------------------------------------------------------------------------- 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 Nine Months Ended June 30 ---------------------------- (In thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES (Restated) Real Estate Net income (loss) $ (7,377) $ 2,842 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 13,852 12,312 Gain on sale of property -- (5,715) Increase in accounts receivable and accrued income (2,118) (1,619) (Increase) decrease in deferred tax asset (3,940) 1,531 Decrease in accounts payable and accrued expenses (4,941) (10,626) Amortization of debt expense 1,385 1,326 Equity in earnings of unconsolidated entities (8,097) (6,073) Dividends and tax sharing payments 17,667 12,994 Other (4,543) (3,919) ------------- ------------- 1,888 3,053 ------------- ------------- Banking Net income 33,674 24,232 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of premiums, discounts and net deferred loan fees 11,458 6,430 Depreciation and amortization 26,903 25,398 Loss on retirement of fixed assets 2,190 -- Provision for loan and lease losses 45,474 50,622 Capitalized interest on real estate under development -- (2,017) Proceeds from sales of trading securities 982,782 580,247 Net fundings of loans held for sale and/or securitization (1,404,694) (1,206,715) Proceeds from sales of loans held for sale and/or securitization 1,697,375 825,744 Loss on sales of real estate held for sale 925 6,104 Provision for losses on real estate held for investment or sale 700 3,150 Gain on sales of trading securities, net (9,682) (13,057) (Increase) decrease in interest-only strips (18,556) (5,653) (Increase) decrease in servicing assets (18,607) 5,173 Amortization of goodwill and other intangible assets 1,705 (2,386) Decrease in other assets 28,829 43,054 Increase in other liabilities 48,330 25,700 Minority interest held by affiliates 8,418 6,058 Minority interest - other 7,313 7,313 Other 62,522 56,532 ------------- ------------- 1,507,059 435,929 ------------- ------------- Net cash provided by operating activities 1,508,947 438,982 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Real Estate Capital expenditures - properties (8,666) (20,577) Property acquisitions -- (15,159) Property sales 22 10,991 Note receivable and accrued interest -- related party Repayments 500 3,000 Equity investment in unconsolidated entities 2,483 2,201 Net funds released by (deposited with) escrow agent 9,628 (2,905) ------------- ------------- 3,967 (22,449) ------------- ------------- Banking Net proceeds from maturities of investment securities 45,000 -- Net proceeds from redemption of Federal Home Loan Bank stock 69,308 22,630 Net proceeds from sales of real estate 17,671 15,908 Net principal collected of loans and leases receivable 912,815 42,159 Principal collected on mortgage-backed securities 357,899 292,784 Purchases of Federal Home Loan Bank stock (44,754) (43,067) Purchases of investment securities (45,717) (32) Purchases of loans receivable (2,225,971) (1,353,712) Purchases of mortgage-backed securities (21,450) -- Purchases of property and equipment (51,249) (76,823) Disbursements for real estate held for investment or sale (8,827) -- Other 14,668 665 ------------- ------------- (980,607) (1,099,488) ------------- ------------- Net cash used in investing activities (976,640) (1,121,937) - ---------------------------------------------------------------------------------------------------------------------------- Continued on following page. Consolidated Statements of Cash Flows (Continued) B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited) ============================================================================================================================ For the Nine Months Ended June 30 ---------------------------- (In thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES (Restated) Real Estate Proceeds from mortgage financing $ 5,555 $ 22,439 Principal curtailments and repayments of mortgages (6,333) (10,268) Proceeds from secured note financings -- 18,000 Repayments of secured note financings (2,500) (11,000) Proceeds from sales of unsecured notes 11,220 7,038 Repayments of unsecured notes (6,156) (4,237) Costs of obtaining financings (502) (680) Dividends paid - preferred shares of beneficial interest (9,000) (9,000) ------------- ------------- (7,716) 12,292 ------------- ------------- Banking Proceeds from customer deposits and sales of certificates of deposit 36,266,862 32,036,231 Customer withdrawals of deposits and payments for maturing certificates of deposit (36,408,935) (31,875,808) Net increase in securities sold under repurchase agreements 199,580 66,021 Advances from the Federal Home Loan Bank 5,640,737 8,075,953 Repayments of advances from the Federal Home Loan Bank (6,131,813) (7,680,640) Net increase (decrease) in other borrowings (4,141) 11,474 Cash dividends paid on preferred stock (7,313) (7,313) Cash dividends paid on common stock (15,000) (12,000) Other 15,289 73,416 ------------- ------------- (444,734) 687,334 ------------- ------------- Net cash provided by (used in) financing activities (452,450) 699,626 - ---------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 79,857 16,671 Cash and cash equivalents at beginning of period 423,855 446,362 ------------- ------------- Cash and cash equivalents at end of period $ 503,712 $ 463,033 - ---------------------------------------------------------------------------------------------------------------------------- Components of cash and cash equivalents at end of period as presented in the consolidated balance sheets: Real Estate Cash and cash equivalents $ 11,999 $ 11,025 Banking Cash and other deposits 491,713 387,008 Federal funds sold and securities purchased under agreements to resell -- 65,000 ------------- ------------- Cash and cash equivalents at end of period $ 503,712 $ 463,033 - ---------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $ 259,680 $ 373,704 Income taxes paid 19,198 (23,951) Shares of Saul Centers, Inc. common stock 6,084 5,843 Cash received during the year from: Dividends on shares of Saul Centers, Inc. common stock 3,672 3,150 Distributions from Saul Holdings Limited Partnership 4,895 4,895 Supplemental disclosures of noncash activities: Rollovers of notes payable - unsecured 3,983 2,992 Loans held for sale exchanged for trading securities 973,129 1,413,654 Loans receivable transferred to loans held for securitization and sale 1,769,784 631,529 Loans made in connection with the sale of real estate 900 -- Loans receivable transferred to real estate acquired in settlement of loans 3,426 376 Loans receivable exchanged for mortgage-backed securities held-to-maturity -- 837,661 - ---------------------------------------------------------------------------------------------------------------------------- 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. Tax Sharing and dividend payments between the Real Estate Trust and the Bank are presented in gross on the Consolidated Statements of Cash Flows. 3. The Real Estate 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. Restatement of Prior Period Financial Statements. On July 31, 2002, the Trust filed a current report on Form 8-K with the United States Securities and Exchange Commission stating that as a result of the Bank's internal accounting review, the Bank's net income had been inadvertently overstated in prior periods due to certain accounting errors involving the valuation of interest-only strips receivable related to the Bank's automobile loan securitizations. The overstatements reflect timing differences in the recognition of income. Consequently, in future periods the amount of servicing and securitization income recognized by the Bank will be higher than if the errors had not been detected. As a result, after consultation and concurrence with its outside auditor, the Trust will restate its financial results for the fiscal years ended September 30, 2000 and 2001, as well as the first quarter of fiscal 2002, the three months ended December 31, 2001. The restatements reduce net income by approximately $3.6 million from $22.4 million to $18.8 million for fiscal 2000, and approximately $8.7 million from $43.7 million to $35.0 million for fiscal 2001. In addition, the restatements reduce net income by approximately $2.0 million from $6.2 million to $4.2 million for the three months ended December 31, 2001. Net income attributable to the second quarter of 2002 covering the three months ended March 31, 2002, previously reported as $8.7 million was understated by approximately $0.7 million as a result of such errors. The amounts contained in this report reflect the adjustments as of or for the three months and nine months ended June 30, 2002 and 2001. The Trust intends to amend its Form 10-K for each of fiscal year 2000 and 2001, and its Form 10-Q for the quarter ended December 31, 2001, and refile such documents with the Securities and Exchange Commission as promptly as possible. As a result of the Trust's recent change in independent auditors, the restatements will require the Trust's new auditors to audit the Trust's financial statements for fiscal years 2000 and 2001, and thus, the Trust may not be in a position to make the amended filings until September 2002. The audit opinions of the Trust's prior auditors covering the fiscal years 2000 and 2001 are no longer in effect. 5. BANKING: LOANS HELD FOR SECURITIZATION AND/OR SALE: Loans held for securitization and/or sale is composed of the following: June 30, September 30, (In thousands) 2002 2001 ------------------ ------------------ Single-family residential loans $ 886,798 $ 233,359 Automobile loans 40,676 282,000 Home improvement and related loans 1,862 12,724 ------------------ ------------------ Total $ 929,336 $ 528,083 ================== ================== LOANS AND LEASES RECEIVABLE: Loans and leases receivable is composed of the following: June 30, September 30, (In thousands) 2002 2001 -------------------- -------------------- Single-family residential $ 3,733,424 $ 4,555,814 Home equity 581,483 372,095 Real estate construction and ground 454,476 472,489 Commercial real estate and multifamily 20,687 30,703 Commercial 1,441,704 1,376,582 Automobile 575,222 320,741 Subprime automobile 270,763 420,658 Automobile leases 1,153,677 1,124,106 Home improvement and related loans 109,702 100,494 Overdraft lines of credit and other consumer 36,846 36,356 -------------------- -------------------- 8,377,984 8,810,038 -------------------- -------------------- Less: Undisbursed portion of loans 870,669 812,325 Unearned discounts and net deferred loan origination costs (53,509) (42,611) Allowance for losses on loans and leases 74,468 63,018 -------------------- -------------------- 891,628 832,732 -------------------- -------------------- Total $ 7,486,356 $ 7,977,306 ==================== ==================== 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: June 30, September 30, (In thousands) 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 $83,699 and $85,152, respectively) 25,457 30,779 ------------------- ------------------- Total real estate held for investment or sale $ 26,382 $ 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." FINANCIAL CONDITION Recent Developments Regarding Arthur Andersen LLP. On June 27, 2002, the Board of Trustees of the Trust, upon the unanimous recommendation of its Audit Committee, approved the dismissal of Arthur Andersen LLP as the Trust's principal independent accountant and the engagement of Ernst and Young LLP to serve as the Trust's principal independent accountant to audit the Company's financial statements for the year ending September 30, 2002. Restatement of Prior Period Financial Statements. On July 31, 2002, the Trust filed a current report on Form 8-K with the United States Securities and Exchange Commission stating that as a result of the Bank's internal accounting review, the Bank's net income had been inadvertently overstated in prior periods due to certain accounting errors involving the valuation of interest-only strips receivable related to the Bank's automobile loan securitizations. The overstatements reflect timing differences in the recognition of income. Consequently, in future periods the amount of servicing and securitization income recognized by the Bank will be higher than if the errors had not been detected. As a result, after consultation and concurrence with its outside auditor, the Trust will restate its financial results for the fiscal years ended September 30, 2000 and 2001, as well as the first quarter of fiscal 2002, the three months ended December 31, 2001. The restatements reduce net income by approximately $3.6 million from $22.4 million to $18.8 million for fiscal 2000, and approximately $8.7 million from $43.7 million to $35.0 million for fiscal 2001. In addition, the restatements reduce net income by approximately $2.0 million from $6.2 million to $4.2 million for the three months ended December 31, 2001. Net income attributable to the second quarter of 2002 covering the three months ended March 31, 2002, previously reported as $8.7 million was understated by approximately $0.7 million as a result of such errors. The amounts contained in this report reflect the adjustments as of or for the three months and nine months ended June 30, 2002 and 2001. The Trust intends to amend its Form 10-K for each of fiscal year 2000 and 2001, and its Form 10-Q for the quarter ended December 31, 2001, and refile such documents with the Securities and Exchange Commission as promptly as possible. As a result of the Trust's recent change in independent auditors, the restatements will require the Trust's new auditors to audit the Trust's financial statements for fiscal years 2000 and 2001, and thus, the Trust may not be in a position to make the amended filings until September 2002. The audit opinions of the Trust's prior auditors covering the fiscal years 2000 and 2001 are no longer in effect. REAL ESTATE The number of properties in the Real Estate Trust's investment portfolio at June 30, 2002, consisted primarily of hotels, office projects and land parcels. At June 30, 2002, the hotel portfolio included 18 properties containing 3,578 available rooms and the office portfolio consisted of 12 properties containing 1,978,000 square feet of gross leasable area. The Real Estate Trust was directly affected by the terrorist attacks of September 11, 2001 because of its concentration of hotels in the Washington, D.C. metropolitan area, one of the sites of the attacks. Eleven of the Real Estate Trust's eighteen hotels are located in the Washington, D.C. Metropolitan area. In addition, five of these 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's prolonged closure and limited flight schedule during the first half of fiscal 2002. Consequently, the hotel portfolio experienced an average occupancy rate of 60.1% and a average room rate of $87.16 during the nine-month period ended June 30, 2002, compared to an average occupancy of $66.8% and an average room rate of $96.35 during the same period in the prior year. For the sixteen hotel properties owned by the Real Estate Trust throughout both periods the average occupancy rates of 59.9% and 67.4%, and average room rates of $84.03 and $94.13. REVPAR (revenue per available room) for the sixteen hotels was $50.37 for the nine-month period ended June 30, 2002, a 21% decrease from REVPAR OF $63.44 for the nine-month period ended June 30, 2001. 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 capital expenditure budget for fiscal 2003. Office space in the Real Estate Trust's office property portfolio was 87% leased at June 30, 2002, compared to a leasing rate of 96% and 97% at September 30, 2001 and at June 30, 2001. The decline in leasing rate is primarily due to the Trust placing into service during December 2001, an 81,000 square foot building in Loudoun County, VA, that remains unleased. At June 30, 2002, the office and industrial portfolio had a total gross leasable area of 2.0 million square feet, of which 31,000 (1.6%)and 202,000 (10.2%) are subject to leases whose terms expire in the balance of fiscal 2002 and in fiscal 2003, respectively. BANKING General. The Bank's assets at the end of the current quarter were $11.0 billion, an increase of $274.6 million from the last quarter. Total loans and leases increased $292.2 million during the quarter to $8.4 billion at June 30, 2002. This increase was primarily due to increases in net fundings of single-family residential loans, automobile leases, commercial loans and home equity loans, which was partially offset by the sale of $593.7 million of single-family residential loans and a $47.0 million decrease in subprime automobile loans. The Bank recorded operating income of $36.2 million during the quarter ended June 30, 2002, compared to operating income of $25.1 million in the prior corresponding quarter. Contributing to the increased income for the current quarter were an increase in other (non-interest) income and a decrease in the provision for loan and lease losses, which were partially offset by a decrease in net interest income and an increase in operating expenses. At June 30, 2002, the Bank's tangible, core, tier 1 risk-based and total risk-based regulatory capital ratios were 5.74%, 5.74%, 7.10% and 10.89%, 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 June 30, 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) June 30, March 31, September 30, (Dollars in thousands) 2002 2002 2001 ----------------- ------------------ ------------------ Non-performing assets: Non-accrual loans: Residential $ 13,448 $ 12,101 $ 7,314 Real estate construction and ground 5 527 - Subprime automobile 8,327 9,983 13,379 Other consumer 4,670 5,126 7,028 ----------------- ------------------ ------------------ Total non-accrual loans (1) 26,450 27,737 27,721 ----------------- ------------------ ------------------ Real estate owned 109,156 109,350 115,931 Allowance for losses on real estate owned (83,699) (85,266) (85,152) ----------------- ------------------ ------------------ Real estate owned, net 25,457 24,084 30,779 ----------------- ------------------ ------------------ Total non-performing assets $ 51,907 $ 51,821 $ 58,500 ================= ================== ================== Allowance for losses on loans and leases $ 74,468 $ 69,018 $ 63,018 Allowance for losses on real estate held for investment 202 202 202 Allowance for losses on real estate owned 83,699 85,266 85,152 ----------------- ------------------ ------------------ Total allowances for losses $ 158,369 $ 154,486 $ 148,372 ================= ================== ================== Ratios: Total non-performing assets to total assets (2) 0.47% 0.48% 0.51% Total allowance for losses to total non-performing assets (1) 116.79% 112.69% 103.29% Allowance for losses on real estate loans to non-accrual real estate loans (1) 59.06% 61.97% 70.86% Allowance for losses on consumer loans and leases to non-accrual consumer loans and leases (1)(3) 346.32% 290.89% 230.55% Allowance for losses on loans and leases to non-accrual loans and leases (1) 281.54% 248.83% 227.33% Allowance for losses on loans and leases to total loans and leases receivable (4) 0.88% 0.84% 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 securitization and/or sale, before deduction of allowance for losses. Non-performing assets totaled $51.9 million, after valuation allowances on REO of $83.7 million, at June 30, 2002, compared to $51.8 million, after valuation allowances on REO of $85.3 million, at March 31, 2002. In addition to the valuation allowances on REO, the Bank maintained $74.5 million and $69.0 million of valuation allowances on its loan and lease portfolio at June 30, 2002 and March 31, 2002, respectively. The $0.1 million increase in non-performing assets for the current quarter reflects a $1.4 million net increase in REO partially offset by a $1.3 million decrease in non-accrual loans. See "Non-accrual Loans" and "REO." Non-accrual Loans. The Bank's non-accrual loans totaled $26.5 million at June 30, 2002, as compared to $27.7 million at March 31, 2002. At June 30, 2002, non-accrual loans consisted of $13.5 million of non-accrual real estate loans and $13.0 million of non-accrual consumer and other loans, compared to non-accrual real estate loans of $12.6 million and non-accrual consumer and other loans of $15.1 million at March 31, 2002. Total non-accrual consumer loans decreased primarily as a result of decreases in delinquent subprime automobile loans. REO. At June 30, 2002, the Bank's REO totaled $25.5 million, after valuation allowances on those assets of $83.7 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 Properties Balance Offs Allowances Allowances Allowances Total ------------------------------------------------------------------------------------------- (Dollars in thousands) Communities 4 $ 129,561 $ 29,767 $ 99,794 $ 79,968 $ 19,826 77.9% Residential ground 1 100 - 100 100 - - Commercial ground 1 9,854 2,732 7,122 3,631 3,491 13.7% Single-family residential properties 6 2,314 174 2,140 - 2,140 8.4% ------------------------------------------------------------------------------------------- Total REO 12 $ 141,829 $ 32,673 $ 109,156 $ 83,699 $ 25,457 100.0% =========================================================================================== During the three months ended June 30, 2002, REO increased $1.4 million primarily as a result of a recovery of an amount previously charged off in one of the communities during the June quarter and the transfer of certain residential loans to REO, which was offset by sales in the communities. During the three months ended June 30, 2002, the Bank received revenues of $2.7 million from the disposition of 184 residential lots or units in the Communities ($1.1 million) and various single-family residential properties ($1.6 million). Delinquent Loans. At June 30, 2002, delinquent loans totaled $95.4 million, or 1.1% of loans, compared to $81.7 million, or 1.0% of loans, at March 31, 2002. The following table sets forth information regarding the Bank's delinquent loans at June 30, 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... $ 17,723 $ 35,896 $ 9,943 $ 13,468 $ 77,030 0.9% 60-89 days.... 2,514 12,108 128 3,594 18,344 0.2% ------------- ------------- -------------- ------------ ---------- ------------- Total........... $ 20,237 $ 48,004 $ 10,071 $ 17,062 $ 95,374 1.1% ============= ============= ============== ============ ========== ============= - -------------------------- (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 of single-family residential mortgage loans, other real estate loans and home equity loans. Total delinquent real estate loans increased to $20.2 million at June 30, 2002, from $11.9 million at March 31, 2002. The increase in delinquencies reflects general economic conditions. Delinquent subprime automobile loans decreased to $48.0 million at June 30, 2002, from $48.9 million at March 31, 2002, primarily because the Bank's portfolio of these 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 19 loans totaling $10.1 million at June 30, 2002 compared to 20 loans totaling $5.9 million at March 31, 2002. The increase in delinquencies reflects general economic conditions. Other consumer loans delinquent 30-89 days increased to $17.1 million at June 30, 2002, from $15.1 million at March 31, 2002. The increase in delinquencies reflects general economic conditions. Troubled Debt Restructurings. At June 30, 2002 and March 31, 2002, the Bank had no troubled debt restructurings. Real Estate Held for Investment. At June 30, 2002 and March 31, 2002, real estate held for investment consisted of one property with book value of $1.1 million, before valuation allowances of $0.2 million. Allowances for Losses. The following tables show loss experience by asset type and the components of the allowance for losses on loans and leases and the allowance for losses on real estate held for investment or sale. These tables reflect charge-offs taken against assets during the periods indicated and may include charge-offs taken against assets, which the Bank disposed of during such periods. Analysis of Allowance for and Chargeoffs of Loans and Leases (Dollars in thousands) Three Months Nine Months Ended Ended June 30, June 30, --------------------------------- 2002 2001 2002 --------------- ---------------- --------------- Balance at beginning of period $ 63,018 $ 54,018 $ 69,018 --------------- ---------------- --------------- Provision for loan and lease losses 45,474 50,622 12,578 --------------- ---------------- --------------- Chargeoffs: Single-family residential and home equity (814) (621) (330) Subprime automobile (31,204) (37,641) (8,677) Other (14,050) (13,019) (3,943) --------------- ---------------- --------------- Total chargeoffs (46,068) (51,281) (12,950) --------------- ---------------- --------------- Recoveries: Single-family residential and home equity 56 73 12 Subprime automobile 9,460 4,975 4,564 Other 2,528 1,611 1,246 --------------- ---------------- --------------- Total recoveries 12,044 6,659 5,822 --------------- ---------------- --------------- Chargeoffs, net of recoveries (34,024) (44,622) (7,128) --------------- ---------------- --------------- Balance at end of period $ 74,468 $ 60,018 $ 74,468 =============== ================ =============== Provision for loan and lease losses to average loans and leases (1) (2) 0.72% 0.78% 0.60% Net loan and lease chargeoffs to average loans and leases (1) (2) 0.54% 0.69% 0.34% Ending allowance for losses on loans and leases to total loans and leases (2) (3) 0.88% 0.70% 0.88% (1) Annualized. (2) Includes loans held for sale and/or securitization and / or sale. (3) Before deduction of allowance for losses. Components of Allowance for Losses on Loans and Leases by Type (Dollars in thousands) June 30, March 31, September 30, 2002 2002 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 54.8 % $ 2,485 55.4 % $ 2,686 56.1 % Home equity 632 6.9 539 6.0 448 4.5 Commercial real estate and multifamily 183 0.3 160 0.3 197 0.4 Real estate construction and ground 4,645 3.0 4,641 3.0 1,852 3.1 Commercial 10,488 9.1 10,516 9.1 9,135 9.0 Automobile 5,110 7.3 3,780 6.6 7,034 7.1 Automobile leases 5,866 13.7 5,866 13.9 6,000 13.2 Subprime automobile 32,000 3.2 32,000 3.9 32,000 4.9 Home improvement and related loans 1,098 1.3 1,694 1.4 1,523 1.3 Overdraft lines of credit and other consumer 937 0.4 610 0.4 491 0.4 Unallocated 11,024 - 6,727 - 1,652 - ----------- ------------ ------------ Total $ 74,468 $ 69,018 $ 63,018 =========== ============ ============ Real Estate Held for Investment or Sale (Dollars in thousands) Activity in Allowance for Losses Three Months Nine Months Ended Ended June 30, June 30, --------------------------------------- 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 85,266 ------------------ ----------------- ---------------------- Total 85,354 80,954 85,468 ------------------ ----------------- ---------------------- Provision for real estate losses Real estate held for sale 2,100 3,150 - ------------------ ----------------- ---------------------- Total 2,100 3,150 - ------------------ ----------------- ---------------------- Chargeoffs, net of recoveries: Real estate held for sale: Communities (3,553) (74) (1,567) ------------------ ----------------- ---------------------- Total net chargeoffs (3,553) (74) (1,567) ------------------ ----------------- ---------------------- Balance at end of period: Real estate held for investment 202 202 202 Real estate held for sale 83,699 83,828 83,699 ------------------ ----------------- ---------------------- Total $ 83,901 $ 84,030 $ 83,901 ================== ================= ====================== Components of Allowance for Losses June 30, March 31, September 30, 2002 2002 2001 ------------------ ----------------- ---------------------- Allowance for losses on real estate held for investment $ 202 $ 202 $ 202 ------------------ ----------------- ---------------------- Allowance for losses on real estate held for sale: Residential ground 100 100 1,689 Commercial ground 3,631 3,631 3,631 Communities 79,968 81,535 79,832 ------------------ ----------------- ---------------------- Total 83,699 85,266 85,152 ------------------ ----------------- ---------------------- Total allowance for losses on real estate held for investment or sale $ 83,901 $ 85,468 $ 85,354 ================== ================= ====================== At June 30, 2002, the Bank's total valuation allowance for losses on loans and leases and real estate held for investment or sale was $158.4 million, an increase of $3.9 million from March 31, 2002. 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 $91.8 million at June 30, 2002, which constituted 74.9% of total non-performing real estate assets, before valuation allowances. During the three months ended June 30, 2002, the Bank recorded net charge-offs of $0.5 million on these assets. The allowance for losses on real estate held for sale at June 30, 2002 is in addition to approximately $32.7 million of cumulative charge-offs previously taken against assets remaining in the Bank's portfolio at June 30, 2002. At June 30, 2002 and March 31, 2002, the combined allowance for losses on consumer loans and leases, including automobile, subprime automobile, home improvement and related loans, overdraft lines of credit and other consumer loans was $45.0 million and $44.0 million, respectively. The slight increase in the allowance for losses on consumer loans and leases is primarily attributable to increased loan balances. Net charge-offs of consumer and other loans totaled $6.8 million for the three months ended June 30, 2002, compared to $11.7 million for the three months ended March 31, 2002. The decline in net chargeoffs is attributable to declining subprime automobile loan balances. Asset and Liability Management. The following table presents the interest rate sensitivity of the Bank's interest-earning assets and interest-bearing liabilities at June 30, 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 June 30, 2002 Real estate loans: Adjustable-rate $ 1,996,449 $ 290,559 $ 357,412 $ 156,975 $ 130,793 $ 2,932,188 Fixed-rate 83,540 76,542 248,675 177,548 462,417 1,048,722 Home equity credit lines and second mortgage 600,721 2,841 10,257 8,688 38,603 661,110 Commercial 614,467 21,195 67,084 44,998 25,326 773,070 Consumer and other 420,077 361,055 1,028,820 260,694 75,088 2,145,734 Loans held for securitization and/or sale 929,336 - - - - 929,336 Mortgage-backed securities 185,796 142,397 222,370 166,458 418,880 1,135,901 Trading securities 6,719 - - - - 6,719 Other investments 244,265 - 46,476 - - 290,741 ------------- ------------- ------------- ------------- ------------ ------------- Total interest-earning assets 5,081,370 894,589 1,981,094 815,361 1,151,107 9,923,521 Total non-interest earning assets - - - - 1,093,323 1,093,323 ------------- ------------- ------------- ------------- ------------ ------------- Total assets $ 5,081,370 $ 894,589 $ 1,981,094 $ 815,361 $ 2,244,430 $ 11,016,844 ============= ============= ============= ============= ============ ============= Deposits: Fixed maturity deposits $ 1,162,249 $ 607,670 $ 177,488 $ 101,157 $ - $ 2,048,564 NOW and statement accounts 2,200,317 46,061 153,411 104,415 222,521 2,726,725 Money market deposit accounts 1,919,711 - - - - 1,919,711 Borrowings: Capital notes - subordinated - - - 150,000 100,000 250,000 Other 628,430 1,297 1,478,181 24,424 95,212 2,227,544 ------------- ------------- ------------- ------------- ------------ ------------- Total interest-bearing liabilities 5,910,707 655,028 1,809,080 379,996 417,733 9,172,544 Minority interest - - - - 144,000 144,000 Total non-interest bearing liabilities - - - - 1,164,757 1,164,757 Stockholders' equity - - - - 535,543 535,543 ------------- ------------- ------------- ------------- ------------ ------------- Total liabilities and stockholders' equity $ 5,910,707 $ 655,028 $ 1,809,080 $ 379,996 $ 2,262,033 $ 11,016,844 ============= ============= ============= ============= ============ ============= Gap $ (829,337) $ 239,561 $ 172,014 $ 435,365 $ 733,374 Cumulative gap $ (829,337) $ (589,776) $ (417,762) $ 17,603 $ 750,977 Adjusted cumulative gap as a percentage of total assets (7.5)% (5.4)% (3.8)% 0.2 % 6.8 % 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 5.4% at June 30, 2002, compared to a negative 6.9% at March 31, 2002. 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 June 30, 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 June 30, 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 $ 535,543 Minority interest in REIT Subsidiary (1) 144,000 Accumulated other comprehensive income (2) 1,220 ------------ 680,763 Adjustments for tangible and core capital: Intangible assets (44,594) Non-includable subsidiaries (3) (1,416) Non-qualifying purchased/originated loan servicing rights (4,395) ------------ Total tangible capital 630,358 5.74% $ 164,777 1.50% $ 465,581 4.24% ------------ ========= ============= ======== ============ ========= Total core capital (4) 630,358 5.74% $ 439,404 4.00% $ 190,954 1.74% ------------ ========= ============= ======== ============ ========= Tier 1 risk-based capital (4) 630,358 7.10% $ 355,280 4.00% $ 275,078 3.10% ------------ ========= ============= ======== ============ ========= Adjustments for total risk-based capital: Subordinated capital debentures 250,000 Allowance for general loan and lease losses 74,468 ------------ Total supplementary capital 324,468 ------------ Total available capital 954,826 Equity investments (3) (2,355) ------------ Total risk-based capital (4) $ 952,471 10.89% $ 710,560 8.00% $ 241,911 2.89% ============ ========= ============= ======== ============ ========= (1) Eligible for inclusion in core capital in an amount up to 25% of the Bank's core capital pursuant to authorization from the OTS. (2) Under OTS policy, accumulated other comprehensive loss is included in regulatory capital. (3) Reflects an aggregate offset of $0.2 million representing the allowance for general loan losses maintained against the Bank's equity investments and non-includable subsidiaries which, pursuant to OTS guidelines, is available as a "credit" against the deductions from capital otherwise required for such investments. (4) Under the OTS "prompt corrective action" regulations, the standards for classification as "well capitalized" are a leverage (or "core capital") ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%. 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 June 30, 2002, after valuation allowances of $83.7 million, by the fiscal year in which the property was acquired through foreclosure. Fiscal Year (In thousands) ----------- ----------------- 1990 $ 426 (1) 1991 19,400 (1)(2) 1992 - 1993 - 1994 - 1995 3,491 (1) 1996 - 1997 - 1998 - 1999 - 2000 - 2001 - 2002 2,140 ----------------- Total REO $ 25,457 ================= - ----------------------- (1) Includes REO with an aggregate net book value of $20.9 million, for which the Bank received an extension of the holding periods through December 19, 2002. (2) Includes REO with a net book value of $2.4 million, which the Book treats as an equity investment for regulatory capital purposes. Although the Bank stopped originating subprime automobile loans in November 2000, the Bank's subprime automobile loan portfolio at June 30, 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 the 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 add income, and regulatory restrictions on such payments. The Real Estate 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 nine-month period ended June 30, 2002, the Bank made tax sharing payments totaling $5.7 million and dividend payments totaling $12.0 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 nine-month period ended June 30, 2002, the Trust purchased through dividend reinvestment 298,000 shares of common stock of Saul Centers and as of June 30, 2002, owned approximately 3,327,000 shares representing 22.4% of such company's outstanding common stock. As of June 30, the market value of these shares was approximately $86.2 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 nine-month period ended June 30, 2002, the Real Estate Trust received total cash distributions of $4.9 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 line 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 in an amount sufficient to finance completely the schedules 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 year with with provisions for extending the term annually. The current maturity date is September 2002 and the Trust is currently in the process of closing on a one-year renewal. 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 June 30, 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 a $8.0 million secured 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 in November 2003. Interest is computed by reference to a floating rate index. At June 30, 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 June 30, 2002 for the remainder 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) $ 27,173 $ --- $ 1,886 $ 29,059 2003 32,319 --- 12,306 44,625 2004 9,009 --- 11,722 20,731 2005 13,795 --- 9,922 23,717 2006 94,406 --- 5,749 100,155 Thereafter 148,270 200,000 14,196 362,466 - ------------------------------------------------------------------- Total $324,972 $200,000 $ 55,781 $580,753 =================================================================== (1) July 1, 2002 - September 30, 2002 Of the $325.0 million of mortgage debt outstanding at June 30, 2002, $292.0 million was nonrecourse to the Real Estate Trust. DEVELOPMENT AND CAPITAL EXPENDITURES On June 29, 2000, the Real Estate trust purchased a 6017 acre site in the Loundon trust Center, a 246-acre business park located in Loudoun County, Virginia, for $1.1 million. The site was purchased for the purposed of developing an 81,000 square feet office/flex building 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 know as Dulles North Building Four. Development costs are projected to be $10.0 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. 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 June 30, 2002, was 7.3%, compared to 8.4% for the quarter ended March 31, 2002. As part of its mortgage banking activities, the Bank sold $593.7 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 $21.0 million and $24.2 million, respectively, at June 30, 2002, and $20.9 million and $28.0 million, respectively, at March 31, 2002, 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 June 30, 2002, recourse to the Bank under these arrangements was $5.5 million, consisting of restricted cash accounts of $3.6 million and overcollateralization of receivables of $1.9 million. The Bank also is obligated under a recourse provision related to the servicing of certain of its residential mortgage loans. At June 30, 2002 and March 31, 2002, recourse to the Bank under this arrangement totaled $3.4 million. There were no material commitments for capital expenditures at June 30, 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 JUNE 30, 2002 (the "2002 quarter") COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 (the "2001 quarter") REAL ESTATE The Real Estate Trust recorded income before depreciation and amortization of $3.0 million and an operating loss of $1.9 million in the 2002 quarter compared to income before depreciation and amortization of $8.9 million and operating income of $4.5 million in the 2001 quarter. The decrease in operating income was largely attributable to declining results from income-producing properties and a gain from the sale of a property in the 2001 quarter. Income after direct operating expenses from hotel properties decreased $2.2 million (18.4%) in the 2002 quarter over the level achieved in the 2001 quarter. This decrease was attributable to a decrease of $220,000 from acquisition properties while results from 16 properties owned throughout both quarters decreased by $2.0 million (19.8%). The decrease in total revenue of $2.9 million (10.2%) was offset by a decrease of $672,000 (4.1%) in direct operating expenses. For the sixteen hotels owned throughout both periods, total revenue decreased by $2.5 million (10.1%) and direct operating expenses decreased by $519,000 (3.5%). Income after direct operating expenses from office and industrial properties decreased $434,000 (5.8%) in the 2002 quarter compared to such income in the 2001 quarter. $587,000 of this decrease reflected lower results from ten properties owned throughout both quarters and $198,000 additional decrease resulting from a property no longer in the portfolio offset by increased results of $351,000 from acquisition properties. The decrease in total revenue of $569,000 (5.4%) was offset by a decrease in direct operating expenses of $136,000 (4.3%). For the ten properties owned throughout both periods, the decrease in total revenue was $726,000 (7.5%) and the decrease in direct operating expenses was $139,000 (4.7%). Other income decreased $140,000 (27.5%) during the 2002 quarter, largely due to lower interest income and lack of apartment income in the current quarter. Interest expense decreased $192,000 (1.5%) in the 2002 quarter, primarily because of lower mortgage interest rates and lower interest on bank lines of credit. The average balance of the Real Estate Trust's outstanding borrowings increased to $578.7 million for the 2002 quarter from $573.7 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 8.93% in the 2002 quarter compared to 9.12% in the 2001 quarter. Capitalized interest decreased $103,000 (100.0%) during the 2002 quarter due to the lower level of development activity in the current quarter. Amortization of debt expense increased $63,000 (31.4%) in the 2002 quarter, primarily due to costs experienced in adding new debt. Depreciation increased $399,000 (9.4%) in the 2002 quarter as a result of the addition of new properties and new assets placed in service in the past year. Advisory, management and leasing fees paid to related parties increased $195,000 (6.3%) 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 and leasing fees decreased $142,000 (7.2%) in the current quarter, reflecting both lower hotel sales and office rents on which the fees are based. General and administrative expense increased $177,000 (50.8%) in the 2002 quarter, principally as a result of higher preliminary stage costs incurred in the current quarter. Equity on earnings of unconsolidated entities reflected earnings of $2.4 million in the 2002 quarter, an increase of $280,000 (13.5%) over the amount recorded in the 2001 quarter. The improvement was due to increased period-to-period earnings of Saul Centers, Inc. The Real Estate Trust did not have any gains in the current quarter from sales of property, whereas in May 2001, the Real Estate Trust received $1.9 million in payment on the condemnation for road improvements of a 3.3 acre piece of its Auburn Hills land parcel. The gain on this transaction was $710,000. Additionally, in June 2001, the Real Estate Trust received $3.0 million from the sale of a 4.8 acre piece of its Circle 75 land parcel in Cobb County, Georgia. The gain on this transaction was $2.5 million. BANKING Overview. The Bank recorded operating income of $36.2 million for the 2002 quarter, compared to operating income of $25.1 million for the 2001 quarter. Increases in other (non-interest) income and a decrease in the provision for loan and lease losses contributed to the increased income for the 2002 quarter and were partially offset by a decrease in net interest income and an increase in operating expenses. Net Interest Income. Net interest income, before the provision for loan and lease losses, decreased $4.5 million (or 4.9%) in the 2002 quarter compared to the 2001 quarter. There was no interest income recorded during the 2002 quarter on non-accrual assets and restructured loans. The Bank would have recorded interest income of $0.8 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 June 30, ------------------------------------------------------------------------------------ 2002 2001 ----------------------------------------- ----------------------------------------- Average Yield/ Average Yield/ Balances Interest Rate Balances Interest Rate -------------- ------------ ----------- -------------- ------------ ----------- Assets: Interest-earning assets: Loans and leases receivable, net (1) $ 8,387,251 $ 130,805 6.24 % $ 8,726,192 $ 172,629 7.91 % Mortgage-backed securities 1,170,876 17,683 6.04 1,099,332 16,455 5.99 Federal funds sold and securities purchased under agreements to resell 64,956 287 1.77 42,242 464 4.39 Trading securities 35,261 563 6.39 74,655 1,043 5.59 Investment securities 46,462 357 3.07 45,698 682 5.97 Other interest-earning assets 171,827 1,560 3.63 181,940 2,738 6.02 -------------- ------------ -------------- ------------ Total 9,876,633 151,255 6.13 10,170,059 194,011 7.63 ------------ ----------- ------------ ----------- Noninterest-earning assets: Cash 262,559 262,810 Real estate held for investment or sale 24,318 42,609 Property and equipment, net 456,886 402,624 Goodwill and other intangible assets, net 25,707 28,056 Other assets 270,206 315,099 -------------- -------------- Total assets $ 10,916,309 $ 11,221,257 ============== ============== Liabilities and stockholders' equity: Interest-bearing liabilities: Deposit accounts: Demand deposits $ 1,609,251 1,224 0.30 $ 1,355,169 1,600 0.47 Savings deposits 1,014,154 2,485 0.98 893,655 3,012 1.35 Time deposits 2,191,569 20,759 3.79 2,851,685 42,355 5.94 Money market deposits 1,887,787 7,741 1.64 1,430,810 11,732 3.28 -------------- --------- -------------- ---------- Total deposits 6,702,761 32,209 1.92 6,531,319 58,699 3.59 Borrowings 2,491,604 31,027 4.98 3,115,004 42,758 5.49 -------------- ------------ -------------- ------------ Total liabilities 9,194,365 63,236 2.75 9,646,323 101,457 4.21 ------------ ----------- ------------ ----------- Noninterest-bearing items: Noninterest-bearing deposits 846,040 734,845 Other liabilities 220,983 217,715 Minority interest 144,000 144,000 Stockholders' equity 510,921 478,374 -------------- -------------- Total liabilities and stockholders' equity $ 10,916,309 $ 11,221,257 ============== ============== Net interest income $ 88,019 $ 92,554 ============ ============ Net interest spread (2) 3.38 % 3.42 % =========== =========== Net yield on interest-earning assets (3) 3.56 % 3.64 % =========== =========== Interest-earning assets to interest-bearing liabilities 107.42 % 105.43 % =========== =========== - ---------------------------------------------------------------------------------------------------------------------------------- (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 June 30, 2002 Compared to Three Months Ended June 30, 2001 Increase (Decrease) Due to Change in (1) --------------------------------------------------------------- Total Volume Rate Change ----------------- ------------------ ------------------ Interest income: Loans (2) $ (6,488) $ (35,336) $ (41,824) Mortgage-backed securities 1,088 140 1,228 Federal funds sold and securities purchased under agreements to resell 965 (1,142) (177) Trading securities (1,317) 837 (480) Investment securities 77 (402) (325) Other interest-earning assets (145) (1,033) (1,178) ----------------- ------------------ ------------------ Total interest income (5,820) (36,936) (42,756) ----------------- ------------------ ------------------ Interest expense: Deposit accounts 10,237 (36,727) (26,490) Borrowings (8,012) (3,719) (11,731) ----------------- ------------------ ------------------ Total interest expense 2,225 (40,446) (38,221) ----------------- ------------------ ------------------ Increase in net interest income $ (8,045) $ 3,510 $ (4,535) ================= ================== ================== - ------------------------------------------------------------------------------------------------------------------------- (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 $42.8 million (or 22.0%) from the level in the 2001 quarter as a result of lower average yields, particularly on loans and leases, coupled with a $338.9 million decline in average balances of loans and leases. Partially offsetting the decrease was an increase in interest income on mortgage-backed securities which resulted primarily from a $71.5 million increase in the average balance of those assets. The Bank's net interest spread decreased slightly to 3.38% in the 2002 quarter, from 3.42% in the 2001 quarter. Average interest-earning assets as a percentage of average interest bearing liabilities increased to 107.4% for the 2002 quarter, compared to 105.4% for the 2001 quarter. Interest income on loans and leases, the largest category of interest-earning assets, decreased $41.8 million from the 2001 quarter primarily because of lower average yields. The average yield on the loan and lease portfolio decreased 167 basis points (from 7.91% to 6.24%) from the 2001 quarter. Interest income declined by $25.5 million (or 28.3%) on single-family residential loans, and by $11.1 million (or 20.5%) on automobile loans, primarily because of lower average yields on those loans. In addition, lower average yields on commercial loans and construction loans contributed to decreases in interest income of $3.0 million (or 24.6%) and $2.3 million (or 41.8%), 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 $1.2 million (or 7.5%) primarily because of an increase of $71.5 million in average balances. Interest expense on deposits decreased $26.5 million (or 45.1%) during the 2002 quarter, due to a decrease in average rates. The 167 basis point decrease in the average rate on deposits (from 3.59% to 1.92%) resulted from a general decline in market interest rates. The Bank's average deposits grew $171.4 million from the prior corresponding quarter. The Bank also reduced its use of higher cost brokered deposits in the 2002 quarter. Interest expense on borrowings decreased $11.7 million (or 27.4%) in the 2002 quarter. The Bank used funds from deposit growth to repay borrowings. Average balances of Federal Home Loan Bank advances decreased by $521.5 million, or 22.3%, and the average interest rate on those advances decreased (from 5.31% to 5.21%), resulting in a $7.4 million reduction in interest expense. Decreases in the average cost of securities sold under repurchase agreements (from 4.81% to 1.82%) and the average balance of those agreements ($93.9 million or 26.3%), resulted in an additional $3.1 million decrease in interest expense. Provision for Loan and Lease Losses. The Bank's provision for loan and lease losses decreased to $12.6 million in the 2002 quarter from $16.7 million in the 2001 quarter. The $4.1 million decrease was 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 increased to $70.2 million in the 2002 quarter from $48.6 million in the 2001 quarter. The $21.6 million (or 44.4%) increase was primarily attributable to increased servicing and securitization income and deposit servicing fees in the 2002 quarter, which were partially offset by a nonrecurring gains, in the 2001 quarter, on other investment and real estate held for sale. Servicing and securitization income increased $24.9 million during the 2002 quarter primarily due to a $20.5 million gain on the securitization and/or sale of real estate loan receivables. Deposit servicing fees increased $3.3 million (or 12.8%) during the 2002 quarter primarily due to fees generated by the Bank's branch and ATM network, which the Bank continues to expand. The Bank recognized a pre-tax gain of $1.6 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 $3.7 million decrease in the gain on real estate held for investment or sale in the current quarter reflects the gain on the sale of one commercial property during the 2001 quarter. Operating Expenses. Operating expenses for the 2002 quarter increased $10.1 million (or 10.2%) from the 2001 quarter. The increase in operating expenses was primarily due to an increase in loan expenses of $7.1 million (or 68.6%), an increase in salaries and employee benefits of $2.4 million (or 4.9%) and an increase in other expenses of $1.1 million (or 8.6%). The increase in loan expenses was due to a $6.9 million writedown of mortgage servicing assets in the June 2002 quarter, as a result of an increase in the amount of prepayments of loans that the Bank services for others. The increase in operating expenses was partially offset by a decrease in marketing expense of $1.1 million (or 46.4%). NINE MONTHS ENDED JUNE 30, 2002 (the "2002 period") COMPARED TO NINE MONTHS ENDED JUNE 30, 2001(the "2001 period") REAL ESTATE The Real Estate Trust recorded income before depreciation and amortization of $3.3 million and operating loss of $11.2 million in the 2002 period compared to operating income before depreciation and amortization of $17.4 million and operating income of $4.5 million 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 $5.7 million in gains from the sale of three properties. Income after direct operating expenses from hotels decreased $7.6 million (25.4%) in the 2002 period over the level achieved in the 2001 period. This decrease was attributable to an increase of $562,000 from acquisition properties while results from 16 properties owned throughout both period decreased by $8.1 million (30.9%). The decrease in total revenue of $11.5 million (14.9%) was offset by a decrease of $4.0 million (8.3%) in direct operating expenses. For the sixteen hotels owned throughout both periods, the decrease in total revenue was $13.1 million (18.4%) and the decrease in direct operating expenses was $4.9 million (11%). Income after direct operating expenses from office and industrial properties decreased $1.6 million (7.1%) in the 2002 period compared to such income in the 2001 period. $1.6 million of this decrease reflected results from the ten properties owned throughout both periods and $45,000 reflected results from non-comparable properties. The decrease in total revenue of $1.7 million (5.5%) was offset by a decrease of $84,000 (1.0%) in direct operating expenses. For the ten properties owned throughout both periods, the decrease in total revenue was $1.5 million (5.1%) coupled with an increase in direct operating expenses of $97,000 (1.2%). Other income decreased $566,000 (32.8%)during the 2002 period due to lower interest income and lower apartment income. Land parcels and other expense decreased $124,000 (13.4%) during the 2002 period due to lower apartment expense. Interest expense decreased $114,000 (0.3%) in the 2002 period, primarily because of lower interest on outstanding mortgage balances and bank borrowings. Average balances of the Real Estate Trust's outstanding borrowings increased to $578.7 million for the 2002 period from $556.6 million for the 2001 period. The increase in average borrowings occurred as a result of mortgage loan refinancings. The weighted average cost of borrowings was 8.95% in the 2002 period compared to 9.34% in the 2001 period. Capitalized interest decreased $237,000 (45.3%) during the 2002 period due to the lower level of development activity in the current period. Amortization of debt expense increased $63,000 (10.2%) in the 2002 period, primarily due to costs experienced in adding new debt. Depreciation increased $1.5 million (12.5%) 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 $393,000 (4.4%) 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 $1.0 million (30.9%). Management and leasing fees decreased $617,000 (10.9%) in the current period, reflecting both lower hotel sales and office rents on which the fees are based. General and administrative expense increased $294,000 (20.8%) in the 2002 period, principally because of higher legal expenses. Equity in earnings of unconsolidated entities reflected earnings of $8.1 million for the 2002 period and earnings of $6.1 million for the 2001 period, an increase of $2.0 million (33.3%). The improvement was due to increased period-to-period earnings of Saul Centers, Inc. During the 2001 period, the Real Estate Trust has sold several properties resulting in gain recognized for the nine-month period of $5.7 million. No similar gains have been recognized in the 2002 period. BANKING Overview. The Bank recorded operating income of $92.7 million for the 2002 period, compared to operating income of $68.4 million for the 2001 period. An increase in other (non-interest) income and a decrease in the provision for loan and lease losses were partially offset by a decrease in net interest income and an increase in operating expenses. Net Interest Income. Net interest income, before the provision for loan and lease losses, decreased $2.5 million (or 0.9%) 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 $2.8 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) Nine Months Ended June 30, ------------------------------------------------------------------------------------- 2002 2001 ----------------------------------------- ------------------------------------------ Average Yield/ Average Yield/ Balances Interest Rate Balances Interest Rate -------------- ------------ ----------- --------------- ----------- ------------ Assets: Interest-earning assets: Loans and leases receivable, net (1) $ 8,396,520 $ 411,768 6.54 % $ 8,644,485 $ 530,660 8.18 % Mortgage-backed securities 1,284,240 58,412 6.06 1,011,913 47,953 6.32 Federal funds sold and securities purchased under agreements to resell 48,399 650 1.79 48,599 2,021 5.54 Trading securities 51,358 2,415 6.27 37,414 1,704 6.07 Investment securities 46,120 1,226 3.54 45,677 2,060 6.01 Other interest-earning assets 202,360 5,725 3.77 177,374 9,226 6.94 -------------- ------------ --------------- ----------- Total 10,028,997 480,196 6.38 9,965,462 593,624 7.94 ------------ ----------- ----------- ------------ Noninterest-earning assets: Cash 241,494 271,759 Real estate held for investment or sale 28,834 48,986 Property and equipment, net 451,848 385,231 Goodwill and other intangible assets, net 26,269 26,361 Other assets 288,556 282,953 -------------- --------------- Total assets $ 11,065,998 $ 10,980,752 ============== =============== Liabilities and stockholders' equity: Interest-bearing liabilities: Deposit accounts: Demand deposits $ 1,504,458 3,509 0.31 $ 1,293,327 6,321 0.65 Savings deposits 955,996 7,094 0.99 880,298 10,528 1.59 Time deposits 2,487,803 81,914 4.39 2,968,554 137,004 6.15 Money market deposits 1,772,002 24,030 1.81 1,321,625 37,213 3.75 -------------- --------- --------------- --------- Total deposits 6,720,259 116,547 2.31 6,463,804 191,066 3.94 Borrowings 2,667,212 96,780 4.84 3,027,321 133,208 5.87 -------------- ------------ --------------- ----------- Total liabilities 9,387,471 213,327 3.03 9,491,125 324,274 4.56 ------------ ----------- ----------- ------------ Noninterest-bearing items: Noninterest-bearing deposits 824,895 668,697 Other liabilities 209,671 205,808 Minority interest 144,000 144,000 Stockholders' equity 499,961 471,122 -------------- --------------- Total liabilities and stockholders' equity $ 11,065,998 $ 10,980,752 ============== =============== Net interest income $ 266,869 $ 269,350 ============ =========== Net interest spread (2) 3.35 % 3.39 % =========== ============ Net yield on interest-earning assets (3) 3.55 % 3.60 % =========== ============ Interest-earning assets to interest-bearing liabilities 106.83 % 105.00 % =========== ============ - ----------------------------------------------------------------------------------------------------------------------------------- (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) Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001 Increase (Decrease) Due to Change in (1) --------------------------------------------------------------- Total Volume Rate Change ------------------ ------------------ ----------------- Interest income: Loans (2) $ (14,311) $ (104,581) $ (118,892) Mortgage-backed securities 13,636 (3,177) 10,459 Federal funds sold and securities purchased under agreements to resell (8) (1,363) (1,371) Trading securities 653 58 711 Investment securities 33 (867) (834) Other interest-earning assets 1,825 (5,326) (3,501) ------------------ ------------------ ----------------- Total interest income 1,828 (115,256) (113,428) ------------------ ------------------ ----------------- Interest expense: Deposit accounts 11,919 (86,438) (74,519) Borrowings (14,718) (21,710) (36,428) ------------------ ------------------ ----------------- Total interest expense (2,799) (108,148) (110,947) ------------------ ------------------ ----------------- Increase in net interest income $ 4,627 $ (7,108) $ (2,481) ================== ================== ================= - ----------------------------------------------------------------------------------------------------------------------- (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 $113.4 million (or 19.1%) from the level in the 2001 period as a result of lower average yields, coupled with lower average loan and lease balances of $248.0 million. A $272.3 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 3.35% in the 2002 period from 3.39% in the 2001 period. Average interest-earning assets as a percentage of average interest bearing liabilities increased to 106.8% 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 $118.9 million from the 2001 period because of lower average yields and balances. The average yield on the loan and lease portfolio decreased 164 basis points (from 8.18% to 6.54%) from the 2001 period. Interest income declined by $65.2 million (or 24.0%) on the Bank's single-family residential loans, by $32.9 million (or 19.5%) on automobile loans, and by $8.8 million (or 45.2%) on construction loans, primarily because of lower average yields and balances on these loans. In addition, lower average yields resulted in a $9.5 million (or 25.2%) decrease in interest income on commercial loans and a $3.5 million (or 17.3%) 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 $10.5 million (or 21.8%) primarily because of a $272.3 million increase in average balances. The positive effect of the increased average balances was partially offset by a decrease in the average yield from 6.32% to 6.06%. Interest expense on deposits decreased $74.5 million (or 39.0%) during the 2002 period, due to a decrease in average interest rates. The 163 basis point decrease in the average rate on deposits (from 3.94% to 2.31%) resulted from a general decline in market interest rates. The Bank also reduced its use of higher cost brokered deposits in the 2002 period. Interest expense on borrowings decreased $36.4 million (or 27.4%) in the 2002 period. Average balances of Federal Home Loan Bank advances decreased by $330.6 million, or 15.0%, and the average interest rate on those advances decreased (from 5.57% to 5.15%), resulting in a $19.7 million reduction of in interest expense. Decreases in the average cost of securities sold under repurchase agreements (from 5.83% to 2.00%) and in the average balances on these borrowings ($31.5 million or 7.8%), contributed to an additional $12.1 million decrease in interest expense. The decreased cost of other borrowings (from 4.84% to 1.20%) resulted in an additional $4.6 million decrease in interest expense. Provision for Loan and Lease Losses. The Bank's provision for loan and lease losses decreased to $45.5 million in the 2002 period from $50.6 million in the 2001 period. The $5.1 million decrease primarily reflected 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 increased to $190.2 million in the 2002 period from $151.3 million in the 2001 period. The $38.8 million (or 25.7%) increase resulted from increases in servicing and securitization income, the net gain on trading securities and deposit servicing fees. A nonrecurring gain on other investment real estate held for sale, both during the 2001 period partially offset this increase. Servicing and securitization income increased $32.9 million during the 2002 period. The increase is primarily due to an increase in the volume of loans securitized and sold during the nine months ended June 30, 2002. The $7.7 million increase in the gain on trading securities reflected $6.4 million in gains on sales of mortgage-backed securities related to mortgage banking activities and a $1.3 million unrealized gain in market value of the Bank's interest in other securities. Deposit servicing fees increased $9.8 million (or 13.1%) during the 2002 period primarily due to fees generated by the Bank's branch and ATM network, which the Bank continues to expand. The Bank recognized a pre-tax gain of $11.1 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 Condensed Consolidated Statements of Operations and Comprehensive Income. Operating Expenses. Operating expenses for the 2002 period increased $17.2 million (or 5.7%) from the 2001 period. Loan expenses increased $3.8 million primarily as a result of writedowns of mortgage servicing assets during the 2002 period, as a result of an increase in the amount of prepayments of loans that the Bank services for others. Property and equipment expenses increased by $6.5 million due primarily to land lease expense and 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 DESCRIPTION ---------- ------------------------------------------------------------------ 3. ORGANIZATIONAL DOCUMENTS (a) Amended and Restated Declaration of Trust filed with the Maryland State Department of Assessments and Taxation on June 22, 1990 as filed as Exhibit 3(a) to Registration Statement No. 33-34930 is hereby incorporated by reference. (b) Amendment to Amended and Restated Declaration of Trust reflected in Secretary Certificate filed with the Maryland State Department of Assessments and Taxation on June 26, 1990 as filed as Exhibit 3(b) to Registration Statement No. 33-34930 is hereby incorporated by reference. (c) Amended and Restated By-Laws of the Trust dated as of February 28, 1991 as filed as Exhibit T3B to the Trust's Form T-3 Application for Qualification of Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is hereby incorporated by reference. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (a) Indenture dated as of March 25, 1998 between the Trust and Norwest Bank Minnesota, National Association, as Trustee, with respect to the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as filed as Exhibit 4(a) to Registration Statement 333-49937 is hereby incorporated by reference. (b) Indenture with respect to the Trust's Senior Notes Due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration No. 33-19909 is hereby incorporated by reference. (c) First Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for Qualification of Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is hereby incorporated by reference. (d) Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 33-9336 is hereby incorporated by reference. (e) Fourth Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby incorporated by reference. (f) Third Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby incorporated by reference. (g) Second Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby incorporated by reference. (h) Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-68652 is hereby incorporated by reference. (i) Indenture with respect to the Trust's Senior Notes due from One Year to Five Years from Date of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for Qualification of Indentures under the Trust Indenture Act of 1939 (file No. 22-10206) is hereby incorporated by reference (j) Indenture dated as of September 1, 1992 with respect to the Trust's Notes due from One to Ten Years form Date of Issue filed as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby incorporated by reference. (k) First Supplemental Indenture dated as of January 16, 1997 with respect to the Trust's Notes due from One to Ten years from Date of Issue filed as Exhibit 4(b) to Registration Statement No. 33-34930 is hereby incorporated by reference. (l) Second Supplemental Indenture dated as of January 13, 1999 with respect to the Trust's Notes due from One to Ten Years from Date of Issuance as filed as Exhibit 4(l) to Registration Statement No. 333-70753 is hereby incorporated by reference. 10. MATERIAL CONTRACTS (a) 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. - ------------------------------------------------------------------------------- (b) Reports on Form 8-K. (1) A current report on Form 8-K, dated June 27, 2002, was filed reporting the Trust had dismissed Arthur Andersen LLP as the independent public accountant of the Trust and engaged Ernst and Young LLP to serve as the independent public accountant to audit the financial statements of the Trust for the fiscal year ending September 30, 2002. (2) A current report on Form 8-K, dated July 31, 2002, was filed by the Trust reporting the inadvertent overstatement of prior period net income due to certain accounting errors involving the valuation of interest-only strips receivable related to the Bank's automobile loan securitizations. 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: August 14, 2002 Stephen R. Halpin, Jr. ----------------- --------------------------------------- Stephen R. Halpin, Jr. Vice President and Chief Financial Officer Date: August 14, 2002 Bill D. Tzamaras ----------------- --------------------------------------- Bill D. Tzamaras Vice President and Principal Accounting Officer CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, B. Francis Saul II, the Trustee, Chairman of the Board of B.F. Saul Real Estate Investment Trust (the "Trust"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Trust's Quarterly Report on Form 10-Q for the period ending June 30, 2002 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: August 13, 2002 B. Francis Saul II ---------------- ---------------------------- B. Francis Saul II Trustee, Chairman of the Board CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Stephen R. Halpin, Jr., the Vice President and Chief Financial Officer of B.F. Saul Real Estate Investment Trust (the "Trust"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Trust's Quarterly Report on Form 10-Q for the period ending June 30, 2002 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: August 13, 2002 Stephen R. Halpin, Jr. ---------------- ---------------------------- Stephen R. Halpin, Jr. Vice President and Chief Financial Officer
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10-Q Filing
Saul B F Real Estate Investment Trust Inactive 10-Q2002 Q3 Quarterly report
Filed: 14 Aug 02, 12:00am