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~~December 3031, 2004

¨	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 its charter)

Maryland		52-6053341
(State or other jurisdiction ofincorporation or organization)		(I.R.S. EmployerIdentification No.)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7501 Wisconsin Avenue

Bethesda, Maryland 20814

(Address of principal executive offices) (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 requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12-2). Yes ¨ No x

The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as of ~~August 16~~February 11, ~~2004~~2005, was 4,807,510.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
~~(a)~~	~~Consolidated Balance Sheets at June 30, 2004 and September 30, 2003~~	3(a)	Consolidated Balance Sheets at December 31, 2004 and September 30, 2004	3
~~(b)~~	~~Consolidated Statements of Operations for the three-month and nine-month periods ended June 30, 2004 and 2003~~	4(b)	Consolidated Statements of Operations for the three-month periods ended December 31, 2004 and 2003	4
~~(c)~~	~~Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity for the three-month and nine-month periods ended June 30, 2004 and 2003~~	6(c)	Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity for the three-month periods ended December 31, 2004 and 2003	6
~~(d)~~	~~Consolidated Statements of Cash Flows for the nine-month periods ended June 30, 2004 and 2003~~	7(d)	Consolidated Statements of Cash Flows for the three-month periods ended December 31, 2004 and 2003	7
~~(e)~~	~~Notes to Consolidated Financial Statements~~	9(e)	Notes to Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
~~(a)~~	~~Financial Condition~~	17(a)	Financial Condition	15
	~~Real Estate~~	17	Real Estate	15
	~~Banking~~	17	Banking	15
~~(b)~~	~~Liquidity and Capital Resources~~	24(b)	Liquidity and Capital Resources	22
	~~Real Estate~~	24	Real Estate	22
	~~Banking~~	25	Banking	24
~~(c)~~	~~Results of Operations~~	(c)	Results of Operations
	Three months ended June 30, 2004 compared to three months ended June 30, 2003	27
			Three months ended December 31, 2004 compared to three months ended December 31, 2003	26
	Nine months ended June 30, 2004 compared to nine months ended June 30, 2003	32
Item 3. Quantitative and Qualitative Disclosures About Market Risk				31
Item 3. Quantitative and Qualitative Disclosures About Market Risk		37
Item 4. Controls and Procedures				31
Item 4. Controls and Procedures		37
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
Item 6. Exhibits				32
Item 6. Exhibits and Reports On Form 8-K		38

Item 1. Financial Statements

Consolidated Balance Sheets

B. F. SAUL REAL ESTATE INVESTMENT TRUST

(In thousands)	~~June~~December 3031, 2004			September 30,~~2003~~2004
	(Unaudited)
ASSETS
Real Estate
Income-producing properties
Hotels	$	261,948		$	251,710
Hotel	$	264,853		$	264,020
Office and industrial		~~182~~186,~~935~~252			~~180~~184,~~385~~454
Other		2,~~803~~253			2,~~803~~253
		447,686			434,898
		453,358			450,727
Accumulated depreciation		(~~175~~185,~~765~~041	)		(~~162~~180,~~453~~075	)
		271,921			272,445
		268,317			270,652
Land parcels		41,~~708~~882			4241,~~425~~722
Real estate held for sale		~~2,185~~550			2,~~560~~640
Investment in Saul Holdings and Saul Centers		5866,~~502~~807			5361,~~383~~767
Cash and cash equivalents		3530,~~456~~821			1831,~~979~~842
Note receivable and accrued interest - related party		67,~~077~~677			27,~~987~~677
Other assets		4440,~~564~~474			3641,~~506~~869
Total real estate assets		~~460~~456,~~413~~528			~~429~~458,~~285~~169
Banking
Cash and other deposits		~~392~~520,~~231~~997			~~414~~542,~~627~~548
Securities purchased under agreements to resell		50,000			—
Loans held for securitization and/or sale		1,~~883~~409,~~115~~795			1,~~378~~965,~~831~~476
Investment securities (market value $70,671 and $46,531, respectively)		71,153			46,345
Investment securities (market value $199,645 and $70,905, respectively)		200,547			71,192
Mortgage-backed securities (market value $440,432 and $490,764, respectively)		436,512			478,392
Mortgage-backed securities (market value $549,765 and $415,503, respectively)		546,138			409,303
Loans receivable (net of allowance for losses of $48,362 and $58,397, respectively)		8,307,162			7,559,557
Loans receivable (net of allowance for losses of $37,750 for both periods)		8,901,504			8,555,557
Federal Home Loan Bank stock		~~138~~136,~~861~~584			~~107~~139,~~374~~347
Real estate held for investment or sale (net of allowance for losses of $202 for both periods)		21,~~592~~920			2221,~~745~~282
Property and equipment, net		~~480~~505,~~842~~493			~~490~~492,~~731~~907
Automobiles subject to lease, net		~~531~~346,~~062~~526			~~855~~435,~~410~~307
Goodwill and other intangible assets, net		2423,~~103~~978			24,~~329~~035
Interest-only strips receivable		~~236~~341,~~705~~591			~~139~~287,~~781~~840
Other assets		~~315~~360,~~099~~168			~~261~~326,~~318~~053
Total banking assets		1213,~~888~~365,~~437~~241			1113,~~779~~270,~~440~~847
TOTAL ASSETS	$	13,~~348~~821,~~850~~769		$	1213,~~208~~729,~~725~~016
LIABILITIES
Real Estate
Mortgage notes payable	$	~~309~~303,~~463~~733		$	~~318~~307,~~265~~245
Mortgage note payable - real estate held for sale		~~4,096~~—			4,~~172~~071
Notes payable - secured		250,000			~~203~~250,~~800~~000
Notes payable - unsecured		56,~~052~~799			5556,~~349~~428
Accrued dividends payable - preferred shares of beneficial interest		1,~~202~~355			~~6,139~~—
Other liabilities and accrued expenses		6222,~~110~~232			6522,~~131~~109
Total real estate liabilities		682,923			652,856
Deferred tax liability, net		35,673			36,448
Total real estate liabilities		669,792			676,301
Banking
Deposit accounts		89,~~639~~151,~~662~~694			8,~~100~~855,~~505~~118
Borrowings		~~203~~218,~~664~~411			~~168~~206,~~314~~579
Federal Home Loan Bank advances		2,~~552~~479,~~214~~645			12,~~987~~736,~~469~~938
Other liabilities		~~478~~444,~~529~~230			~~533~~426,~~137~~532
Capital notes - subordinated		175,000			~~250~~175,000
Total banking liabilities		12,~~049~~468,~~069~~980			1112,~~039~~400,~~425~~167
Commitments and contingencies
Minority interest held by affiliates		~~108~~120,~~671~~049			98114,~~062~~933
Minority interest - other		296,013			249,698
Minority interest — other		296,013			296,013
TOTAL LIABILITIES		13,~~136~~554,~~676~~834			1213,~~040~~487,~~041~~414
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million		516			516
Common shares of beneficial interest, $1 par value, 10 million shares authorized, 6,641,598 shares issued		6,642			6,642
Paid-in surplus		92,943			92,943
Retained earnings		~~155~~210,~~914~~675			~~112~~185,~~424~~342
		256,015			212,525
		310,776			285,443
Less cost of 1,834,088 common shares of beneficial interest in treasury		(43,841	)		(43,841	)
TOTAL SHAREHOLDERS’ EQUITY		~~212~~266,~~174~~935			~~168~~241,~~684~~602
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	13,~~348~~821,~~850~~769		$	1213,~~208~~729,~~725~~016

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 MonthsEnded June 30,						For the Nine MonthsEnded June 30,
	For the Three Months Ended December 31,
(In thousands, except per share amounts)	2004			2003			~~2004~~			~~2003~~
REAL ESTATE
Income
Hotels	$	2724,~~490~~570		$	2320,~~685~~675		$	~~71,097~~		$	~~63,212~~
Office and industrial (including $1,261, $1,266, $3,749 and $3,848 of rental income from banking segment, respectively)		9,657			9,661			28,570			29,607
Office and industrial (including $1,266 and $1,246 of rental income from banking segment, respectively)		9,559			9,343
Other		~~431~~323			~~301~~227			~~1,214~~			~~905~~
Total income		3734,~~578~~452			3330,~~647~~245			~~100,881~~			~~93,724~~
Expenses
Direct operating expenses:
Hotels		16,~~385~~427			1514,~~143~~281			~~45,698~~			~~42,537~~
Office and industrial properties		2,~~921~~883			2,~~840~~827			~~8,680~~			~~8,567~~
Land parcels and other		~~367~~250			~~317~~239			~~989~~			~~871~~
Interest expense		12,001			12,265			38,297			36,942
Interest and amortization of debt expense		12,054			12,493
Amortization of debt expense		2,619			306			3,076			856
Depreciation		4,976			4,493
Depreciation		4,662			4,633			13,792			14,554
Advisory, management and leasing fees - related parties		3,348			3,061
Advisory, management and leasing fees - related parties		3,439			3,202			9,724			9,172
General and administrative		553			311
General and administrative		6,926			670			8,174			1,681
Total expenses		40,491			37,705
Total expenses		49,320			39,376			128,430			115,180
Equity in earnings (losses) of unconsolidated entities:
Equity in earnings (losses) of unconsolidated entities:
Saul Holdings and Saul Centers		1,976			2,056
Saul Holdings and Saul Centers		1,971			1,806			6,012			6,366
Other		(227	)		(124	)
Other		(80	)		—			(460	)		(376	)
REAL ESTATE OPERATING LOSS	$	(4,290	)	$	(5,528	)
Impairment loss on investments		—			—			—			(625	)
BANKING
Gain on sale of property		117			—			2,768			—
Interest income
REAL ESTATE OPERATING LOSS	$	(9,734	)	$	(3,923	)	$	(19,229	)	$	(16,091	)
Loans	$	118,276		$	97,036
BANKING
Mortgage-backed securities		4,575			5,322
Interest income
Other		3,156			2,248
Loans	$	102,103		$	99,102		$	299,534		$	304,235
Total interest income		126,007			104,606
Mortgage-backed securities		5,133			7,730			15,626			30,573
Interest expense
Trading securities		363			1,202			1,150			3,541
Deposit accounts		18,372			14,138
Investment securities		333			295			840			894
Borrowings		23,845			32,298
Other		1,607			1,548			4,651			5,092
Total interest expense		42,217			46,436
Total interest income		109,539			109,877			321,801			344,335
Net interest income		83,790			58,170
Interest expense
Provision for loan losses		(383	)		5,922
Deposit accounts		14,145			19,748			41,984			65,131
Net interest income after provision for loan losses		84,173			52,248
Borrowings		21,069			30,835			80,407			93,650
Other income
Total interest expense		35,214			50,583			122,391			158,781
Deposit servicing fees		34,091			31,300
Net interest income		74,325			59,294			199,410			185,554
Servicing, securitization and mortgage banking income		59,923			36,552
Provision for loan losses		(5,644	)		5,920			(5,150	)		20,379
Automobile rental income, net		25,249			46,424
Net interest income after provision for loan losses		79,969			53,374			204,560			165,175
Other		14,380			11,743
Other income
Total other income		133,643			126,019
Deposit servicing fees		33,240			31,611			95,546			91,216
Servicing and securitization income		47,900			33,035			135,360			77,182
Automobile rental income, net		37,748			58,574			125,514			182,671
Gain on mortgage banking activities		1,471			6,403			7,820			14,635
Other		11,600			9,882			33,668			32,387
Total other income		131,959			139,505			397,908			398,091

Continued on following page.

Consolidated Statements of Operations (Continued)

B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)

	For the Three MonthsEnded June 30,						For the Nine MonthsEnded June 30,
	For the Three Months Ended December 31,
(In thousands, except per share amounts)	2004			2003			~~2004~~			~~2003~~
BANKING (Continued)
Operating expenses
Salaries and employee benefits	$	5963,~~353~~995		$	5354,~~158~~525		$	~~169,981~~		$	~~158,042~~
Servicing assets amortization and other loan expenses		215,~~316~~490			139,~~242~~636			~~30,071~~			~~37,060~~
Property and equipment (including $1,261, $1,266, $3,749 and $3,848 of rental expense paid to real estate segment, respectively)		9,296			9,588			28,914			29,169
Property and equipment (including $1,266 and $1,246 of rental expense paid to real estate segment, respectively)		10,715			9,678
Marketing		3,~~332~~285			32,~~950~~789			~~7,881~~			~~6,996~~
Data processing		8,~~812~~268			8,~~645~~942			~~26,722~~			~~26,127~~
Depreciation and amortization		3830,~~546~~098			5245,~~896~~680			~~126,617~~			~~167,047~~
Other		1416,~~126~~150			1416,~~128~~049			~~52,435~~			~~42,829~~
Total operating expenses		~~135~~148,~~781~~001			~~155~~147,~~607~~299			~~442,621~~			~~467,270~~
BANKING OPERATING INCOME	$	7669,~~147~~815		$	3730,~~272~~968		$	~~159,847~~		$	~~95,996~~
TOTAL COMPANY
Income before taxes, minority interest and discontinued operations	$	66,413		$	33,349		$	140,618		$	79,905
Income from continuing operations before income taxes and minority interest	$	65,525		$	25,440
Income tax provision		2223,~~951~~508			118,~~913~~544			~~49,220~~			~~27,752~~
Income before minority interest and discontinued operations		43,462			21,436			91,398			52,153
Income from continuing operations before minority interest		42,017			16,896
Minority interest held by affiliates		(87,~~513~~516	)		(~~3,537~~518	)		~~(14,808~~	)		~~(8,741~~	)
Minority interest — other		(7,~~254~~255	)		(617,~~329~~931	)		~~(29,940~~	)		~~(18,985~~	)
TOTAL COMPANY INCOME FROM CONTINUING OPERATIONS	$	27,695		$	11,570		$	46,650		$	24,427
INCOME (LOSS) FROM CONTINUING OPERATIONS		27,246			(1,553	)
DISCONTINUED REAL ESTATE OPERATIONS
Discontinued real estate operations:
Loss from operations of discontinued real estate asset (including loss on disposal of $215, $—, $215, $—, respectively)		(326	)		(133	)		(995	)		(757	)
Loss from operations of discontinued real estate assets		(1,779	)		(310	)
Income tax benefit		(~~114~~623	)		(47108	)		~~(348~~	)		~~(265~~	)
LOSS ON DISCONTINUED REAL ESTATE OPERATIONS		(~~212~~1,156	)		(86202	)		~~(647~~	)		~~(492~~	)
TOTAL COMPANY NET INCOME	$	27,483		$	11,484		$	46,003		$	23,935
TOTAL COMPANY NET INCOME (LOSS)	$	26,090		$	(1,755	)
Dividends: Real Estate Trust’s preferred shares of beneficial interest		(1,~~355~~354	)		(1,~~355~~354	)		~~(4,064~~	)		~~(4,064~~	)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	26,128		$	10,129		$	41,939		$	19,871
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	24,736		$	(3,109	)
NET INCOME PER COMMON SHARE
NET INCOME (LOSS) PER COMMON SHARE
Income before minority interest and discontinued operations	$	8.75		$	4.16		$	18.16		$	9.97
Income (loss) from continuing operations	$	5.39		$	(0.61	)
Minority interest held by affiliates		(1.77	)		(0.73	)		(3.08	)		(1.81	)
Discontinued operations		(0.24	)		(0.04	)
Minority interest — other		(1.51	)		(1.31	)		(6.23	)		(3.94	)
NET INCOME (LOSS) PER COMMON SHARE (BASIC AND DILUTED)	$	5.15		$	(0.65	)
Discontinued operations		(0.04	)		(0.02	)		(0.13	)		(0.10	)
NET INCOME PER COMMON SHARE (BASIC AND DILUTED)	$	5.43		$	2.10		$	8.72		$	4.12

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 MonthsEnded June 30,						For the Nine MonthsEnded June 30,
	For the Three Months Ended December 31,
(Dollars in thousands)	2004			2003			~~2004~~			~~2003~~
COMPREHENSIVE INCOME
COMPREHENSIVE INCOME (LOSS)
Net income	$	27,483		$	11,484		$	46,003		$	23,935
Net income (loss)	$	26,090		$	(1,755	)
Other comprehensive income		—			—			—			—
TOTAL COMPREHENSIVE INCOME	$	27,483		$	11,484		$	46,003		$	23,935
TOTAL COMPREHENSIVE INCOME (LOSS)	$	26,090		$	(1,755	)
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
Beginning of period		~~129~~185,~~226~~342			80112,~~598~~424			~~112,424~~			~~68,438~~
Net income		27,483			11,484			46,003			23,935
Net income (loss)		26,090			(1,755	)
Adjustments - Saul Holdings Investments		560			587			1,551			3,005
Adjustments - Saul Holdings investment		597			512
Dividends:
Real Estate Trust preferred shares of beneficial interest:
Distributions payable		(1,~~355~~354	)		(1,~~355~~354	)		~~(4,064~~	)		~~(4,064~~	)
End of period		~~155~~210,~~914~~675			91109,~~314~~827			~~155,914~~			~~91,314~~
ACCUMULATED OTHER COMPREHENSIVE INCOME
TREASURY SHARES
Beginning of period		—			—			—			—
Beginning and end of period (1,834,088 shares)		(43,841	)		(43,841	)
Net unrealized holding gains (losses)		—			—			—			—
TOTAL SHAREHOLDERS’ EQUITY	$	266,935		$	166,087
End of period		—			—			—			—
TREASURY SHARES
Beginning of period (1,834,088, 1,814,688, 1,834,088 and 1,814,688 shares)		(43,841	)		(41,848	)		(43,841	)		(41,848	)
Purchases (19,400 shares)		—			(1,993	)		—			(1,993	)
End of period (1,834,088 shares)		(43,841	)		(43,841	)		(43,841	)		(43,841	)
TOTAL SHAREHOLDERS’ EQUITY	$	212,174		$	147,574		$	212,174		$	147,574

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 MonthsEnded June 30,
	For the Three Months Ended December 31,
(In thousands)	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss	$	(133,~~227~~975	)	$	(113,~~027~~822	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain on sale of property		(2,768	)		—
Depreciation		4,976			4,575
Loss on disposal of discontinued real estate asset		215			—
Amortization of debt expense		569			425
Depreciation		14,047			14,884
Equity in earnings of unconsolidated entities, net		(1,749	)		(1,932	)
Increase in accounts receivable and accrued income		(8,736	)		(5,988	)
Deferred tax benefit		(1,097	)		(818	)
Deferred tax benefit		(661	)		(683	)
Increase (decrease) in accounts receivable and accrued income		645			(1,430	)
Decrease in accounts payable and accrued expenses		(~~4,520~~114	)		(86,~~579~~541	)
Amortization of debt expense		3,978			1,560
Dividends and tax sharing payments		10,058			5,220
Equity in earnings of unconsolidated entities, net		(5,552	)		(5,990	)
Other		(108	)		121
Impairment loss on investments		—			625
		9,205			(4,202	)
Dividends and tax sharing payments		22,355			20,498
Other		(675	)		(4,594	)
		4,456			706
Banking
Net income		5930,~~230~~065			342,~~962~~067
Adjustments to reconcile net income to net cash used in operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of premiums, discounts and net deferred loan fees		208,~~639~~801			166,~~552~~938
Depreciation and amortization		126,617			167,047
Tax provision		4,893			9,223
Deferred tax provision (benefit)		(34,397	)		25,646
Depreciation and amortization		30,098			45,680
(Gain) loss on on sales of property and equipment		(818	)		364
Provision for loan losses		(383	)		5,922
Provision for loan losses		(5,150	)		20,379
Minority interest held by affiliates		7,516			518
Proceeds from sales of trading securities		570,288			1,625,746
Minority interest - other		2,500			13,193
Net fundings of loans held for securitization and/or sale		(4,740,413	)		(4,310,629	)
Proceeds from sales of trading securities		68,486			281,936
Proceeds from sales of loans held for sale and/or securitization		4,027,872			2,428,736
Purchases and net fundings of loans held for securitization and/or sale		(1,439,766	)		(1,528,419	)
Gain on mortgage banking activities		(7,820	)		(14,635	)
Proceeds from sales of loans held for securitization and/or sale		1,866,633			1,206,506
Gain on sales of real estate held for sale		(1,301	)		(5,757	)
Increase in interest-only strips receivable		(53,751	)		(17,564	)
Increase in interest-only strips receivable		(96,924	)		(38,004	)
Increase in other assets		(37,202	)		(32,204	)
Increase in other assets		(53,616	)		(18,793	)
Increase (decrease) in other liabilities		15,924			(96,876	)
Increase (decrease) in other liabilities		(14,999	)		40,029
Other		(1,726	)		(6,732	)
Minority interest held by affiliates		14,808			8,741
		502,088			(109,812	)
Minority interest - other		15,693			7,313
Net cash provided by (used in) operating activities		511,293			(114,014	)
		(120,291	)		(12,303	)
Net cash used in operating activities		(115,835	)		(11,597	)
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties		(132,~~597~~805	)		(4,~~749~~602	)
Property sales		3,719			—
Property sales, net		2,090			—
Note receivable and accrued interest — related party
Equity investment in unconsolidated entities		(2,144	)		1,082
Repayments		750			2,250
Other investments		(311	)		(235	)
Advances		(3,840	)		—
		(3,170	)		(3,755	)
Investment in Saul Holdings and Saul Centers		3,279			3,141
Other investments		(689	)		(1,467	)
		(10,378	)		(825	)
Banking
Net proceeds from redemption of Federal Home Loan Bank stock		192,559			105,096
Purchases of investment securities		(129,279	)		—
Purchases of Federal Home Loan Bank stock		(224,047	)		(106,414	)
Proceeds from redemption of Federal Home Loan Bank Stock		84,177			55,130
Proceeds from maturities of investment securities		10,000			—
Purchases of Federal Home Loan Bank stock		(81,414	)		(70,104	)
Purchases of investment securities		(35,000	)		—
Net principal (dispersed) collected on loans		(175,608	)		211,677
Net proceeds from sales of real estate		7,882			11,677
Purchases of loans receivable		(118,610	)		(740,733	)
Disbursements for real estate held for investment or sale		(2,413	)		(2,740	)
Principal collected on mortgage-backed securities		49,136			58,190
Net proceeds from sales of property and equipment		23,320			—
Purchases of mortgage-backed securities		(184,190	)		—
Net purchases of property and equipment		(42,065	)		(32,434	)
Net repayments of automobiles subject to lease		69,108			74,404
Net principal collected of loans receivable		4,221,739			3,328,544
Net purchases of property and equipment		(22,830	)		(16,396	)
Net (purchases) repayments of automobiles subject to lease		227,319			(4,217	)
Net proceeds from sales of property and equipment		—			23,016
Principal collected on mortgage-backed securities		150,539			496,074
Net proceeds from sales of real estate		229			4,016
Purchases of loans receivable		(5,449,975	)		(4,062,146	)
Disbursements for real estate held for investment or sale		(973	)		(838	)
		(920,142	)		(266,560	)
		(510,254	)		(401,638	)
Net cash used in investing activities		(~~930~~513,~~520~~424	)		(~~267~~405,~~385~~393	)

Continued on following page.

Consolidated Statements of Cash Flows (Continued)

B. F. SAUL REAL ESTATE INVESTMENT TRUST (Unaudited)

	For the Nine MonthsEnded June 30,
	For the Three Months Ended December 31,
(In thousands)	2004			2003
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing	$	—		$	46,000
Proceeds from revolving credit facility	$	—		$	4,000
Principal curtailments and repayments of mortgages		(7,980	)		(46,079	)
Repayments of revolving credit facility		—			(5,800	)
Net secured note financings (repayments)		46,200			6,150
Principal curtailments and repayments of mortgages		(7,284	)		(2,588	)
Proceeds from sales of unsecured notes		91,~~942~~435			32,~~799~~990
Repayments of unsecured notes		(91,~~239~~064	)		(3,~~905~~057	)
Costs of obtaining financings		(~~7,524~~143	)		(~~1,344~~641	)
Purchase of treasury stock		—			(1,993	)
		(7,056	)		(5,096	)
Dividends paid - preferred shares of beneficial interest		(9,000	)		(9,000	)
		22,399			(6,372	)
Banking
Proceeds from customer deposits and sales of certificates of deposit		3816,~~486~~558,~~221~~635			3312,~~588~~145,~~985~~053
Customer withdrawals of deposits and payments for maturing certificates of deposit		(3716,~~947~~262,~~064~~058	)		(3311,~~048~~968,~~116~~411	)
Net increase (decrease) in securities sold under repurchase agreements		5,036			(374,647	)
Net increase in securities sold under repurchase agreements		16,021			36,671
Advances from the Federal Home Loan Bank		126,~~582~~445,~~819~~000			72,~~161~~305,~~330~~148
Repayments of advances from the Federal Home Loan Bank		(126,~~018~~702,~~074~~293	)		(71,~~064~~845,~~980~~680	)
Net increase in other borrowings		30,314			14,543
Net (decrease) increase in other borrowings		(4,190	)		18,918
Issuance of 6-7/8% subordinated debentures		171,938			—
Issuance of 6 7/8% subordinated debentures		—			171,938
Issuance of 8% Noncumulative Perpetual Preferred Stock, Series C		~~120,622~~—			—120,500
Redemption of 13% Noncumulative Perpetual Preferred Stock, Series A		~~(81,750~~—	)		—(81,750	)
Redemption of 9-1/4% Subordinated Debentures		(252,775	)		—
Cash dividends paid on preferred stock		(2,500	)		(3,250	)
Cash dividends paid on preferred stock		(8,250	)		(7,313	)
Cash dividends paid on common stock		(12,000	)		(6,000	)
Cash dividends paid on common stock		(21,000	)		(15,000	)
		36,615			893,137
		1,068,037			254,802
Net cash provided by financing activities		29,559			888,041
Net cash provided by financing activities		1,090,436			248,430
Net increase in cash and cash equivalents		27,428			368,634
Net increase (decrease) in cash and cash equivalents		44,081			(30,552	)
Cash and cash equivalents at beginning of period		574,390			433,606
Cash and cash equivalents at beginning of period		433,606			465,686
Cash and cash equivalents at end of period	$	601,818		$	802,240
Cash and cash equivalents at end of period	$	477,687		$	435,134
Components of cash and cash equivalents at end of period as presented in the consolidated balance sheets:
Real Estate
Cash and cash equivalents	$	3530,~~456~~821		$	75,~~472~~926
Banking
Cash and other deposits		~~392~~520,~~231~~997			~~427~~796,~~662~~314
Securities purchased under agreements to resell		50,000			—
Cash and cash equivalents at end of period	$	~~477~~601,~~687~~818		$	~~435~~802,~~134~~240
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Cash paid during the period for:
Interest (net of amount capitalized)	$	166,530		$	206,134
Interest	$	55,320		$	64,762
Income taxes		74,622			16,921
Income taxes paid, net		20,211			1,276
Shares of Saul Centers, Inc. common stock		65,~~087~~371			52,~~844~~009
Cash received during the year from:
Cash received during the period from:
Dividends on shares of Saul Centers, Inc. common stock		41,~~470~~595			41,~~090~~460
Distributions from Saul Holdings Limited Partnership		41,~~895~~632			41,~~895~~632
Supplemental disclosures of noncash activities:
Rollovers of notes payable - unsecured		41,~~474~~665			51,~~532~~456
Loans receivable exchanged for mortgage-backed securities held to maturity		108,640			—
Loans receivable transferred to real estate acquired in settlement of loans		—			98
Loans receivable transferred to real estate acquired in settlement of loans		3,082			3,019

The Notes to Consolidated Financial Statements are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ~~General~~GENERAL: - 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 Bank, F.S.B. and its subsidiaries (“Chevy Chase” or the “Bank”). “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.” 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, 2003. The results of operations for interim periods are not necessarily indicative of results to be expected for the year.

~~Certain~~The ~~reclassifications~~Trust ofhas ~~prior~~prepared ~~periods’~~its ~~information~~financial ~~have~~statements and ~~been~~other ~~made~~disclosures toon ~~conform~~a ~~with~~fully ~~the~~consolidated ~~presentation~~basis. ~~for~~The term “Trust” used in the ~~three~~text and ~~nine~~the ~~months~~financial ~~ended~~statements ~~June~~included 30herein refers to the consolidated entity, ~~2004~~which includes B.F. Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase Bank, F.S.B. and its subsidiaries (“Chevy Chase” or the “Bank”). “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 ~~reclassification~~Real ofEstate ~~certain~~Trust ~~income~~are designated as “Real Estate,” while the business conducted by the Bank and ~~expense~~its ~~amounts~~subsidiaries tois ~~loss~~identified ~~from~~by the term “Banking.” 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 ~~discontinued~~a ~~real~~normal ~~estate~~recurring ~~asset~~nature. toThese ~~assure~~financial statements ~~comparability~~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, 2004. The results of ~~all~~operations for interim periods are ~~presented~~not necessarily indicative of results to be expected for the year.

~~2. Consolidated financial statements - The accompanying financial statements include the accounts of the Real Estate Trust, which is~~Certain ~~involved~~reclassifications ~~in the ownership and development~~ of ~~income-producing~~prior ~~properties.~~periods’ ~~The~~information ~~accounts of the Bank~~ have ~~also~~ been ~~consolidated.~~made ~~Accordingly,~~to ~~the~~conform ~~accompanying~~with ~~financial statements reflect~~ the ~~assets,~~presentation ~~liabilities, operating results and cash flows~~ for ~~two~~ ~~business operations: Real Estate and Banking. All significant inter-company transactions, except as disclosed elsewhere in~~ the financial statements, have been eliminated in consolidation. Tax sharing and dividend payments between the Real Estate Trust and the Bank are presented gross in the Consolidated Statements of Cash Flows. For purposes of calculating primary and diluted earnings per share, weighted average common shares outstanding totaled 4,807,510 for both the three ~~and~~months ~~the nine-month periods~~ ended ~~June~~December 3031, 2004, ~~4,817,210~~including ~~for~~ the ~~three-month~~reclassification ~~period~~of ~~ended~~certain ~~June~~income ~~30, 2003~~ and ~~4,823,653~~expense ~~for~~amounts ~~the~~to ~~nine-month~~loss ~~period~~from ~~ended~~operations ~~June~~of discontinued ~~30,~~real ~~2003.~~estate Noasset ~~dividends~~to ~~have~~assure ~~been~~comparability ~~declared on the common shares in any~~ of ~~the~~all periods presented.

32. ~~Taxes~~CONSOLIDATED -FINANCIAL ~~The~~STATEMENTS: 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 Real Estate Trust’s acquisition of an additional 20% equity interest in the Bank in June 1990, the Bank became a member of the Real Estate Trust’s affiliated group filing consolidated federal income tax returns. The current effect of the Real Estate Trust’s consolidation of the Bank’s operations into its federal income tax return results in the use of the Real Estate Trust’s net operating losses to reduce the federal income taxes the Bank would otherwise owe.

4.The ~~Investment~~accompanying financial instatements ~~Saul~~include ~~Centers~~the accounts of the Real Estate Trust, ~~Inc.~~which ~~and~~is ~~Saul~~involved ~~Holdings~~in ~~Limited~~the ~~Partnership~~ownership and development of income-producing ~~During~~properties. The accounts of the ~~nine-month~~Bank ~~period~~have ~~ended~~also ~~June~~been ~~30,~~consolidated. ~~2004~~Accordingly, the ~~Real~~accompanying ~~Estate~~financial statements ~~Trust~~reflect ~~purchased~~the assets, ~~either~~liabilities, ~~through~~operating ~~dividend~~results ~~reinvestment~~and orcash ~~direct purchase,~~flows ~~approximately~~for ~~237~~two business operations: Real Estate and Banking. All significant inter-company transactions,~~000~~ ~~shares~~except ofas ~~common~~disclosed ~~stock~~elsewhere ofin ~~Saul~~the ~~Centers~~financial statements, ~~Inc~~have been eliminated in consolidation. ~~(“Saul~~Tax ~~Centers”),~~sharing and asdividend payments between the Real Estate Trust and the Bank are presented gross in the Consolidated Statements of ~~June~~Cash 30Flows. For purposes of calculating primary and diluted earnings per share, ~~2004~~weighted average ~~owned~~common ~~approximately~~shares 3outstanding totaled 4,~~981~~807,~~000~~510 ~~shares~~for ~~representing~~both 24the three month period ended December 31, 2004 and December 31, 2003.7% ofThe ~~such~~Trust ~~company’s~~has ~~outstanding~~no common ~~stock~~share equivalents. AsOn ofJanuary ~~June~~20, 302005, ~~2004,~~ the ~~market~~Trust ~~value~~declared ofa ~~these~~dividend ~~shares~~on ~~was~~its ~~approximately~~common shares of $~~127~~0.8248 ~~million.~~per ~~Substantially~~share, ~~all~~totaling ~~these~~approximately ~~shares~~$1.2 ~~have~~million, ~~been~~payable ~~pledged~~on asJanuary ~~collateral~~21, ~~with~~2005, ~~the~~to ~~Real~~holders ~~Estate~~of ~~Trust’s~~record ~~credit~~on ~~line~~December ~~banks~~30, 2004.

~~In fiscal 1993, the Real Estate Trust entered into a series of transactions in connection with the initial public offering of Saul Centers~~3. ~~The~~TAXES: Real Estate Trust transferred its 22 shopping centers and one of its office properties, together with the debt associated with such properties, to a newly formed partnership, Saul Holdings Limited Partnership (“Saul Holdings Partnership”), in which as of June 30, 2004 the Real Estate Trust owns (directly or through one of its wholly owned subsidiaries) a 19.6% interest, other entities affiliated with the Real Estate Trust own a 4.7% interest and Saul Centers owns a 75.7% interest. Under the Saul Holdings Partnership agreement, the units are generally convertible on a one-for-one basis into common stock of Saul Centers. However, at the current time, the units held by the Real Estate Trust are not convertible into Saul Centers common stock because of restrictions contained in the Saul Holdings Partnership agreement on the number of shares of common stock of Saul Centers that the Real Estate Trust and its affiliates can beneficially own at any point in time. The Real Estate Trust shares in cash distributions from operations and from capital transactions involving the sale of properties. The partnership agreement of Saul Holdings Partnership provides for quarterly distributions to the partners out of net cash flow. The quarterly distributions since inception have been 39 cents per unit. During the nine-month period ended June 30, 2004, 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 credit line banks.

InThe ~~connection~~Real ~~with~~Estate ~~the~~Trust ~~transfer~~voluntarily ofterminated its ~~properties~~qualification toas ~~Saul~~a ~~Holdings~~real ~~Partnership,~~estate ~~the~~investment ~~Real Estate~~trust ~~Trust~~under ~~was~~the ~~relieved~~Internal ofRevenue ~~approximately~~Code ~~$196~~during ~~million~~fiscal ~~in mortgage debt and deferred interest~~1978. ~~Pursuant~~As to a ~~reimbursement~~result ~~agreement among the partners~~ of ~~Saul Holdings Partnership and its subsidiary limited partnerships (collectively,~~ the ~~“Partnerships”),~~ ~~the~~ Real Estate Trust’s ~~and~~acquisition ~~its~~of ~~subsidiaries~~an additional ~~that~~20% ~~are~~equity ~~partners~~interest in the ~~Partnerships~~Bank ~~agreed~~in toJune ~~reimburse~~1990, ~~Saul Centers and~~ the ~~other~~Bank ~~partners~~became ina ~~the~~member ~~event~~of the ~~Partnerships~~Real ~~fail~~Estate toTrust’s ~~make~~affiliated ~~payments~~group ~~with~~filing ~~respect~~consolidated tofederal ~~certain~~income ~~portions of~~tax ~~the~~returns. ~~Partnerships’~~The ~~debt~~current ~~obligations~~effect ~~and~~of ~~Saul~~the ~~Centers~~Real orEstate ~~any~~Trust’s ~~such~~consolidation ~~other~~of the ~~partners~~Bank’s ~~personally~~operations ~~make~~into ~~payments~~its ~~with~~federal ~~respect~~income totax ~~such~~return ~~debt~~results ~~obligations.~~in ~~At June 30, 2004,~~ the ~~maximum~~use ~~potential obligations~~ of the Real Estate Trust’s ~~and~~net ~~its~~operating ~~subsidiaries under~~losses ~~this~~to ~~agreement~~reduce ~~totaled~~the ~~approximately~~federal ~~$100.0~~income ~~million~~taxes the Bank would otherwise owe.

4. INVESTMENT IN SAUL CENTERS, INC. AND SAUL HOLDINGS LIMITED PARTNERSHIP – REAL ESTATE TRUST:

During the three-month period ended December 31, 2004, the Real Estate Trust purchased, either through dividend reinvestment or direct purchase, approximately 160,000 shares of common stock of Saul Centers, Inc. (“Saul Centers”), and as of December 31, 2004 owned approximately 4,250,000 shares representing 25.9% of such company’s outstanding common stock. As of December 31, 2004, the market value of these shares was approximately $162.6 million. Substantially all these shares have been pledged as collateral with the Real Estate Trust’s credit line banks.

In fiscal 1993, the Real Estate Trust entered into a series of transactions in connection with the initial public offering of Saul Centers. The Real Estate Trust transferred its 22 shopping centers and one of its office properties, together with the $196 million of mortgage debt and deferred interest associated with such properties, to a newly formed partnership, Saul Holdings Limited Partnership (“Saul Holdings Partnership”), in which as of December 31, 2004 the Real Estate Trust owns (directly and through its wholly owned subsidiaries) a 19.4% interest, other entities affiliated with the Real Estate Trust own a 4.7% interest and Saul Centers owns a 75.9% interest. Under the Saul Holdings Partnership agreement, the units are generally convertible on a one-for-one basis into common stock of Saul Centers. However, at the current time, the units held by the Real Estate Trust are not convertible into Saul Centers common stock because of restrictions contained in the Saul Holdings Partnership agreement on the number of shares of common stock of Saul Centers that the Real Estate Trust and its affiliates can beneficially own at any point in time. The Real Estate Trust shares in cash distributions from operations and from capital transactions involving the sale of properties. The partnership agreement of Saul Holdings Partnership provides for quarterly distributions to the partners out of net cash flow. The quarterly distributions since inception have been 39 cents per unit. During the three-month period ended December 31, 2004, the Real Estate Trust received total cash distributions of $1.6 million from Saul Holdings Partnership. Substantially all of the Real Estate Trust’s ownership interest in Saul Holdings Partnership has been pledged as collateral with the Real Estate Trust’s credit line banks.

Pursuant to a reimbursement agreement among the partners of Saul Holdings Partnership and its subsidiary limited partnerships (collectively, the “Partnerships”), the Real Estate Trust and its subsidiaries that are partners in the Partnerships agreed to reimburse Saul Centers and the other partners in the event the Partnerships fail to make payments with respect to certain portions of the Partnerships’ debt obligations and Saul Centers or any such other partners personally make payments with respect to such debt obligations. At December 31, 2004, the maximum potential obligations of the Real Estate Trust and its subsidiaries under this agreement totaled approximately $100.0 million. The Real Estate Trust believes that Saul Holdings will be able to make all payments due with respect to its debt obligations.

4. ~~Investment~~INVESTMENT inIN ~~Saul~~SAUL ~~Centers~~CENTERS ~~Inc~~INC. ~~and~~AND ~~Saul~~SAUL ~~Holdings~~HOLDINGS ~~Limited~~LIMITED ~~Partnership~~PARTNERSHIP - REAL ESTATE TRUST (Continued) :

AsThe of June 30, 2004, the Real Estate Trust, through its partnership interest in Saul Holdings Partnership of 19.6% and its ownership of common shares of Saul Centers of 24.7%, effectively owns 38.3% of the consolidated entities of Saul Centers. Following are the Saul Centers unaudited condensed Consolidated Balance Sheets as of ~~June 30,~~December 31, 2004 and ~~September 30~~2003, ~~2003~~ and the unaudited Consolidated Statements of Operations for the ~~nine~~three month ~~periods~~period ended ~~June~~December 3031, 2004 and 2003. ~~The consolidated statements include the accounts~~ of Saul Centers, ~~its~~follow: ~~subsidiaries, Saul Holdings Partnership and other subsidiary partnerships which are majority owned by Saul Centers.~~

SAUL CENTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)	June 30,2004			September 30,2003
	December 31,
(In thousands)	2004			2003
Assets
Real estate investments	$	~~651~~682,~~177~~808		$	~~537~~552,~~172~~115
Accumulated depreciation		(~~172~~181,~~851~~420	)		(~~161~~164,~~153~~823	)
Other assets		5682,~~456~~008			4184,~~515~~324
Total assets	$	~~534~~583,~~782~~396		$	~~417~~471,~~534~~616
Liabilities and stockholders’ equity (deficit)
Liabilities and stockholders’ equity
Notes payable	$	411,544		$	400,668
Mortgage notes payable	$	453,646		$	357,248
Other liabilities		2728,~~024~~786			2221,~~470~~725
Total liabilities		~~438~~482,~~568~~432			~~423~~378,~~138~~973
Total stockholders’ equity (deficit)		96,214			(5,604	)
Total stockholders’ equity		100,964			92,643
Total liabilities and stockholders’ equity	$	~~534~~583,~~782~~396		$	~~417~~471,~~534~~616

4. Investment in Saul Centers Inc. and Saul Holdings Limited Partnership (Continued)

SAUL CENTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Nine MonthsEnded June 30,
	For the Three Months Ended December 31,
(In thousands)	2004			2003
Revenue
Base rent	$	6423,~~461~~774		$	5720,~~149~~434
Other revenue		155,~~897~~795			145,~~455~~695
Total revenue		8029,~~358~~569			7126,~~604~~129
Expenses
Operating expenses		165,~~153~~896			155,~~034~~344
Interest expense		18,702			19,316
Interest and amortization of deferred debt expense		7,114			6,449
Amortization of debt expense		647			618
Depreciation and amortization		5,828			4,962
Depreciation and amortization		14,947			12,266
General and administrative		2,475			1,818
General and administrative		5,695			4,533
Total expenses		21,313			18,573
Total expenses		56,144			51,767
Operating income		8,256			7,556
Operating income		24,214			19,837
Gain on sale of property		—			182
Gain on sale of property		182			—
Net income before minority interest		8,256			7,738
Income before minority interest		24,396			19,837
Minority interest		(2,028	)		(2,023	)
Minority interest		(6,090	)		(6,059	)
Net income		6,228			5,715
Net income		18,306			13,778
Preferred dividends		(2,000	)		(1,244	)
Preferred dividends		(5,244	)		—
Net income available to common shareholders	$	4,228		$	4,471
Net income available to common shareholders	$	13,062		$	13,778

5. DISCONTINUED OPERATIONS – REAL ESTATE TRUST:

On December 27, 2004 the Real Estate Trust determined it would sell one of its other real estate properties because the property no longer meets the Real Estate Trust’s investment criteria. Therefore, on December 27, 2004, the Real Estate Trust determined that the held for sale criteria in accordance with FASB No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” has been met. Accordingly, the Real Estate Trust has compared the carrying value of the asset to its estimated fair value, less cost to sell, to determine if the asset is impaired. The Real Estate Trust has determined that no adjustment to the carrying amount is required. The asset is classified as Real Estate Held for Sale on the Consolidated Balance Sheets. The operating income, $18,000 for the three months ended December 31, 2004, from this asset is included in Loss from Operations of Discontinued Real Estate Assets on the Consolidated Statements of Operations. The sale of this asset closed on January 31, 2005. The Real Estate Trust received proceeds from the sale of approximately $1.4 million.

On December 9, 2004 the sale of a hotel property, which was placed on the market for sale during fiscal 2004, was finalized and the Real Estate Trust received proceeds from the sale of approximately $2.2 million. The proceeds from the sale, along with an additional $3.6 million from the Real Estate Trust, were paid into an escrow fund with which United States government securities were purchased. The government securities became replacement collateral for the loan securing the hotel, and became the sole source of payment for the $4.4 million loan (the “Defeased loan”). As a result of the transaction, the principal amount owed by the Real Estate Trust was reduced by $4.4 million, with corresponding reductions in the principal and interest payments to be made to maturity. The escrow fund is maintained by Wells Fargo Bank, National Association, as Securities Intermediary and Custodian, and the Real Estate Trust is no longer the primary obligor with respect to the Defeased loan (see Note 6). Included in the Loss from Operations of Discontinued Real Estate Assets on the Consolidated Statements of Operations for the quarter ended December 31, 2004 is an additional loss of $11,000 which reflects the difference between the actual loss on the sale of the property and the estimated loss recorded in Fiscal 2004. Also included in the Loss from Operations of Discontinued Real Estate Assets is an operating loss of $186,000 from the hotel property, through December 9, 2004, the date of sale, and $1.6 million of costs associated with the defeasance of the mortgage loan, including a $1.5 million prepayment premium.

6. EXTINGUISHMENT OF LIABILITIES – REAL ESTATE TRUST:

In connection with the sale of the hotel property (see Note 5) in December 2004 the Real Estate Trust deposited cash of approximately $5.8 million into an escrow fund with which United States government securities were purchased to complete a partial defeasance of a mortgage loan made to the Real Estate Trust. The Defeased loan which totals approximately $4.4 million was accounted for as if it was extinguished in December 2004. The escrowed funds, including cash flows from the investments, which will be used solely to satisfy principal and interest payments of the Defeased loan through maturity, will be sufficient to satisfy all future debt service requirements for the defeased debt instrument.

~~5. Notes payable – secured - On February 25, 2004, the Real Estate Trust issued, in a private offering, $250.0 million aggregate principal amount of~~ 7.~~50%~~ ~~Senior~~INDUSTRY ~~Secured~~SEGMENT ~~Notes~~INFORMATION due 2014 (the “2004 Notes”). A substantial portion of the net proceeds of the offering were used to redeem the $200 million 9.75% Senior Secured Notes issued in March 1998 (the “1998 Notes”), including accrued interest through March 31, 2004 and pay a redemption premium, for early redemption of the notes, of $6.5 million which is included in General and administrative expense for the quarter ended June 30, 2004. These funds, totaling $216.25 million, which were escrowed at closing, were paid out on April 1, 2004. The Trust received approximately $28.1 million in proceeds from this offering after the redemption of the 1998 Notes, including accrued interest, the early redemption premium and after deducting costs associated with the offering. In addition, the Real Estate Trust wrote-~~off~~ ~~unamortized~~REAL ~~debt~~ESTATE ~~costs~~TRUST: of $2.4 million, included in Amortization of debt expense for the quarter ended June 30, 2004, relating to the unamortized debt costs of the 1998 Notes. The 2004 Notes are nonrecourse obligations of the Real Estate Trust and are secured by a first priority perfected security interest in all of the common stock of the Bank held by the Real Estate Trust. The Real Estate Trust plans to use the net proceeds to fund renovation and construction activities as well as for general corporate purposes.

6.Industry ~~Discontinued~~segment ~~operations~~information –with Onregard ~~June~~to ~~22, 2004~~ the Real Estate Trust ~~determined it would sell one of its hotel properties because the property no longer meets the Real Estate Trust’s investment criteria and~~ is ~~located~~presented ~~outside of the Real Estate Trust’s core markets~~below. ~~Therefore, on June 22, 2004, the Real Estate Trust determined that the held for sale criteria in~~For ~~accordance~~information ~~with~~regarding ~~FASB No. 144, “Accounting for~~ the ~~Impairment or Disposal of Long-Lived Assets” has been met. Accordingly~~Bank, ~~the~~please ~~Real~~refer ~~Estate Trust has written down its investment in the property~~ to ~~its fair value, less cost to sell. The asset, classified as Real estate held for sale on~~ the ~~Consolidated~~“Banking” ~~Balance~~sections ~~Sheets, is subject to a mortgage note~~ of ~~$4.1 million, included in Mortgage note payable – real estate held for sale on~~ the ~~Consolidated~~accompanying ~~Balance~~financial ~~Sheets.~~statements The Real Estate Trust has recognized a loss of $215,000 as a result of this write-down, which is included in Loss from operations of discontinued real estate asset on the Consolidated Statements of Operations. The Real Estate Trust expects the sale of this asset to occur in the next twelve months.

7. Adoption of recently issued accounting pronouncements - In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 is an Interpretation of Accounting Research Bulletin No. 51 and addresses consolidation by business enterprises of variable interest entities (“VIEs”). FIN 46 is based on the theory that an enterprise controlling another entity through interests other than voting interests should consolidate the controlled entity. Business enterprises are required under the provisions of FIN 46 to identify VIEs, based on specified characteristics, and then determine whether they should be consolidated. An enterprise that holds a majority of the variable interests in another enterprise is considered the primary beneficiary of that enterprise and, therefore, should consolidate the VIE. The primary beneficiary of a VIE is also required to include various disclosures in interim and annual financial statements. Additionally, an enterprise that holds a significant variable interest in a VIE, but that is not the primary beneficiary, is also required to make certain disclosures. The adoption of FIN 46 did not have an impact on the Real Estate Trust’s financial condition or results of operations.


	Three Months Ended December 31,
(In thousands)	2004			2003
INCOME (from continuing operations)
Hotels	$	24,570		$	20,675
Office and industrial properties		9,559			9,343
Other		323			227

	$	34,452		$	30,245

OPERATING PROFIT (LOSS) (from continuing operations) (1)
Hotels	$	4,966		$	3,553
Office and industrial properties		4,883			4,870
Other		67			(18	)

		9,916			8,405
Equity earnings of unconsolidated entities, net		1,749			1,932
Interest and amortization of debt expense		(12,054	)		(12,493	)
Advisory, management and leasing fees - related parties		(3,348	)		(3,061	)
General and administrative		(553	)		(311	)

Operating loss from continuing operations	$	(4,290	)	$	(5,528	)

IDENTIFIABLE ASSETS (AT PERIOD END)
Hotels	$	169,522		$	173,883
Office and industrial properties		124,085			125,128
Other		162,921			120,558

	$	456,528		$	419,569

INTEREST AND AMORTIZATION OF DEBT EXPENSE (from continuing operations)
Hotels	$	3,031		$	3,154
Office and industrial properties		3,074			3,170
Other		5,949			6,169

	$	12,054		$	12,493

DEPRECIATION (from continuing operations)
Hotels	$	3,177		$	2,841
Office and industrial properties		1,793			1,646
Other		6			6

	$	4,976		$	4,493

CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS (from continuing operations)
Hotels	$	833		$	3,595
Office and industrial properties		1,812			908
Other		160			87

	$	2,805		$	4,590

(1)	Operating profit (loss) includes income less direct operating expenses and depreciation

8. ~~Industry~~SUBSEQUENT ~~segment~~EVENTS ~~information~~– -REAL ~~Real~~ESTATE ~~Estate~~TRUST: ~~Trust~~

~~Industry~~On ~~segment~~January ~~information~~31, ~~with~~2005 ~~regard~~the tosale of the ~~Real~~other ~~Estate~~real ~~Trust~~estate isproperty, ~~presented~~which ~~below.~~was ~~For~~placed ~~information~~on ~~regarding~~the market during the ~~Bank,~~quarter ~~please~~ended ~~refer~~December to31, 2004, was finalized and the ~~“Banking”~~Real ~~sections~~Estate ofTrust received proceeds from the ~~accompanying~~sale ~~financial~~of ~~statements~~approximately $1.4 million.

	Nine Months EndedJune 30,
(In thousands)	2004			2003
INCOME (from continuing operations)
Hotels	$	71,097		$	63,212
Office and industrial properties		28,570			29,607
Other		1,214			905
	$	100,881		$	93,724
OPERATING PROFIT (LOSS) (from continuing operations)(1)
Hotels	$	16,675		$	11,355
Office and industrial properties		14,839			15,823
Other		208			17
		31,722			27,195
Equity earnings of unconsolidated entities, net		5,552			5,990
Impairment loss on investments		—			(625	)
Gain on sale of property		2,768			—
Interest and debt expense		(41,373	)		(37,798	)
Advisory, management and leasing fees - related parties		(9,724	)		(9,172	)
General and administrative		(8,174	)		(1,681	)
Operating loss from continuing operations	$	(19,229	)	$	(16,091	)
IDENTIFIABLE ASSETS (AT PERIOD END)
Hotels	$	177,553		$	176,213
Office and industrial properties		124,700			125,784
Other		158,160			124,687
	$	460,413		$	426,684
DEPRECIATION (from continuing operations)
Hotels	$	8,724		$	9,320
Office and industrial properties		5,051			5,217
Other		17			17
	$	13,792		$	14,554
CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS
Hotels	$	10,813		$	2,589
Office and industrial properties		2,551			1,967
Other		233			193
	$	13,597		$	4,749

On January 31, 2005 the Real Estate Trust executed an extension and expansion of its $55.0 million secured revolving credit facility. The credit facility was increased to $60.0 million, the interest rate spread over the floating index was reduced by 25 basis points to 200 basis points over the floating index and the term of the credit facility was extended to January 31, 2008, with provisions for extending the term for an additional year.

~~(1)~~9. ~~Operating~~LOANS ~~profit~~HELD ~~(loss)~~FOR ~~includes~~SECURITIZATION ~~income~~AND/OR ~~less~~SALE ~~direct~~– ~~operating~~THE ~~expenses~~BANK: ~~and depreciation~~

13At December 31, 2004, loans held for securitization and/or sale were composed of single-family residential and home equity loans of $1,407.8 million and $2.0 million, respectively. At September 30, 2004, loans held for securitization and/or sale were composed of single-family residential and home equity loans of $1,965.1 million and $394,000, respectively.

~~Table~~10. ofLOANS ~~Contents~~RECEIVABLE – THE BANK:

9. Loans receivable:

Loans receivable is composed of the following:

(In thousands)	~~June~~December 3031, 2004			September 30,~~2003~~ 2004
Single-family residential	$	5,~~067~~505,~~215~~643		$	45,~~397~~232,~~394~~551
Home equity		1,~~617~~769,~~282~~471			1,~~336~~721,~~776~~605
Real estate construction and ground		~~228~~264,~~152~~714			~~234~~223,~~356~~447
Commercial real estate and multifamily		38,632			19,435
Commercial		944,092			920,178
Commercial		898,813			888,847
Prime automobile		239,651			271,731
Prime automobile		313,587			492,896
Other		122,873			137,475
Other consumer		111,007			180,734
		8,846,444			8,506,987
		8,274,688			7,550,438
Deferred loan origination costs, net of unearned discounts		92,810			86,320
Deferred loan origination costs, net of unearned discounts		80,836			67,516
Allowance for losses on loans		(37,750	)		(37,750	)
Allowance for losses on loans		(48,362	)		(58,397	)
		55,060			48,570
		32,474			9,119
Total	$	8,901,504		$	8,555,557
Total	$	8,307,162		$	7,559,557

1011. ~~Real~~REAL ~~estate~~ESTATE ~~held~~HELD ~~for~~FOR ~~investment~~INVESTMENT orOR ~~sale~~SALE – THE BANK:

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:

(In thousands)	~~June~~December 3031, 2004		September 30,~~2003~~ 2004
Real estate held for investment (net of allowance for losses of $202 for both periods)	$	925	$	925
Real estate held for sale		20,~~667~~995		2120,~~820~~357
Total real estate held for investment or sale	$	21,~~592~~920	$	2221,~~745~~282

1413

1112. ~~Business~~BUSINESS ~~segments~~SEGMENTS – THE BANK:

The Bank has three operating segments: retail banking, commercial banking, and nonbanking services. Retail banking consists of traditional banking services, which include lending, leasing and deposit products offered to retail and small business customers. Commercial banking also consists of traditional banking services, as well as products and services tailored for larger corporate customers. Nonbanking services include asset management and similar services offered by subsidiaries of the Bank. In the following table, commercial banking and nonbanking services have been combined and reported as other.

	Retail Banking			Other				Total
(In thousands)	RetailBanking			Other			Total
Three Months Ended June 30, 2004
Three Months Ended December 31, 2004
Operating income	$	~~195~~203,~~159~~300		$	1214,~~468~~571		$	$217,871	~~207,627~~
Operating expense		~~126~~137,~~637~~866			1112,~~422~~247			150,113	~~138,059~~
Core earnings		6865,~~522~~434			12,~~046~~324			67,758	~~69,568~~
Non-core items		21,~~087~~672			~~4,492~~385			2,057	~~6,579~~
Operating income	$	7067,~~609~~106		$	52,~~538~~709		$	$69,815	~~76,147~~
Average assets	$	1112,~~774~~274,~~066~~702		$	1,~~209~~260,~~854~~537		$	$13,535,239	~~12,983,920~~
Three Months Ended June 30, 2003
Three Months Ended December 31, 2003
Operating income	$	~~185~~168,~~398~~518		$	12,~~186~~696		$	$181,214	~~197,584~~
Operating expense		~~146~~138,~~971~~145			10,~~467~~719			148,864	~~157,438~~
Core earnings		3830,~~427~~373			1,~~719~~977			32,350	~~40,146~~
Non-core items		(21,~~874~~562	)		—180			(1,382	~~(2,874~~)	)
Operating income	$	3528,~~553~~811		$	12,~~719~~157		$	$30,968	~~37,272~~
Average assets	$	10,~~696~~926,~~921~~381		$	1,~~169~~158,~~258~~654		$	$12,085,035	~~11,866,179~~
	Retail Banking			Other				Total
Nine Months Ended June 30, 2004
Operating income	$	556,001		$	38,113			$	594,114
Operating expense		409,127			32,362				441,489
Core earnings		146,874			5,751				152,625
Non-core items		2,549			4,673				7,222
Operating income	$	149,423		$	10,424			$	159,847
Average assets	$	11,352,113		$	1,186,071			$	12,538,184
Nine Months Ended June 30, 2003
Operating income	$	530,548		$	35,200			$	565,748
Operating expense		436,524			31,044				467,568
Core earnings		94,024			4,156				98,180
Non-core items		(1,503	)		(681	)			(2,184	)
Operating income	$	92,521		$	3,475			$	95,996
Average assets	$	10,516,413		$	1,141,350			$	11,657,763

The financial information for each segment is reported on the basis used internally by the Bank’s management to evaluate performance. Core earnings excludes certain items such as income and expenses related to certain securitization transactions, adjustments to loan loss reserves in excess of net ~~chargeoffs~~charge-offs and certain other nonrecurring items. Items excluded from core earnings are shown as non-core items. Measurement of the performance of these segments is based on the management structure of the Bank and is not necessarily comparable with financial information from other entities. The information presented is not necessarily indicative of the segment’s results of operations if each of the segments were independent entities.

1513. CAPITAL NOTES – SUBORDINATED – THE BANK:

On December 2, 2003, the Bank issued $175.0 million aggregate principal amount of 6⁷/8% subordinated debentures due 2013 (the “2003 Debentures”). On January 2, 2004, the net proceeds of the offering, along with short-term borrowings, were used to redeem all $150.0 million of the 9¹/4% subordinated debentures due 2005 (the “1993 Debentures”) and all $100.0 million of the 9¹/4% subordinated debentures due 2008 (the “1996 Debentures”).

14. ISSUANCE AND REDEMPTION OF PREFERRED STOCK – THE BANK:

12. Capital notes - subordinated:

On December 2, 2003, the Bank issued $175.0 million aggregate principal amount of 6 7/8% subordinated debentures due 2013 (the “2003 Debentures”). On January 2, 2004, the net proceeds of the offering, along with short-term borrowings, were used to redeem all $150.0 million of the 9¼% subordinated debentures due 2005 (the “1993 Debentures”) and all $100.0 million of the 9¼% subordinated debentures due 2008 (the “1996 Debentures”).

13. Issuance and redemption of preferred stock:

In October 2003, the Bank sold $125.0 million of its 8% Noncumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”). The net proceeds from the issuance of the Series C Preferred Stock were used to redeem all of the 13% Noncumulative Perpetual Preferred Stock, Series A, on October 31, 2003, at a price of $27.25 per share. The Series C Preferred Stock trades on the New York Stock Exchange under the symbol “CCX PrC.” The Bank will pay quarterly dividends in arrears at an annual rate of 8% on the Series C Preferred Stock only if the Board of Directors declares them and the OTS does not object. Dividends, once declared, are payable on or before the fifteenth day of February, May, August and November of each year. The dividend payment date for the initial dividend period, however, was January 15, 2004. Dividends not declared in a quarter will not be paid at any future time, except that upon a liquidation or redemption, accrued dividends for the current period will be paid.

The Series C Preferred Stock is includable in the Bank’s core capital. The holders of the Series C Preferred Stock have no voting rights, except in certain limited circumstances.

The Series C Preferred Stock may not be redeemed before October 1, 2008 except under certain circumstances. On and after October 1, 2008, the Series C Preferred Stock may be redeemed at the option of the Bank, in whole or in part, from time to time, at a redemption price of $25.00 per share, plus all distributions accrued and unpaid on the Series C Preferred Stock that have been declared, and accrued and unpaid dividends for the then-current dividend period, whether or not declared, up to the date of such redemption.

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 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.”

The ~~principal~~ principal business activities of the Real Estate Trust are the ownership of 80% of the outstanding common stock of the Bank, whose assets accounted for 97% of the Trust’s consolidated assets at ~~June~~December 3031, 2004, and the ownership and development of of income-producing properties. By virtue of its ownership of a majority interest in the Bank, the Trust is a savings and loan holding company and subject to regulation, examination and supervision by the OTS.

The following discussion and analysis provides information that management believes to be necessary for an understanding of the Trust’s financial condition and results of operations, and should be read in conjunction with the accompanying financial statements, notes thereto and other information contained in this document.

FINANCIAL CONDITION

REAL ESTATE

The Real Estate Trust’s investment portfolio at ~~June~~December 3031, 2004, consisted primarily of hotels, office projects, and land parcels. ~~During~~At ~~the~~December ~~quarter ended June 30~~31, 2004, the Real Estate Trust’s hotel portfolio included 1817 properties containing 3,~~573~~383 available rooms. The office property portfolio consisted of 13 properties with a total gross leasable area of 1,978,000 square feet.

The hotel portfolio, excluding the property which was disposed on December 9, 2004, experienced an average occupancy of 6562.19% and an average room rate of $9097.7397 during the ~~nine~~three-month period ended ~~June~~December 3031, 2004, compared to an average occupancy of 5960.80% and an average room rate of $8685.5481 during the same period in the prior year. REVPAR (revenue per available room) for the hotels was $5961.0364 for the ~~nine~~three-month period ended ~~June~~December 3031, 2004, a 1419.08% increase over REVPAR for the ~~nine~~ three-month period ended ~~June~~December 3031, 2003 of $51.7846.

Office space in the Real Estate Trust’s office property portfolio was 8890.95% leased at ~~June~~December 3031, 2004, compared to a leasing rate of 8685.29% at ~~both~~December ~~June 30~~31, 2003 and ~~March~~90.0% 31at September 30, 2004. At ~~June~~December 3031, 2004, of the total gross leasable area of 1,978,000 square feet, 44175,~~993~~906 square feet (28.39%) and ~~258~~183,~~907~~062 square feet (139.13%) are subject to leases expiring in the remainder of fiscal ~~2004~~2005 and fiscal ~~2005~~2006, respectively.

BANKING

General. The Bank’s assets increased by $~~485~~94.4 million during the current quarter to $1213.94 billion at ~~June~~December 3031, 2004. ~~Total~~Investment ~~loans~~and mortgage-backed securities increased by a combined $~~508~~266.52 million due to additional purchases during the current quarter. Total loans decreased $209.7 million to $10.23 billion at ~~June~~December 3031, 2004. The Bank recorded operating income of $7669.18 million during the quarter ended ~~June~~December 3031, 2004, compared to operating income of $3731.30 million during the quarter ended ~~June~~December 3031, 2003. The increase in operating income is attributable to ~~decreases~~increases in interest ~~expense,~~income ~~the~~and ~~provision~~other ~~for~~(non-interest) ~~loan~~income ~~losses~~ and ~~operating~~to ~~expenses,~~decreases ~~and~~in ~~was~~interest ~~partially offset~~expense byand athe ~~decrease~~provision infor ~~other~~loan ~~(non-interest) income~~losses.

OnAt December 231, ~~2003~~2004, the Bank’s ~~issued~~tangible, ~~$175.0~~core, ~~million~~tier of1 ~~its~~risk-based ~~2003~~and ~~Debentures.~~total Onrisk-based ~~January~~regulatory 2capital ratios were 6.15%, ~~2004~~6.15%, 8.83% ~~the~~and ~~net~~11.14%, ~~proceeds~~respectively. ofThe ~~that~~Bank’s ~~offering,~~regulatory ~~along~~capital ~~with~~ratios ~~short-term~~exceeded ~~borrowings,~~regulatory ~~were~~requirements ~~used~~as towell ~~redeem~~as ~~all~~the ~~$250.0~~standards ~~million~~established offor “well-capitalized” institutions under the ~~1993~~prompt ~~Debentures~~corrective ~~and~~action regulations issued pursuant to the ~~1996~~Federal ~~Debentures~~Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). See “Capital.”

AtDuring ~~June~~the 30quarter ended December 31, 2004, the Bank’s ~~tangible,~~declared ~~core, tier 1 risk-based~~ and ~~total~~paid ~~risk-based regulatory~~out ~~capital~~of ~~ratios~~retained ~~were~~earnings ~~6.04%,~~a ~~6.04%,~~cash ~~8.41%~~dividend ~~and~~on ~~10.87%,~~its ~~respectively.~~Common ~~The~~Stock ~~Bank’s~~in ~~regulatory capital ratios exceeded~~ the ~~requirements~~amount ~~under~~of ~~the Financial Institutions Reform~~$1,200 ~~Recovery~~per ~~and~~share. ~~Enforcement Act of 1989 (“FIRREA”) as~~The ~~well~~Bank asalso ~~the~~declared ~~standards~~and ~~established~~paid ~~for~~a ~~“well-capitalized”~~cash ~~institutions~~dividend ~~under~~on ~~the~~its ~~prompt~~Preferred ~~corrective~~Stock ~~action~~in ~~regulations issued pursuant to~~ the ~~Federal~~amount ~~Deposit Insurance Corporation Improvement Act~~ of ~~1991 (“FDICIA”)~~$0.50 ~~See “Capital~~per share.”

~~During~~15 the quarter ended June 30, 2004, the Bank declared and paid out of retained earnings a cash dividend on its Common Stock in the amount of $800 per share. The Bank also declared a cash dividend on its Preferred Stock in the amount of $0.50 per share, which was paid May 17, 2004.

Asset Quality. 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 30,2004			March 31,2004			September 30,2003
	December 31, 2004			September 30, 2004			December 31, 2003
Non-performing assets:
Non-accrual loans:
Residential mortgage	$	78,~~667~~812		$	118,~~017~~993		$	610,~~567~~286
Home equity		12,~~444~~162			1,~~461~~767			1,~~480~~396
Real estate and construction and ground		—			—			1,004
Real estate construction and ground		819			—			1,259
Total non-accrual real estate loans		911,~~111~~793			1210,~~478~~760			912,~~051~~941
Commercial		~~347~~237			~~349~~242			249
Subprime automobile		~~1,618~~913			21,~~187~~164			4,~~372~~260
Other consumer		1,312			1,319			1,928
Prime automobile		1,073			1,069			1,405
Total non-accrual loans (1)		12,388			16,333			15,600
Other consumer		379			472			503
Real estate acquired in settlement of loans		20,667			18,791			21,820
Total non-accrual loans (1)		14,395			13,707			19,358
Total non-performing assets	$	33,055		$	35,124		$	37,420
Real estate acquired in settlement of loans		20,995			20,357			18,751
Allowance for losses on loans	$	48,362		$	54,000		$	58,397
Total non-performing assets	$	35,390		$	34,064		$	38,109
Allowance for losses on loans	$	37,750		$	37,750		$	60,879
Allowance for losses on real estate held for investment		202			202			202
Total allowances for losses	$	4837,~~564~~952		$	5437,~~202~~952		$	5861,~~599~~081
Ratios:
Non-performing assets to total assets		0.26	%		0.2826	%		0.3230	%
Allowance for losses on real estate loans to non-accrual real estate loans (1)		~~100~~85.8051	%		7191.2302	%		7569.6566	%
Allowance for losses on loans to non-accrual loans (1)		~~390~~262.3924	%		~~330~~275.6241	%		~~374~~314.3449	%
Allowance for losses on loans to total loans receivable (2)		0.4736	%		0.5536	%		0.6564	%

(1)	Before deduction of allowances for losses.

(2)	Includes loans receivable and loans held for securitization and/or sale, before deduction of allowance for losses.

Non-performing assets totaled $3335.14 million at ~~June~~December 3031, 2004, compared to $3534.1 million at ~~March~~at 31September 30, 2004. The $21.03 million ~~decrease~~increase in non-performing assets ~~for~~during the current quarter resulted primarily from ~~a decrease in non-accrual loans which was partially offset by an increase in REO. During~~ the ~~quarter~~transfer ~~ended~~of ~~June~~a ~~30,~~real ~~2004,~~estate ~~the~~construction ~~Bank’s~~loan ~~REO increased $1.9 million~~ to ~~$20.7~~non-accrual ~~million as a result of the foreclosure of three residential properties~~status. The Bank maintained $4837.48 million ~~and $54.0 million~~ of valuation allowances on its loan portfolio at ~~June~~December 3031, 2004 and ~~March~~September 3130, 2004~~, respectively~~.

~~Delinquent Loans. At June 30, 2004, delinquent loans totaled $34.1 million, or 0.3% of loans, a decrease of $~~16.0 ~~million from the level at March 31, 2004. The following table sets forth information regarding the Bank’s delinquent loans at June 30, 2004.~~

	Principal Balance (Dollars in thousands) Loans Delinquent for
	30-59 days			60-89 days			Total
Residential Mortgage	$	4,470		$	2,262		$	6,732
Home Equity		4,229			595			4,824
Other Real Estate		—			—			—
Commercial		2,073			950			3,023
Subprime Automobile		9,456			2,809			12,265
Other Consumer		5,236			2,020			7,256
Total	$	25,464		$	8,636		$	34,100
Total as a Percentage of Loans (1)		0.2	%		0.1	%		0.3	%

(1) Includes loans held for sale and/or securitization, before valuation allowances, unearned premiums and discounts and deferred loan origination fees (costs).

During the current quarter, the process of renewing two residential construction loans totaling $7.6 million (which had been classified delinquent 30-59 days in the March 31, 2004 quarter) was completed so that at June 30, 2004, there were no delinquent other real estate loans.

Delinquent subprime automobile loans decreased from $13.2 million at March 31, 2004 to $12.3 million at June 30, 2004.

~~Commercial~~Delinquent ~~loans classified as delinquent 30-89 days consisted of 14 loans totaling $3~~Loans.0 ~~million~~At atDecember ~~June 30~~31, 2004, ~~compared~~ todelinquent 13 loans ~~totaling~~totaled $1032.6 million, ator ~~March~~0.3% 31of loans, ~~2004.~~essentially unchanged ~~The~~from ~~total~~the level at ~~March~~September 3130, 2004. ~~included~~The 8following ~~loans~~table ~~with~~sets anforth ~~aggregate~~information ~~balance~~regarding ofthe ~~$8.4~~Bank’s ~~million~~delinquent ~~which~~loans ~~were~~at ~~renewed~~December ~~during~~31, ~~the current quarter~~2004.

Potential Problem Assets. Although not considered non-performing assets, primarily because the loans are not 90 or more days past due and the borrowers have not abandoned control of the properties, potential problem assets are experiencing problems sufficient to cause management to have serious doubts as to the ability of the borrowers to comply with present repayment terms. At June 30, 2004 and March 31, 2004, potential problem assets totaled $5.3 million and $15.4 million, respectively. The decrease resulted from the repayment in full during the current quarter of the Bank’s aggregate balances of $9.9 million in two syndicated loans.


	Principal Balance (Dollars in thousands) Loans Delinquent for
	30-59 days			60-89 days			Total
Residential Mortgage	$	5,364		$	4,813		$	10,177
Home Equity		4,766			623			5,389
Commercial		822			48			870
Subprime Automobile		5,069			1,396			6,465
Other Consumer		7,131			2,600			9,731

Total	$	23,152		$	9,480		$	32,632

Total as a Percentage of Loans ⁽¹⁾		0.2	%		0.1	%		0.3	%

~~Troubled~~(1) ~~Debt~~Includes ~~Restructurings.~~loans Atheld ~~June~~for ~~30,~~sale ~~2004~~ and/or ~~March 31~~securitization, ~~2004~~before valuation allowances, ~~the~~unearned ~~Bank~~premiums ~~had~~and nodiscounts ~~troubled~~and ~~debt~~deferred ~~restructurings.~~loan origination fees (costs).

~~Real~~Total ~~Estate~~residential ~~Held~~mortgage ~~for~~loans ~~Investment.~~delinquent At30-89 ~~June~~days ~~30,~~increased to ~~2004~~$10.2 ~~and~~million ~~March~~at December 31, 2004, ~~real~~from ~~estate~~$8.2 ~~held~~million ~~for~~at ~~investment~~September ~~consisted~~30, of2004, ~~one property~~ with athe ~~book~~majority ~~value~~ of ~~$0.9~~the ~~million, net~~increase ofin ~~valuation~~the ~~allowances~~60-89 ofdays $0category.2 ~~million.~~

19Delinquent subprime automobile loans decreased to $6.5 million at December 31, 2004 from $8.9 million at September 30, 2004. Delinquent other consumer loans increased to $9.7 million at December 31, 2004 from $7.1 million at September 30, 2004.

~~Table~~Potential Problem Assets. Although not considered non-performing assets, primarily because the loans are not 90 or more days past due and the borrowers have not abandoned control of ~~Contents~~the properties, potential problem assets are assets which are experiencing problems sufficient to cause management to have serious doubts as to the ability of the borrowers to comply with present repayment terms. At December 31, 2004 and September 30, 2004, potential problem assets totaled $0.7 million.

Troubled Debt Restructurings. At December 31, 2004 and September 30, 2004, the Bank had no troubled debt restructurings.

Real Estate Held for Investment. At December 31, 2004 and September 30, 2004, real estate held for investment consisted of one property with a book value of $0.9 million, net of valuation allowances of $0.2 million.

Allowances for Losses. The following tables show loss experience by asset type and the components of the allowance for losses on loans.

Analysis of Allowance for and Charge-offs of Loans

(Dollars in thousands)

	Nine Months EndedJune 30,						Three Months EndedJune 30,
	Three Months Ended December 31,						Year Ended September 30,
	2004			2003			2004			~~2003~~
Balance at beginning of period	$	5837,~~397~~750		$	6658,~~079~~397		$	5458,~~000~~397		$	~~63,487~~
Provision for loan losses		(~~5,150~~383	)		205,~~379~~922			(514,~~644~~522	)		~~5,920~~
Charge-offs:
Single family residential		(~~232~~67	)		(~~259~~76	)		(32279	)		~~(51~~	)
Home equity		(~~556~~119	)		(~~646~~214	)		(~~184~~786	)		~~(230~~	)
Commercial real estate and multifamily		—			(382	)		—			(2	)
Subprime automobile		(1,716	)		(5,708	)		(15,596	)
Subprime automobile		(13,001	)		(23,347	)		(3,074	)		(6,489	)
Other consumer		(2,119	)		(3,066	)		(9,897	)
Other consumer		(7,517	)		(8,187	)		(1,971	)		(2,553	)
Total charge-offs		(4,021	)		(9,064	)		(26,558	)
Total charge-offs		(21,306	)		(32,821	)		(5,261	)		(9,325	)
Recoveries:
Recoveries:
Home equity		32			67			340
Home equity		208			151			68			35
Subprime automobile		2,838			4,011			14,613
Commercial real estate and multifamily		—			6			—			—
Other consumer		1,534			1,546			5,480
Subprime automobile		11,925			8,852			4,028			3,899
Total recoveries		4,404			5,624			20,433
Other consumer		4,288			2,091			1,171			721
Net (charge-offs) recoveries		383			(3,440	)		(6,125	)
Total recoveries		16,421			11,100			5,267			4,655
Balance at end of period	$	37,750		$	60,879		$	37,750
Charge-offs, net of recoveries		(4,885	)		(21,721	)		6			(4,670	)
Provision for loan losses to average loans (1) (2)		(0.01	)%		0.26	%		(0.14	)%
Balance at end of period	$	48,362		$	64,737		$	48,362		$	64,737
Net loan charge-offs to average loans (1) (2)		(0.01	)%		0.15	%		0.06	%
Provision for loan losses to average loans (1) (2)		(0.07	%)		0.33	%		(0.22	%)		0.27	%
Ending allowance for losses on loans to total loans (2) (3)		0.36	%		0.64	%		0.36	%
Net loan charge-offs to average loans (1) (2)		0.07	%		0.35	%		0.00	%		0.21	%
Ending allowance for losses on loans to total loans (2) (3)		0.47	%		0.74	%		0.47	%		0.74	%

(1)	Annualized

(2)	Includes loans held for securitization and/or sale.

(3)	Before deduction of allowance for losses.

Components of Allowance for Losses on Loans by Type

(Dollars in thousands)

	June 30, 2004				September 30, 2003
	December 31, 2004				September 30, 2004
	Amount		Percent ~~ofLoans~~of ~~toTotalLoans~~Loans to Total Loans		Amount		Percent ~~ofLoans~~of ~~toTotalLoans~~Loans to Total Loans
Balance at end of period allocated to:
Single family residential	$	4,275	6867.23	%	$	24,~~161~~275	6468.76	%
Home equity		23,~~740~~500	1617.03			23,~~426~~350	1516.05
Commercial real estate and multifamily		144	0.4			162	0.2
Real estate construction and ground		2,156	2.6			2,025	2.1
Real estate construction and ground		2,025	2.3			2,098	2.6
Commercial		6,851	9.2			7,361	8.8
Commercial		9,821	8.9			14,400	10.0
Prime automobile		6,560	2.4			5,400	2.6
Subprime automobile		124,~~000~~155	0.42			164,~~000~~920	10.13
Other consumer		8,450	3.8			10,082	6.4
Other		3,393	1.0			3,559	1.1
Unallocated		86,~~907~~860	—			116,~~068~~860	—
Total	$	4837,~~362~~750			$	5837,~~397~~750

2018

At ~~June~~December 3031, 2004, the Bank’s total ~~valuation~~ allowances for losses on loans and real estate held for investment or ~~sale~~ sale was $4838.60 million, aunchanged ~~decrease of $5.6 million~~ from ~~$54.2~~the ~~million~~level at ~~March~~September 3130, 2004. The allowance for losses on loans represents management’s estimate of credit losses inherent in the Bank’s loan portfolio as of the balance sheet date. The Bank’s allowance consists of several key elements, which include the allocated allowance, specific allowances for identified loans and the unallocated allowance. Management reviews the adequacy of the valuation allowances on loans using a variety of measures and tools including historical loss performance, delinquency status, current economic conditions, internal risk ratings and current underwriting policies and procedures.

The allowance for losses on single-family residential loans was $4.3 million at both December 31, 2004 and September 30, 2004. The allowance for losses on loans secured by real estate totaled $910.21 million at ~~June~~December 3031, 2004, which constituted ~~100~~85.85% of total non-accrual real estate loans. During the three months ended ~~June~~December 3031, 2004, the Bank recorded net charge-offs of $0.12 million on these assets. ~~The allowance for losses on single-family residential loans was $4.3 million at June 30, 2004, an increase of $0.7 million from the level at March 31, 2004.~~

The allowance for losses on ~~other~~prime ~~consumer~~automobile loans, ~~including~~increased slightly ~~automobile,~~during ~~home~~the ~~improvement~~quarter ~~and~~ended ~~related~~December ~~loans~~31, ~~overdraft~~2004 ~~lines~~as ofa ~~credit~~result ~~and~~of ~~other~~increased ~~consumer~~delinquencies ~~loans~~on ~~decreased~~these ~~to $20~~loans.5 ~~million at June 30, 2004, from $21.1 million at March 31, 2004.~~

The $6.9 million of unallocated allowance for losses onat ~~commercial~~December ~~loans~~31, ~~was reduced~~2004 toremained ~~$9.8~~unchanged ~~million~~from the level at ~~June~~September 30, 2004,. ~~from~~The ~~$14.3~~unallocated ~~million~~allowance atis ~~March~~based ~~31,~~upon ~~2004.~~management’s ~~The~~evaluation ~~decrease~~and ~~resulted~~judgement ~~from~~of various ~~the~~conditions ~~repayment~~that are not directly measured in ~~full~~the determination of ~~two~~the ~~loans~~allocated ~~during~~allowance. The conditions evaluated in connection with the ~~current~~unallocated ~~quarter~~allowance include existing general economic and business conditions affecting key lending areas of the Bank’s, ~~interests~~credit inquality ~~two~~trends, ~~syndicated~~collateral ~~loans~~volumes, ~~for~~loan ~~which~~volumes and concentrations, seasoning of the ~~bank~~loan ~~had established~~portfolio, aspecific ~~combined~~industry ~~allowance~~conditions ~~for~~within ~~losses~~portfolio ~~totaling~~segments, ~~$4.8~~recent ~~million~~loss experience, regulatory examination results and findings of the Bank’s internal credit evaluations.

The Bank’s ~~unallocated~~valuation allowance for losses ~~decreased~~on toreal ~~$8.9~~estate ~~million~~held atfor ~~June~~investment ~~30,~~or ~~2004,~~sale ~~from~~was $90.82 million at ~~March~~December 31, 2004. ~~The unallocated allowance is based upon management’s evaluation~~ and ~~judgement~~September of various conditions that are not directly measured in the determination of the allocated allowance. The conditions evaluated in connection with the unallocated allowance include existing general economic and business conditions affecting key lending areas of the Bank30, credit quality trends, collateral volumes, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience, regulatory examination results and findings of the Bank’s internal credit evaluations2004.

Asset and Liability Management. The following table presents the Bank’s ~~valuation~~interest ~~allowance~~rate ~~for~~sensitivity ~~losses~~gap onat ~~real~~December ~~estate~~31, 2004. Balances of interest-earning ~~held~~assets ~~for~~and ~~investment~~interest-bearing liabilities are shown in the earlier of the period where contractual payments are due, interest rates adjust or ~~sale~~prepayment ~~was~~is $0anticipated to occur.2 ~~million~~Adjustable atand ~~June~~floating 30rate loans are included in the period in which their interest rates are next scheduled to adjust, ~~2004~~and prepayment rates are assumed for all of the Bank’s loans based on management’s estimates. The Bank’s deposits with no stated maturity, including savings and ~~March~~transaction 31accounts, have ~~2004~~interest rates that may reprice at any time. However, market experience has proven that these deposits adjust to market prices over a much longer period of time. The Bank considers these deposits to be relatively insensitive to interest rate changes. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

~~Asset~~19 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, 2004, 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 annual 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. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

Interest Rate Sensitivity Table (Gap)

(Dollars in thousands)

Six Monthsor Less

More thanSix MonthsthroughOne Year

More thanOne YearthroughThree Years

More thanThree YearsthroughFive Years

More thanFive Years

Total

Six Months or Less

More than Six Months through One Year

More than One Year through Three Years

More than Three Years through Five Years

More than Five Years

Total

As of June 30, 2004

Real estate loans:

Adjustable-rate

3,~~127~~606,~~902~~740

~~401~~391,~~333~~771

~~782~~792,~~902~~185

~~859~~886,~~679~~584

~~548~~257

5,~~172~~677,~~364~~537

Fixed-rate

3834,~~707~~701

3128,~~572~~581

7266,~~902~~506

3026,~~184~~920

85,~~765~~676

~~182~~162,~~130~~384

Home equity credit lines and second mortgages

1,~~399~~544,~~425~~129

349,~~329~~445

~~100~~37,~~813~~167

5937,~~958~~695

82202,~~518~~820

1,~~677~~831,~~043~~256

Commercial

~~717~~804,~~947~~627

1410,~~014~~746

4635,~~216~~453

3325,~~677~~854

8565,~~283~~952

~~897~~942,~~137~~632

Consumer and other

~~140~~92,~~615~~465

9763,~~281~~213

~~160~~135,~~512~~087

2318,~~327~~726

515,~~115~~954

~~426~~325,~~850~~445

Loans held for securitization and/or sale

1,~~883~~409,~~115~~795

—

1,~~883~~409,~~115~~795

Mortgage-backed securities

7870,~~411~~593

6163,~~671~~282

83201,~~430~~901

~~126~~137,~~403~~208

8673,~~597~~154

~~436~~546,~~512~~138

Other investments

~~246~~317,~~566~~594

—

71200,~~153~~546

—

~~317~~518,~~719~~140

Total interest-earning assets

7,~~632~~880,~~688~~644

~~640~~567,~~200~~038

1,~~317~~468,~~928~~845

1,~~133~~132,~~228~~987

~~268~~363,~~826~~813

1011,~~992~~413,~~870~~327

Total non-interest earning assets

—

1,~~895~~951,~~567~~914

Total assets

7,~~632~~880,~~688~~644

~~640~~567,~~200~~038

1,~~317~~468,~~928~~845

1,~~133~~132,~~228~~987

2,~~164~~315,~~393~~727

1213,~~888~~365,~~437~~241

Deposits:

Fixed maturity deposits

~~936~~965,~~824~~289

~~388~~395,~~327~~348

~~319~~404,~~446~~408

~~103~~116,~~124~~469

—

1,~~747~~881,~~721~~514

NOW, statement and passbook accounts

~~2,879,893~~—

5156,~~432~~858

~~171~~114,~~299~~263

~~116~~115,~~590~~246

~~248~~3,~~468~~326,330

3,~~467~~612,~~682~~697

Money market deposit accounts

2,~~339~~434,~~452~~045

—

2,~~339~~434,~~452~~045

Borrowings:

Capital notes - subordinated

—

175,000

Other

1,~~929~~891,~~055~~588

~~123~~3,~~185~~712

~~427~~494,~~540~~974

~~236~~269,~~628~~753

3938,~~470~~027

2,~~755~~698,~~878~~054

Total interest-bearing liabilities

85,~~085~~290,~~224~~922

~~562~~455,~~944~~918

~~918~~1,~~285~~013,645

~~456~~501,~~342~~468

~~462~~3,~~938~~539,357

10,~~485~~801,~~733~~310

Minority interest

—

175,391

Total non-interest bearing liabilities

—

1,~~546~~651,~~813~~048

Stockholders’ equity

—

~~680~~737,~~500~~492

Total liabilities & stockholders’ equity

85,~~085~~290,~~224~~922

~~562~~455,~~944~~918

~~918~~1,~~285~~013,645

~~456~~501,~~342~~468

26,~~865~~103,~~642~~288

1213,~~888~~365,~~437~~241

Gap

~~(452~~2,~~536~~589,722

)

77111,~~256~~120

~~399~~455,~~643~~200

~~676~~631,~~886~~519

(~~194~~3,~~112~~175,544

)

Cumulative gap

~~(452~~2,~~536~~589,722

)

~~(375~~2,~~280~~700,842

)

243,~~363~~156,042

~~701~~3,~~249~~787,561

~~507~~612,~~137~~017

Cumulative gap as a percentage of total assets

(319.54

(220.92

023.26

528.43

34.96

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 2~~20.92% at ~~June 30,~~December 31, 2004, ~~compared~~essentially tounchanged afrom ~~negative 5~~20.48% at ~~March~~September 3130, 2004. The ~~change~~current ~~in the Bank’s one-year~~ gap ~~during~~reflects ~~this period results from~~ various initiatives undertaken by management in light of the current ~~low~~ interest rate environment, including increased origination of short-term adjustable rate loans which were ~~mostly~~ funded through the use of short-term deposits and borrowings. ~~The Bank continues to consider a variety of strategies to manage its interest rate risk position.~~

Capital. At ~~June~~December 3031, 2004, the Bank complied with all of its regulatory capital requirements under ~~FIRREA~~FDICIA, and its capital ratios exceeded the ratios established for “well-capitalized” institutions under OTS prompt corrective action regulations.

22The following table shows the Bank’s regulatory capital levels at December 31, 2004, compared 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. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

The following table shows the Bank’s regulatory capital levels at June 30, 2004, compared 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. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

Regulatory Capital

(Dollars in thousands)

	Actual					Minimum Capital Requirement				~~ExcessCapital~~Excess Capital
	Amount			As a % of Assets		Amount		As a % of Assets		Amount		As a % of Assets
Stockholders’ equity per financial statements	$	~~680~~737,~~500~~492
Minority interest in REIT Subsidiary (1)		144,000
		824,500
		881,492
Adjustments for tangible and core capital:
Intangible assets		(42,~~440~~315	)
Non-includable subsidiaries (2)		(~~933~~11,321	)
Non-qualifying purchased/originated loan servicing rights		(38,~~961~~769	)
Total tangible capital		~~777~~819,~~166~~087		6.0415	%	$	~~192~~199,~~864~~791	1.50	%	$	~~584~~619,~~302~~296	4.5465	%
Total core capital (3)		~~777~~819,~~166~~087		6.0415	%	$	~~514~~532,~~304~~777	4.00	%	$	~~262~~286,~~862~~310	2.0415	%
Tier 1 risk-based capital (3)		~~777~~819,~~166~~087		8.4183	%	$	~~370~~371,~~401~~893	4.00	%	$	~~406~~447,~~765~~194	4.4183	%
Adjustments for total risk-based capital:
Subordinated capital debentures		175,000
Allowance for general loan losses		4837,~~362~~750
Total supplementary capital		~~223~~212,~~362~~750
Total available capital		1,~~000~~031,~~528~~837
Equity investments (2)		(2,231	)
Equity investments		(2,573	)
Total risk-based capital (3)	$	~~998~~1,~~297~~029,264		1011.8714	%	$	~~740~~743,~~802~~786	8.00	%	$	~~257~~285,~~495~~478	23.8714	%

(1)	Eligible for inclusion in core capital in an amount up to 25% of the Bank’s core capital pursuant to authorization from the OTS.

(2)

Reflects an aggregate offset of $0.2 million representing the general allowance for losses maintained against the Bank’s equity capital investments and non-includable subsidiaries which, pursuant to OTS guidelines, is available as a “credit” against the deductions otherwise required for such investments.

(3)	Under the OTS “prompt corrective action” regulations, the standards for classification as “well capitalized” are a leverage (or “core capital”) ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.

~~OTS~~21 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, 2004, by the fiscal year in which the property was acquired through foreclosure.

Fiscal Year	(In thousands)
1990	$	2,231	(1)
1991		11,369	(2)
1995		4,665	(2)
2003		56
2004		2,346
Total REO	$	20,667

During the quarter ended December 31, 2004, a subsidiary of the Bank purchased for $10.4 million an ownership interest in a limited liability company. The investment is classified as other assets on the Consolidated Balance Sheets and is treated as a non-includable asset and deducted from core capital for regulatory capital purposes.

OTS capital regulations provide a five-year holding period (or such longer period as may be approved by the OTS) for REO to qualify for an exception from treatment as an equity investment. If an REO property is considered an equity investment, its then-current book value is deducted from total risk-based capital. The following table sets forth the Bank’s REO at December 31, 2004, by the fiscal year in which the property was acquired through foreclosure.


Fiscal Year	(In thousands)
1990	$	2,573	⁽¹⁾
1991		11,753	⁽²⁾
1995		5,131	⁽²⁾
2003		1,434
2004		104

Total REO	$	20,995

⁽¹⁾	The Bank treats this amount as an equity investment for regulatory capital purposes.

⁽²⁾	The Bank received an extension of the holding periods of these properties through April 7, 2005.

LIQUIDITY AND CAPITAL RESOURCES

REAL ESTATE

The Real Estate Trust’s cash flows from operating activities have ~~been~~ historically been insufficient to meet all of its cash flow requirements. The Real Estate Trust’s internal sources of funds, primarily cash flow generated by its income-producing properties, generally have been sufficient to meet its cash needs other than the repayment of principal on outstanding debt, including outstanding unsecured notes sold to the public, the payment of interest on its indebtedness, and the payment of capital improvement costs. In the past, the Real Estate Trust funded such shortfalls through a combination of external funding sources, primarily new financings, the sale of unsecured notes, refinancing of maturing mortgage debt, proceeds from asset sales, and dividends and tax sharing payments from the Bank. ~~For~~Although cash flows from operating activities have improved over the prior two fiscal years and for the quarter ended December 31, 2004, for the foreseeable future, the Real Estate Trust’s ability to generate positive cash flow from operating activities and to meet its liquidity needs, including debt service payments, repayment of debt principal and capital expenditures, will continue to depend on these available external sources. Dividends received from the Bank are a component of funding sources available to the Real Estate Trust. The availability and amount of dividends in future periods is dependent upon, among other things, the Bank’s operating performance and income, and regulatory restrictions on such payments.

The Real Estate Trust believes that the financial condition and operating results of the Bank in recent periods should enhance prospects for the Real Estate Trust to receive tax sharing payments and dividends from the Bank. During the ~~nine~~three-month period ended ~~June~~December 3031, 2004, the Bank made tax sharing payments totaling $~~5.6~~458,000 ~~million~~ and dividend payments totaling $169.86 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 Real Estate Trust have generated net operating losses while the Bank has reported net income. It is anticipated that the Trust’s consolidation of the Bank’s operations into the Trust’s federal income tax return will result in the use of the Real Estate Trust’s net operating losses to reduce the federal income taxes the Bank would otherwise owe. If in any future year, the Bank has taxable losses or unused credits, the Real Estate Trust would be obligated to reimburse the Bank 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~~three-month period ended ~~June~~December 3031, 2004, the Trust purchased through dividend reinvestment or direct purchase, ~~237~~160,000 shares of common stock of Saul Centers and as of ~~June~~December 3031, 2004 owned approximately 34,~~981~~250,000 shares representing 2425.79% of such company’s outstanding common stock. As of ~~June~~December 3031, 2004, the market value of these shares was approximately $~~127~~162.86 million. Substantially all these shares have been pledged as collateral with the Real Estate Trust’s credit line banks.

As22 the owner, directly and through two wholly-owned subsidiaries, of a limited partnership interest in Saul Holdings Limited Partnership (“Saul Holdings Partnership”) the Real Estate Trust shares in cash distributions from operations and from capital transactions involving the sale of properties. The partnership agreement of Saul Holdings Partnership provides for quarterly cash distributions to the partners out of net cash flow. During the nine-month period ended June 30, 2004, 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 lines of credit banks.

InTable March 1998, the Real Estate Trust issued $200.0 million aggregate principal amount of 9.75% Senior Secured Notes due 2008, (the “1998 Notes”). Contents

OnAs ~~February~~the 25owner, ~~2004,~~directly ~~the~~and ~~Real~~through ~~Estate~~two ~~Trust~~wholly-owned ~~issued~~subsidiaries, inof a ~~private~~limited ~~offering,~~partnership ~~$250.0~~interest ~~million aggregate~~in ~~principal~~Saul ~~amount~~Holdings Limited ofPartnership ~~7.50% Senior Secured Notes due 2014~~ (~~the~~ “~~2004~~Saul ~~Notes~~Holdings Partnership”). ~~A substantial portion of~~ the ~~net~~Real ~~proceeds~~Estate ofTrust ~~the~~shares ~~offering~~in ~~were~~cash ~~used~~distributions tofrom ~~redeem~~operations ~~the 1998 Notes, including accrued interest through March 31, 2004~~ and ~~pay~~from ~~a redemption~~capital ~~premium,~~transactions ~~for~~involving ~~early redemption of~~ the ~~notes,~~sale of $6properties.5 ~~million.~~The ~~These~~partnership ~~funds,~~agreement ~~totaling~~of ~~$216.25~~Saul ~~million,~~Holdings ~~which~~Partnership provides ~~were~~for ~~escrowed~~quarterly atcash ~~closing,~~distributions ~~were~~to ~~paid~~the partners out onof ~~April~~net 1,cash ~~2004~~flow. ~~The~~During ~~Trust received approximately $28.1 million in proceeds from this offering after~~ the ~~redemption~~three-month ofperiod ~~the~~ended ~~1998~~December ~~Notes~~31, ~~including accrued interest~~2004, the ~~early~~Real ~~redemption~~Estate ~~premium~~Trust ~~and~~received ~~after~~total ~~deducting~~cash ~~costs~~distributions ~~associated~~of ~~with the offering~~$1.6 ~~The~~million ~~2004~~from ~~Notes~~Saul ~~are~~Holdings ~~nonrecourse~~Partnership. Substantially ~~obligations~~all of the Real Estate Trust’s ~~and~~ownership ~~are secured by a first priority perfected security~~ interest in ~~all~~Saul ofHoldings ~~the~~Partnership ~~common~~has ~~stock~~been ofpledged ~~the~~as ~~Bank~~collateral ~~held~~with by the Real Estate Trust.’s ~~The~~lines ~~Real~~of ~~Estate~~credit ~~Trust plans to use the net proceeds to fund renovation and construction activities as well as for general corporate purposes~~banks.

On February 25, 2004, the Real Estate Trust issued, in a private offering, $250.0 million aggregate principal amount of 7.50% Senior Secured Notes due 2014 (the “2004 Notes”). The 2004 Notes are nonrecourse obligations of the Real Estate Trust and are secured by a first priority perfected security interest in all of the common stock of the Bank held by the Real Estate Trust. The Real Estate Trust used the net proceeds to redeem all of its outstanding $200.0 million aggregate principal of 9.75% Senior Secured Notes due 2008, to fund renovation and construction activities as well as for general corporate purposes.

The Real Estate Trust is currently selling unsecured notes, with maturities ranging from one to ten years, primarily to provide funds to repay maturing unsecured notes. To the degree that the Real Estate Trust does not sell new unsecured notes in amounts sufficient to finance completely the scheduled repayments of outstanding unsecured notes as they mature, it will finance such repayments from other sources of funds.

24The Real Estate Trust has a $55.0 million secured revolving credit line with an unrelated bank that matures on December 12, 2006, with provisions for extending the term for an additional year. This facility is secured by a portion of the Real Estate Trust’s ownership in Saul Holdings Partnership and Saul Centers. Interest is computed by reference to a floating rate index. At December 31, 2004, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $55.0 million. On January 31, 2005 the Real Estate Trust executed an extension and expansion of its $55.0 million secured revolving credit facility. The credit facility was increased to $60.0 million, the interest rate spread over the floating index was reduced by 25 basis points to 200 basis points over the floating index and the term of the credit facility was extended to January 31, 2008, with provisions for extending the term for an additional year.

The Real Estate Trust also has an additional $45.0 million revolving credit line with an unrelated bank that matures on September 26, 2006. This facility is secured by a portion of the Real Estate Trust’s ownership in Saul Holdings Partnership and Saul Centers. Interest is computed by reference to a floating rate index. At December 31, 2004, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $45.0 million.

The ~~Real~~maturity ~~Estate~~schedule ~~Trust has a $55.0 million secured revolving credit line with an unrelated bank that matures on December 12, 2006, with provisions~~ for ~~extending~~ the ~~term annually. This facility is secured by a portion of the~~ Real Estate Trust’s ~~ownership~~outstanding indebt ~~Saul~~at ~~Holdings~~December ~~Partnership and Saul Centers. Interest is computed by reference to a floating rate index. At June 30~~31, 2004, for the ~~Real~~balance ~~Estate~~of ~~Trust~~fiscal 2005 ~~had~~and nosubsequent ~~outstanding~~years ~~borrowings~~is ~~and~~set ~~unrestricted~~forth ~~availability~~in ofthe ~~$55.0~~following ~~million.~~table:

The Real Estate Trust also has an additional $45.0 million revolving credit line with an unrelated bank that matures on September 26, 2006. 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, 2004, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $45.0 million.

The maturity schedule for the Real Estate Trust’s outstanding debt at June 30, 2004 for the balance of fiscal 2004 and subsequent years is set forth in the following table:

Debt Maturity Schedule

(In thousands)

Fiscal Year	Mortgage Notes Payable		~~Mortgage NotesPayable~~	Notes Payable Secured		~~MortgageNote Payable -Real Estate HeldFor Sale~~	Notes Payable Unsecured		~~Notes PayableSecured~~	Total		~~Notes PayableUnsecured~~		~~Total~~
2004 (1)			$	2,960		$	25		$	—		$	2,991	$	5,976
2005 (1)	$	13,009		$	—		$	8,860		$	21,869
2005				16,207			110			—			11,354		27,671
2006		94,850			—			8,150			103,000
2006				94,554			118			—			7,799		102,471
2007		5,284			—			6,586			11,870
2007				5,415			128			—			5,992		11,535
2008		5,670			—			4,438			10,108
2008				5,814			137			—			3,941		9,892
2009		15,487			—			5,030			20,517
Thereafter		169,433		~~184,513~~	250,000		~~3,578~~	23,735		~~250,000~~	443,168		~~23,975~~		~~462,066~~
Total	$	303,733	$	~~309,463~~$	250,000	$	~~4,096~~$	56,799	$	~~250,000~~$	610,532	$	~~56,052~~	$	~~619,611~~

(1) ~~July~~January 1, ~~2004~~2005 - September 30, ~~2004~~2005

Of the total mortgage debt outstanding at ~~June~~December 3031, 2004, $~~305~~296.80 million was non-recourse to the Real Estate Trust.

REAL ESTATE DEVELOPMENT AND CAPITAL EXPENDITURES

The Real Estate Trust has placed one of its other real estate properties on the market for sale because the property no longer meets the Real Estate Trusts investment criteria. No adjustment to the carrying value of the property was required. The sale of this asset closed on January 31, 2005. The Real Estate Trust received proceeds from the sale of approximately $1.4 million.

The Real Estate Trust owns various land parcels with approximately 380 acres of available land. These parcels offer potential development opportunities for the Trust.

The Real Estate Trust believes that the capital improvement costs for its income-producing properties will be in the range of $1112.0 to $1419.0 million per year for the next several years.

BANKING

Liquidity. The goal of liquidity management is to provide adequate funds to meet changes in loan demand or unexpected deposit withdrawals. The Bank accomplishes this goal by maintaining liquid assets in the form of cash and short-term investments, as well as sufficient unused borrowing capacity with securities dealers and other wholesale lenders. Growth in the Bank’s core deposits and principal and interest payments on loans and mortgage-backed securities also provide sources of liquidity. In addition, the Bank’s mortgage loan portfolio can be used as collateral for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta.

At ~~June~~December 3031, 2004, the estimated remaining collateral, after market value and other adjustments, of that portion of the Bank’s assets that may be pledged to the ~~FHLB~~ FHLB of Atlanta and various securities dealers totaled $3.36 billion, or 2526.97% of total assets. The Bank’s maximum credit availability with the FHLB of Atlanta ~~was~~is ~~recently increased to~~ 50% of total assets, provided that the Bank has sufficient collateral to pledge against its advances and subject to certain limitations and conditions imposed by the FHLB of Atlanta.

Also at ~~June~~December 3031, 2004, the Bank had cash and other short-term assets totaling $~~442~~571.20 million, or 3.4.3% of total assets.

25The Bank also accesses a variety of other short-term and long-term funding sources, including securitizations and sales of loan receivables. As part of its mortgage banking activities, the Bank sold or securitized and sold $1.9 billion of single-family residential mortgage loans during the December 2004 quarter. Generally, all long-term, fixed-rate residential mortgage loans originated during the current quarter have been or are in the process of being sold. Variable rate mortgage loans are either sold or placed into the Bank’s portfolio.

The Bank also accesses a variety of other short-term and long-term funding sources, including securitizations and sales of loan receivables. As part of its mortgage banking activities, the Bank sold or securitized and sold $1.6 billion of single-family residential mortgage loans during the June 2004 quarter. Generally, all long-term, fixed-rate residential mortgage loans originated during the current quarter have been or are in the process of being sold. Variable rate mortgage loans are either sold or placed into the Bank’s 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 used from time to time will be determined by a number of factors, including capital planning objectives, lending and investment strategies and market conditions.

~~Commitments~~24 and Contingencies. In connection with its loan origination, securitization and sale activities, the Bank generally receives or retains various interests in the sold loans, which may include servicing assets, securities, or interest-only strips receivable. The Bank sometimes retains a limited amount of recourse with its securitization through one or more means, most often through the establishment of reserve accounts, overcollateralization of receivables or retention of subordinated asset-backed certificates. The Bank records these interests as assets on its financial statements. In some cases, the Bank determines the carrying value of the assets based on future cash flows expected to be received by the Bank from the underlying assets. Some of these cash flows are payable to the Bank before the claims of others, while other cash flows are subordinated to the claims of others. The following tables summarize the carrying value of these assets at June 30, 2004 and March 31, 2004.

	June 30, 2004
	Not Subordinated		Subordinated		Total
	(in thousands)
Servicing assets	$	138,172	$	—	$	138,172
Interest-only certificates		132,959		—		132,959
Interest-only strips receivable		101,804		1,942		103,746
Overcollateralization of loans		—		1,532		1,532
Reserve accounts		3,956		15,393		19,349
Total	$	376,891	$	18,867	$	395,758
	March 31, 2004
	Not Subordinated		Subordinated		Total
	(in thousands)
Servicing assets	$	111,765	$	—	$	111,765
Interest-only certificates		94,273		—		94,273
Interest-only strips receivable		103,180		2,578		105,758
Overcollateralization of loans		—		2,245		2,245
Reserve accounts		3,084		17,476		20,560
Total	$	312,302	$	22,299	$	334,601

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, 2004, recourse to the Bank under these arrangements was $3.8 million, consisting of restricted cash accounts amounting to $2.0 million and overcollateralization of receivables amounting to $1.8 million. At March 31, 2004, recourse to the Bank under these arrangements was $4.5 million, consisting of restricted cash accounts amounting to $2.7 million and overcollateralization of receivables amounting to $1.8 million.

The Bank also is obligated under recourse provisions related to the servicing of certain residential mortgage loans. At June 30, 2004 and March 31, 2004, recourse to the Bank under these arrangements totaled $4.1 million and $3.9 million, respectively.

There were no material commitments for capital expenditures at June 30, 2004.

Loan Originations, Securitizations and Sales – Retained Interests and Servicing Assets. In connection with its loan origination, securitization and sale activities, the Bank generally receives or retains various interests in the sold loans, which may include servicing assets, securities, or interest-only certificates and/or interest-only strips receivable (collectively, “interest-only strips receivable”). The Bank sometimes retains a limited amount of recourse with its securitization through one or more means, most often through the establishment of reserve accounts, overcollateralization of receivables or retention of subordinated asset-backed certificates. The Bank records these interests as assets on its financial statements. In some cases, the Bank determines the carrying value of the assets based on future cash flows expected to be received by the Bank from the underlying assets. Some of these cash flows are payable to the Bank before the claims of others, while other cash flows are subordinated to the claims of others. The following tables summarize the carrying value of these assets at December 31, 2004 and September 30, 2004.


	December 31, 2004
	Not Subordinated		Subordinated		Total
	(in thousands)
Servicing assets	$	164,770	$	—	$	164,770
Interest-only certificates, AAA-rated		233,856		—		233,856
Interest-only strips receivable		106,861		874		107,735
Overcollateralization of loans		—		943		943
Reserve accounts		14,652		9,912		24,564

Total	$	520,139	$	11,729	$	531,868


	September 30, 2004
	Not Subordinated		Subordinated		Total
	(in thousands)
Servicing assets	$	147,757	$	—	$	147,757
Interest-only certificates, AAA-rated		184,305		—		184,305
Interest-only strips receivable		102,495		1,040		103,535
Overcollateralization of loans		—		1,519		1,519
Reserve accounts		6,726		12,257		18,983

Total	$	441,283	$	14,816	$	456,099

Commitments and Contingencies. The Bank is obligated under various recourse provisions related to the swap of single-family residential loans for mortgage-backed securities issued by the Bank. At December 31, 2004, recourse to the Bank under these arrangements was $2.0 million and consisted of restricted cash accounts. At September 30, 2004, recourse to the Bank under these arrangements was $3.8 million, consisting of restricted cash accounts amounting to $2.0 million and overcollateralization of receivables amounting to $1.8 million.

The Bank also is obligated under recourse provisions related to the servicing of certain residential mortgage loans. At December 31, 2004 and September 30, 2004, recourse to the Bank under these arrangements totaled $4.0 million. There were no material commitments for capital expenditures at December 31, 2004.

RESULTS OF OPERATIONS

THREE MONTHS ENDED ~~JUNE~~DECEMBER 3031, 2004 COMPARED TO THREE MONTHS ENDED ~~JUNE~~DECEMBER 3031, 2003

REAL ESTATE

The Real Estate Trust recorded aan operating loss from continuing operations ~~before depreciation and amortization~~ of ~~debt service of~~ $24.53 million ~~and an operating loss of $9.7 million~~ in the quarter ended ~~June~~December 3031, 2004 (the “2004 quarter”) compared to ~~income from operations before depreciation and amortization of debt service of $1.0 million and~~ an operating loss from continuing operations of $35.95 million in the quarter ended ~~June~~December 3031, 2003 (the “2003 quarter”). The changes reflect improved operating results in the hotel portfolio ~~which~~and ~~were completely~~lower ~~offset~~interest byand ~~the~~amortization ~~write-off~~ of ~~unamortized~~ debt ~~costs~~expense ofoffset ~~$2.4~~by ~~million~~increased depreciation, advisory and ~~the~~management ~~early~~fees ~~redemption~~and ~~premium of $6.5 million, included in~~ general and administrative ~~expense, associated with the payoff of the Real Estate Trust’s $200 million Senior Secured Notes~~expenses.

Income after direct operating expenses from hotels increased $21.67 million, or 3027.04%, in the 2004 quarter from the level achieved in the 2003 quarter. Total revenue increased $3.89 million, or 1618.18%, as the overall occupancy percentage for the hotel properties increased from 6760.50% for the 2003 quarter to 7362.49% for the 2004 quarter, ana 84.78% increase, while the average room rate increased $712.9416, or 914.12%, from $8685.8681 in the 2003 quarter to $9497.8097 in the 2004 quarter, reflecting the strong demand at the Real Estate Trust’s hotel properties, particularly the Northern Virginia and Florida properties. Room sales for the 2004 quarter increased $3.52 million, or 19.09%, from the 2003 quarter, while food, beverage and other sales increased $~~282~~717,000, or 515.53%. Direct operating expenses increased approximately $12.2 million, or 815.20%, reflecting increased operating costs, such as payroll costs, advertising, franchise costs and other operating costs associated with the increased hotel occupancy.

Income after direct operating expenses from office and industrial properties ~~decreased~~increased $85160,000, or 1.2.5%, in the 2004 quarter compared to the 2003 quarter. Total revenue ~~remained~~increased ~~constant~~$216,000, ator $92.73%, ~~million~~ in ~~each~~the ~~period~~2004 quarter. Successful leasing efforts during the quarter ~~have~~and the prior fiscal year have increased the office and industrial overall occupancy percentage from 8685.29% at ~~June~~December 3031, 2003 to 8890.95% at ~~June~~December 3031, 2004. The revenue generated from the increased occupancy is slightly offset by lower rental rates as leases turn over. Direct operating expenses increased $8156,000, or 2.90%, as higher ~~bad debt,~~ leasing, payroll and utility costs offset lower ~~property~~bad ~~taxes~~debt expenses.

Other income, which includes interest income, income from other real estate properties and other miscellaneous income, increased $~~130~~96,000, or 4342.23%, principally due to ~~increased revenue from the Real Estate Trust’s other real estate investments and~~ higher interest income in the quarter reflecting the Trust’s increased invested cash balance ~~resulting~~ ~~from~~in the ~~net~~2004 ~~proceeds received from the $250 million Senior Secured Debt offering~~Quarter.

Land parcels and other expense increased $5011,000, or 154.86% in the 2004 quarter when compared to the 2003 quarter as a result of increased operating expenses at the Real Estate Trust’s other real estate properties.

Interest and amortization of debt expense decreased $~~264~~439,000, or 3.5%, in the 2004 quarter when compared to the 2003 quarter. Interest expense in the 2004 quarter includes interest of approximately $4.7 million on the ~~new~~ $250 million, 7.50% Senior Secured Notes which were issued on February 25, 2004, interest expense in the 2003 quarter includes interest of approximately $4.9 million on the redeemed $200 million, 9.75% Senior Secured Notes. Other interest expense was lower by approximately $280,000 due to reduced mortgage interest expense, due to the lower mortgage ~~and~~balances, lower line of credit ~~balances~~interest expense and lower ~~interest~~unsecured ~~rates~~note ~~on those borrowings~~interest. The average balance of outstanding borrowings increased to $~~654~~615.5 million in the 2004 quarter from $~~588~~578.79 million in the 2003 quarter, reflecting the increased principal of the Senior Secured Note ~~Debt and the overlap period for that~~ debt which offset lower mortgage and line of credit balances. The average cost of borrowings was 7.4682% in the 2004 quarter and 8.5966% in the 2003 quarter. ~~reflecting~~The decreased average cost of borrowings reflects the 225 basis point reduction in the outstanding Senior Secured Note debt. Amortization of debt expense increased approximately $30,000 in the 2004 quarter reflecting the amortization of the costs associated with the $250 million Senior Secured Note offering.

~~Amortization~~Depreciation ~~of debt~~ expense increased $~~2.3~~483,000, ~~million~~or 10.8%, reflecting ~~the~~capital ~~write-off~~improvements ofin ~~unamortized~~both ~~debt costs of $2.4 million relating to~~ the ~~$200 million~~hotel ~~Senior~~and ~~Secured~~office ~~Notes.~~and ~~This~~industrial ~~increase~~portfolios ~~was~~that ~~slightly~~have ~~offset~~been byplaced ~~lower~~in ~~other~~service ~~debt~~during ~~cost~~the ~~amortization~~2004 ~~reflecting~~quarter ~~debt refinancing~~ and ~~extensions which settled during~~ the prior fiscal year.

~~Depreciation~~Advisory, ~~expense~~management ~~remained~~and ~~relatively~~leasing ~~stable~~fees atpaid ~~approximately~~to related parties increased $287,000 or 9.4%, in the 2004 quarter when compared to the 2003 quarter.6 ~~million~~The advisory fee in the 2004 quarter was $487,000 per month compared to $472,000 per month for ~~each~~the 2003 quarter, an aggregate increase of $45,000. The remainder of the increase, totaling $242,000, ~~periods~~was due mainly to higher hotel management fees reflecting the 18.8% increase in hotel revenue.

~~Advisory,~~General ~~management~~ and ~~leasing~~administrative ~~fees~~expense ~~paid to related parties~~ increased $~~237~~242,000 orfrom ~~7.4%~~$311,000 in the ~~2004 quarter when compared to the~~ 2003 quarter. ~~The advisory fee in the 2004 quarter was $472,000 per month compared~~ to $~~458~~553,000 ~~per~~in ~~month for~~ the ~~2003~~2004 quarter, ~~an aggregate increase of $42,000. The remainder of the cost increase, totaling $195,000, was~~ due ~~mainly~~ to higher ~~hotel~~legal, ~~management~~accounting ~~fees~~and ~~reflecting~~other ~~the~~administrative 16costs.1% ~~increase in hotel revenue.~~

~~General~~Equity ~~and~~in ~~administrative~~earnings ~~expense~~of ~~increased~~unconsolidated ~~approximately~~entities ~~$6.3~~reflected ~~million~~net ~~from~~earnings ~~$670,000~~of ~~in the 2003 quarter to~~ $61.97 million in the 2004 quarter ~~due~~as compared to ~~the~~ $61.59 million ~~redemption~~ ~~premium~~in ~~paid~~the as2003 quarter, a ~~result~~decrease of ~~the~~$183,000, ~~early~~or ~~redemption~~9.5%. ofEarnings ~~the~~from ~~$200~~Saul ~~million~~Holdings ~~Senior~~Partnership ~~Secured~~and ~~Notes.~~Saul ~~This~~Centers ~~increase~~were ~~was~~lower ~~slightly offset~~ by ~~lower legal~~$80,000 ~~accounting and licensing costs.~~

2726

~~Equity~~ in ~~earnings of unconsolidated entities reflected net earnings of $1.9 million in~~ the 2004 quarter asprimarily ~~compared~~due to ~~$1.8~~ ~~million~~dilution incaused ~~the~~by ~~2003~~a ~~quarter,~~November an2003 ~~increase~~Saul ofCenters ~~$85,000,~~preferred orstock ~~4.7%.~~offering ~~Earnings~~and ~~from~~additional ~~Saul~~general ~~Holdings Partnership~~ and ~~Saul~~administrative ~~Centers~~costs incurred ~~were higher~~ by ~~$165,000 in~~ the ~~2004~~organization ~~quarter~~which ~~primarily~~offset ~~due~~increases toin ~~the~~ operating income generated as a result of the acquisition activity of those entities ~~partially offset by dilution caused by a November 2003 Saul Centers preferred stock offering~~. Losses from other investments totaled $80227,000 in the 2004 quarter. Nocompared ~~losses~~to ~~were~~$124,000 ~~recorded~~ in the 2003 quarter. These losses are a result of write-downs of a certain non-public investment accounted for under the equity method.

During the 2004 quarter the Real Estate Trust ~~received~~determined athat ~~refund~~it would sell one of ~~approximately~~its ~~$117,000~~other ~~for~~real anestate ~~expenditure~~properties. ~~relating~~Included toin athe ~~September~~net ~~2003~~2004 ~~land~~quarter ~~sale~~Loss from Operations of Discontinued Real Estate Assets of $1.8 ~~The~~million ~~original~~is ~~gain~~operating onincome ~~the~~of $18,000 for this property. The sale of this ~~parcel~~asset ~~was~~closed ~~recorded~~on inJanuary 31, 2005. During the fiscal year ended September 30, ~~2003~~2004 (“Fiscal 2004”) the Real Estate Trust determined it would sell one of its hotel properties and wrote down its investment in this asset to its estimated fair value, less cost to sell in Fiscal 2004. ~~This~~The ~~refund~~sale ~~has~~of ~~been~~the ~~recorded~~hotel asproperty closed on December 9, 2004. Included in the 2004 quarter Loss from Operations of Discontinued Real Estate Asset is an additional ~~gain~~loss of $11,000 which reflects the difference between the actual loss on the sale of ~~this~~the ~~land~~hotel ~~parcel~~property and the estimated loss recorded in Fiscal 2004. Also included in the Loss from Operations of Discontinued Real Estate Assets is an operating loss of $186,000 for the hotel property for the period during the 2004 quarter that the Real Estate Trust owned and operated the property and $1.6 million of costs associated with the defeasance of the mortgage which the hotel property secured, including a $1.5 million prepayment premium.

During the 2004 quarter the Real Estate Trust determined it would sell one of its hotel properties and has written down its investment in this asset by $215,000 to reflect its estimated fair value, less cost to sell, of $2.2 million. Included in the 2004 quarter Loss from Operations of Discontinued Real Estate Asset of $326,000 is the $215,000 write-down. The Real Estate Trust expects the sale of this asset to occur in the next twelve months.

BANKING

Overview. The Bank recorded operating income of $7669.18 million for the three months ended ~~June~~December 3031, 2004 (the “2004 quarter”), compared to operating income of $3731.30 million for the three months ended ~~June~~December 3031, 2003 (the “2003 quarter”). The increase in operating income was attributable to ~~decreases~~increases in interest ~~expense,~~ ~~the~~income ~~provision~~and ~~for~~other ~~loan~~(non-interest) ~~losses~~income and ~~operating~~decreases ~~expenses,~~in ~~and~~interest ~~was~~expense ~~partially~~and ~~offset~~the byprovision afor ~~decrease~~loan ~~in other (non-interest) income~~losses.

Net Interest Income. Net interest income, before the provision for loan losses, increased $1525.06 million (or 2544.30%) in the 2004 quarter. ~~The~~No ~~Bank recorded~~ interest income ofwas ~~$0.1~~recorded ~~million~~ on non-accrual and restructured loans during the 2004 quarter. The Bank would have recorded additional interest income of $0.32 million during the 2004 quarter if non-accrual assets and restructured loans had been current in accordance with their original terms. See “Financial Condition – Asset Quality – Non-Performing Assets.”

28The 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. The table contains information of the bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

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. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trust’s financial presentation.

Net Interest Margin Analysis

(Dollars in thousands)

Three Months Ended June 30,

Three Months Ended December 31,

2004

2003

AverageBalances

Interest

Yield/Rate

AverageBalances

Interest

Yield/Rate

Average Balances

Interest

Yield/ Rate

Average Balances

Interest

Yield/ Rate

Assets:

Interest-earning assets:

Loans receivable, net (1)

10,~~255~~825,~~040~~388

~~102~~118,~~103~~276

34.9837

89,~~721~~243,~~134~~339

9997,~~102~~036

4.5520

Mortgage-backed securities

~~457~~392,~~437~~984

54,~~133~~575

4.4966

~~584~~436,~~719~~478

75,~~730~~322

54.2988

Federal funds sold and securities purchased under agreements to resell

5474,~~176~~457

~~135~~366

1.0097

5979,~~264~~750

~~180~~201

1.2101

Trading securities

2910,~~958~~301

~~363~~140

45.8544

8947,~~451~~081

~~1,202~~572

54.3886

Investment securities

70129,~~355~~647

~~333~~789

12.8943

46,~~386~~233

~~295~~263

2.5428

Other interest-earning assets

~~228~~231,~~140~~577

1,~~472~~861

23.5821

~~191~~196,~~362~~448

1,~~368~~212

2.8647

Total

11,~~095~~664,~~106~~354

~~109~~126,~~539~~007

34.9532

910,~~692~~049,~~316~~329

~~109~~104,~~877~~606

4.5316

Noninterest-earning assets:

Cash

~~284~~323,~~551~~376

~~285~~292,~~242~~267

Real estate held for investment or sale

2021,~~110~~349

2522,~~389~~336

Property and equipment, net

~~480~~500,~~758~~270

~~468~~488,~~404~~466

Automobiles subject to lease, net

~~577~~389,~~980~~047

1795,~~017,678~~237

Goodwill and other intangible assets, net

24,~~144~~015

24,~~519~~292

Other assets

~~501~~612,~~271~~828

~~352~~413,~~631~~108

Total assets

1213,~~983~~535,~~920~~239

1112,~~866~~085,~~179~~035

Liabilities and stockholders’ equity:

Interest-bearing liabilities:

Deposit accounts:

Demand deposits

2,~~168~~232,~~508~~867

1,~~128~~202

0.2122

1,~~856~~975,~~236~~247

1,~~211~~007

0.2620

Savings deposits

1,~~233~~213,~~148~~864

~~841~~853

0.2728

1,~~132~~160,~~980~~050

~~1,293~~801

0.4628

Time deposits

1,~~732~~869,~~718~~576

810,~~167~~173

12.8918

1,~~929~~741,~~111~~649

118,~~821~~275

21.4590

Money market deposits

2,~~329~~388,~~320~~781

46,~~009~~144

01.6903

2,~~141~~317,~~681~~090

54,~~423~~055

10.0170

Total deposits

7,~~463~~705,~~694~~088

1418,~~145~~372

0.7695

7,~~060~~194,~~008~~036

1914,~~748~~138

10.1279

Borrowings

3,~~182~~358,~~342~~477

2123,~~069~~845

2.6584

2,~~710~~685,~~964~~754

3032,~~835~~298

4.5581

Total liabilities

1011,~~646~~063,~~036~~565

3542,~~214~~217

1.3253

9,~~770~~879,~~972~~790

5046,~~583~~436

21.0788

Noninterest-bearing items:

Noninterest-bearing deposits

1,~~209~~298,~~721~~788

1,~~112~~067,~~177~~672

Other liabilities

~~307~~284,~~226~~637

~~299~~332,~~817~~107

Minority interest

175,391

~~144~~175,~~000~~391

Stockholders’ equity

~~645~~712,~~546~~858

~~539~~630,~~213~~075

Total liabilities and stockholders’ equity

1213,~~983~~535,~~920~~239

1112,~~866~~085,~~179~~035

Net interest income

7483,~~325~~790

5958,~~294~~170

Net interest spread (2)

2.6379

2.4628

Net yield on interest-earning assets (3)

2.6887

2.4532

Interest-earning assets to interest-bearing liabilities

~~104~~105.2243

99101.2072

(1)

Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the extent reflected in the Condensed 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.

2928

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, 2004Compared to Three Months Ended June 30, 2003Increase (Decrease) Due to Changein (1)

Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003 Increase (Decrease) Due to Change in (1)

Volume

Rate

TotalChange

Interest income:

Loans (2)

5917,~~372~~155

~~(56~~4,~~371~~085

)

321,~~001~~240

Mortgage-backed securities

(~~1,533~~514

)

(~~1,064~~233

)

(~~2,597~~747

)

Federal funds sold and securities purchased under agreements to resell

(1589

)

~~(30~~254

)

~~(45~~165

)

Trading securities

(~~731~~846

)

~~(108~~414

)

(~~839~~432

)

Investment securities

~~429~~506

~~(391~~20

)

38526

Other interest-earning assets

~~777~~241

~~(673~~408

)

~~104~~649

Total interest income

5816,~~299~~453

~~(58~~4,~~637~~948

)

~~(338~~21,401

)

Interest expense:

Deposit accounts

61,~~829~~058

~~(12~~3,~~432~~176

)

(54,~~603~~234

)

Borrowings

2736,~~421~~953

(3745,~~187~~406

)

(98,~~766~~453

)

Total interest expense

3438,~~250~~011

(4942,~~619~~230

)

(154,~~369~~219

)

Increase (decrease) in net interest income

24(21,~~049~~558

)

(947,~~018~~178

)

1525,~~031~~620

(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 2004 quarter ~~decreased~~increased $021.34 million (or 020.35%) from the 2003 quarter primarily as a result of ~~lower~~higher average yields ~~and~~on ~~lower~~higher average balances of loans ~~mortgage-backed securities~~receivable. Partially offsetting the ~~decreased~~increased income was ana ~~increase~~decrease in ~~loan~~ interest income ~~caused~~on bymortgage-backed asecurities ~~$1.5~~caused ~~billion~~by ~~increase~~lower ~~in the~~ average balances ~~of loans~~and ~~receivable~~lower average yields.

The Bank’s net interest spread increased to 2.6379% in the 2004 quarter from 2.4628% in the 2003 quarter. The 1751 basis point increase ~~reflected~~was primarily athe ~~smaller~~result ~~decrease~~of ina ~~interest-earning~~197 ~~asset~~basis ~~average~~point ~~yields~~decrease ~~than~~in ~~interest-bearing~~the ~~liability~~cost ~~average~~of ~~costs~~borrowings. Average interest-earning assets as a percentage of average interest-bearing liabilities increased to ~~104~~105.24% for the 2004 quarter compared to 99101.27% for the 2003 quarter.

Interest income on loans, the largest category of interest-earning assets, increased to $3118.03 million ~~(or~~for 3the 2004 quarter from $97.0%) ~~from~~million for the 2003 quarter primarily because of higher average balances ofand ~~loans receivable offset by lower~~ average yields ~~caused~~of ~~by declines in the various indices on which interest rates on adjustable rate~~ loans ~~are based~~receivable. The average yield on the loan portfolio ~~decreased~~increased 5717 basis points (from 4.5520% to 34.9837%) from the 2003 quarter, reflecting increases in the various indices on which interest rates of adjustable rate loans are based. Interest income on single-family residential loans increased $917.59 million due to $1.64 billion of higher average balances, ~~which~~as ~~was~~well ~~partially~~as ~~offset~~higher ~~by lower~~ average yields during the 2004 quarter. Lower average yields and lower average balances of automobile loans resulted in a $75.20 million (or 5251.53%) decrease in interest income on those loans.

Interest income on mortgage-backed securities decreased $20.67 million (or 3314.60%) due to a $~~127~~43.35 million ~~reduction~~decline in average balances as well as a decrease in the average interest ~~rates~~yields on those securities from 54.2988% to 4.4966%.

Interest expense on deposits ~~decreased~~increased $54.62 million (or 2829.49%) during the 2004 quarter,. ~~due~~The toincrease ~~decreased~~resulted ~~average~~from ~~rates.~~a ~~The~~16 36 basis point ~~decrease~~increase in the average rate on deposits (from 10.1279% to 0.7695%) ~~resulted~~due ~~from~~to aincreased ~~reduction in the~~ rates paid by the Bank in response to ~~declines~~increases in market interest rates. ~~The~~and ~~decrease~~a in$511.1 ~~the~~million ~~average~~increase ~~rate~~in ~~on deposits was partially offset by higher~~ average deposit balances offor ~~$403.6 million compared to~~ the ~~2003~~2004 quarter.

Interest expense on borrowings decreased $8.5 million (or 26.2%) in the 2004 quarter compared to the 2003 quarter. Interest expense on advances from the FHLB of Atlanta decreased $5.0 million (or 19.7%) due primarily to lower average rates paid on the advances which was partially offset by higher average balances. The Bank replaced maturing higher cost advances with lower cost advances

throughout the past year. The average balances of subordinated debentures decreased by $134.0 million, and the average rate on those borrowings decreased by 190 basis points resulting in a decrease of $3.8 million in interest expense. On December 2, 2003, the Bank issued $175.0 million aggregate principal amount of 6⁷/8% subordinated debentures due 2013. On January 2, 2004, the net proceeds of the offering, along with short-term borrowings, were used to redeem all $250.0 million of the Bank’s 9¹/4% subordinated debentures due 2005 and 2008.

Provision for Loan Losses. During the 2004 quarter, the Bank recorded a negative provision for loan losses of $0.4 million, compared to a provision of $5.9 million in the 2003 quarter. The negative provision reflected the amount of the Bank’s recoveries in excess of charge-offs on the Bank’s loan portfolio during the quarter. Management’s prior decisions to discontinue subprime automobile lending and indirect consumer lending, and focus more on residential mortgages, have improved the overall credit quality of the Bank’s loan portfolio. As the balances of automobile loans continue to decline, charge-offs and delinquencies also have been declining. The combination of these factors contributed to the Bank’s decision to reduce the provision for loan losses. See “Financial Condition – Asset Quality – Allowances for Losses.”

Other income. Other non-interest income increased to $133.6 million in the 2004 quarter from $126.0 million in the 2003 quarter. The $7.6 million (or 6.0%) increase was primarily attributable to an increase in servicing, securitization and mortgage banking income as well as deposit servicing fees, offset partially by decreases in automobile rental income.

Servicing, securitization and mortgage banking income increased to $59.9 million in the 2004 quarter, from $36.6 million in the 2003 quarter, primarily as a result of a gain of $54.9 million resulting from the securitization and sale of $1.6 billion of loans during the 2004 quarter compared to a gain of $26.8 million resulting from the securitization and sale of $776.9 million of loans in the 2003 quarter.

Deposit servicing fees increased to $34.1 million in the 2004 quarter, from $31.3 million in the 2003 quarter, primarily due to fees generated from the continued expansion of the Bank’s branch network.

Automobile rental income decreased to $25.2 million in the 2004 quarter from $46.4 million in the prior corresponding quarter. The $21.2 million decrease resulted primarily from a $406.2 million (or 51.1%) decrease in average outstanding leases as a result of the Bank’s prior decision to discontinue origination of automobile leases.

Operating Expenses. Operating expenses during the 2004 quarter increased $0.7 million from the 2003 quarter. The increase was largely due to increases in salaries and employee benefits and servicing assets amortization and other loan expenses, which were mostly offset by reductions in depreciation and amortization.

Depreciation and amortization expense decreased $15.6 million (or 34.1%), largely as a result of decreased depreciation expense of automobiles subject to lease. Depreciation expense related to automobiles subject to lease decreased $16.1 million, to $19.7 million for the 2004 quarter, due to lower levels of outstanding leases resulting from the Bank’s prior decision to discontinue origination of those leases.

Salaries and employee benefits increased $9.5 million (or 17.4%) in the 2004 quarter due primarily to increased expenses in the retail branch network.

Servicing assets amortization and other loan expenses increased $5.9 million (or 60.8%) as a result of an increase in amortization expense during the quarter ended December 31, 2004. Contributing to the increased expense was a $3.9 million reduction in the mortgage servicing rights valuation allowance caused by an increase in the value of the Bank’s mortgage servicing assets during the 2003 quarter.

Interest expense on borrowings decreased $9.8 million (or 31.7%) in the 2004 quarter compared to the 2003 quarter. Interest expense on advances from the FHLB of Atlanta decreased $6.3 million (or 26.2%) during the 2004 quarter due to lower average rates paid on the advances which was partially offset by higher average balances. The Bank replaced maturing higher cost advances with lower cost advances during the quarter. The average balances of subordinated debentures decreased by $75.0 million, and the average rate on those borrowings decreased by 245 basis points resulting in a decrease of $2.8 million in interest expense. On December 2, 2003, the Bank issued $175.0 million aggregate principal amount of 6 7/8% subordinated debentures due 2013. On January 2, 2004, the net proceeds of the offering, along with short-term borrowings, were used to redeem all $250.0 million of the Bank’s 9¼% subordinated debentures due 2005 and 2008.

Provision for Loan Losses. During the 2004 quarter, the Bank recorded a negative provision for loan losses of $5.6 million, compared to a provision of $5.9 million in the 2003 quarter. Management’s prior decisions to discontinue subprime automobile lending and indirect consumer lending, and focus more on residential mortgages, have improved the overall credit quality of the Bank’s loan portfolio. As the balances of automobile loans continue to decline, charge-offs and delinquencies also have been declining. In addition, the Bank’s interest in two syndicated loans, for which the Bank had established a combined allowance for losses totaling $4.8 million, were repaid in full during the current quarter. The combination of these factors contributed to the Bank’s decision to reduce the provision for loan losses. See “Financial Condition – Asset Quality – Allowances for Losses.”

Other income. Other non-interest income decreased to $132.0 million in the 2004 quarter from $139.5 million in the 2003 quarter. The $7.5 million (or 5.4%) decrease was primarily attributable to decreases in automobile rental income and gain on mortgage banking activities, and was partially offset by an increase in servicing and securitization income and deposit servicing fees.

Automobile rental income decreased to $37.7 million in the 2004 quarter from $58.6 million in the prior corresponding quarter. The $20.9 million decrease resulted primarily from a $439.7 million (or 43.2%) decrease in average outstanding leases as a result of the Bank’s prior decision to discontinue origination of automobile leases.

Gain on mortgage banking activities decreased to $1.5 million in the 2004 quarter, from $6.4 million in the 2003 quarter, as a result of decreased sales volume in the 2004 quarter.

Servicing and securitization income increased to $47.9 million in the 2004 quarter, from $33.0 million in the 2003 quarter, primarily as a result of a gain of $47.5 million resulting from the securitization and sale of $1.3 billion of loans during the 2004 quarter compared to a gain of $28.6 million resulting from the securitization and sale of $760.4 million of loans in the 2003 quarter.

Operating Expenses. Operating expenses during the 2004 quarter decreased $19.8 million (or 12.7%) from the 2003 quarter. The decrease was largely due to reductions in depreciation and amortization and servicing assets amortization and other loan expenses, and was partially offset by an increase in salaries and employee benefits.

Depreciation and amortization expense decreased $14.4 million (or 27.2%), largely as a result of decreased depreciation expense of automobiles subject to lease. Depreciation expense related to automobiles subject to lease decreased $14.2 million, to $28.7 million for the 2004 quarter, due to lower levels of outstanding leases. The reduced levels reflect the Bank’s prior decision to discontinue origination of automobile leases.

Servicing assets amortization and other loan expenses decreased $10.9 million (or 82.5%) as a result of an increase in the value of the Bank’s mortgage servicing assets, which resulted in the reduction in the mortgage servicing rights valuation allowance.

Salaries and employee benefits increased $6.2 million (or 11.7%) in the 2004 quarter due primarily to increased expenses in the residential mortgage lending area and retail branch network.

RESULTS OF OPERATIONS

NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO NINE MONTHS ENDED JUNE 30, 2003

REAL ESTATE

The Real Estate Trust recorded a loss from operations before depreciation and amortization of debt service of $2.4 million and an operating loss of $19.2 million in the nine-month period ended June 30, 2004 (the “2004 period”) compared to a loss from operations before depreciation and amortization of debt service of $681,000 and an operating loss of $16.1 million in the nine-month period ended June 30, 2003 (the “2003 period”). The changes reflect improved operating results in the hotel portfolio and the gain associated with a land sale which were completely offset by declining results in the office and industrial portfolio, increased interest expense, the write-off of unamortized debt costs of $2.4 million and the early redemption premium of $6.5 million, included in general and administrative expense, associated with the payoff of the Real Estate Trust’s $200 million Senior Secured Notes.

Income after direct operating expenses from hotels increased $4.7 million, or 22.8%, in the 2004 period from the level achieved in the 2003 period. Total revenue increased $7.9 million, or 12.5%, as the overall occupancy percentage for the hotel properties increased from 59.8% for the 2003 period to 65.1% for the 2004 period while the average room rate increased $4.19, or 4.8%, from $86.54 in the 2003 period to $90.73 in the 2004 period, reflecting the strong demand at the Real Estate Trust’s hotel properties, particularly the Northern Virginia and Florida properties. Room sales for the 2004 period increased approximately $7.2 million, or 14.5%, from the 2003 period, while food, beverage and other sales increased approximately $700,000, or 5.4%. Direct operating expenses increased $3.2 million, or 7.4% reflecting increased operating costs, such as payroll costs, advertising and other operating costs associated with the increased hotel occupancy.

Income after direct operating expenses from office and industrial properties decreased $1.1 million, or 5.5%, in the 2004 period compared to the 2003 period. Total revenue decreased $1.0 million, or 3.5%, in the 2004 period as increased vacancy, specifically at two of the Trust’s office properties, offset contractual rent increases. In addition, leased space is turning over at lower rental rates in the current period. Direct operating expenses increased $113,000 between the periods as increased insurance, payroll and bad debt expenses were slightly offset by lower property taxes and repair and maintenance costs.

Other income, which includes interest income, income from other real estate properties and other miscellaneous income, increased $309,000, or 34.1%, in the 2004 period principally due to increased revenue from the Real Estate Trust’s other real estate investments and higher interest income in the period reflecting the increased invested cash balance resulting from the net proceeds received from the $250 million Senior Secured Debt offering.

Land parcels and other expense increased $118,000, or 13.5% in the 2004 period when compared to the 2003 period as a result of increased operating expenses at the Real Estate Trust’s other real estate properties.

Interest expense increased $1.4 million from $36.9 million in the 2003 period to $38.3 million in the 2004 period. Interest expense in the 2004 period includes interest on the new $250 million Senior Secured Notes which were issued on February 25, 2004 and interest is payable from that date, therefore interest expense includes interest on both the $200 million and the $250 million Senior Secured Debt from February 25, 2004 through March 31, 2004. This overlap in interest resulted in additional interest charges of approximately $1.9 million in the 2004 period. This increase in interest expense was slightly offset by lower interest expense on other debt due to lower mortgage and line of credit balances and lower interest rates on those borrowings. The average balance of outstanding borrowings increased to $644.8 million in the 2004 period from $585.2 million in the 2003 period, reflecting the overlap period of the Senior Secured Debt which offset lower mortgage and line of credit balances. The average cost of borrowings was 8.08% in the 2004 period and 8.65% in the 2003 period, reflecting the 225 basis point reduction in the outstanding Senior Secured Note debt.

Amortization of debt expense increased $2.2 million, reflecting the write-off of unamortized debt costs of $2.4 million relating to the $200 million Senior Secured Notes. This increase was slightly offset by lower other debt cost amortization reflecting debt refinancing and extensions which settled during the prior fiscal year.

Depreciation expense decreased $762,000, or 5.2%, as a result of the retirement of certain office tenant improvements and hotel improvements in the 2003 period.

Advisory, management and leasing fees paid to related parties increased $552,000, or 6.0%, in the 2004 period when compared to the 2003 period. The advisory fee in the 2004 period was $472,000 per month compared to $458,000 per month for the 2003 period, an aggregate increase of $126,000. The remainder of the cost increase, totaling $426,000, was due to higher hotel management fees reflecting the 12.5% increase in hotel revenue and increased office leasing costs paid.

General and administrative expense increased $6.5 million from $1.7 million in the 2003 period to $8.2 million in the 2004 period due to the $6.5 million redemption premium paid as a result of the early redemption of the $200 million Senior Secured Notes. Other increases, such as the write-off of certain acquisition and development costs for projects that the Real Estate Trust has determined not to pursue were offset by lower legal and licensing costs.

Equity in earnings of unconsolidated entities reflected net earnings of $5.6 million in the 2004 period as compared to $6.0 million in the 2003 period, a decrease of approximately $400,000. Earnings from Saul Holdings Partnership and Saul Centers were lower by $354,000 in the 2004 period primarily due to the dilution caused by a November 2003 Saul Centers preferred stock offering. Losses from other investments totaled $460,000 in the 2004 period as compared to losses of $376,000 in the 2003 period. These losses are a result of write-downs of a certain non-public investment accounted for under the equity method.

The Real Estate Trust recorded an impairment charge of $625,000 in the 2003 period due to write-downs of certain non-public investments accounted for under the cost method. No impairment charges were recorded in the 2004 period.

In February 2004 the Commonwealth of Virginia acquired 7.93 acres of land owned by the Real Estate Trust for use in a highway project. The purchase price of the land was $3.6 million and resulted in a gain of approximately $2.7 million. In addition, during the quarter ended June 30, 2004 the Real Estate Trust received a refund of approximately $117,000 for an expenditure relating to a September 2003 land sale. The original gain on the sale of this parcel was recorded in the fiscal year ended September 30, 2003. This refund has been recorded as an additional gain on sale of this land parcel in the quarter ended June 30, 2004. There were no property sales in the 2003 period.

During the quarter ended June 30, 2004 the Real Estate Trust determined it would sell one of its hotel properties and has written down its investment in this asset by $215,000 to reflect its estimated fair value, less cost to sell, of $2.2 million. Included in the 2004 period Loss from Operations of Discontinued Real Estate Asset of $995,000 is the $215,000 write-down. The Real Estate Trust expects the sale of this asset to occur in the next twelve months.

BANKING

Overview. The Bank recorded operating income of $159.8 million and for the nine months ended June 30, 2004 (the “2004 period”), compared to operating income of $96.0 million for the nine months ended June 30, 2003 (the “2003 period”). The increase in operating income was attributable to decreases in interest expense, the provision for loan losses and operating expenses, and was partially offset by decreases in interest income and other (non-interest) income.

Net Interest Income. Net interest income, before the provision for loan losses, increased $13.9 million (or 7.5%) in the 2004 period. The Bank recorded interest income of $0.2 million on non-accrual and restructured loans during the 2004 period. The Bank would have recorded interest income of $1.0 million during the 2004 period if non-accrual assets and restructured loans had been current in accordance with their original terms. See “Financial Condition – Asset Quality – Non-Performing Assets.”

Net Interest Margin Analysis

(Dollars in thousands)

	Nine Months Ended June 30,
	2004						2003
	AverageBalances		Interest		Yield/Rate		AverageBalances		Interest		Yield/Rate
Assets:
Interest-earning assets:
Loans receivable, net (1)	$	9,774,116	$	299,534	4.09	%	$	8,307,835	$	304,235	4.88	%
Mortgage-backed securities		441,309		15,626	4.72			742,873		30,573	5.49
Federal funds sold and securities purchased under agreements to resell		69,186		520	1.00			68,551		677	1.32
Trading securities		31,294		1,150	4.90			82,946		3,541	5.69
Investment securities		54,232		840	2.07			46,412		894	2.57
Other interest-earning assets		214,724		4,131	2.57			185,478		4,415	3.17
Total		10,584,861		321,801	4.05			9,434,095		344,335	4.87
Noninterest-earning assets:
Cash		286,749						300,072
Real estate held for investment or sale		20,648						24,915
Property and equipment, net		481,739						469,717
Automobiles subject to lease, net		687,223						1,069,893
Goodwill and other intangible assets, net		24,216						24,664
Other assets		452,748						334,407
Total assets	$	12,538,184					$	11,657,763
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits	$	2,058,719		3,182	0.21		$	1,753,540		3,628	0.28
Savings deposits		1,190,082		2,444	0.27			1,081,867		4,110	0.51
Time deposits		1,727,358		24,333	1.88			1,977,616		40,078	2.70
Money market deposits		2,315,382		12,025	0.69			2,072,053		17,315	1.11
Total deposits		7,291,541		41,984	0.77			6,885,076		65,131	1.26
Borrowings		3,008,893		80,407	3.56			2,747,162		93,650	4.55
Total liabilities		10,300,434		122,391	1.58			9,632,238		158,781	2.20
Noninterest-bearing items:
Noninterest-bearing deposits		1,115,212						1,057,630
Other liabilities		305,526						294,259
Minority interest		175,391						144,000
Stockholders’ equity		641,621						529,636
Total liabilities and stockholders’ equity	$	12,538,184					$	11,657,763
Net interest income			$	199,410					$	185,554
Net interest spread (2)					2.47	%					2.67	%
Net yield on interest-earning assets (3)					2.51	%					2.62	%
Interest-earning assets to interest-bearing liabilities					102.76	%					97.94	%

(1) Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the extent reflected in the Condensed 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.

Volume and Rate Changes in Net Interest Income

(Dollars in thousands)

	Nine Months Ended June 30, 2004Compared to Nine Months Ended June 30, 2003Increase (Decrease) Due to Changein (1)
	Volume			Rate			TotalChange
Interest income:
Loans (2)	$	66,339		$	(71,040	)	$	(4,701	)
Mortgage-backed securities		(11,121	)		(3,826	)		(14,947	)
Federal funds sold and securities purchased under agreements to resell		10			(167	)		(157	)
Trading securities		(1,954	)		(437	)		(2,391	)
Investment securities		191			(245	)		(54	)
Other interest-earning assets		891			(1,175	)		(284	)
Total interest income		54,356			(76,890	)		(22,534	)
Interest expense:
Deposit accounts		5,875			(29,022	)		(23,147	)
Borrowings		12,461			(25,704	)		(13,243	)
Total interest expense		18,336			(54,726	)		(36,390	)
Increase (decrease) in net interest income	$	36,020		$	(22,164	)	$	13,856

(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 2004 period decreased $22.5 million (or 6.5%) from the 2003 period primarily as a result of lower interest income on mortgage-backed securities, which resulted from lower average yields on and lower average balances of those securities. Also contributing to the decreased income were lower average yields on loans receivable, which was partially offset by a $1.5 billion increase in the average balances of loans receivable.

The Bank’s net interest spread decreased to 2.47% in the 2004 period from 2.67% in the 2003 period. The 20 basis point decrease primarily reflected a greater decrease in interest-earning asset average yields than interest-bearing liability average costs. Average interest-earning assets as a percentage of average interest-bearing liabilities increased to 102.8% for the 2004 period compared to 97.9% for the 2003 period.

Interest income on loans, the largest category of interest-earning assets, decreased $4.7 million from the 2003 period primarily because of lower average yields caused by declines in the various indices on which interest rates on adjustable rate loans are based. Higher average balances of loans receivable partially offset the decline in interest income. The average yield on the loan portfolio decreased 79 basis points (from 4.88% to 4.09%) from the 2003 period. Lower average yields and lower average balances of automobile loans resulted in a $22.4 million (or 48.2%) decrease in interest income on those loans. Interest income on single-family residential loans increased $17.7 million due to $1.5 billion of higher average balances, which was partially offset by lower average yields during the 2004 period.

Interest income on mortgage-backed securities decreased $14.9 million (or 48.9%) due to a $301.6 million reduction in average balances and, to a lesser extent, a decrease in the average interest rates on those securities from 5.49% to 4.72%.

Interest expense on deposits decreased $23.1 million (or 35.5%) during the 2004 period, due to decreased average rates. The 49 basis point decrease in the average rate on deposits (from 1.26% to 0.77%) resulted from a reduction in the rates paid by the Bank in response to declines in market interest rates. The decrease in the average rate on deposits was partially offset by higher average balances of $406.5 million compared to the 2003 period.

Interest expense on borrowings decreased $13.2 million (or 14.1%) in the 2004 period compared to the 2003 period. The average balance of securities sold under repurchase agreements decreased by $314.8 million, and the average rate on those borrowings decreased 52 basis points resulting in a decrease of $3.5 million in interest expense. Interest expense on advances from the FHLB of Atlanta decreased $4.8 million (or 6.7%) during the 2004 period due to lower average rates paid on the advances, which were partially offset by higher average balances. The Bank replaced maturing higher cost advances with lower cost advances during the period. In addition, the average rate on subordinated debentures decreased to 7.74% from 9.25% resulting in a decrease of $4.5 million in interest expense. On December 2, 2003, the Bank issued $175.0 million aggregate principal amount of 6 7/8% subordinated debentures due 2013. On January 2, 2004, the net proceeds of the offering, along with short-term borrowings, were used to redeem all $250.0 million of the Bank’s 9¼% subordinated debentures due 2005 and 2008.

Provision for Loan Losses. During the 2004 period, the Bank recorded a negative provision for loan losses of $5.2 million, compared to a provision of $20.4 million in the 2003 period. Management’s prior decisions to discontinue subprime automobile lending and indirect consumer lending, and focus more on residential mortgages, have improved the overall credit quality of the Bank’s loan portfolio. As balances of automobile loans continue to decline, charge-offs and delinquencies also have been declining. In addition, the Bank’s interest in two syndicated loans, for which the Bank had established a combined allowance for losses totaling $4.8 million, were repaid in full during the current quarter. The combination of these factors contributed to the Bank’s decision to reduce the provision for loan losses. See “Financial Condition – Asset Quality – Allowances for Losses.”

Other income. Other non-interest income decreased slightly to $397.9 million in the 2004 period from $398.1 million in the 2003 period. The $0.2 million decrease was primarily attributable to decreases in automobile rental income and gain on mortgage banking activities, and was offset by an increase in servicing and securitization income.

Automobile rental income decreased to $125.5 million in the 2004 period from $182.7 million in the prior corresponding period. The $57.2 million decrease resulted primarily from a $382.7 million (or 35.8%) decrease in average outstanding leases as a result of the Bank’s prior decision to discontinue origination of automobile leases.

Gain on mortgage banking activities decreased to $7.8 million in the 2004 period, from $14.6 million in the 2003 period, as a result of decreased sales volume in the 2004 period.

Servicing and securitization income increased to $135.4 million in the 2004 period, from $77.2 million in the 2003 period, primarily as a result of gains of $125.1 million resulting from the securitization and sale of $3.4 billion of loans during the 2004 period compared to gains of $60.6 million resulting from the securitization and sale of $1.7 billion of loans in the 2003 period.

Operating Expenses. Operating expenses during the 2004 period decreased $24.6 million (or 5.3%) from the 2003 period. The decrease in operating expenses is largely due to a decline in depreciation and amortization and servicing assets amortization and other loan expenses, and was partially offset by increases in salaries and employee benefits and other expenses.

Depreciation and amortization expense decreased $40.4 million (or 24.2%), largely as a result of decreased depreciation expense of automobiles subject to lease. Depreciation expense related to automobiles subject to lease decreased $35.0 million, to $97.0 million for the 2004 period, due to lower levels of outstanding leases. The reduced levels reflect the Bank’s prior decision to discontinue origination of automobile leases.

Servicing assets amortization and other loan expenses decreased $7.0 million (or 18.9%) as a result of an increase in the value of the Bank’s mortgage servicing assets, which resulted in the reduction in the mortgage servicing rights valuation allowance.

Salaries and employee benefits increased $11.9 million (or 7.6%) in the 2004 period due primarily to increased expenses in the residential mortgage lending area and retail branch network.

Other operating expenses increased $9.6 million (or 22.4%) primarily as a result of costs related to the January 2, 2004 redemption of the Bank’s $250.0 million of subordinated debentures due 2005 and 2008.

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.”

Item 4. CONTROLS AND PROCEDURES

The Trust maintains disclosure controls and procedures that are designated to ensure that information required to be disclosed in the Trust’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Trust’s management, including its Chairman and its Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Trust carried out an evaluation, under the supervision and with the participation of the Trust’s management, including its Chairman and its Vice President and Chief Financial Officer of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of ~~June~~December 3031, 2004. Based on the foregoing, the Company’s Chairman and its Vice President and Chief Financial Officer concluded that the Trust’s disclosure controls and procedures were effective at the reasonable assurance level as of ~~June~~December 3031, 2004.

During the three months ended ~~June~~December 3031, 2004 there were no changes in the Trust’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

3731

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.

(b) The Registrant did not file any reports on Form 8-K during the fiscal quarter covered by this report.

EXHIBITS

3832

(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, B.F. Saul 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. 31. Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith). 32. Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).


		(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, B.F. Saul 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.

3912. Ratio of Earnings to Fixed Charges (filed herewith). 31. Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith). 32. Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer (filed herewith).

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)
	B. F. SAUL REAL ESTATE INVESTMENT TRUST
Date: August 16, 2004		/s/ STEPHEN R. HALPIN, JR.
	(Registrant)
		Stephen R. Halpin, Jr.
Date: February 11, 2005	Stephen R. Halpin, Jr.
		Vice President and Chief Financial Officer
	Stephen R. Halpin, Jr.
Date: August 16, 2004		/s/ KENNETH D. SHOOP
	Vice President and Chief Financial Officer (Principal Financial Officer)
		Kenneth D. Shoop
Date: February 11, 2005	Kenneth D. Shoop
		Vice President and Principal Accounting Officer
	Kenneth D. Shoop
	Vice President, Chief Accounting Officer and Treasurer (Principal Accounting Officer)

4034

Table of Contents

Table of Contents

Table of Contents

InTable March 1998, the Real Estate Trust issued $200.0 million aggregate principal amount of 9.75% Senior Secured Notes due 2008, (the “1998 Notes”). Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Filing Compare · SAUL B F REAL ESTATE INVESTMENT TRUST